Advisors are dealing with new tax-planning challenges since the release of the federal budget on April 16.Sean Kilpatrick/The Canadian Press
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For years, a change to the capital gains inclusion rate was a popular bogeyman in pre-budget speculation, but this year the Liberal government surprised almost everyone by actually raising it.
In a recent LinkedIn Live webinar, Globe Advisor assistant editor Mark Burgess spoke with Brian Ernewein, senior advisor at KPMG in Canada’s national tax centre, about who the proposed changes will affect and why some business owners may consider holding investments personally.
You were in the budget lockup in Ottawa. What was the reaction to this big change?
I’ve sometimes noted [with] these rumours that even a stopped clock is right twice a day and that we were bound to see some change to capital gains at some point. But this year turned out to be the year for the stopped clock to be correct. Most of the betting before the budget seemed to be on some sort of additional tax on the wealthy, maybe a higher tax rate – applying the income above the highest current personal tax bracket – or surtaxes applying to grocery chains or oil and gas [companies]. The capital gains change did come as a bit of a surprise. I have to say I’m rather impressed the government managed to keep it under wraps until budget day.
The government presented the change as a measure that will affect 0.13 per cent of individuals. Tell us who’s going to be affected by this.
It’s important to note that the government estimates that corporations will pay more than half of this additional tax. That includes tax paid by private companies owned by individuals, but I don’t think that burden on individuals is captured in that 0.13 per cent personal tax statistic.
As far as individuals being affected directly, the bulk of this tax will be paid by very high-income taxpayers. But at the same time, this shouldn’t be taken to mean that middle-class taxpayers won’t be affected adversely by the change. [With a] small business or family cottage, the value of that asset may have increased a great deal in the past 40 years. Maybe the cottage that someone acquired for $50,000 in 1984 is worth 10 or 20 times that now. If that person sells that cottage next year for $1-million, their gains will exceed the $250,000 annual limit to which the current 50 per cent inclusion rate will still apply. And even if that’s the only gain that person will ever recognize in their lifetime, they’ll be in the 0.13 per cent for that year.
Can you give an overview of how the new inclusion rate affects business owners?
Companies, including private corporations, are going to be subject to the higher inclusion rate, and they won’t be subject to the annual $250,000 lower inclusion rate threshold that’s available only to individuals. So, it seems to follow that the tax burden on investment property gains generated in a private company could be higher than it would have been if the individual owner had realized those capital gains directly.
We don’t have any detail on this point. But from my discussion with Department of Finance officials at the budget lockup, I don’t think the intention is to integrate this additional corporate tax on capital gains with the personal tax applying to dividend distributions. In other words, there seems to be the potential for there to be effectively a tax cost attributable to generating capital gains on investment property within a private company that won’t be recognized at the personal level. So, you end up with possible double taxation.
If that’s true, then that would lead – all other things being equal – to think about holding investment assets personally, or perhaps through a trust, but it would militate against the use of a private company.
– Mark Burgess, Globe Advisor assistant editor
This interview has been edited and condensed.
Must-reads from Globe Advisor this week
How Ottawa’s hike to capital gains inclusion rate affects trusts
Trusts are used to control assets for beneficiaries such as spouses, minor children and dependents with special needs. They can also protect assets from family law claims, keep assets confidential, and lower probate taxes. But advisors say Ottawa’s proposed changes to the capital gains inclusion rate could cause Canadians to rethink how trusts are used and structured. “If you’re setting one up from scratch today … you might find there’s a real additional cost,” says Aaron Hector at CWB Wealth Management in Calgary. “It’s going to impact, to an extent, the design of new trusts.” Brenda Bouw reports.
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Why this money manager believes ESG investing is out and impact investing is in
Investing through an environmental, social and governance (ESG) lens has lost its way in recent years, a shift that money manager François Bourdon blames on “sustainability tourists” – and not the travel kind. The managing partner of sustainability-focused firm Nordis Capital says too many companies venture into sustainability in one part of their business while maintaining other parts that can be harmful to society and the environment. “ESG is becoming a bit toxic. Nobody really knows what it is and what it includes or doesn’t include,” Mr. Bourdon says. Brenda Bouw asks what he’s been buying and selling.
Advisors seize federal budget opportunity to educate and engage Canadians
While advisors are working with clients on tax strategies in response to the changes introduced in this year’s federal budget, some have also used social media to explain the changes to a wider audience. Mark McGrath, associate portfolio manager at PWL Capital Inc. in Squamish, B.C., took to social media with a 15-part thread to counter the government’s claim that changes to the capital gains inclusion rate would affect only 40,000 Canadians. “As a financial planner, I felt it was my duty to educate,” says Mr. McGrath, whose business is focused on serving physicians – a group affected by the proposed rules. His posts exploded, with total impressions on X reaching 3.3 million. Deanne Gage reports.
Also see:
Four misconceptions about how the federal budget affects corporations
Where to look beyond the Magnificent Seven for exposure to AI
How three fund managers are playing the energy bull market
How this former food industry business owner is finding new identities in retirement
What a U.S. ruling on net investment income tax could mean for Canadian dual citizens
What you and your clients need to know
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Capital gains change separated from budget bill in calculated move to corner Conservatives, observers say
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– Globe Advisor Staff