One Comment About Taxation – The Canadian Proposal to Increase the Capital Gains Inclusion Rate – Canadians are “Planning in the Dark”

 

It’s been almost a month since the Canadian federal budget was released.  Normally, the “long tail” on budget articles / comments is not that long.  Perhaps a few days or a week at best.

In the present case, the furor over the capital gains inclusion rate increase from the current 50% to 2/3’s (with only individuals getting a $250,000 annual threshold at the current 50% inclusion rate with any amount in excess of that threshold at the 2/3’s) is keeping the discussion alive and lively.  The disingenuous and misleading messaging by the government that the proposal will only affect 0.13% of individuals is also angering many.

The fact that Canadians are still talking about this proposal is encouraging.  Canadians need to understand how short-sighted this proposal truly is.  Canada has a very significant productivity challenge.  There are many concerns being raised by common-sense folks who understand this proposal will directly or indirectly have a negative impact on themselves and Canada.  Canada desperately needs to encourage investment, not discourage it by making it more expensive for people to risk their capital.

In the meantime, many business organizations like the Canadian Medical Association (which believes that the proposals will impact doctor recruitment and retention), the Mining Association of Canada and other business groups are speaking out against the proposals.  Such pushback and attention is growing but the government shows no outward sign of backing down.  Indeed, on May 13, 2024, the Prime Minister released a “cutesy” video in support of the proposals.  I provided a rebuttal video to the PM’s video yesterday.

Over the last month, I have spoken to well over 750 accountants, lawyers, investment advisors and average Canadians either at in-person or virtual info-sessions about the proposals.  One of those sessions was put on by my colleague Jay Goodis of Tax Templates Inc and myself through our Canadian Tax Matters platform and was attended by over 400 people.  What is obvious is that people are hungry for more information.

Unfortunately, there is no draft legislation available to answer the detailed and excellent questions that are being posed.  For example, will estates (specifically, “graduated rate estates”) be afforded the $250,000 threshold? Will “elections” be available to enable people to trigger dispositions before June 25, 2024 instead of actually having to trigger actual dispositions? How will capital gains “reserves” be treated if such gains were triggered during a period where the inclusion rate was 50%?  How will loss carry-forwards be treated?  As Jay and I said during our Canadian Tax Matters session, Canadians are currently “planning in the dark”.  Not good.

Obviously, the sooner the draft legislation is released, the better.  In addition, if this government is insistent on retaining this awful proposal, then at the very minimum the June 25, 2024 implementation date should be significantly extended – say to January 1, 2025 – so as to give Canadians adequate time to plan their affairs with full information available.

The people I have been speaking to over the last month are not buying nor believing the government messaging about the capital gains inclusion rate increase especially after I explain why the messaging is so misleading. When they learn more, the agitation levels are apparent.

The agitation levels of successful Canadians – or as the government likes to refer to as “rich” – is even more apparent.  I’ve mentioned it before and I’ll mention it again.  More and more Canadians are exploring leaving Canada.  There has been a significant increase in my practice of successful Canadians wanting to explore leaving Canada.  Many have already pulled the trigger.

Some “Doubting Thomas” type people have written to me demanding I provide evidence of such reactions.  Obviously, I cannot for confidentiality / privilege reasons, but I invite such Doubting Thomas people to book time with me to monitor the increased activity.

One of the most common questions I get during the sessions I have spoken at – and by email or text – is will a new government drop the proposals?  Obviously, I do not have the answer to that.  I’m sure you can guess what I’m hoping for.

Having said that, I thought Conservative Leader Pierre Polievre addressed such a question rather well in his May 3, 2024 op-ed.  People need to continue to speak up and stop supporting organizations that pander to this government which appears hell-bent to impose their political agendas regardless of the damage that may occur.

In the meantime, Canadians should carefully consider whether or not early acceleration of capital gains makes sense for them.  In many cases, it may not.  For example, for higher income Canadians, the triggering of capital gains before June 25, 2024 may cause the amended alternative minimum tax (“AMT”) to apply.  If so, the question will be whether or not there is a feasible plan to try to recover such AMT within the next 7 taxation years since the AMT is a refundable tax to the extent it does not apply in those future years.

Another question will be to figure out what the estimated breakeven period will be if taxation is triggered early.  Such an analysis will inevitably involve estimates and predictions such as future rates of return on the re-invested capital.  Obviously, such predictions will be an estimate / “best guess” at best.

Despite left-leaning academics and economists who support the capital gains inclusion rate proposal on the basis of “equity”, the short rebuttal is that “equity” ignores the real world of investing where investors look at overall risk, liquidity and the time value of money.

John F. Kennedy, the United States’ 35th President from 1961-1963, once said: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy”.

Yep – wise words from JFK from over 60 years ago.  The Canadian government would be wise to heed such advice and eliminate the capital gains inclusion increase proposal.  For the benefit of ALL Canadians.

 

One Comment About Leadership – Become a Friendlier Person / Leader

 

Dale Carnegie, in his classic book “How to Win Friends and Influence People” encouraged readers to become friendlier persons.  One of his tips was for people to become genuinely interested in other people.  In doing so, he encouraged people to “recall that a person’s name is to that person the sweetest and most important sound in any language.”

Over the years, I have deliberately worked on the above suggestions.  When I sit down with a colleague and genuinely listen, ask them questions and try to get to know them, it makes a big difference over time.  In the midst of doing so, when I use my colleague’s name in the conversation, the interest level and engagement in the conversation becomes noticeably better.

Without trying to denigrate the above, here’s a simple analogy.  For my dog, Enzo, his name (along with the word “treat”…ha!) is the sweetest and most important sound to him in his dog world.  If I mention his name, he knows he’s going to be paid attention to.  His ears perk up, he often gets noticeably excited, will go get his toys for us to play with him, etc.

Human beings are similar.  We are social creatures and the use of someone’s name in a conversation shows respect and engagement if it is used genuinely.  But don’t be that person that that overuses a person’s name in conversations…it can become annoying and quickly viewed as disingenuous.

Becoming a friendlier person involves becoming GENUINELY interested in other people.  Find the balance of using a person’s name in conversation without overdoing it.  Your leadership journey will be better for it.  I’m also confident that you will find that the people you serve will enjoy dealing with a more friendly leader who is genuinely interested in them.

 

One Comment About Economics: Canada’s Government Drops its Threat to Go After Real Estate Investment Trusts (“REITs”)

 

Yes, I know, this topic might be another taxation comment but it has broader consequences.

A couple of years ago, the Canadian government, in a continued attack on “boogeyman” that are apparently the cause of Canada’s housing challenges (short term rental owners, foreign owners and those damn “flippers” also fall into this category), announced that they were considering levying REITs with a new taxation regime (exactly what we didn’t know) since they were apparently accumulating excessive profits on residential rentals.  Right….

Well, on May 8, 2024, the Department of Finance announced in a three sentence statement that no changes to the taxation regime of REITs was being considered at this time.  This all because apparently the government came to its senses after significant pushback from the real estate industry.

Once again, this approach by the government of Canada is very frustrating.  Such approach on many files – including real estate taxation – is to create “boogeymen”, make a bunch of threats, implement poor policy and hope for the political win.  While I appreciate politics will always win the day (since the governing party is always thinking about how to maintain power and win the next election), one can’t help but crave good policies that instead think of the greater good.  In this particular case, cooler heads did prevail but not after a bunch of wasted effort that could have been positively expended elsewhere.

Frustrating.

 

Bonus Comment – Quote From Brene Brown –– American Researcher and Author – About Leaders Being Genuinely Interested

 

“A brave leader is someone who says I see you. I hear you. I don’t have all the answers, but I’m going to keep listening and asking questions.”

 

Yep, totally agree!  Leaders, are you taking genuine interest in those around you?

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