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February 16, 2017 | Puppynomics

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

A year ago the feds had a skinny budget surplus of a billion. This year they’ve managed to spend $13 billion more than they collect. And that’s despite a multi-billion haul from the new soak-the-rich tax bracket.

But this is just the start. The new deficit is forecast to be over $25 billion, followed by one of at least $28 billion. The Finance Department estimates Canada could be in the red until the year 2051, when this blog celebrates its 43rd birthday and I’m a pissy 102-year-old. Of course, it gets worse when interest rates start to normalize, since we already have a debt exceeding $700 billion that must be financed. Over the four years of T2 governance, that debt should swell by about $100 billion.

So what?

Politicians who spend a lot, tax a lot. You’re about to see what this means. It could be quite a shocker after we kicked out a government that actually reduced the GST. For that, apparently, we can partially blame 3.5 million new voters who flocked to the young Trudeau. Nice hair, tats, weed, hot wife, selfies, shirtless boxing dude celebrity – how could he not win over a boring old guy with a plastic head and Boomer paunch, who likes cats?

Ironically, while most of the world seems to be on an anti-government populist tangent, young voters in Canada embraced more government as the solution to their needy shortcomings. This is expensive, as we shall all discover. Thinking the rich can foot the bill is folly.

Nonetheless, it’s looking more and more like this is exactly what the federal Liberals will be doing. The new uber-tax bracket is already in place. The TFSA contribution limit was gelded to keep the wealthy from benefiting. Now we can expect a Doctor Tax taking aim at small business corporations. Perhaps a hack out of the dividend tax credit, whacking seniors who are GIC refugees. Plus the idea we’ve been punting of a house tax. Yes, and a jump in the capital gains tax.

The chorus is rising on this one. Gluskin Sheff chief economist and Bay Street smart guy David Rosenberg this week all but promised his firm’s clients they’ll soon get a hosing. The capital gains inclusion rate, now 50%, will rise to 75%, he says – which means taxes on increases in the value of rental condos, mutual funds, stocks, ETFs and more will jump by half.

Example. An investment property sold today for a $100,000 profit would have half that taxed at the seller’s marginal rate. So a rich dude earning $225,000, now with a 53.5% marginal tax rate, would pay $26,750 in capital gains tax. But with a 75% inclusion rate, the bill rises to $40,125. That’s a hike of 50%. Bummer.

This is exactly the opposite direction to that in which the US is moving – where the Trumpster promises a massive tax decrease for the middle class, and an epic drop in corporate tax (from 35% to just 15%). Says Rosy: “The implications for the Canadian dollar are decisively negative, not to mention the deflating effect on asset values. It’s a classic move to make everyone poorer, cloaked under the veil of redressing income inequality.”

In contrast to the above, the highest personal US tax rate is 39.6%, and for the wealthiest Americans, the top capital gains tax rate is 20%. In other words, if this budget change comes to pass, the tax load here for investors – in real estate as well as financial securities – will be double that of those to the south.

That’s why the dollar will be pooched, Canadian markets affected, and every poor schmuck with a bank mutual fund whacked. If you think residential real estate is immune, stop getting your news from Instagram. These days over half of all condo sales in the GTA, for example, are to investors – people who buy them precisely because they expect to earn a tax-advantaged capital gain. This also impacts every family in Vancouver with a basement rental suite full of hollow-eyed, pasty subterranean deplorables, since they’ve commercialized their properties and will be facing a capital gains bill upon sale, for a portion of the value.

And while nobody’s shedding tears for the lonely 268,000 Canadians with 1%er incomes ($220,000 or more) – especially those irritating, T2-voting lefty hipsters – many of these folks might simply stop bleeding money for the rest of society. They can focus on investing within tax shelters, for example. They can leave the country. They can throw in the towel and retire. They could even stop risking their after-tax income to restore a derelict general store, where 19 new jobs were created. Just saying.

You may recall the new federal government said taxing the rich with a special bracket would pay for a middle-class break, averaging under $10 a week. It didn’t happen. Turns out there aren’t enough high income-earners. That now adds $4 billion a year to the deficit. Genius move.

A tax-and-spend Canada in a laissez-faire world begs trouble. Let’s hope the moisters get it. After all, they’ll be paying.

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February 16th, 2017

Posted In: The Greater Fool

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