Taxes should not wag the tail of the investment dog, but that's what Trudeau wants | Canada News Media
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Taxes should not wag the tail of the investment dog, but that’s what Trudeau wants

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Kim Moody: Ottawa is encouraging people to crystallize their gains and pay tax. That’s a hell of a fiscal plan

The Canadian federal budget has been out for a week, which is plenty of time to absorb just how terrible it is.

The problems start with weak fiscal policy, excessive spending and growing public-debt charges estimated to be $54.1 billion for the upcoming year. That is more than $1 billion per week that Canadians are paying for things that have no societal benefit.

Next, the budget clearly illustrates this government’s continued weak taxation policies, two of which it apparently believes  are good for entrepreneurs. But the proposed $2-million Canadian Entrepreneurs Incentive (CEI) and $10-million capital gains exemption for transfers to an employee ownership trust (EOT) are both laughable.

Why? Well, for the CEI, virtually every entrepreneurial industry (except technology) is not eligible. If you happen to be in an industry that qualifies, the $2-million exemption comes with a long, stringent list of criteria (which will be very difficult for most entrepreneurs to qualify for) and it is phased in over a 10-year period of $200,000 per year.

For transfers to EOTs, an entrepreneur must give up complete legal and factual control to be eligible for the $10-million exemption, even though the EOT will likely pay the entrepreneur out of future profits. The commercial risk associated with such a transfer is likely too great for most entrepreneurs to accept.

Capital gains tax hike

But the budget’s highlight proposal was the capital gains inclusion rate increase to 66.7 per cent from 50 per cent for dispositions effective after June 24, 2024. The proposal includes a 50 per cent inclusion rate on the first $250,000 of annual capital gains for individuals, but not for corporations and trusts. Oh, those evil corporations and trusts.

There is a lot wrong with this proposed policy. The first is that by not putting individuals, corporations and trusts on the same taxation footing for capital gains taxation, the foundational principle of integration (the idea that the corporate and individual tax systems should be indifferent to whether an investment is held in a corporation or directly by the taxpayer) is completely thrown out the window. This is wrong.

Some economists have come out in strong favour of the proposal, mainly because of equity arguments (a buck is a buck), but such arguments ignore the real world of investing where investors look at overall risk, liquidity and the time value of money.

If capital gains are taxed at a rate approaching wage taxation rates, why would entrepreneurs and investors want to risk their capital when such investments might be illiquid for a long period of time and be highly risky?

They will seek greener pastures for their investment dollars and they already are. I’ve been fielding a tremendous number of questions from investors over the past week and I’d invite those academics and economists who support the increased inclusion rate to come live in my shoes for a day to see how the theoretical world of equity and behaviour collide. It’s not good and it certainly does nothing to help Canada’s obvious productivity challenges.

Of course, there has been the usual chatter encouraging such people to leave (“don’t let the door hit you on the way out,” some say) from those who don’t understand basic economics and taxation policy, but these cheerleaders should be careful what they wish for. The loss of successful Canadians and their investment dollars affects all of us in a very negative way.

The government messaging around this tax proposal has many people upset, including me. Specifically, it is the following paragraph in the budget documents that many supporters are parroting that is upsetting:

“Next year, 28.5 million Canadians are not expected to have any capital gains income, and 3 million are expected to earn capital gains below the $250,000 annual threshold. Only 0.13 per cent of Canadians with an average income of $1.4 million are expected to pay more personal income tax on their capital gains in any given year. As a result of this, for 99.87 per cent of Canadians, personal income taxes on capital gains will not increase.” (This is supposedly about 40,000 taxpayers.)

Bluntly, this is garbage. It outright ignores several facts.

For one thing, there are hundreds of thousands of private corporations owned and controlled by Canadian resident individuals. Those corporations will be subject to the increased capital gains inclusion rate with no $250,000 annual phase-in. Because of the way passive income is taxed in these Canadian-controlled private corporations, the increased tax load on realized capital gains will be felt by individual shareholders on the dividend distribution required to recover certain refundable corporate taxes.

Furthermore, public corporations that have capital gains will pay tax at a higher inclusion rate and this results in higher corporate tax, which means decreased amounts are available to be paid out as dividends to individual shareholders (including those held by individuals’ pensions).

The budget documents simply measured the number of corporations that reported capital gains in recent years and said it is 12.6 per cent of all corporations. That measurement is shallow and not the whole story, as described above.

Tax hit for cottages

There are also millions of Canadians who hold a second real estate property, either a cottage-type and/or rental property. Those properties will eventually be sold, with the probability that the gain will exceed the $250,000 threshold.

Upon death, an individual will often have their largest capital gains realized as a result of deemed dispositions that occur immediately prior to death. This will have the distinct possibility of capital gains that exceed $250,000.

And people who become non-residents of Canada — and that is increasing rapidly — have deemed dispositions of their assets (with some exceptions). They will face the distinct possibility that such gains will be more than $250,000.

The politics around the capital gains inclusion rate increase are pretty obvious. The government is planning for Canadian taxpayers to crystallize their inherent gains prior to the implementation date, especially corporations that will not have a $250,000 annual lower inclusion rate. For the current year, the government is projecting a $4.9-billion tax take. But next year, it dramatically drops to an estimated $1.3 billion.

This is a ridiculous way to shield the government’s tremendous spending and try to make them look like they are holding the line on their out-of-control deficits. The government is encouraging people to crystallize their gains and pay tax. That’s a hell of a fiscal plan.

There’s an old saying that tax should not wag the tail of the investment dog, but that is exactly what the government is encouraging Canadians to do in the name of raising short-term taxation revenues. It is simply wrong.

I hope the government has some second sober thoughts about the capital gains proposal, but I’m not holding my breath.

 

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX composite little changed in late-morning trading, U.S. stock markets down

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TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.

The S&P/TSX composite index was up 0.05 of a point at 24,224.95.

In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.

The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.

The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.

The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.

This report by The Canadian Press was first published Oct. 10, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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