One Comment About Taxation – Still Waiting for the Capital Gains Inclusion Rate Increase Draft Legislation – In the Meantime, Canadians are “Planning in the Dark”

 

Well, June is almost upon us.  It’s almost summer season where Canadians get to enjoy BBQs, camping, swimming outdoors and working on our tans for a very short period.

But wait!  Isn’t there an important June date coming up that affects the taxation pocketbook of millions of Canadians?  Well, indeed there is! June 25, 2024 to be exact. That is the day that the government announced in its April 16, 2024 budget that the capital gains inclusion rate would be increasing from the current 50% to 2/3’s for corporations and trusts and any individual who has annual capital gains in excess of $250,000.  Unfortunately, detailed draft legislation was not released in the budget documents to lay out specifically how this proposal will work and we still do not have such details.

From April 16 – June 24, 2024, the government has banked and budgeted on the fact that Canadians would frantically trigger early gains on capital properties so as to “lock in” their gains under a lower inclusion rate.  The budget documents estimate that the amount of extra tax revenue that the government will collect by doing this to be approximately $7 billion.

Besides finding that number egregious, I find it horrible that the government is expecting Canadians to let the “tax tail” wag the “investment dog”.  That flies in the face of every foundational investment theory and from what I have preached in all of my years of being a tax advisor.  In other words, yes, tax is important.  But it’s only one consideration when deciding whether to monetize or artificially trigger gains.  Break-even and payback period analyses are also very important.

Since April 16, 2024, tax practitioners have fielded an unending amount of questions from people wondering what they should do.  Unfortunately, tax practitioners and their clients are “planning in the dark”.  One might think that legislation to change the capital gains inclusion rate should be pretty easy to draft.  But you would be incorrect.  Details matter.

For example, how will capital loss carry-forwards now work?  Will the government enable a one-time election – effective June 25, 2024 – like it did when it repealed the old $100K capital gains deduction (effective February 22, 1994) to effectuate dispositions? Or will it only respect legal dispositions?  How exactly will the triggered gains interact with the new / amended alternative minimum tax?  These types of questions are only scratching the surface.  There are many detailed questions that tax practitioners need to properly advise their clients.

But wait!  Our illustrious Finance Minister announced last week that the legislative package will be released before the House rises for summer recess!  That’s good, isn’t it?  Well, no it isn’t.  If the draft legislation is released on, say June 14, that leave practitioners a whopping 5 business days to absorb the details and try to give proper advice to a whole host of people.  Not good.

On May 1, 2024, The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada (a non-partisan committee whose role is not to advocate but to comment on technical taxation matters…I used to be a co-Chair of this Committee) released a letter to the Department of Finance with many great recommendations on how the new rules should be designed.  Included in its recommendations is for the government to provide an elective disposition (as discussed above) and moving the effective date to January 1, 2025 to enable taxpayers to better prepare.  CPA Canada released a follow-up letter on May 15, 2024 expressing significant concern that the draft legislation has not been released and, again, recommended moving the effective date of the proposal from June 25, 2024 to January 1, 2025.

While I agree with moving the implementation date to January 1, 2025, my first preference, as I’ve stated consistently since the proposal was released, is that the capital gains inclusion rate increase should be scrapped.  It’s bad for Canada especially at a time when our country desperately needs to encourage entrepreneurship, investments into Canada and reward people to take calculated risks with their capital.  The government is being blatantly misleading as it continues to say that this measure will only affect 0.13% of taxpayers.  That’s hogwash and thankfully many other experts are pushing back at such a disingenuous “statistic”.

I’ll happily debate any academic and / or economist who thinks this proposal will be good for Canada.  But be warned…if you accept my challenge, you need to come armed with real-life examples of how the capital gains inclusion rate increase will make life better for the average Canadian, investor, entrepreneur and pensioner.

In other words, I’m genuinely interested in knowing how such a proposal will assist in achieving equity / fairness, help in achieving “inter-generational fairness”, how taking money from people who are “old and who have already made their money” (all of these are vacuous speaking points that our Prime Minister has trumpeted in support of the change) is helpful for Canada and how such a proposal will encourage people to invest in Canada.  I’m not interested in your academic theories, formulas and “studies” that are not tested against behavioral change and real-life examples.  I live real-life everyday and while I’m certainly open to different views / experiences, my real-life experiences (combined with a strong knowledge of theory and policy) of how bad tax and economic policy impacts every-day Canadians is pretty compelling.

As the 1700s German philosopher, Immanuel Kant, once wrote: “Experience without theory is blind, but theory without experience is mere intellectual play”.  Very wise and true.

Despite the massive pushback, Canadians may have to wait for an election and government change to have the right thing done (scrapping the capital gains inclusion rate increase).  In the meantime, at a minimum, the recommendations of the Joint Committee and CPA Canada should be followed by delaying implementation to January 1, 2025 to enable Canadians the proper time to seek advice after tax professionals have fully absorbed the details.

Planning in the dark is never a good thing.

 

One Comment About Leadership – Leaders, Be a “Storyteller”

 

There are many articles and books written on the power of storytelling.  Some actually say that it is the ability of humans to tell stories that have enabled them to become the dominant species on Earth.  Whether the stories are told in oral, written, artwork or even movie form, they can be very powerful to get messages across.

Many readers will likely recall many days of sitting in a classroom listening to your instructors.  For me, if the topic was very technical / boring, it took a ton of energy to follow the instructor and ensure I got good value from the instruction.  In some cases, the instructor was so awful and not engaging that I might as well have just read the textbook / other sources (which, of course, I did).  The time spent listening to the instructor (or actually in some cases falling asleep) would have been better spent elsewhere.

My favorite instructors – even today – are the ones that can effectively “make it real”.  They most often do this by telling stories.  The stories are very illustrative and seek to make the technical content “real”.  Many successful public speakers are great at this.  Tony Robbins comes to mind.  Steve Jobs with his famous “one more thing!” line after spending time during Apple’s events showcasing the latest gadget / technology was also a very effective storyteller.  My parish priest always starts his homilies with a story.  At the end of his story, there is usually a punchline with chuckles coming from the audience.  He then proceeds to make his point about his latest teaching using that story.  It’s very effective and engaging.

If you can relate to the above, then think about your own leadership.  When you are mentoring your teammates, are you simply trying to lecture to them about some technical issue or talk to them about how they can improve?  If so, how about instead tell them a story that illustrates your points.

I’ve found, however, that there’s a fine balance between telling “Grandpa stories” vs stories that are effective.  In other words, you don’t want to simply tell stories that reminisce about the “good old days”.  You know the ones: “when I was a kid, we would walk 5 miles to school uphill both ways in freezing temperatures….”.  Instead, during your teaching moments, take the time to think of an effective story – often with your experience – that you are confident your audience will relate to.

I often tell stories when teaching difficult taxation concepts. It can be very effective, especially when explaining why such tax provisions actually exist (in other words, trying to explain what the purpose of the tax provisions are that is the subject of the moment).  I also do it when I’m trying to explain basic leadership or life concepts.  I certainly don’t have it mastered but it is something I continue to practice and find it very effective.

Leaders, if you’re not a storyteller, I think you should try to become one.  It’s a very effective teaching tool.

 

One Comment About Economics: Increased Costs to Canada For the “Enhanced” Journalism Tax Credits?

 

Regular readers of mine will know that I am no fan of Canada’s Journalism Tax Credits.  I have been very vocal about how I believe the taxation system is not the way to support Canada’s journalism industry and I have previously written about it in this newsletter here and I produced a podcast episode on this topic here.

Overly simplified, the journalism tax credits are a series of various lucrative credits authorized under the Income Tax Act and have been around since the 2019 Federal Budget.  The credits have been worth approximately $600 million since their introduction.  While that number may seem small in the whole scheme of things, it is not when you consider the fact that such amounts are distributed to a very small group of businesses and can be material to the recipient (especially the labor credits).  What bothers me most, however, is the fact that the credits encourage such organizations to not “bite the hand that feeds them”.

In my opinion, the quality of “news” from the so-called “mainstream media” has significantly declined over the years.  I don’t think you’ll find too many reasonable people who disagree.  Instead of reporting the “news”, we are constantly bombarded with opinions, shaming pieces, talking heads / self-appointed “experts” who think they know more about complex topics than specialists, endless articles on progressive topics that are completely out-of-touch with the average person, etc.  While such decline commenced before the introduction of the journalism tax credits, I believe it has accelerated since that time.

The November 2023 Fall Economic Statement released by the Canadian federal government announced increases to the journalism tax credits, especially to the labor tax credit.  Earlier this month, the Canadian Parliamentary Budget Officer (“PBO”) released a Legislative Costing Note about how much such increases will cost the public purse.  The Note does a nice job of succinctly summarizing the credits and what the increased support will cost Canadians.  The PBO estimates it will cost Canadians an additional $104 million.  Again, not a big number in the whole scheme of things but very material to the recipients which, again, for the reasons explained above, it is not good.

The Journalism Tax Credits need to be repealed for the betterment of all Canadians.

 

Bonus Comment – Quote From Steve Jobs –– Deceased American Businessman, Investor, Inventor and Co-Founder of Apple – About Storytelling

 

“The most powerful person in the world is the storyteller. The storyteller sets the vision, values, and agenda of an entire generation that is to come.”

 

Yep, totally agree!  Leaders, are you a storyteller?

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