Entries from September 2019 ↓

T2, v2

The latest CBC poll tracker shows the Libs with a 64% chance of forming government – either a majority (36%) or a minority (28%), propped by the Dippers. So, if this is the outcome in three weeks, we should be ready. And Mr. Scheer should be ashamed.

This election has been all about spending. Giving. Largesse. Big Government’s back – a mothering omnipresent, omnipotent and omniscient mass papering over the individual financial failures of its citizenry. Can a guaranteed annual income be far off? Seems this is where Millennial voters want to land.

But the past 24 hours have unrobed the other side – taxes and debts. Let’s review, then set out an action plan for surviving T2 v2.

The spending promises are historic. More OAS for the wrinklies. More CPP for survivors. More grants for students, Less interest for them to pay. Billions to subsidize first-time house buyers. More billions for enhanced child pogey. More paid parental leave. Pharmacare coming. And $3 billion less in revenues because of a tax cut for the vaunted ‘middle class.’

This atop an existing federal budget already in the red. Actually the Trudeau Liberals have spent more than they’ve taken in from the moment of election in 2015. And now we have a tsunami of additional spending. T2’s oath in the last campaign of a ‘temporary’ deficit of $10 billion for two years was shattered. This time dear leader isn’t even promising to balance the books. Ever.

So a day ago we got data: a deficit over $27 billion next year, then $23 billion, $22 billion and $21 billion. Yes, the better part of $100 billion over the 48 months – and that’s assuming the economy hums. If a recession happens, with falling revenues and increased social spending, we‘re pooooooched. At least your kids are. Today’s debts = tomorrow’s taxes, after all. (The interest on the debt is $35 billion a year. Even at low rates. Ouch.) Deficits simply mean governments are spending money not yet received. Kinda like when you buy a boat with money you don’t have.

Speaking of which, you’d best get it now.

As profound as the new Lib deficits are forecast to be, they’re costed on a wave of new taxes Canadians can expect after October 21st. For example a ‘luxury tax’ will click in on the purchase of a boat, car, RV, airplane or other personal-use items selling for $100,000 or more. So, imagine you’re a ‘rich’ dude making $230,000 a year, in the 54% tax bracket. If you want that 40-foot $120,000 motorhome for retirement cruising it’ll now cost you 13% HST (in Ontario) plus a 10% luxury tax, for a total of $149,000 – all paid in after-tax dollars. Thus you’d have to earn $209,000 to buy something priced at $120,000.

This is but the beginning. Overspending will not just end. The floor on a luxury tax can be dropped easily once in place. A hundred grand could morph into eighty or sixty in a few budgets. And since taxes modify behaviour (more on that in a moment) there’s no guarantee the projected revenue from this kind of tax ($585 million a year) will materialize. Recall the new uber bracket imposed on people earning over $220,000 in the last campaign? It has raised about half the amount expected because – surprise, surprise – people just started taking income in other forms.

That’s the funny thing about tax. Get it right, make it fair, people pay. Go heavy, target a few, they bolt.

In addition to the luxury tax on spending – which may be avoided by leasing – the Trudeauites will also tax non-resident owners of real estate and start whacking Amazon and Google for $540 million a year. Great. Give people and companies reasons not to spend money here. That should work out well. Then there’s the almost $2 billion anticipated from squeezing corporations, making it harder for them to expense debt payments. Less money for expansion and employment, possibly. This also means the war against small business will be back on.

Anyway, see the drift here? All of the parties have engaged in vote-buying, but none so all-encompassing as the guys who’ll likely win. Spending means taxation. So – as stated – get ready.

This brings us to tax avoidance.

First, of course, buy the motorhome now. And that 911 Carrera 4 GTS. That Cessna or sport yacht. Tell your spouse you’re actually saving ten or twenty grand by not waiting. This is an example of fiscal prudence you learned from the prime minister. It’s all good, honey. Seriously.

Next, do not let a single tax shelter slide by you unutilized. The TFSA. Your kid’s RESP or RDSP. Your matched corporate DC plan. Your RRSP. Remember that the more you earn the bigger the tax break when it comes to retirement savings.

Then, income-split. If your partner and you have disparate income levels you can utilize a spousal RRSP. You can loan him/her a boodle of cash to invest and nothing will be attributed back. Split pension income. Split the CPP. Have a joint non-registered investment account. Gift your squeeze or your adult kids money to stuff into their TFSAs.

Invest in stuff that provides a tax break. Shares or funds kicking out dividends come with a dividend tax credit, for example . Be aware that 50% of all capital gains are untaxed, a huge reduction on the hit you suffer with earned income.

Be tax-smart in your family. The person with the lowest income should be the investor while the one making more buys the groceries, gas and kibble. Create a tax-deductible mortgage by borrowing against home equity to invest (prudently). Retain cash in your small business to invest at a lower tax rate – up to the Bill Morneau limit.

If any of this makes you feel like a soiled little fiscal cheat, just remember four in ten families pay no net tax. The top 1% foots about a fifth of the entire national tax bill. And the wealth gap ain’t your fault.

Now, I’m going shopping.


Old dogs

Patrick is 48 and single, renting. His brother Les is 41, two kids, house and mortgage. Mom lives in a little condo, no financing, no savings. Dad has dementia. He’s in the hospital and not coming home. This family’s in crisis.

P reads the blog, contacted me for help and let me know his folks have owned a rental house in DT Toronto for more than half a century. It brings in about forty grand a year – which supports the parents – and is worth $2 million, even in its deferred-maintenance state. Dad’s minimum care in a dodgy public facility will cost a little under $3,000 a month. Alzheimer’s is an expensive affliction, in addition to being a personal hell. More respectful and attentive care in a private facility in the GTA costs about eight grand a month.

The sons have no money, or are unwilling to spend it on a failing father. Nor does she. So, I said, stating the obvious, the rental real estate has to go. Sell it, invest the proceeds and you’ll have enough to care for the guy with dignity, and still support mom.

And then, the second crisis. Tax.

Although Mom agreed the real estate should be sold, Les (he has POA) is apoplectic at seeing a chunk of his inheritance disappear in tax, then the capital eroded by nursing home bills. Despite the absolute windfall gain on this house, and the fact it’s been generating GIC-level, fully-taxable gains, the guy is balking at a sale.

So what is the liability?

It’s the sale price ($2 million) less the adjusted cost base (ACB), divided by half and taxed at his parents’ marginal rate. The ACB is not only what it cost fifty years ago (maybe $200,000) but also the addition of improvements made along the way which were not claimed against rental income, plus the sale commission. So, let’s say the capital gain ends up being $1.7 million. Half of that is free, and half added to income – thus $850,000 is the taxable amount.

If that were added to mom’s income in 2019 she’d end up in the 54% tax bracket and have to hand over about four hundred thou of the sale price, keeping $1.6 million, or 80%. Not so bad. If she and her husband bought the property jointly in the 1970s with money they both contributed, the gain could be split between them. But, thanks to our ‘tax-the-rich’ system, the bill would not be reduced.

The after-tax proceeds of more than a million and a half, if invested conservatively, could kick out about six grand a month. That’s enough to handle the long-term care facility bills now, then move dad into better surroundings when the 24/7 care need kicks in, with a minor erosion in capital. Mom can stay where she is. Her husband gets the best possible attention. Almost all of the capital is preserved for her eventual needs and possibly her estate.

But guess what? Les says no. Too much tax.

“The question is simple,” I told Pat. “How are you going to finance your father’s care? Your brother’s attitude disgusts me if he’s more worried about taxes on a windfall gain he had nothing to do with rather than the care of your parents. You can tell him that.”

And I guess he did. The real estate sale was halted. The trail went cold.

There are about 750,000 people in Canada now with Alzheimer’s or dementia. That compares with 81,000 deaths a year from cancer. But cancer cases are diminishing. Dementia is an epidemic. In a decade the number afflicted will be close to a million, with an increase of 66% in new cases. This is a function of demographics (9.6 million Boomers) and longevity.

There’s no treatment and no cure. Nobody gets over Alzheimer’s. Nobody gets better. The decline can take a decade or more, and early-onset patients may be afflicted in their forties or fifties. Cognitive ability degrades and in the end nobody functions on their own. Often caregivers – usually elderly spouses – suffer immensely as they struggle to look after someone whose path leads to absolute dependence. The best care possible is not at home. It’s in a facility staffed with people who aren’t figuring things out for the first time. And that costs money. Big money. Every family should be aware of this, and prepare.

Ensure you have power of attorney for yourself, and that your parents have done the same. Make sure there’s a will. Don’t have a relative as the executor – unless she is a probate and estate lawyer. As you age, simplify your life. Shed assets. Raise cash. Become less encumbered and more liquid. Sell the cottage. Ditch the boat. Spell out the beneficiaries of your RRSPs and the successor holders of your TFSAs. If you have business interests or other assets consider having a secondary or even tertiary will. Get some insurance to cover probate costs or outstanding mortgage balances.

Tell your partner if this stuff happens to you, to skip the heroics. Alzheimer’s patients belong in a care facility, not wandering off from the front door into traffic. But financing the long goodbye is daunting. It takes advance thought, and action.

As Patrick found, it cannot wait for a crisis – when human nature never fails to disappoint.