Math is hard, Budgeting is Harder

Another Budget announcement has come and gone, and once again, the pesky budget has still not balanced itself. Of course, no one really expected anything close to balance, or spending restraint – after all, that wouldn’t get the votes.

However, the budget also wasn’t as bad as feared by many. The big news of course, is the capital gains inclusion rate increase, although I am seeing a lot of falsehoods already surrounding that. Let’s dig in.

As we know, the capital gains inclusion rate was raised from 50% to 66.6%, with a caveat that it applies only to the capital gain over $250,000.00 in any given year ( for individuals ). A little quick math suggest it is not as bad as feared. If you had a $300,000.00 capital gain, and you were in the top tax bracket ( in Ontario ) , as of right now, you would pay around $80,295.00. After the new rules come into effect, the capital gains tax on that same gain would be around $84,737.99. A change of approx $4442.00 or 5.50%. Not exactly earth shattering, however I am not a fan of governments relieving people of their hard earned money to spend on the next scandal. However, this is about where the good news ends, and where the white lies start to emerge.

According to the budget today, this change only affects the wealthiest .14% of Canadians – Bullshit. Lies, and more lies. Since the capital gains inclusion rate also applies to corporations – it affects a lot more than the ultra rich. Now, the corporate inclusion rate is 66.66% without any $250,000.00 exemption. So from dollar 1 all the way up is taxed at the new inclusion rate. For any broker out there that is incorporated, and earnings capital gains in their corporation – you are affected. For anyone who saves money in a mutual fund – mutual funds are considered corporations, so they pay the higher tax rate. This means that mutual fund capital gains ( if not passed on to the shareholders, which is not always the case ) pay the new higher rate. And since there is no inclusion exemption for corporations, they pay from dollar one. So let’s stop blowing smoke up Canadians ass and pretending this only affects the wealthy. Last time I checked someone who saves $100.00 a month into a mutual fund is not exactly wealthy or rich, although I was never good at Liberal math.

It also applies to the tax year. This is a big issue. So, let’s say mom and dad own a cottage that they bought for like $75,000.00 way way back in the day. If mom and dad pass away and the cottage is sold, the capital gains from the sale – which could be hundreds of thousands, or millions of dollars, all goes on the final year tax return, meaning that all of a sudden the estate is paying the higher inclusion rate. How many people do we see every year who have a paltry retirement income, but are sitting on massive unrealized capital gains in cottages, second properties and stocks? I know in my career I personally have come across dozens of people – probably hundreds. Unless I hang out with only the most elite, wealthy people in the country, it is definitely affecting more than the .14% of the “rich”.

Of course, it is easy to sell something if you make the wealthy out to be the bad guy. The rich need to pay more, they need to pay their fair share we are told. Ok, sure, but the issue with that, is that the rich will up and leave. Now who you gonna tax? Wealth fleeing Canada has become an issue, and every single time they raise taxes, it exacerbates the problem becoming its own self fulfilling prophecy. You tax the rich, the rich start to leave, so you have to raise taxes again on the rich, the next round of rich people leave, and on and on. Now, some might think I am being alarmist, however, my little pocket of Florida has a lot, and I mean a lot of former Canadian residents who took their money and moved. And by a lot I mean thousands. That is just my little pocket of Florida. And by ‘ their money’ I don’t mean thousands, or even hundreds of thousands. I mean millions and tens of millions. Not exactly chicken feed if you know what I mean.

But, the largest problem that was created today was what I like to call the boiling frog theory. If you are not familiar with the theory, I suggest you look it up. Capital gains being taxed at 50% in Canada was almost a religion – it was basically sancrosect. Changing the inclusion rate was almost the third rail of taxation – nobody wanted to touch it. By changing the inclusion rate today, they got people used to it. Oh sure, it only applies to the wealthy. But funny thing, I have never heard a politician define exactly what the term ‘ wealthy’ means. What is wealthy, exactly? So, we start with an exemption of $250,000.00 , but over time, inflation eats away at what that $250,000.00 actually is worth. And then, we add another bracket to the tax, and the first $250,000.00 is exempt, and then the 66.6% inclusion rate applies to, let’s say the next $250,000.00, and then over $500,000.00 we take it up to, oh, let’s say 75%, and then after 1 million, we tax it at 100%. You know – to really make the wealthy pay their fair share. Of course, it goes bit by bit, and no one really notices it – so long as the rich pay their fair share that is. And of course, this increased tax comes at a time when the government knows the baby boomers will all be selling off their investment properties and cottages in the coming decade or so. Talk about things working out!!! And of course, the same rich people that policies like this try to target will just pay better lawyers and better accountants to find better loopholes – and pay effectively what they are paying today. According to the Finance Minister, the new capital gains tax will raise 19 Billion in new taxes in the coming years – but just like the last time they raised taxes on the wealthy – they actually lost money because the wealthy were one step ahead.

Today though is a lot bigger than what it is – it is what it represents. The Canadian government sent a message today! They sent a message that success and wealth is not something to be proud of – it is something to be taxed. Productivity in Canada is some of the lowest in the developed world. Taxation changes like today ensures that Canada will not only not stop the decline, but certainly not change the direction. Today was also a signal to foreign investors – Canada is closed for business. Do not invest in Canadian companies, Canadian innovations, Canadian businesses, because we will increase the taxes, and change the rules on you. Business hates uncertainty, and when a government changes taxes on a whim, it creates a lot of uncertainty. And, let’s not forget that someone who has been sitting on capital gains for years, perhaps decades, is all of a sudden subject to these higher tax rates. That is simply not right. You want to change the tax rate? Fine, but it applies to anything from this day on – not things already on the books.

Imagine you were a small business owner that had spent his or her entire life building a business. You made it through the hard times, you didn’t have a whole lot of extra funds, but you always knew that you could sell your business and retire. After today, the government is going to come along and steal ( yes I said steal ) and extra, roughly 9% of your retirement fund. ( 66.6% – 50% = 16.6%, at a 53.53% tax rate is Ontario is 8.88% ) No warning, no reason given, and certainly nothing you could prepare for. Imagine if someone came along to you, tonight, and stole 9% of every dollar you had? Just took it! Nothing you could do to get it back. Doesn’t seem fair, now does it?

However, I am sure the government will put all these new found billions they confiscate from the hard worker into some bullshit fluff program. You know, the really important ones like spending millions of dollars on studying the re gendering of fucking unicorns. Or the programs that ensure that every men’s washroom has tampons in it. You know – the real hard hitting programs.

And even after stealing more money from average Canadians, the deficit will still increase by around 40 billion dollars for the year. 4o billion more dollars in the hole, and I anticipate a lot less people to tax the shit out of in the coming years. The top 20% of earners in Canada pay almost 60% of the taxes. If 10% of the top 20% wealthy decide to leave – the Canadian government will have a revenue problem. The bond market knows the spending is a problem, and rates rebounded to end the day flat. The Canadian government will have to finance the debt, and the bond market is demanding they pay up in yield to take on the risk.