La Revolución . She comes. You ready?
This week the date of the looming federal budget is to be announced. If you ever for a fleeting moment doubted what the theme will be, I hope you caught T2’s lecture to Europeans a few days ago. It was really directed at us. The Canadian deplorables and their weasely overlords.
“It’s time to pay a living wage, to pay your taxes, and to give your workers the benefits – and peace of mind – that come with stable, full-time contracts,” said the prime minister who has never run a business. “Increasing inequality has made citizens distrust their governments. Distrust their employers. And we’re watching that anxiety transform into anger on an almost daily basis… it’s time for us, as leaders in politics and business, to step up.”
In our case, stepping up means taxing the rich – or the perceived rich. (For Trudeau, by the way, it also means scrapping electoral reform, a change which would have ensured the Liberals lose the next election and a Trumpian movement win seats in Parliament.) The German press labeled our guy the “anti-Trump” (and sexy) since The Donald wants to lower taxes and unshackle business while we’ll get more taxes and a war on entrepreneurs.
Last week we detailed some of the changes being contemplated, then had a big argument between the lefties and the capitalists. Under consideration in this budget are higher capital gains taxes, a lower dividend tax credit, a small business retained earnings tax, perhaps a windfall housing gain tax and new regs forcing business owners and operators to act more like employees plus end income-splitting with family members. This comes atop creation of a new tax bracket in the last budget which boosted the marginal tax rate on the 1%ers (over $225,000 income) to a withering 54%.
Tax, tax, tax and more tax. And an insatiable government which will still spend $100 billion more than it takes in during a four-year term. Yes, he’s the anti-Trump. But since (a) he has a majority and (b) his support base of moisters is rife with anti-Boomer sentiment, plus riddled with house lust and disentitlement, la revolución está aquí.
Here are a few things to contemplate in your defence:
♠ Aggressively avoid taxation. It’s not illegal (evasion is) and there are many obvious ways to reduce your tax exposure or grow money free of it. The top choice is still the RRSP, and Wednesday’s the deadline to seriously reduce your 2016 tax bill. These are of the greatest benefit to rich people, who can stuff up to $25,000 in a plan (per year) and wipe away more than $12,000 in taxes. They also let you spilt income with a spouse, finance a maternity leave, shift taxes into lower-income years, buy a house, create a mortgage, or simply take taxable assets you now own and make then non-taxed.
♠ Other vehicles include TFSAs (tax-free portfolio growth, income-splitting with children or a spouse, retirement income without reducing pensions), RESPs (tax-shelter all growth in your kids’ education plan, plus get tax-free annual grants), and RRIFs (convert RRSPs into a long-lasting income stream during TU years, while still growing assets tax-free). How can you afford not to take advantage of this stuff?
♠ Regarding capital gains, count on T2 upping the inclusion rate, which could raise taxes a significant 40%. In no way should this deter you from investing or building a proper portfolio. But it’ll make more sense to delay crystallizing a capital gain, to eschew frequent trading and focus on long-term buy-and-hold strategies. The last thing you want is a ‘tactical’ financial advisor who says he can beat the market by flipping stocks around.
♥ Don’t pig out on maple. If US rates rise and taxes fall, the loonie will erode and our economy struggle – especially given the swelling tax load. Remain twice as exposed to American and international growth assets as to those here. And recall the advice given often about hedging against our currency. Keeping about a fifth of your portfolio in US$-denominated stuff (at all times) is wise.
♠ If you have a bundle in your house and not so much in financial assets, then diversify at the same time you create a tax deduction. A home equity LOC will unlock up to 65% of real estate value and should come at prime plus a half (3.2%). Invest that in a nice stable balanced and diversified portfolio giving a six or seven per cent return over the long term, and wealth will grow more predictably. Besides, with interest-only payments, 100% of them are deductible from taxable income. Win, win.
♠ If you operate through a small business, consider taking salary instead of dividends. Not only will you earn RRSP room but you’ll escape some of the potential nastiness Ottawa has in store. In any case, remember that there’s no advantage to taking income as dividends since the tax you and your company pay together equals the tax you’d fork over personally. And you earn RRSP room. Plus, your company escapes tax by deducting the salary.
♠ Stick with a low-turnover portfolio to avoid triggering capital gains (or wait until there’s a new government). A good advisor will rebalance your portfolio only when necessary, often triggering some losses at the same time gains are realized – mitigating the cost. And always remember – you can enjoy all the capital gains you want inside your TFSA and Ottawa won’t Hooover one dime of it.
♠ Finally, never invest just to avoid, escape or evade tax. Sure it sucks, but paying up is a fact of life. Stick with the plan and manage assets to accomplish your life’s goals. Besides, if you’re obedient and supportive, Justin could make you a Senator! No tax worries then.