Strike one, eat the rich. Strike two, attack the docs. Strike three, tax risk.
Welcome to the second T2 budget, now just a few weeks off, proving without a doubt the land belongs to the 99%ers, now moving in a direction opposite to the Trump-infused masses beneath us.
Yes, it’s Deplorables Week here at GreaterFool as we chronicle the federal government’s self-lubricating push to take wealth and income from the successful, then sprinkle it upon the rest. It started with the new tax bracket boosting the top marginal rate well above 50%. It continued with the halving of TFSA contributions. It looks certain to lower the hammer on the self-employed, including doctors with corps, by Hoovering their retained earnings. And now comes the ultimate penalty for having saved and invested – a honking big increase in the capital gains tax.
Word is spreading that T2 and his finance guy, Bill Morneau (who should know better) will increase the capital gains inclusion rate from 50% to at least 66% and maybe even 75%.
Simply that every rental condo, mutual fund, stock, ETF, gold bar or piece of land that has appreciated in value since you bought it will help finance all those people who never saved anything, maybe bought a house, had kids and expect a good life.
Currently the profit you make on an investment is taxed at 50% of your personal marginal rate. This recognizes the fact that (a) the money you invested in the first place was already taxed, (b) over time inflation has artificially added to gains and should not be taxed and (c) when you invest (rather than save), you absorb risk. Sometimes a lot of it – unlike sticking money in a GIC. That risk means your capital ends up in the economy and probably helps give somebody a job. So, to encourage this activity, capital gains have been taxed less than earned income.
T2 does not get this. Nor do a lot of academics and tax theorists. They hate the preferential treatment of money made through investing (capital gains, dividends or small corps) and argue that every dollar should taxed equally – whether you earned it as a civil servant with a defined-benefit pension, or as an entrepreneur surviving by your wits. Taxing income in different ways, they add, has made the divide between the 1% and the 99% worse. It runs counter to the current Liberal thinking that the greatest social benefit will come when we all make roughly the same. So we get Robin Hood, while the Americans get Robber Baron.
Anyway, here’s what it means if you are a 1%er (income over $225,000). On a capital gain now you will pay between 23.8% (BC) and 27% (NS). So if you bought stocks for $100,000 that went to $200,000, the tax would be something close to $25,000. You get to keep the other $75,000 in profit.
If the inclusion rate goes to 66%, the tax bill will rise to about $35,000. If the rate rises to 75%, then the tax owing will become roughly $40,000.Yes, you despicable rich people, that’s an effective tax increase of 50%. And, yes, it’s being seriously contemplated for immediate implementation.
This week major accounting firm Grant Thornton sounded the alarm with its clients – an unusual event. Its conclusion: “It is anticipated that the government will increase the capital gain inclusion rate from 50% to 66.67% or possibly 75% to address the current deficit. Note that a 75% inclusion rate would result in a 50% increase in capital gains tax and a 66.67% inclusion rate would result in a 33.33% increase in capital gains tax.”
Of course, gains in residential real estate are (for now) exempt from capital gains tax, so a change like this might only serve to drive more money into a single asset and make people even more unprepared for their retirement needs. That would push debt levels higher – and already household debt is greater than the value of the entire economy. Yikes. Is this what our leaders wish?
Unknown is whether the feds will accompany this with changes to the lifetime cap gains tax exemption, or the ability small business owners have to retire and sell out on a tax-advantaged basis. Plus you can still (so far) deduct capital losses from gains to reduce the tax. But see the direction we are heading in?
The hated 1%ers pay 11% of all income taxes. That’s a big burden. Without them, the Deplorables would be paying a lot more. I guess that’s the plan.