The Tax Man Cometh...
“By 2025, every single business and human in Canada will be broke, that is, if they haven’t left the country already.” — Canadian financial, political, and corporate pundits
A bell tolls!
The Tax man cometh…
AAAAAHHHHH Boogeyman, amiright?
Capital Gains Tax (CGT) is not the end of the world, and in reality, has very little effect on like 99% of people in any real and or substantive way. Is it a bummer that taxes will change over time? I mean, when they go up, sure. But are you sure you know what Capital Gains Taxes even are?
By the way Canadians and certainly the vast majority of our press is reacting… no, not really.
As always, let’s start at the footings and work our way up, ok?
What are Capital Gains Taxes?
Simple, they are taxes that are paid on the gain made by any non tax sheltered investment. Stocks, bonds, GIC’s, properties, cryptocurrencies, etc… when you make a gain on the investment, a percentage of that gain is taxed at your current income level. CGT is a factor of your personal or corporate income, in any given year, given preferential treatment to your personal or corporate income in that particular year.
It is not complex.
From a non-nominal point of view, as of today, if you make $1 in capital gains and dispose of that gain, you will pay your income tax rate of 50% of that gain.
- if you are in a 30% tax bracket, and dispose of the $1 in gains, you will pay 30% on the CGT of $0.50, or $0.15.
You keep 85% of your gain, the rest goes into the tax pool.
Come July, if you dispose of $250,001 in gains, you will pay an additional 16.7% on any dollar, at your personal income tax rate, above $250,000. That $1 above the allotted is taxed at 66.7%.
- for the sake of consistency, you’re now paying $0.20 at the same 30% non-nominal tax rate on those gains.
You take home $0.80 of every dollar.
I will get into some of the arguments being made below, but I will ask this one question: how many people do you know who will dispose of more than $250,000 of capital gains in one year?
Specifically, who out there is disposing of an asset with an Adjusted Cost Base (ACB) or initial investment of $250,000, with a gain of $250,001 or more, in a single year? Do you know anyone who has this kind of money? Because I do— quite a few actually. But the fact is, the CRA says around ~.14% of Canadians fall into this category. (Source)
Are you pissed off at the new changes? Can you count on one hand how many people fall into the .14%?
How mad can you really be?
For many of our clients, specifically those who hold corporately held investments in our Segregated Fund portfolio, you’re already paying full bore CGT on an annual basis inside that investment, which over time can increase the ACB of your investment and lower the tax paid in years where you make gains (7-8 years out of ten when including dividend gains). You’re also receiving a capital loss carry-forward in years where the portfolio loses value. 2022 would be an exception to this, because we made a wild amount of money being paid dividends that ate the loss up.
For people working with individual accounts or stock/ mutual fund brokers or with the bank, you’re only subject to any gains on non-registered or corporate owned gains when you dispose of the gain in the first place. Again, offset by a portion of the ACB and your nominal income tax.
Again, if the increases only affect those with gains over $250,000… do you think that perhaps, they now have more incentive to plan ahead? I would imagine so. They’re wealthy and can afford to abuse the tax code, so let them and don’t worry about it.
Well, hold on there Mr Darris, Capital is mobile… WE’RE ALL GONNA LOSE OUR JOBS!!!
Ok, let’s check under the bed for this monster, ok, lil buddy?
Sorry to patronize, (not really) but let’s be honest, if a large corporation, or even a small to medium enterprise (SME) which make up the bulk of employment in Canada outside of the government, is going to pack up and leave the country, why would they have waited all this time and why don’t they do it in other parts of the world where tax is actually high?
I am Albertan, so let’s compare comparables, alright?
Norway is an extremely wealthy nation with very high tax rates, their wealth was built upon the backs of big tough rig workers, just like here in Alberta. Well, they built wealth for their people, while we gave our resources away for nothing, but that’s conversation for burgers and beers, let’s stick to the point.
In the late 60’s, Norway discovered vast stores of offshore resources to exploit, and private enterprise came out of the woodwork to begin to negotiate. Much like in Canada, at the time, most resource exploration and exploitation were state owned and entrepreneurs decided to assert that “socialism bad”, let us do the work, make the profits and we will pay you royalties for letting them do the work.
Canada said, “OK!”. Norway said “nah, if you want to play, you’ll have to pay!”. For a long time, Norway’s government and people owned the rights to their resources and most of the money went into the hands of Norwegians. Our current Prime Ministers father thought it would be a good idea to follow the same path and was systematically torn apart because of it. Since then, tax rates and capital gains rates have decreased, and stayed at levels among the bottom 1/3rd of OECD counterparts for nearly 4 decades.
Meanwhile, over the last twenty or so years, Norway has opened up their resources to outsiders and corporate interests, pay nearly Twenty times the amount paid in Alberta, on royalties and nearly five times more income tax on revenue (Source). Heck, even in America, resource company’s pay a royalty nearly eight times more than we get here in Alberta.
Is capital mobile? Sure, but where will it go? Capital gains tax just hit its highest percentage since 1922 in America, and frankly taxes are slowly rising in most of the industrialized world.
SME’s can’t just pack up and move, they’d be forced to sell, which could incur a massive amount of taxes on any sale. Then the business owner must start over in a jurisdiction where they don’t know anything about the market?
I doubt it. We’re not all Murray Edwardses, you know? (Not an indictment against the man, he said he’d leave if taxes increased. They did, then he left.)
So yes, Capital is “mobile”, but let’s be honest, it isn’t going anywhere. Canada is far too favourable to capital and the wealthy to see it move.
Lastly on that point; when capital moves, it forms a vacuum, and that space is always filled soon after it forms. I can’t find anything under the bed, buddies. I think we’re safe.
In the last few days, we’ve been hearing a lot from doctors associations around the country. Their gripe is valid IMO, but in practice it is a little silly. Most family physicians and clinicians across the country are incorporated. Which means income they are paid, from our tax dollars, are paid into a corporation, which receives preferential tax treatment, but is mainly set up as a shield from liability, as all corporations are, against personal capital and wealth against legal issues.
I am incorporated. Financial Value Inc. is my corporation.
Corporations pay capital gains tax at the top nominal tax rate, regardless of the amount. So, the new tax rate on gains above $250,000 hits corporations at dollar one. This is generally offset over time, because the corporation can pay dividends, which are preferential to regular income and incurs less tax. Over many years, the owner of a properly managed corporation, will simply pay less tax than the average employed person. (They don’t pay into CPP or EI, so… there is that too.)
Now, here is the interesting feature of corporations and capital gains. On the sale of a corporation, the owner(s) of the corp are exempt from $1,250,000 in capital gains. This is indexed to inflation and grows annually. Under the right circumstances, the sale of a corporate asset may be covered by this exemption and the sale of the shares of the corporation are certainly covered.
While CGT has in fact increased the tax liability a corporation may be obligated to deal with, over time… I wouldn’t say there is much to whine about here.
For Doctors, here is where things get strange.
Doctors don’t have a business to sell. In Canada, as I understand it, a doctor can’t sell the patient base they have built to a new doctor. As a financial advisor and agency owner, I can sell my agency and my clients to a new advisor, have my CGT exemption absorb a huge portion of the gain, and work around a lot of the rest over time. A doctor has nothing to sell.
So… what is the problem here?
Any professional I meet, in any field, and certainly Doctors, I will advise they immediately purchase a permanent life insurance contract inside their corporations, shelter any and all corporate dollars that aren’t paid out in dividends to them, and use the corp as leverage in retirement, if they are insurable.
The fact that our industry, that accountants, that lawyers aren’t absolutely pushing the idea that CGT is nearly completely avoidable is, in my opinion, insane. We have the product… capital gains are negligible for most people, and doubly so for owners of corporations.
Doctors, please, I am begging you, talk to your financial advisor about Whole Life and or Universal Life insurance policies. They’re big ol tax shelters, there is zero reason this hasn’t been planned for. This goes for any professional, and farmers too!
Ok, pal, now I have checked the closets, we’re monster free here.
Let’s check the rest of the house together, ok?
I am not interested in hearing about landlords, vacation/ retirement property owners complaints about capital gains in a country where property values have made life unaffordable for people in my generation and younger. You bought the home to build equity, you have it, it is far more than you imagined. There is nothing here to worry about. I had an opportunity to buy a second property for $99,000 9 years ago, it is now worth well over $500,000; had I pulled the trigger at the time, I would not be concerned about capital gains tax, nor should you on your luxury items. We have flow through shares and other risk mitigation tools, I can’t find myself feeling bad about your 8% increase in nominal taxes accrued on gains you didn’t earn.
The windows are locked, the basement is clear too, champ.
The boogeyman can’t get you.
The tax man can roll through town, but if you have planned ahead, there is only so much he can do.
When the bells ring— dance.
✌🏻
Darris Cameron
CEO,
Financial Value Inc.