April 26, 2021 | It’s Coming

It’s been a week now since the feminist, gender-neutral, anti-racist, pro-family, indigenous-friendly, BIPOC-supportive, child-centric, inclusionary and diverse budget for all Canadian peoplekind. As you know, it spent up a storm. Deficits to the horizon. Everybody gets a pony.

Missing? New taxes to pay for this stuff.

They come later. In fact, after the election which will follow the heralding of herd immunity. October 18 seems reasonable. And if the Libs win, we pay.

As reported here, accountants were telling clients two measures were slam dunks. First, a new tax bracket for upper income-earners (effective around $400k per year, boosting the top combined marginal level closer to 60%). Second, a higher capital gains inclusion rate, meaning 60% or 70% of a gain would be included in taxable income, rather than the existing half.

Neither materialized. We dodged the bullets. But don’t get too smug, since the odds are large a re-elected Trudeau-Chrystia tag team will do exactly this. Thus (if it happens) Canada would have a new level of personal income Hoovering in place for 2022, plus enhanced capital gains taxation effective from the night of the budget.

If you (and your accountant or advisor) think this is a possibility, explore the options. Some professionals can incorporate, for example, taking only enough salary to max RSP contributions (staying below the super-tax threshold) while earning less-taxed dividends and building retained earnings. Also think about crystallizing capital gains, if you’ve been carrying them around for a while. While nobody likes selling a growth asset and triggering tax, better to do it when the hit is less.

There’s more on the table. The GST could increase – but sales taxes whack lower-earners who spend a greater proportion of their income on necessities. So it’s more likely the Libs will continue their attack on the ‘wealthy’, like those with TFSAs. Recall there was no public outcry in 2015 (other than moaning and wailing on this pathetic blog) when T2 slashed TFSA contributions in half from Harper’s ten grand a year. “There aren’t a lot of people with $10,000 lying around at the end of the year,” he said, as if that was a good thing.

Well, now the tax-free contribution room has grown to $75,500 Those who have invested correctly have a hundred grand in there. Many have considerably more. In a decade these folks will carry roughly a quarter million in TFSAs, which can generate $1,500 or so a month in retirement, completely tax-free and uncounted as income for the purposes of CPP taxation or OAS clawback. In two decades, double that.

Does this suggest the Libs may tighten again? Cut the current $6,000 annual amount of new room back to $3,000 (the average contribution is less than that)? Cap the amount that can be accumulated inside a plan?

But what about RRSPs? The system is heavily weighted to favour those who earn more, since contribution room is based on income (the TFSA is far more democratic) Therefore ‘rich’ folks can shovel over $27,800 a year into their plans, enjoy tax-free growth, and deduct the whole boodle from taxable income. But in reality, the average contribution is just $6,000 a year and 80% of all the RRSP room Canadians have accumulated by working remains, sadly, unused.

Meanwhile the cost to Ottawa of allowing RRSP is pegged at $17.2 billion a year (in contract, TFSAs cost the feds $1.79 billion annually). So is the fact that tax shelters are costly and shunned by average people – who are busy feeding mortgages – justification for more Liberal diddling in an era of terrifying structural deficits?

Finally, what about houses? The principal residence exemption (PRE) from capital gains costs Ottawa just over $7 billion a year in lost revenue, and there’s been talk that this outrageous loophole for unearned wealth should be nipped.

But we all know that’s not gonna happen. The budget’s almost-complete silence on the current real estate mania spoke volumes. There’s zero appetite in Ottawa to touch the opiate of the masses.

Conclusions?

The current fiscal situation ain’t sustainable. Not even close. Either spending has to drop (which T2 will not do) or revenues must rise (which Chrystia will cause). So, prepare. Start by maximizing tax shelters that exist currently – like stuffing your TFSA and investing it for maximum tax-free growth. Also consider borrowing money to fill up all the unused RRSP room you’ve accumulated. The loan interest isn’t deductible, but the big tax refund can be used to pay it down. You can also transfer existing assets into a retirement plan (or TFSA), but this may be a taxable event. However, if the cap gain inclusion rate is destined to rise later, why not trigger such a gain now?

Naturally, take advantage of pension income-splitting with your squeeze, and use a spousal RRSP or a cheapo spousal loan to reduce the overall tax profile of your glorious union. Dump money into Junior’s RESP so you can collect the 20% government handout for doing so. If a child is disabled, the RDSP is a big potential source of subsidized gains. Apply for your CPP early, unless you already know your death date, and fully fund TFSAs for your spouse or other adult family members – so long as they promise to give it back.

Mostly, don’t be naïve or relieved. The budget played us.

Garth Turner April 26th, 2021

Posted In: The Greater Fool

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