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Kim G C Moody’s Musings – 1-1-1 Newsletter For September 4, 2024
One Comment About Taxation – U.S Presidential Candidate Kamala Harris’ Plan to Tax Unrealized Capital Gains Lacks Common Sense
When should income be taxed? Put another way, especially in the context of computing business income, how is profit for tax purposes computed?
That seems like a straightforward question, right? Well, it’s not. In fact, it’s been the subject of a number of textbooks, numerous court cases and Canada Revenue Agency administrative positions. In Canadian tax, one of the landmark writings on this subject was the 1983 Tax Paper “Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes” written by the eminent Professor Brian Arnold. That Paper was updated in 2015 by Professor Arnold and a cast of superstar tax practitioners into a new book. The Paper and updated book is a staple for any serious Canadian tax practitioner.
Why do I mention this? Well, for non-tax practitioners, it’s often taken for granted that you only pay tax when you receive something in exchange. For example, if you provide your labour and get cash in your bank account, well you’re only taxed then. If you purchase a cottage property and then later sell it for a profit, that realization date is when you need to report a taxable capital gain.
However, our taxing statutes go much beyond those simple examples. For example, in the computation of business profits, most businesses (with the exception of farming and fishing), must record profits on an accrual basis, not on a cash basis. In other words, if you sell something but have still not been paid, you generally (with some exceptions) must record that sale in your income. Inventory and capital purchases are not an immediate deduction. The above-mentioned paper / book dives into a lot of detail with respect to these issues.
When trying to explain these difficult concepts to people I mentor, I try to distill the complex timing and profit computation issues into a bite-sized concept as follows: if there has been an economic realization, then generally there will be taxation consequences.
There are numerous exceptions to this overly simplistic concept such as deemed realizations upon death or becoming a non-resident of Canada, imputed taxable income amounts when certain conditions are met (for example, if I receive a loan from a company that I’m related to, I’m deemed to have received an interest income inclusion), deemed realizations when the use of a property has changed from, for example, a personal use property to an income purpose and a host of other exceptions.
The United States tax system is vastly different from that of Canada’s. Notwithstanding, the basic issues of how to compute income are similar, but again, different.
With the above in mind, I couldn’t help but shake my head at the U.S. Vice-President / presidential candidate’s – Kamala Harris – proposal which she has adopted from President Joe Biden to tax unrealized capital gains for people who are worth $100 million or more. For such people, they would be required to annually pay a minimum tax of 25% of their income and unrealized capital gains.
Yes, you read that correctly. The proposal is to have wealthy Americans pay an annual tax – akin to a wealth tax – on their unrealized capital gains.
While some media organizations and progressive “think-tanks” trumpet the ideology that by not taxing wealthy people’s unrealized capital gains that such people are taking advantage of this “loophole”, I like to think about it another way. This simplistic view is simple nonsense and violates the good concepts of common sense, fairness and the basic timing issues / computation of profit generally described above.
Ideas like this are simple poor policies that unfairly target the wealthy. It’s been in vogue forever to “tax the rich” and “stick it to the wealthy” since they are taking advantage of “loopholes” (a vacuous phrase that describes nothing) but proper taxation and economic policy needs a more foundational underpinning.
In addition, like any form of a wealth tax, the idea is rife with administrative complexities such as how to value assets (especially non-financial assets like businesses, land, rental properties and other real estate). What would happen if, in a subsequent year, there are unrealized losses and taxes have previously been paid on unrealized gains? Liquidity issues would be common since wealth is often tied up in assets that can not be easily liquidated.
As one well respected US tax lawyer recently wrote, the scariest part of the proposal is that this could open “…the door to a more generalized effort by the government to tax you on something that you still own? Right now the proposal is only to use this wealth tax for the truly wealthy. Not just billionaires, but also anyone with at least $100 million. Once we start down this path, could we some years from now face a tax like this for someone with $20 million, $10 million, even $1 million? [of assets]”
I agree.
Another American commentator put it bluntly in his recent writing quoting another “think-tank”: “Taxing unrealized capital gains contradicts the basic principles of fairness and property rights essential for a free and prosperous society. Taxation, if we’re going to have it on income, should be based on actual income earned, not on paper gains that may never materialize”.
One can’t help but think that if this proposal were to somehow pass into law in the U.S., the exodus of capital would be large and would contribute to economic chaos.
Despite the complexities of tax law (including the timing of receipt of income and the computation of profit), there is inherently some common sense involved in developing all tax and economic policies. The Harris proposal to tax unrealized capital gains lacks common sense.
Canadians should watch with interest how this proposal plays out. In my opinion, any similar types of proposals in Canada, like a home equity tax, should be roundly rejected.
One Comment About Leadership – Cherish Your Time
Last week, I awoke to the news that superstar NHL hockey player, Johnny Gaudreau and his brother, Matthew, were tragically killed in a senseless accident. As many will know, Johnny was a long-time Calgary Flames player. He was originally drafted by the Flames and he spent parts of 9 seasons playing for the Flames. I’m a 30 year Calgary Flames season ticket holder so I had the pleasure to watch him mature into a young man and excellent hockey player. When he passed away at age 31, he left behind his wife, two young children, his parents, siblings and many friends. He was in the prime of his NHL career and just beginning his life as a father and husband. So sad. Like many people, I was shocked and saddened by the news. And I felt horrible for his family. It was a stark reminder that life and time is precious for all of us.
For leaders, time is your most precious resource and needs to be guarded carefully. There are many pressures that pull on your availability. And as your responsibilities grow, such pressures will continue to increase. How you spend your time is critically important to ensure growth as a leader, person and your organization.
For me, mastery of my available time has been an exercise in discipline and ensuring that I don’t allow myself to be enamored with shiny objects. Having a morning routine, as I wrote about earlier in this newsletter, is critically important for me. Ensuring that my days are planned out in advance is also critically important.
I’ll be hosting a virtual Time Mastery Masterclass for MacKay CEO Forums on September 16, 2024. I’d encourage you to attend if you would like some tips on how to protect and get the most out of your most precious resource – time.
In the meantime, my sincere condolences to the Gaudreau family.
One Comment About Economics: Parliamentary Budget Officer’s Fiscal Sustainability Report – Alberta vs British Columbia – 2024
The PBO’s Fiscal Responsibility Report for 2024 was released last week. This report provides the PBO’s assessment of the sustainability of government finances over the long term for the federal government, provincial governments and public pension plans. It’s an interesting read.
For the federal government, the PBO states the following:
Current fiscal policy at the federal level is sustainable over the long term. We estimate that the federal government could permanently increase spending or reduce taxes by 1.5 per cent of GDP ($46 billion in current dollars, growing in line with GDP thereafter) while stabilizing net debt at its initial level of 29.1 per cent of GDP over the long term.
I find that conclusion surprising but with our current federal government, $46 billion is a pittance in spending.
As part of its Report, the PBO released a FSR At-A-Glance Tool. It’s an interesting graphic to obtain good summary information about the Report quickly. I used the tool to compare my home province, Alberta, to that of its neighbour – British Columbia.
I love Alberta for its energetic and entrepreneurial spirit, its beauty and richness in natural resources. Its provincial government is also one of the most fiscally sensible in Canada. The FSR At-A-Glance tool reveals the following about Alberta:
- Alberta’s long-term outlook for population growth is the highest in Canada. In the long run, Alberta is projected to have the fastest growing economy. This is mainly due to favourable demographics resulting in faster growth in total hours worked compared to the national average while labour productivity growth remains on par.
- Current fiscal policy is sustainable over the long term. Under current policy, revenues and program spending (in current dollars, growing in line with GDP thereafter) are sufficient to stabilize government net debt (as a share of the economy) in the long term.
- Alberta’s long-run fiscal outlook begins favourably – current revenues significantly exceed current spending as a share of the economy. However, due to provincial medium-term plans and cost pressures of population aging, the primary balances are projected to deteriorate over the projection horizon.
Not surprisingly, Alberta rates high in fiscal responsibility and outlook.
Now let’s compare this to Alberta’s neighbor, British Columbia. B.C. is known for its natural beauty, warmer temperatures and rich resources. Unfortunately, though, it has a long history with progressive / liberal politics who are irresponsible fiscally.
The PBO says the following about B.C.:
- British Columbia’s long-term outlook for population growth is in line with the national average. In the long run, British Columbia is projected to have slower real GDP growth compared to the national average. This is mainly due to slower growth in labour productivity compared to the national average.
- Current fiscal policy is not sustainable over the long term. Permanent tax increases or spending reductions amounting to 1.8 per cent of GDP ($7.4 billion in current dollars, growing in line with GDP thereafter) would be required to stabilize government net debt (as a share of the economy) in the long term.
- British Columbia’s medium-term fiscal outlook negatively contributes to its fiscal sustainability as program spending exceeds provincial revenues as a share of GDP. However, because of relatively slower economic growth, we project that British Columbia will begin to receive Equalization beginning in 2066, with payments rising as a share of the provincial economy in later years, helping to improve the primary balance over the long term.
That is concerning about B.C. It obviously needs a significant course correction as any casual observer would likely agree. Thankfully, B.C. is having a provincial election in October 2024. It has a real chance to change course by electing a government that is more fiscally responsible.
I’m hopeful it will.
Quote From Thomas Edison – American Inventor and Businessman – About The Preciousness of Time
“Time is really the only capital that any human being has, and the only thing he can’t afford to lose.”
Absolutely agree!
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