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October 27, 2019 | The Big Bite

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.

Justin Trudeau may be the prime minister. But Jag Singh may up being the finance guy. As mentioned here a few days ago, it’s the sum of all fears – that a minority left-lib government will cave to the far-lefties in order to retain power. T2 says no coalition. But he cannot govern without support. Facts are facts.

This terrifies Nate.

“I have a question about the inclusion rate on capital gains and possible government future changes,” he writes me. “If the Libs and NDP passed changes to the inclusion rate would it be effective immediately?  Just wondering the likely outcome. Pam and I have about 2-plus million in unrealized capital gains in real estate most of which is on one property. Selling sooner would be a big difference? I wonder about selling to myself or into a limited company thereby triggering capital gains tax –   sounds crazy but the extra tax is around $500,000 plus for all our buildings? Ouch.”

Yup, big ouch. The tax hit on dumping those properties would be 50% higher in this scenario. But is this a realistic possibility?

First, how are capital gains taxes calculated?

When an asset is sold, the difference between its market value (selling price) and what you invested in it (the ACB – adjusted cost base) is called a capital gain. In the case of real estate the ACB includes the purchase price plus the cost of all improvements made while you’ve owned it. That number is reduced if you claimed capital cost allowance annually or deducted the improvements from taxes owed. (Never, ever let your accountant claim CCA on a leased condo, by the way…)

If you sell for a profit over the ACB then half that gain is tax-free. Yay! The other half is added to your taxable income for the year in which the sale occurs. Clearly that can push you into a higher tax bracket, so just imagine if the capital gains inclusion rate moves from 50% to 75%.

Example: Nate, who has an income of $100,000, sells and realizes a million in profit on his properties. Under the current rules $500,000 is added to his income and his 2019 tax total (for Ontario) is $153,000. If the cap gains tax were bumped to 75%, his tax would jump to $220,000.

Of course, the dollar-is-a-dollar crowd argues investors today (in investment real estate, stocks or ETFs etc) get an outrageous advantage in having only half the gains taxed while working schmucks are fully exposed to tax on employment income, rent, pensions or interest on their pathetic GICs. Sadly, this is growing in our tilting society.

“When you go to work, you’re taxed on almost all of your income,” says Jag. “It doesn’t make sense that someone making their money from investments is taxed on only half.”

Says the lobby group, ‘Canadians for Tax Fairness’: “This costs the government $10 billion that could boost their inadequate investment in child care. It would create more jobs, boost participation of women in the labour force and increase tax revenue over time. Budgets are about priorities. When 92% of the benefit of this protected loophole goes to the top 10% it makes one question their stated commitment to tax fairness and helping the “middle class”. “

The current 50% inclusion rate has been in place for two decades. Bumping it up by half, the NDP claims, would bring in $3 billion that Ottawa can spend on social programs. The socialists claim 88% of the cap gains benefit goes to the top 1%, and “this is unfair for people who are trying to build a better future for their families.”

Let’s not forget that the Liberals themselves have toyed with diddling with capital gains. A controversial plan to restrict this in terms of farm families (and others) was abandoned after sharp criticism, and the party’s 2015 platform included a commitment to review every tax advantage investors ( aka ‘the rich’) enjoy over employees. This was the philosophy at the heart of Morneau’s attack on the self-employed and private corps last year.

Why should capital gains receive special tax treatment?

Simple, so people invest. Doing so involves inherent risk, since assets can fall in value as easily as they increase. Taxing gains less and allowing losses to be deducted from profits recognizes that risk. It encourages people to put money into businesses, creating jobs. Or into the capital markets, strengthening the overall economy. Or into rental real estate, providing housing. Or financing government debt, so politicians can overspend. Current laws also keep us competitive with the US (even though cap gains are taxed less there), since money has no patriotism.

“If we raise the capital gains tax rate that’s just going to encourage more people to look at the American market to start businesses or to develop things down there as opposed to here if that happens,” says tax academic Jack Mintz. “It’s not good to start looking at hiking more taxes on investors at this point.”

In any case, is this change possible?

My answer to Nate: an unqualified maybe. T2’s been coy so far about how far into the sheets he’ll crawl with the Dippers. Obviously the Libs need money. The projected deficit numbers are horrendous, and if a recession materializes we’re pooched. Meanwhile Trudeau has shown – with his special tax bracket for high income-earners, his attack on stock options and his assault on business owners and professionals – that he’s no friend of the investor class.

Selling now and paying on 50% to avoid selling later at 75% is a strategy. It’s called ‘insurance.’

And yes, the tax change would be effective the night it was introduced. In 20 weeks.

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October 27th, 2019

Posted In: The Greater Fool

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