The 2024 Capital Gains Tax Hike: A Shortsighted Move and Its Ripple Effects
Adrian C. Spitters FCSI®, CFP®, CEA® President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
The Uproar over the Capital Gains Inclusion Rate Increase
It's been almost a month since the Canadian federal budget was released, and the furor surrounding the proposed capital gains inclusion rate increase, from the current 50% to two-thirds, shows no signs of abating. The government's disingenuous claim that the proposal will only affect 0.13% of individuals has further fueled the outrage, as many Canadians recognize the far-reaching implications of this change.
The fact that the discussion remains lively and ongoing is encouraging, as it suggests that people are beginning to understand the true shortsightedness of this proposal. Canada has a significant productivity challenge, and discouraging investment by making it more expensive for people to risk their capital is counterproductive to the country's economic interests.
A Growing Chorus of Dissent
Business organizations across various sectors, including the Canadian Medical Association (which believes the proposals will impact doctor recruitment and retention), the Mining Association of Canada, and others, are speaking out against the proposal. The Canadian Medical Association fears that the changes could hinder their ability to attract and retain top medical talent, while the Mining Association of Canada is concerned about the potential negative impact on investment in the mining sector.
Despite the mounting pushback and attention from diverse industry groups, the government shows no outward sign of backing off. On Monday, the prime minister even released a misleading video in an attempt to double down on the proposal, further fueling frustrations among those who oppose the changes.
Planning in the Dark: The Need for Clarity
As the debate rages on, a significant challenge facing Canadians is the lack of draft legislation outlining the specifics of the proposed changes. This absence of clarity has left many "planning in the dark," unsure of how the changes will affect their specific situations and unable to make informed decisions.
Crucial questions remain unanswered, such as how the proposed changes will impact estates (specifically, graduated-rate estates), whether elections will be available to enable people to trigger dispositions before June 25, 2024, how capital gains reserves will be treated if such gains were triggered during a period where the inclusion rate was 50%, and how loss carry-forwards will be treated.
The Threat of Capital Flight
Perhaps the most concerning aspect of this issue is the growing sentiment among successful Canadians – or, as the government prefers to call them, the "rich" – to explore leaving the country. Over the past month, there has been a significant increase in the number of successful individuals seeking advice on relocating, with many having already decided to depart Canada.
While some may dismiss these concerns as mere hyperbole, the fact remains that Canada cannot afford to lose its most productive and financially successful citizens. Their contributions to the economy through investment, job creation, and tax revenue are invaluable, and their exodus would only exacerbate the very productivity challenges the government claims to be addressing.
The Importance of Proactive Planning
Canadians should carefully consider whether or not the early acceleration of capital gains makes sense for them. While in some cases, it may be beneficial to trigger capital gains before June 25, 2024, the decision should not be taken lightly.
For example, triggering capital gains early may cause the amended Alternative Minimum Tax (AMT) to apply. In such cases, the question will be whether there is a feasible plan to try to recover such AMT within the next seven taxation years, since the AMT is a refundable tax to the extent it does not apply in those future years.
Another crucial consideration is the estimated breakeven period if taxation is triggered early. Such an analysis will inevitably involve estimates and predictions, such as future rates of return on the re-invested capital, making it a complex decision that requires careful planning and expert guidance.
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The Voice of Reason: Heeding JFK's Wisdom
Despite some left-leaning academics and economists supporting the capital gains inclusion rate proposal on the basis of equity, many argue that this perspective ignores the real-world dynamics of investing, where investors consider overall risk, liquidity, and the time value of money.
As John F. Kennedy eloquently stated more than 60 years ago: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy."
These wise words from JFK underscore the potential consequences of the proposed changes, and the Canadian government would be wise to heed such advice and eliminate the capital gains inclusion increase proposal, for the benefit of all Canadians.
In times of uncertainty, proactive planning and a diversified approach to wealth management are essential. By partnering with experienced professionals and exploring alternative investment strategies, you can fortify your portfolio against economic threats, minimize tax exposure, and preserve your hard-earned wealth for generations to come.
A Partnership for Holistic Wealth Management
To navigate this complex landscape, I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.
Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. Through my relationship with this firm and other key industry professionals and firms, my clients gain exclusive access to alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax structures, and tax-efficient corporate insurance solutions – all designed to fortify and de-risk portfolios against economic threats, inflation, and higher taxes.
Complimentary Portfolio Evaluation
In the face of these proposed changes, it is crucial to re-evaluate your portfolio strategy and ensure that your investments are well-positioned to weather the potential impact. As a valued reader, we are offering a complimentary portfolio evaluation to confirm if your portfolio is positioned to weather the 2024 budget changes.
Email me at aspitters@pfcwealthsolutions.com or use my Calendly Link to book your complimentary portfolio evaluation. During this no-obligation consultation, we can provide insights into how we can help you navigate the 2024 budget changes to ensure your portfolio is resilient to the tax changes and aligned with your long-term financial goals.
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