Deplorables Week continues on this pathetic blog as we flotsam and jetsam are sloshed and slammed between the shoals of Trudeauesque socialism and Trumpian cavalier capitalism. Here we have a government bent on redistributing wealth, and to the south a machine focused on creating it. In Canada taxes are about to rise. Again. In America, they’ll soon fall. They elected a billionaire business guy. We picked a teacher. With tats.
And judging by yesterday’s comment section slugfest, this land of crazed beavers and horny moose is growing as divided as the States. An astonishing number of people think all investors are greedy, deserve to be Hoovered and have the ethics of weasels. The 1%ers (and those aspiring to be) believe a top tax bracket of 54% is theft. So a 50% jump in capital gains tax is simply over the top.
Class warfare. Economic insurrection. Disdain and outrage. How can this end well?
Beats me. Trump may blow up, or send the Dow to 30,000. Canada may drift further left or end up with failed mutual-fund flogger Kevin O’Leary at the helm. Imagine. Another reality TV ego. Oy.
Well, we can’t change the government here at GreaterFool, but we can change your life a little. So if T2 dramatically raises the tax load on capital gains (we’ll know within the next three weeks) here are ten simple things you might want to consider in response (or anyway).
1 The first money to invest should go into your TFSA. The room has risen above $50,000, so this is finally a serious vehicle. Money inside grows free of all tax, forever, and can be used to provide taxless income in retirement which will not push you into a higher bracket nor cause the seniors’ pogey to be clawed back. Yes, it’s a capital gains tax-free zone. Besides, there’s no refund for making a contribution, so the bicycle-riding, metrosexual, lefty social justice detractors have nothing to say.
2 If Ottawa does make investing in a non-registered account more taxing, then up your exposure to RRSPs. Here invested money also grows entirely free of taxation, plus you receive a tax refund for contributing an amount as big as 18% of your annual income (to $25,370). Of course, by putting money in a plan you’re making it taxable again, so try to time withdrawals for points in your life when you income (and tax bracket) will be lower.
3 It shouldn’t need to be spelled out, but after yesterday’s comments everything requires crayons. Never put a GIC into your TFSA or RRSP, or hold cash there in a so-called ‘high-yield’ account. If you’re going to shelter assets from tax, invest in things with a high potential for growth, especially inside the TFSA. That means equity-based ETFs. And don’t forget to hold 20% of your portfolio in US$. We all know where the loonie is headed.
4 If dear leader does target capital gains in the coming budget, don’t trigger any. After all, unrealized profits attract no tax whatsoever – which means you can hold on to growing assets, enjoy the advance, and pay nothing until this all blows over. That could be the autumn of 2019.
5 Of course, capital gains are not the only way to make money. Dividends are cool, too. Thanks to the dividend tax credit, income received in this form is also taxed less than income from employment (but don’t tell the steerage section). Among my fav divvy-producing assets are preferred shares, currently kicking out a yield close to 5%. Sweet.
6 Hopefully you’ve heard that taxes on capital gains can be reduced or eliminated entirely by applying capital losses against them. If you still own those crap shares in that loser junior oil drilling outfit your BIL told you was a sure thing, sell them and use the loss to wipe out taxable profits on the better stuff. Try to overcome that human mistake of hanging on to junk until it rises enough to wipe out your initial dumb decision. Chances are it won’t. Sell. Tell her you made a genius move. It was all planned.
7 Capital gains taxes are based on marginal incomes. The more you make, the more you pay. So if you earn a modest amount, don’t sweat this stuff. Leave now and visit the plus-size Victoria’s Secret blog next door.
8 Remember, conversely, the more you earn the more that tax shelters will benefit you. For example, RRSP contribution room is based on your previous year’s income – so someone toiling in the 54% bracket can reduce their tax bill by a whopping $12,000 just for moving assets from a taxable account into a registered one. (Meanwhile the TFSA is completely egalitarian with everyone getting the same room, regardless of income. And which one did Trudeau target?)
9 Better yet, move those assets into a spousal RRSP with your less-taxed partner as the beneficiary and you’ll not only defer a mess of tax, but split income at the same time. You get the deduction from your taxable income, your squeeze gets the money and can eventually take it out at a highly-reduced rate. Also open a joint non-registered plan – and half the income can be attributed to the person who pays less, which will reduce the capital gains tax hit.
10 Finally, if you’re a typical Canadian, house-rich and liquidity-starved, consider borrowing against all that windfall equity to diversify. Home equity lines of credit are cheap, can equal 65% of your home’s value and if used to invest in a financial portfolio are tax-deductible. Make interest-only payments, and every dollar can be deducted from your taxable income while the assets you bought gain value over time. Revenge.
We will never surrender.