Canadians need more time to digest new capital gains inclusion rules

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Kim Moody: Scrapping the plan is best, but Canadians need enough time to seek advice after tax professionals have fully absorbed the details

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It’s almost the summer season, when we get to enjoy BBQs, camping, swimming outdoors and working on our tans for a very short period of time. But wait. Isn’t there an important June date coming up that affects the taxation pocketbook of millions of Canadians?

Indeed, there is. June 25, 2024, to be exact. That is the day the capital gains inclusion rate will increase from the current 50 per cent to two-thirds for corporations and trusts and any individual who has annual capital gains in excess of $250,000, as the government announced in its April 16 budget.

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Unfortunately, the budget did not have detailed draft legislation to specifically lay out how this proposal will work and we still do not have such details.

From April 16 to June 24, the government has banked and budgeted on the fact that Canadians would frantically trigger early gains on capital properties so as to lock in their gains under a lower inclusion rate. The budget documents estimate that the amount of extra tax revenue the government will collect by doing this will be approximately $7 billion.

Besides finding that number egregious, I find it horrible that the government is expecting Canadians to let the tax tail wag the investment dog. That flies in the face of every foundational investment theory and is against what I have preached in all my years of being a tax adviser. In other words, yes, tax is important, but it’s only one consideration when deciding whether to monetize or artificially trigger gains. Break-even and payback-period analyses are also very important.

Since April 16, tax practitioners have fielded an unending number of questions from people wondering what they should do. Unfortunately, tax practitioners and their clients are planning in the dark. You might think that legislation to change the capital gains inclusion rate should be pretty easy to draft. But you would be incorrect. Details matter.

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For example, how will capital-loss carry-forwards now work? Will the government enable a one-time election — effective June 25 — like it did when it repealed the old $100,000 capital gains deduction (which became effective Feb. 22, 1994) to effectuate dispositions? Or will it only respect legal dispositions? How exactly will the triggered gains interact with the new/amended Alternative Minimum Tax?

These types of questions are only scratching the surface. There are many other detailed questions that tax practitioners need to properly advise their clients.

But wait. Our illustrious finance minister last week announced that the legislative package will be released before the House rises for summer recess on June 21. That’s good, isn’t it? Well, no, it isn’t. If the draft legislation is released on, say, June 14, that leaves practitioners a whopping five business days to absorb the details and try to give proper advice to a whole host of people. Not good.

On May 1, 2024, the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada (a non-partisan committee whose role is not to advocate but to comment on technical taxation matters … I used to be a co-chair of this committee) sent a letter to the Department of Finance that had many great recommendations on how the new rules should be designed.

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Included was for the government to provide an elective disposition (as discussed above) and move the effective date to Jan. 1, 2025, to enable taxpayers to better prepare. CPA Canada released a follow-up letter on May 15 expressing significant concern that the draft legislation has not been released and also recommended moving the effective date of the proposal to Jan. 1, 2025.

While I agree with moving the implementation date to Jan. 1, my first preference is that the capital gains inclusion rate increase should be scrapped. It’s bad for Canada, especially at a time when our country desperately needs to encourage entrepreneurship, investments into Canada and reward people to take calculated risks with their capital.

The government is being blatantly misleading as it continues to say that this measure will only affect 0.13 per cent of taxpayers. That’s hogwash and, thankfully, many other experts are pushing back against such a disingenuous statistic.

I’ll happily debate any academic or economist who thinks this proposal will be good for Canada. But be warned: if you accept my challenge, you need to come armed with real-life examples of how the capital gains inclusion rate increase will make life better for the average Canadian, investor, entrepreneur and pensioner.

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In other words, I’m genuinely interested in knowing how such a proposal will assist in achieving equity and fairness, help in achieving “inter-generational fairness,” how taking money from people who are “old and who have already made their money” (all of these are vacuous speaking points that Prime Minister Justin Trudeau has trumpeted in support of the change) is helpful for Canada and how such a proposal will encourage people to invest in Canada.

I’m not interested in academic theories, formulas and studies that are not tested against behavioural change and real-life examples. I live real life every day and while I’m certainly open to different views and experiences, my real-life experience (combined with a strong knowledge of theory and policy) of how bad tax and economic policy impact everyday Canadians is pretty compelling.

As the 1700s German philosopher Immanuel Kant once wrote: “Experience without theory is blind, but theory without experience is mere intellectual play.” Very wise and true.

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Despite the massive pushback, Canadians may have to wait for an election and government change to have the right thing done (scrapping the capital gains inclusion rate increase). In the meantime, at a minimum, the recommendations of the joint committee and CPA Canada should be followed by delaying implementation to Jan. 1, 2025, to give Canadians enough time to seek advice after tax professionals have fully absorbed the details.

Planning in the dark is never a good thing.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimmoody.

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