One Comment About Taxation – Will the Capital Gains Proposals Get Passed?

 

By now, most readers know that capital gains are preferentially taxed in Canada, like most countries; and for good reason.  Prosperous countries realize that investors, including entrepreneurs, take significant risks that can have extended long-term benefits to society and the economy.  Thus, the concerns when Canada introduced complex proposals earlier this year to increase the capital gains inclusion rate effective June 25, 2024.

 

And for those that continue to mindlessly bleat out the “buck is a buck is a buck” line in support of the proposals, well, I’ll repeat the phrase made by former Finance Minister Benson in 1969: “The government rejects the proposition that every increase in economic power, no matter what its source, should be treated the same for tax purposes. This proposition, put forward forcefully by the Royal Commission on Taxation, has often been summarized rather inelegantly as ‘a buck is a buck is a buck.’ But although the government does not accept this theory in all its splendid simplicity, neither does it believe that the distinction between a so-called ‘capital gain’ and an income receipt is either great enough or clear enough to warrant the tremendous difference from being completely exempt and being completely taxable”.

 

Yep – totally agree.  In addition, I often hear that “employment risk is absolutely the same as entrepreneurial / investor risk”.  Right.  Hogwash.  To people that say that I challenge them to put their money where their mouth is and put up their life savings – including their gold-plated pensions – and start a business.  You think it’s easy?  You think it’s a guarantee to riches?  Well, do it.  I dare you.

 

With the above out of the way, will the proposals actually become law given the fact there is not currently a bill before Parliament? As many know, the business of Parliament has been stalled.  Combine that with the fact that some of the opposition parties have made it clear that they would like to topple the government.

 

Accordingly, there is political risk that could delay or even permanently suspend the proposals thus keeping the 50% inclusion rate as the current benchmark.  I have been asked about that last possibility many times in the last month. Is it possible?

 

The short answer is, yes.  It’s possible. I often provide a caveat to this answer, though.  For those of you who like mindless comedy like I do, I often use the famous line in the 1994 movie Dumb and Dumber as the caveat.  The goofy main character, Lloyd, asks Mary, a beautiful woman that he is infatuated with, what the chances are that they could end up together.  She replies that the chance of that happening is about one in a million.  “So, you’re saying there’s a chance!” Lloyd excitedly states.

 

And that kind of summarizes my thoughts about the capital gains proposals not getting passed into law.  There’s a chance but it’s small.  With the NDP continuing to prop-up the Liberals, it’s likely to proceed but, you never know.  Those more astute with politics might have different points of view but that’s my best guess.

 

If an election is called before the capital gains proposals are passed, all bills before Parliament would die.  To become law, a new bill would need to be put before Parliament by the new government.  Would the new government be compelled to re-introduce the bills that died as a result of the election call?  No.  And if it is a new governing party, it would be highly unlikely that the proposals would move forward.  Would that mean a lot of Canadians may have proactively planned as if the proposals would become law (which is usually the right thing to do) but all for not.  Yes. Crazy.

 

What should affected taxpayers do in the meantime?  Well, taxpayers and the Canada Revenue Agency are in quite a pickle.  The CRA is charged with administering the law.  However, the capital gains proposals are not yet law, but they will have retroactive effect to June 25, 2024 and forward should it become law.  Presently, the CRA has no legal ability to assess affected tax returns on the basis that the capital gains proposals are law.  The related tax forms and CRA approved tax preparation software has not been updated / approved.  Should taxpayers proactively file affected returns in such a way to account for such impact?

 

The CRA recently provided guidance via CPA Canada (who has been proactively dealing with the CRA on this question) that encourages taxpayers to file affected returns on the basis of the proposed legislation using a variety of different options.  I have reviewed the CRA suggestions and they make logical sense.  In today’s high-interest rate environment, one would generally want to ensure that probable tax liabilities are timely paid so as to avoid possible costly interest charges.  Currently, that rate is 9%.

 

But what if the opposite happens?  In other words, if you follow the CRA recommendations and proactively file and pay tax on the basis of the proposed legislation but the proposals never get passed?  Well, in that case you would need to file an amended return to adjust for the correct amount of taxable capital gains and request a refund for the overpaid tax.  CRA would also pay interest on such overpayments but, of course, at a rate lower than the current 9% for liabilities.  That refund rate is currently 7% for non-corporate taxpayers and 5% for corporations.

 

So, what to think of all this confusion?  Well, as Albert Einstein famously stated: “In the middle of difficulty lies a path to order.” I think that is apropos in the present case.

 

In today’s uncertain tax environment involving capital gains, it is certainly confusing but indeed there is a path to order.  Canadians would be wise to keep paying attention to this evolving story.

 

One Comment About Leadership – Leaders, Help Unlock the Music Trapped Inside Your Teammates

 

One of my favourite leadership coaches is Catherine Bell of The Awakened Company.  I have had the pleasure of knowing her for roughly 30 years and she has helped coach me and the organizations I have been aligned with for years.  She is also a member of one of my MacKay CEO Forums groups that I Chair.

 

She presented for that group last week on “Awakening Your Organizational Culture” and it was a great eye opener and reminder on why creating a purposeful and intentional culture in your organization is critical.

 

One of the things that Catherine spoke about was ensuring that leaders involve teammates in creating the purpose and vision (or as Simon Sinek calls the “Why”) of the organization. “People support what they create,” said Catherine.

 

She also mentioned: “Most people die with their music locked up inside them”.

 

Those were great reminders that one of the leader’s roles is to involve teammates in the creation of the organization’s “why” and in doing so hopefully they will help unlock their teammates’ music that otherwise might be locked up inside them.

 

Leaders, are you proactively doing this?

 

One Comment About Economics: Canada’s Proposed Emissions Cap

 

Yesterday, the Canadian federal government released draft regulations to impose an emissions cap.  Such regulations are aimed squarely at the oil and gas industry.  In my home province of Alberta, where oil and gas is a very important industry that drives a lot of wealth and success to many Canadian families, the proposals went over like a lead balloon.  Rightfully so, Alberta Premier Danielle Smith reacted strongly against such proposals.

 

As the Financial Post reports:

 

Ottawa’s draft regulations for an oil and gas emissions cap have landed with a thud in the Canadian oil patch, where the resounding response was consternation over a policy that is perceived as punishing domestic energy producers.

 

The draft rules released on Monday are being interpreted as a de facto cap on oil and gas production in Western Canada, with many in the sector warning that price volatility combined with existing environmental obligations and the proposed emissions cap could drive an unknown number of companies to shut-in production to comply with the new rules.

 

“We’ll be the only (oil and gas exporting) country in the world that’s going to have an artificially higher cost due to the emissions cap and the efforts we’ll need to invest in to reduce emissions to stay inside the cap,” Precision Drilling Corp. chief executive Kevin Neveu said.

 

“In order to abate emissions, you have to invest more and more money to do that. So, you have two choices: either invest more money to reduce emissions or reduce production to reduce emissions.”

 

Under the draft rules, upstream oil and gas producers, as well as oilsands and liquified natural gas production facilities, will be required to cut emissions by an estimated 35 per cent by the end of the decade.

….

“Canada’s emissions profile is not unusual. What’s unusual about Canada and our emissions is we seem to be the only exporting nation of the world that is willing to self-immolate,” Michael Belenkie, chief executive of Advantage Energy Ltd., said.

 

“All we’re doing is we’re shutting ourselves down at our own expense and watching global emissions increase.”

 

Well put.  This proposal is very concerning and simply put is not good for Canada.  It’s good politics, though, since most of the Liberal Party’s voter base – shrinking as it has – is in Central Canada who, as a whole, often have a shallow understanding of the importance of our country’s oil and gas industry. Should these caps ever come to fruition, there is no doubt that Canadians will be poorer for this despite the crowing of the Liberal Ministers that these policies will create jobs…..yeah, right.

 

It’s time for a government change…it can’t happen soon enough so common sense can hopefully return as the norm instead of radical nonsense.

 

Bonus Comment – Quote From Abraham Lincoln – 16th President of the United States – About Being an Effective Leader and Not Provoking People Unnecessarily

 

“Leadership is the art of giving people a platform for spreading ideas that work.”

 

Leaders, again, are you unlocking the music trapped inside your teammates??

 

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