The assault

After the election comes a Throne Speech. Late in October, maybe. They’re always packed with vagueness, fluff and unicorns. Normally we’d get an economic statement of some kind, but this year the pre-Christmas session of Parliament will be too short.

So the real news will be in the budget, earlier than usual. March. Maybe even February, from Chrystia our non-financial Finance Minister. Gulp. Remember the Libs’ campaign slogan? “Forward. For Everyone.” Except if you have wealth.

The Street’s anticipating changes coming for the capital gains inclusion rate. That means profits selling rental properties, gold wafers, a cottage, stocks, ETFs and a mess of other stuff will be hit. Currently you get a deal. Half the gain on a sale is tax-free. The other half is included in annual income.

The average income in Canada is just under $90,000, with a tax rate of 26% and marginal rate of 31% (each dollar above 90k taxed at that level) – so small capital gains would still leave you with 85% of the proceeds. Not bad.

Larger gains push annual incomes and tax rates higher. Those in the top tier (incomes over $230,000) have a marginal rate in provinces like Ontario of 53.3%. That means 73% of the capital gain are retained, while the rest is sucked off by the deities on Parliament Hill. Compared with the Hoovering earned incomes received, this is not such a bad deal.

Ironically, it was Liberals who dropped the inclusion rate to 50%. Paul Martin did that, erasing the previous 75% level as part of a $58 billion tax cut in his 2000 budget. Yes, tax cut. From Liberals. The same guys who trashed the deficit. But the Libs of two decades ago were radically different dudes from the tax-and-speed gang currently in control of the nation. Now we have red ink washing over the gunwales with a government hooked on spending and starved for more revenue while it has zero plans to ever balance the books.

Now, before we go further, let’s address this question: why are capital gains taxed less than income from employment, rent from your tenants or interest on a GIC?

A few reasons. First, by offering a lower tax rate on capital gains from investing corporate shares (or funds holding them), for example, the tax code acknowledges risk-taking. You might gain. You might lose. But the activity of putting money into jobs-creating and goods-producing enterprises is beneficial for everyone, since this grows the economy. Collecting interest from a GIC or getting paid to show up at work do not constitute the same risk.

Second, a lower cap gains rate recognizes investors are being whacked by inflation on the assets being sold. The tax applies to their inflated nominal value, so not only do investors pay a levy on the real return, but also on the inflation which has been created by central banks. Not the case for employment interest or collected rents, which is paid and taxed in current dollars.

Third, capital gains taxes are paid on money which has already been taxed. The same dollar was hit by income tax, sales taxes and payroll taxes. If invested in equities or funds, the money was taxed again in the hands of corporations, then taxed once more when shares or units were sold, generating a capital gain. Enough already. And not the case with your salary, which is taxed just once.

Fourth, capital gains tax future consumption because savings are reduced, while present consumption is untaxed. The net effect is to discourage investing and saving, and to favour spending. Not good for society as this reduces future available capital and has a negative impact on long-term economic growth. Buying a house with 20x leverage, in other words, borrows against the future. Investing in corporate assets, in contrast, puts money away for future use. Liberals used to understand that.

Okay, so now what? If the Street’s right and Chrystia drops the hammer, what avenues are available to thwart her?

Well, gains can be triggered now, of course, at the 50% inclusion rate. You can also sell off losers to claim against profits. But only sell if you planned on dumping these assets within the next few months anyway, since long-term investment goals should not be irrevocably altered by potential tax changes.

Make non-registered assets into registered ones. Contributions in kind can shift things into a TFSA or RRSP (if you have the room) from a non-reg account. Of course capital gains tax will be triggered, but you can escape transaction charges.

Obviously making full use of tax-free and retirement savings accounts becomes even more of a no-brainer if the inclusion rate jumps. Remember that the TFSA limit is $75,500 (rising to almost $82,000 next year, or over $150,000 for a couple. RRSPs are unlimited but based on earned income – up to over $28,000 this year. Nine in 10 Canadians have not maxed either, and the amount of unused room grows dramatically every year (because the masses are blowing their brains on real estate). Add in other shelters like RESPs for your kids or maybe the new FHSA for the thing in your basement, and there’s much opportunity to grow money and pay no tax. Among these the TFSA stands uniquely. Max it.

The election’s over. The people have spoken. Take cover.

About the picture: “I’ve read your blog since it started,” writes Dean. “I even went to one of your “Live Performances “ in Edmonton about years ago! This is Fitz our 6 year old Doberman-Boxer-Bulldog cross. He is a very happy and sleepy boy. He has his own instagram page too! My wife loves him more than me! Dog_with_the_lips_of_a_man. Thanks for all your good advice!”