Nibble the rich

And so it begins.

MPs dribble back to their Commons seats today. Tomorrow the Throne Speech. Then the holidays. And after that the main event. Chrystia’s budget – which will look nothing like the last one (which nobody remembers).

The Speech from the Throne is ceremonial, usually irrelevant and a good occasion to wear a new hat. But it is laden with clues of what’s to come.

Here’s another clue. When Liberal MP Mark Holland, now the Lib House Leader, was asked if the T2 minority would forge a formal deal with the NDP to stay in power, he sayeth:

“When I look at the platforms, there’s a lot of common ground and there are a lot of places where there can be unanimity.”

Yikes. That sure sounds like some kind of coalition thing happening. At the least it suggests Liberal policies sprinkled with Dipper faery dust in order to prevent the government from losing a confidence vote. So what is the ‘common ground’ between the Libs and the socialists?

More spending and a je-ne-sais-quoi ‘tude about deficits and debt? Natch.

Additional government in our lives? More TikTok, less Fraser Institute? Absolutely.

Higher taxes? Eat the rich? Now you’re talkin’.

The entire NDP campaign, if you can recall it, was about whacking the wealthy. In this country, that means people earning more than $250,000 a year. In terms of net worth, if yours is $840,000 or more that qualifies you as a member of the top 5%. To be a 2%er requres a NW of $2.5 million. And those with net worth of $9.7 million possess more than the other 99%. And note this is total net worth – including bloated real estate – not just investible assets.

What did Jag want? First, a wealth tax on those one percenters (by net worth) and, second, a boost in the capital gains inclusion rate. Meanwhile in the US the Biden administration is noodling a capital gains tax on billionaires embracing business wealth – in other words, a tax on the fluctuating value of stock that has not actually been realized. And the crowd in the street applauds.

It’s unlikely that’s coming here. Even a wealth tax is a long shot (but not so one on inheritance and large estates). However the odds seem to be rising that the capital gains inclusion rate will inflated from 50% to (maybe) 75%. The Trudeau gang, if they do it, will point to history. It was Mulroney (a Tory) who bumped the inclusion rate from 50% to 66.67% back in 1988. Then two years later, it hit 75%. Once the Cons were punted, the Libs dropped it back to 50% as an economic stimulator.

What does this mean?

Let’s assume you sell your rental condo after several years of ownership and clear a hundred grand. Half of that is free of tax, while the other $50,000 is added to your annual income. That’s taxed at your marginal rate. Thus the top tax on capital gains in Canada would be one-half of the highest marginal rate, or 26%. Even 1%ers retain the other 74%.

An inclusion rate of 75% (as the NDP demands) would hike the effective tax rate to just under 40%. Big move. The Dippers claim this would Hoover another $45 billion out of the hides of taxpayers. Given that the T2 government plans to increase spending next year by $78 billion (on top of the $140 billion in Chrystia’s first budget) – and the fact that 95% of the population would not be directly affected – it’s irresistible.

What to do? When would such a tax hike take effect?

Traditionally these changes come the moment the finance minister utters them. Legislation is passed later, but the CRA considers it a done deal on budget day. Backdating this to the beginning of 2022 would be grossly unfair and punitive. People make decisions based on the tax code, so it cannot be changed capriciously. And a Jag/Socks alliance would never do that, right?

Well, you can always trigger cap gains now and pay according to current rules. You can also sell off the dogs and trigger losses to offset those gains. An easy way to do the former is to transfer profitable assets into your RRSP or TFSA as a contribution in kind. This is a taxable event, but you don’t actually need to sell anything to accomplish it.

This tax creep on non-registered assets also underscores the wisdom of ensuring all registered accounts are stuffed. The 2022 accumulated room for TFSAs will pass $81,000 in January, plus the top RRSP contribution limit rises to $29,210 (a max of 18% of earned income). And remember you can contribute into the spousal plan of a partner who earns less (to split retirement income and allow low-taxed withdrawals), as well as fully fund the TFSA of your squeeze or adult kids. Nothing will be attributed back for tax purposes.

It’s astonishing, but over 90% of Canadians do not max out the tax shelter vehicles they’re given. And we know that 80% of the dough inside TFSAs is sitting in low-interest cash or near-cash assets like GICs. Many people risk running out of money, with only their financial illiteracy to blame.

Meanwhile those already paying a tax rate of more than 50%, and about to see a big jump in capital gain taxation, would like you to know this: the top 1% earn 9.9% of the income in Canada yet pay 21.1% of all income taxes.

Of the 28,519,410 taxpayers in this country, only 311,850 report income of $250,000 or more.

We don’t have too few taxes. We have too few rich people.

About the picture: “Our dog Hector would love to see his face on the blog, if you’d have him,” writes Ben. “We happily rent our family home on Vancouver Island, and while we skim the MLS from time to time, it feels like people have lost their mind when a 60s bung is listed at $1.4 and sells over asking. Thanks for writing.”