Ain’t happening

Bicycle guy called out to me during my morning walk, as I was enjoying the latest Bad Bunny track.

He pulled up and wanted talk about taxes. And the evil people running Canada.

“I want to give my cottage to my daughter but this capital gains thing is killing me,” he said. “I’ve worked hard for every dollar in my life. Now I’m done working and I want to do this, but can’t pay the tax. Pierre’s going to reverse it, right? Please tell me so.”

Fuhgeddaboudit, I muttered. Nobody’s going to be cutting taxes. Not this one. Not anything.

Think about it. The feds will spend $40 billion more this year than they collect in revenues (which includes $8.5 billion for housing). That forty billion doesn’t even cover interest payments on the federal debt. Meanwhile our defence spending is subpar, the health care system is dodgy and the Mills and Zs are screaming for subsidized real estate while parents want cheap daycare and untaxed monthly kid pogey.

Most Canadians think capital gains taxes are paid by Galen Weston and the snorflers on Bay Street, I told the bike dude. There’s no public appetite to cut them because voters want more government services, more spending and lower personal taxes. It’s just what the Conservative leader is telling them (more on that in a few paragraphs).

Regarding cap gains taxes, here are a few things to remember.

Yes, the cottage is taxed when it changes hands. That hit can be avoided (possibly) by using some of your PR exemption, as we’ve previously detailed. But that comes off the principal residence gain itself when you sell. Be careful.

The tax is based on 66.67% of a gain which is then included in that year’s taxable income. The top marginal tax rate is around 53%, depending on your province, so the tax is roughly half of two-thirds of your profit. But the first $250,000 (annually) in cap gains is taxed less, at a 50% inclusion rate.

It’s key to remember this quarter-million-dollar break is only available to individuals, not corporations or trusts. They must include the full two-thirds into income, which hurts. (Most people also don’t know that 100% of capital gains are included in calculating the AMT – alternate minimal tax – a mandatory parallel system that can bite a lot of unsuspecting taxpayers.)

“The new $250,000 band, as it applies only to individuals, appears to be completely at odds with this important concept that tax rules are designed in such a way that the same amount of tax should be paid irrespective of whether income or gains are realized by an individual, by a corporation or through another type of entity,” says accounting firm Fruitman Kates, “as it now appears to be more beneficial in certain circumstances to hold capital assets personally, as the tax on personal capital gains may be lower!”

You betcha. That’s why the docs are so pissed. Many doctors earn their income through medical professional corps, which have traditionally held retirement investment assets. Now every dollar in gains – as with self-employed plumbers and myriads of other entrepreneurs – will be taxed at a higher rate than Bicycle Guy pays. A basic unfairness has just been baked into the system.

This adds to the oft-given advice that it’s better to take income in the form of a salary – earning RRSP room – than as dividends from an incorporated business. There was never any tax to be saved using that strategy (since the combo of corporate and dividend taxes equalled the levy on a salary), and now we know business owners will be whacked with a higher capital gains rate.

Finally, add the accountants, be mindful the feds will not let go even when you’re a crusty corpse.

“Planning for death also now takes on an even greater importance. Overnight, the likely tax bill on death has increased significantly for many people. Therefore, steps should be taken as early as possible to put plans in place to minimize the deemed disposition of capital assets on death. This could involve actions such as lifetime gifting and structuring businesses to ensure that future growth passes to the next generation while you are alive.”

Okay, so about tax cuts – can or will the Conservatives ‘axe the tax’ as Pierre has been yelling about for months? After all, the carbon tax is supposed to help save the planet and 90% of the money collected is returned to consumers in cheques and direct deposits. This raises questions.

First, can we cut any taxes, given the deficit – without gutting an equal amount of spending? And, second, what if our exports face border carbon tariffs from countries demanding we have a low-emission policy, like them? Third, do we replace this with something else, or just call climate change a commie hoax? Was Jasper a fluke?

Beats me. But John McNally has some stuff to say. He’s an economist with Scotiabank. His big report on the issue was published today. Here it is.

Between the lines the bank report says Poilievre is sloganeering in an irresponsible way that creates uncertainty for industry, producers, provinces,, trade policy and climate scientists. “Repealing the carbon pricing system (without suitably replacing it) would put Canada off track for reaching climate goals. The policy is currently expected to account for roughly one third of emissions reductions by 2030, with industrial carbon pricing responsible for three quarters of this decline.”

If we don’t do this, McNally asks, then what? Nothing?

An answer would be helpful, n’est-ce pas?

About the picture: “Here is a picture of Valla, a Norwegian Fjord, with her human, Kate,” writes Virginia, in Victoria. “Kate and I volunteer together at the Victoria Therapeutic Riding Association where Princess Anne came for a visit last spring. Valla, also known as Cream Puff, is cheeky and confident. She likes to go fast and is often the first in the herd of 13 to check out anything new or interesting, such as this fun teeter totter that develops balance and a strong core. Cream Puff has to work for her keep at the therapy barn but she and the other horses are well loved by the  couple of hundred volunteers and a small staff.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.