‘Planning in the dark’ over capital gains inclusion rate
It’s been almost a month since the Canadian federal budget was released and the long tail on budget articles and comments is normally not that long — perhaps a few days or a week at best.
But the furor over the capital gains inclusion rate increase from the current 50 per cent to two-thirds (with only individuals getting a $250,000 annual threshold at the current 50 per cent inclusion rate) is keeping the discussion alive and lively. The disingenuous and misleading messaging by the government that the proposal will only affect 0.13 per cent of individuals is also angering many.
The fact that Canadians are still talking about this proposal is encouraging. People 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 the country. 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, such as the Canadian Medical Association (which believes the proposals will impact doctor recruitment and retention), the Mining Association of Canada and others, are speaking out. Pushback and attention are growing, but the government shows no outward sign of backing off. On Monday, the prime minister even released a misleading video in an attempt to double down.
Over the last month, I have spoken to more than 750 accountants, lawyers, investment advisers and average Canadians either at in-person or virtual info-sessions about the proposals. One of those sessions, put on by my colleague Jay Goodis of Tax Templates Inc. and myself through our Canadian
Tax Matters platform, 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 per cent? How will loss carry-forwards be treated?
As Jay and I said during our 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 least, the June 25, 2024, implementation date should be significantly extended — say, to Jan. 1, 2025 — to give Canadians adequate time to plan their affairs with full information available.
The people I have been speaking to over the past month are neither buying nor believing the government’s messaging about the capital gains inclusion rate increase, especially after I explain why the messaging is so misleading. When they learn more, their agitation levels are apparent.
The agitation levels of successful Canadians — or, as the government likes to refer to them, the “rich” — are even more apparent. I’ve mentioned it before, but more and more Canadians are exploring leaving this country. There has been a significant increase in my practice of successful individuals wanting to explore leaving Canada. Many have already pulled the trigger.
Some “Doubting Thomas” types have written to me demanding I provide evidence of such reactions. Obviously, I cannot for confidentiality/privilege reasons, but I invite these 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, Conservative Leader Pierre Poilievre addressed such a question rather well in an op-ed earlier this month. People need to continue to speak up and stop supporting organizations that pander to this government, which appears hell-bent on imposing its political agenda regardless of the damage that may occur.
In the meantime, Canadians should carefully consider whether or not the early acceleration of capital gains makes sense for them. In many cases, it may not.
For example, triggering 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 seven 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 break-even 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 or best guess.
Despite left-leaning academics and economists who support the capital gains inclusion rate proposal on the basis of equity, the short rebuttal is that this ignores the real world of investing, where investors look at overall risk, liquidity and the time value of money.
John F. Kennedy 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.”
Wise words from JFK from more than 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.
THIS IGNORES THE REAL WORLD OF INVESTING.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com