It goes without saying that most Canadians are expecting significant changes to the current tax system in Canada when the Feds announce their budget on April 19th.
After a year long pandemic that has triggered spending most Canadians have never seen before in history, it is impossible to avoid an increase in our day-to-day tax implications. According to the Globe & Mail, “Canada arrives at this budget with an estimated deficit of $363-billion for the past year ended March 31 – nearly 10 times the budget shortfall of a year earlier. Relative to the size of the Canadian economy, it’s the biggest one-year bath of red ink since the Second World War.”
It goes without saying, this budget will affect you which makes it is essential to be aware of what you can expect.
What Can you Expect
Although it is impossible to predict what will be proposed or implemented, there are some common themes that have come up over the course of the last two years since the last budget announcement date was released.
We’ve heard rumors of an increase to HST of 2%, which affects all Canadians. We’ve heard rumors of a new wealth tax or estate tax that could target those with certain net worth levels on death. Like most new taxes it may not affect every Canadian today but one day, after years of economic growth and inflation, the “net worth” number will feel awfully low on a National level and will impact the majority of Canadians, not just the elite.
Another possible change is a new tax on your principal residence. In the US, homeowners pay tax on the growth of the value of their principal residence when they sell. However, they are also able to deduct the interest on their mortgage against their income. This is a reasonable trade off of course, but it has also created additional problems as Americans are rarely in a rush to pay off their mortgage and as a result, keep their debt levels quite high.
One of the most obvious and likely changes to happen is an increase to the capital gains inclusion rate. This would mean that the current inclusion rate of 50% would increase to 75%, which represents a growth in capital gains tax of 50% to your bottom line. Think about that. You’ve changed nothing, but your current real estate portfolio, sale of your business, stock holdings, and many other assets could see an increased tax bill of 50% almost overnight.
Let’s do some math on this last point. If you were to sell an investment property today and earn a $1M capital gain (the difference between your purchase price, expenses and actual sale price), your inclusion tax rate would be 50%. If these changes are made because of this budget, your tax dollar liability on the same $1M capital gain immediately jumps by a brand new 50% for a difference of $132,500!
Capital Gains Tax (Current)
Capital Gain = $1M
Inclusion Rate = 50%
Marginal Tax Rate = 53%
Net Tax Owing = $265k,000
Capital Gains Tax (Likely Proposal)
Capital Gain = $1M
Inclusion Rate = 50%
Marginal Tax Rate = 53%
Net Tax Owing = $397,500
Some may say that this is still a great profit and in fact question why 100% is not included in the overall taxable portion already, and we agree that it is always good to at least discuss different philosophies. But no matter what you believe is right or fair, if you own assets that are taxed as capital gains, now is the time to understand how you can protect the very assets that you may have owned for any number of years.
Proper Planning Starts Now
I spoke with a client recently and in reviewing their permanent insurance policy, I was struck with the extra value that this policy now has for their family.
As business owners and real estate investors, their future tax liability is quite significant, but so are their current assets. If the capital gains inclusion rate is approved and implemented, this family could face a 50% increase in their terminal tax liability which will have a drastic, potentially disastrous impact on their family business and assets. The CRA will demand their money, but where it will come from?
Thankfully, this insurance policy has a large, permanent, tax free insurance benefit that will help to at least mitigate a large portion of their estate tax. But just as importantly if not even more so, the growth of the cash value inside their policy is more valuable then ever as it too can grow tax free and could even be used to supplement retirement income tax free.
In a country where taxes will continue to rise, despite being one of the highest taxed nations in the world, do you really care if one of the most tax efficient, safest asset is called “life insurance”? Or would you prefer to make sure that your capital gains can be paid off or that your money can grow tax free with no annual deposit limit?
In the case of this family and many others we serve, they are more interested in what the strategy provides for them by using this exceptional tax planning asset, then they are the actual title or stigma of the product.
There has never been a better time to explore proper tax and estate planning. Depending on your situation, your CA, Lawyer or Advisor could suggest using family trusts, estate freezes, life insurance or other tax efficient strategies available to you as a Canadian. Regardless of which makes the most sense for you, now is the time to ask.
