Here we go…

This may be dangerous, but no guts, no glory. Let’s make some assumptions about you, the hapless, addicted readers of this pathetic, athletic blog.

You’re no socialist. You want taxes lower, not higher. The trade-off may be less from government. Not a problem. You favour ending deficits, controlled spending in Ottawa, no debt balloon. You don’t hate people with small businesses. You think a top tax bracket of 53% is high enough. Rich people aren’t evil. The climate may need fixing, but you’re not sure civil servants are the ones to do it. And why are we giving money to people to buy houses when that just makes them cost more?

That sum it up? Good.

So, who do you vote for? Let’s review what the major parties would do to your personal finances (and your nation).

The Dippers

Disaster, actually. Rampant federal spending and endless deficits, according to Jag. ‘Rich’ people would see Canada’s first wealth tax brought into being – a 1% annual levy on all assets, personal, business and real estate. This would raise billions, but also lead to accountants and tax lawyers entering a golden age. The likely result would be higher income tax brackets to make up the difference and, most consequentially, a big change to capital gains tax.

Currently 50% of the increased value in financial assets (stocks, ETFs, bonds, rental real estate) as well as cottages and businesses is included in personal income and taxed at the marginal rate. So the most anyone pays is about 26% of the capital gain. The Dippers would jump the inclusion rate to 75%, increasing the tax take by half. Ouch. You can imagine the impact this would have on anyone with a non-registered retirement portfolio, or transferring ownership of the family cabin.

Regarding real estate, the socialists would impose a 15% tax on Chinese dudes (on top of the existing 15-20% taxes) and allow 30-year mortgages. Plus all new home buyers would get a pony. Your choice of color.

The Libs

If you liked the last four years of increased spending, more government and the crawl towards cradle-to-grave nurturing, you’ll love the new agenda. More money to parents to finance babies, more paid parental leave, more people removed from the tax rolls, more CPP paid to survivors, more OAS paid to 75+ wrinklies, and free money to moisters for their epic mortgages.

All that comes with a big pricetag. Deficits of at least $90 billion over four years, which will increase the national debt by about 12% – a massive amount over a single term of government. To help pay for that the Trudeau gang will bring in a 10% ‘luxury’ tax on stuff costing more than $100,000, including cars, boats and RVs. Also likely is some diddling with dividends and capital gains taxes (that was in the 2015 platform) and maybe another assault on entrepreneurs, docs and others with incorporations. If the economy slides into a recession, or interest rates rise a little, the river of red ink could become an ocean. When everybody gets a prize for showing up, the money soon runs out. Who knew?

The Tories

At every stop now the prime minister lumps Andrew Scheer in with “Doug Ford, Stephen Harper and Jason Kenney”. Oh yeah, and Trump. The message is clear. Be afraid of cons and cuts.

Actually the Conservatives are planning deficits, too. But only for a couple of years, then spending will match revenues. They will also cut taxes, but more broadly, and bring in credits for families and transit users, while providing tax-free maternity/paternity benefits and money to make houses more energy-efficient. Foreign aid will be hacked 25% but no mention of chops to social programs.

Conservatives would end the carbon tax and also reverse the ban on income-splitting for small business owners which came into effect last year. Then entrepreneurial couples could share dividends as they did in the past. Scheer would unwisely gut the mortgage stress test and (like the NDP) bring back 30-year amortizations. Both, of course, would make real estate cost more.

Meanwhile Greens & the Max Party are irrelevant. Liz will have a couple of MPs and no influence. PPC will be a one-man party. The morning of October 22nd could bring a minority government, red or blue (even tied), and in the days after, possibly a coalition. Tories and the Bloc could coalesce, which would be odd.  Or the Libs and NDP might join. God help us.

‘Through kids, divorce, moving, career…’

NewWest, a poster here, was in touch yesterday. “I know that GreaterFool is usually a Dog Blog, but my good cat Toby passed on to Cat Paradise yesterday and I thought I’d send a picture of him helping me read the blog and making important investment decisions,” she writes. “He was my faithful companion and familiar for nineteen years, through kids, divorce, moving, career change – I knew him longer than most people in my life – and just sending this email is a fitting memorial somehow. Toby made my days so much better, even at the very end when old age finally came and he couldn’t jump up on my desk any more to lie on the keyboard. He died at home, on his favourite blanket, lying in the sun, a peaceful end for which I am grateful.

“It still surprises me how eight pounds of fur, mystery and complete confidence could make such an impact on my life, but he did. I miss him.”

RIP, Toby.

Kid cash

– Andy Seliverstoff photo

Enough of T2, Jag, ‘Doug’ Scheer, Max, Greenies-Greta and the Blochead dude. Let’s stray back into the real world for at least a day, where people actually mean what they say. In this life folks worry about taxes, cash flow, houses, debt, savings, pensions and their kids. And that brings us to Kate and her Little Star.

First, the MSU: “I am a long-time reader, shook your hand once, has been featured on the blog before and keep sending you every cute picture of a dog I see on the Internet. In short, many years faithful fan here. Here goes the mandatory introduction paragraph. But this is not what my email is about.”

Of course not. There’s an ask coming. Turns out Little Star is 11 and has been bringing home money as a movie/commercial extra. Mom, apparently, is also weird. “We are reading the books about stock market investing before bed and once she understands diversification, indexes, compound interest and freedoom-35 concepts, I want to lure her into putting 50% (or more) of her income into a portfolio. Now the question is where her portfolio should be kept.”

There’d be no issue if LS was at the age of majority (19 in BC, 18 most everywhere else) since then she could have a TFSA and chunk the cash in there routinely, or just open a non-reg account. But minors can’t do that. And parents wanting to teach their kids about investing face an issue.

Here are the four options Kate is sweating, and her comments:

1. Formal trust – expensive to set up (requires a lawyer), can put any money in (not sure if they care about the source), cannot withdraw anything until she is 19 and then the interest/capital gains are taxed in her hands (?). It seems too complicated and not too flexible.
2. Informal trust – easy to set up but NGATB told me that the money invested will be attributed to me (why? she is the one who earned the money). The Internet says that parents receive letters from CRA but as long as they can prove (yearly?) that the income belongs to the child (invoices, CCB statements), they are fine. The Internet also says that people do withdraw the money but then it is a gray area since the trust is informal. This seems an OK option as long as I can prove that she made the money and the investment income is attributed to her.
3. RESP – ours is unfortunately maxed ;)
4. My TFSA – I have a little bit of room there. I can create a separate TFSA for her under my name and make her a beneficiary and once she is 19, move all the money into her accounts tax-free. BUT if I die before that, she will be taxed on interest/capital gains. Besides, she is eating up my TFSA room and what if she starts making a reasonable amount?

“What would you recommend? I do not think you previously discussed this topic in your blog and it might be helpful for other people, too. It looks like my idea to train her to save and invest from the early age is not easy to implement. I would really appreciate your opinion on the subject.”

Good research. A formal trust is a truly bad idea, costly, cumbersome and irrational unless Little Star is bring in tens or hundreds of thousands. An informal trust, or in-trust account, is just that – not a trust, just a bank vehicle with a defined beneficiary. No cost involved, but there are things to know…

Once money is in there, it belongs to the kid on a permanent basis. Income – interest and dividends – is attributed back to the trustee (mom) for tax purposes. But since most assets for an 11-year-old would be growthy in nature, yielding capital gains, no tax. In any case, if you want to prove to the CRA that LS earned the money, fine. You can also throw in the monthly kiddie pogey too, and no income will be attributed to you. Once the child hits the age of majority, the trust becomes their property, with all gains/income taxable in their hands. If the trustee croaks before that happens, the in-trust account sits in the estate until the offspring hits 19/18.

So, this is an option. But be aware a trustee has obligations to manage the money prudently. If not, the kid can sue you. Seriously.

Well, here’s the advice.

The first choice is the RESP, since money grows in 100% tax-free and LS is already the beneficiary. A nice balanced portfolio can be held there, and lots of lessons taught and learned about how assets perform. You say the current RESP is ‘maxed’? That probably means you’ve put enough in annually to earn the full government grant ($2,500). But the rules allow $50,000 to be dumped into this type of account, per child, and invested for decades. So there is likely enough room here to store lots of royalty cheques. Plus you can still go back one year at a time and claim the grant.

Second choice is to use your TFSA, and simply decide that the proceeds will go to your child when she hits the magic number. All growth is free of tax and, no, nothing will be taxed away if you die – only the increase in the value of the TFSA (if any) following death. If you have a spouse, make him the ‘successor holder’, then he can gift the money later. Also tax free.

Lastly, third choice, is that in-trust account. There’s the potential for confusion here, a CRA challenge, tax attribution or legal issues. The good news is then you can teach her the difference between torts and tarts. Essential in show biz.