Kim Resources@2x

Kim G C Moody’s Musings – 1-1-1 Newsletter For February 5, 2025

 

One Comment About Taxation – The Capital Gains “Deferral” is the Right Decision But Certainly Should Not Be Celebrated

 

Well, by now, most Canadians will know that The Department of Finance announced the “deferral” of the capital gains proposals (first released in the April 16, 2024 federal budget) to January 1, 2026.  The Canada Revenue Agency also announced in a companion release that it would stop administering the proposals for 2024 and 2025 filings.

 

There are many technical questions about these announcements for tax specialists like me.  However, for the average Canadian, let me interpret these announcements for you in plain English:  the vast majority of the capital gains proposals are dead.  They have a snowball’s chance in hell of ever being implemented despite the government’s announcement.

 

By positioning the announcement as a “deferral”, the government is punting this toxic issue to the next government since it is very likely that an election will be called before the proposed implementation date.  If, God forbid, the Liberal Party gets re-elected with its new leader, they could indeed decide to move forward with the proposals but given the “deferral” they could also decide to drop it like a hot potato.  If the Conservatives are elected, the proposals are dead given the emphatic announcement by Conservative leader, Pierre Poilievre, that he would “reverse” such proposals should he become PM.

 

So, why were the proposals toxic?  Well, there were a number of reasons.  The PMO decided to go back to the lame political well of “asking the rich to pay a little bit more”.  And falsely stating that the proposals would only apply to 0.13% of Canadians.  They then defended the proposals by stating they were necessary to provide “intergenerational fairness”.  And in a cringe-worthy cutesy video by the PM about the proposals, the PMO even invented a new marketing phrase – the “capital gains advantage” where an inappropriate comparison of a nurse’s salary to an investment banker realizing capital gains was done.  It was topped off by then Finance Minister Freeland’s bizarre speech stating “Do you want to live in a country where those at the very top live lives of luxury, but must do so in gated communities behind ever higher fences, using private health care and airplanes because the public sphere is so degraded and the wrath of the vast majority of their less privileged compatriots burns so hot?”  Interestingly, Ms. Freeland who is one of the Liberal Party leadership candidates has stated that if she becomes leader she would not move forward with the proposals.

 

In other words, the politics of these proposals were ugly, misleading and false. Overall, Canadians weren’t buying the ugly politics and were awake to the fact that these misguided proposals were a simple wide-sweeping and complex tax grab to support out-of-control spending.

 

But, it gets worse. Canadians were encouraged to crystallize their holdings prior to the planned implementation date of June 25, 2024. Letting the “tax tail wag the investment dog” is never a good idea but the government was essentially encouraging it so as to add one-time taxation revenues.  Now, with the benefit of hindsight, many such dispositions were obviously not necessary.

 

Many in the tax community were scrambling.  This includes hard-working bureaucrats at the tax legislation division who scrambled to develop draft legislation in a timely fashion.  The CRA was also left in a quandary having to decide how to administer such proposals and develop new forms. Tax software developers were also left scrambling.

 

But, most importantly, taxpayers and their advisors were left in a constant state of uncertainty.  Should they accelerate dispositions not knowing exactly what the legislation looked like? Advisors could not adequately and technically address taxpayer / client questions. Filing corporate tax returns for affected corporations was a mess.  Given the fact the proposals were not passed, how should they report capital gains?

 

Advisors have seen this movie recently – twice – with the debacle of the Underused Housing Tax filing season and the “bare trust” debacle last year.  This tax filing season was shaping up to be another debacle.

 

Given the above, the decision by the government to back down from this additional debacle is the right decision.  But it is not to be celebrated.  There was a lot of damage caused by the ugly politics and the long lingering uncertainty.  Many in the tax community, including me, had called for the government to suspend or defer the proposals until the uncertainty could be dealt with months ago.  Such cries fell on deaf ears until the fury became so intense the government was essentially forced into making a decision.

 

The damage caused includes a growing and significant distrust of our tax system, both in the way tax policy is proposed and how it is administered.  As a reminder, our tax system is a self-reporting system.  When there is a massive distrust in the overall system, the system has a high potential to break down.  The capital gains debacle is a textbook example of how Canada should not introduce taxation policy.  There is a much better way and our country’s history has good pockets of those examples.  Tax reform, as promised by the Conservative Party, is a spark of hope to return to those better examples.

 

In the meantime, the tax community needs to acknowledge those people who worked hard during this most recent debacle.  It includes, as mentioned, affected taxpayers, advisors, the bureaucrats at the Department of Finance and the CRA (who were trying hard to release instructive information) and software providers.  One can only hope that better times are ahead and our tax system can materially improve.

 

As the famous American economist, Thomas Sowell, implied in his writings, when governments introduce tax policies without thinking them through, they end up governing by crisis, not by principle.  And to paraphrase former U.K. Prime Minister, Margaret Thatcher, a tax policy that changes with the political winds is not policy—it is politics.

 

Very apropos.  Canada needs to learn from such wisdom.  We don’t need further tax crisis.  Nor tax policies that change with the winds.  A significant rethink of how taxation policy is introduced and administered in Canada is very much in order.

 

One Comment About Leadership – Leaders, Are You Creating Memorable Lessons?

 

Leaders, think about a person or company that has created a great memory for you. And what those lessons are.

 

Here’s one from me.  For those old enough, think back to 1996 in Canada.  The airline industry was dominated by Air Canada and Canadian Airlines.  Both were stodgy, not known for great service nor their friendliness.  There was room for a new start-up and the scrappy WestJet entered the marketplace in 1996.  It was privately held and proud of it.  It was committed to doing things differently.  And it was based out of Calgary, AB, my hometown.  Accordingly, I started flying with them and indeed it was a much better experience.

 

One of my strongest memories of WestJet, and I have many, is back in its early days.  The crew would play games with its passengers as to who would get off the plane first when it landed.  One of the games involved the use of two toilet paper rolls…one for each side of the plane.  The objective was for each side of the plane to unroll the toilet paper roll all the way to the back without ripping the paper.  If it was ripped, then a person would have to hold the broken pieces together in order to proceed.  Whichever side of the plane could unroll the TP in such a fashion first would be able to get off the plane first.  The laughter and competition was intense!  Frankly, it was hilarious.

 

I’m guessing I first experienced this game in 1997.  Twenty-eight years later, I still remember the experience with fond memories.  The lesson learned for me was to not be afraid to inject humour, fun and re-think the status quo in an industry known for its minimal service.

 

For unknown reasons (likely a “safety issue”), this game was abandoned shortly after 1997.  The experience of WestJet has changed over the years but the scrappiness, unpretentiousness and the rethinking of the status quo was a welcome addition to the skies.

 

Leaders, are you creating similar memories for your team?

 

One Comment About Economics – U.S. Tariffs

 

Well, what can I say?  Am I an expert in this space?  No.  But as mentioned in a previous newsletter, most economists, and people who apply common sense logic, will agree that no one wins in a tariff war.

 

The 30-day deferral of tariffs applying to Canada announced on February 3, 2025 by the Trump administration is welcome news.  Hopefully, the 30 days can be used to recall Parliament or at a minimum to develop a better plan and negotiate so as to prevent the tariff threat from becoming real.

 

There is obviously a lot of politics and “strategy” at play here with the U.S. government’s attempt to change the world order.  I read an interesting short LinkedIn post that I thought was interesting and I’d encourage readers to take a quick peek at this person’s perspective.  You can access it here.

 

In the meantime, buckle up.  Having said that, know what you can control.  And what you can’t.  This issue falls into the “can’t” category. So, bring the blood pressure down and keep focusing on what you can control.

 

Bonus Comment – Quote from American Author – Seth Godin – About The Importance For Leaders to Create Good Memories

 

“People don’t buy goods and services. They buy relations, stories, and magic.”

 

Yep, absolutely!  Why do you think I’m still loyal to WestJet….even after all these years and its inconsistent service?

 

Hope you enjoyed this edition of 1-1-1…please sign up for my mailing list today.