This is Globe Advisor’s weekly newsletter for professional financial advisors, published every Friday. If someone has forwarded this newsletter to you via e-mail, or you’re reading this on the web, you can register for Globe Advisor, then sign up for this newsletter and others on our newsletter sign-up page. For more from Globe Advisor, visit our homepage.
For years, a change to the capital gains inclusion rate was a popular bogeyman in pre-budget speculation, but this year the Liberal government surprised almost everyone by actually raising it.
In a recent LinkedIn Live webinar, Globe Advisor assistant editor Mark Burgess spoke with Brian Ernewein, senior advisor at KPMG in Canada’s national tax centre, about who the proposed changes will affect and why some business owners may consider holding investments personally.
You were in the budget lockup in Ottawa. What was the reaction to this big change?
I’ve sometimes noted [with] these rumours that even a stopped clock is right twice a day and that we were bound to see some change to capital gains at some point. But this year turned out to be the year for the stopped clock to be correct. Most of the betting before the budget seemed to be on some sort of additional tax on the wealthy, maybe a higher tax rate – applying the income above the highest current personal tax bracket – or surtaxes applying to grocery chains or oil and gas [companies]. The capital gains change did come as a bit of a surprise. I have to say I’m rather impressed the government managed to keep it under wraps until budget day.
The government presented the change as a measure that will affect 0.13 per cent of individuals. Tell us who’s going to be affected by this.
It’s important to note that the government estimates that corporations will pay more than half of this additional tax. That includes tax paid by private companies owned by individuals, but I don’t think that burden on individuals is captured in that 0.13 per cent personal tax statistic.
As far as individuals being affected directly, the bulk of this tax will be paid by very high-income taxpayers. But at the same time, this shouldn’t be taken to mean that middle-class taxpayers won’t be affected adversely by the change. [With a] small business or family cottage, the value of that asset may have increased a great deal in the past 40 years. Maybe the cottage that someone acquired for $50,000 in 1984 is worth 10 or 20 times that now. If that person sells that cottage next year for $1-million, their gains will exceed the $250,000 annual limit to which the current 50 per cent inclusion rate will still apply. And even if that’s the only gain that person will ever recognize in their lifetime, they’ll be in the 0.13 per cent for that year.
Can you give an overview of how the new inclusion rate affects business owners?
Companies, including private corporations, are going to be subject to the higher inclusion rate, and they won’t be subject to the annual $250,000 lower inclusion rate threshold that’s available only to individuals. So, it seems to follow that the tax burden on investment property gains generated in a private company could be higher than it would have been if the individual owner had realized those capital gains directly.
We don’t have any detail on this point. But from my discussion with Department of Finance officials at the budget lockup, I don’t think the intention is to integrate this additional corporate tax on capital gains with the personal tax applying to dividend distributions. In other words, there seems to be the potential for there to be effectively a tax cost attributable to generating capital gains on investment property within a private company that won’t be recognized at the personal level. So, you end up with possible double taxation.
If that’s true, then that would lead – all other things being equal – to think about holding investment assets personally, or perhaps through a trust, but it would militate against the use of a private company.
– Mark Burgess, Globe Advisor assistant editor
This interview has been edited and condensed.
Must-reads from Globe Advisor this week
How Ottawa’s hike to capital gains inclusion rate affects trusts
Trusts are used to control assets for beneficiaries such as spouses, minor children and dependents with special needs. They can also protect assets from family law claims, keep assets confidential, and lower probate taxes. But advisors say Ottawa’s proposed changes to the capital gains inclusion rate could cause Canadians to rethink how trusts are used and structured. “If you’re setting one up from scratch today … you might find there’s a real additional cost,” says Aaron Hector at CWB Wealth Management in Calgary. “It’s going to impact, to an extent, the design of new trusts.” Brenda Bouw reports.
Hybrid advice creates opportunities, but also client retention problems
A growing robo-advice market is blurring the lines between digital and human advice, creating opportunities for firms that integrate their offerings and move clients from one stream to the other. However, the approach has created a potential client retention problem. “Some of the traditional investment firms have built these digital offerings off the side and haven’t figured out how to integrate them with their existing offers,” says Kevin Spraggs, vice-president of research at Investor Economics. Wealth management firms must create a clear progression pathway or risk losing those clients as they mature. Danny Bradbury reports.
Why this money manager believes ESG investing is out and impact investing is in
Investing through an environmental, social and governance (ESG) lens has lost its way in recent years, a shift that money manager François Bourdon blames on “sustainability tourists” – and not the travel kind. The managing partner of sustainability-focused firm Nordis Capital says too many companies venture into sustainability in one part of their business while maintaining other parts that can be harmful to society and the environment. “ESG is becoming a bit toxic. Nobody really knows what it is and what it includes or doesn’t include,” Mr. Bourdon says. Brenda Bouw asks what he’s been buying and selling.
Advisors seize federal budget opportunity to educate and engage Canadians
While advisors are working with clients on tax strategies in response to the changes introduced in this year’s federal budget, some have also used social media to explain the changes to a wider audience. Mark McGrath, associate portfolio manager at PWL Capital Inc. in Squamish, B.C., took to social media with a 15-part thread to counter the government’s claim that changes to the capital gains inclusion rate would affect only 40,000 Canadians. “As a financial planner, I felt it was my duty to educate,” says Mr. McGrath, whose business is focused on serving physicians – a group affected by the proposed rules. His posts exploded, with total impressions on X reaching 3.3 million. Deanne Gage reports.
Also see:
Four misconceptions about how the federal budget affects corporations
Where to look beyond the Magnificent Seven for exposure to AI
How three fund managers are playing the energy bull market
How this former food industry business owner is finding new identities in retirement
What a U.S. ruling on net investment income tax could mean for Canadian dual citizens
What you and your clients need to know
Echelon Wealth Partners faces action by Canada’s industry regulator over U.S. trading
Toronto-based brokerage Echelon Wealth Partners Inc. used to do very little trading in U.S. over-the-counter stocks. Then it hired Stephen Burns. In the four years after Mr. Burns joined the investment dealer in 2018 as managing director of electronic trading, regulators say Echelon Wealth executed more than $185-million of trades in shares on the U.S. OTC market. The Canadian Investment Regulatory Organization has launched a disciplinary hearing against the firm over gatekeeping failures. David Milstead and Clare O’Hara report.
Retired Canadians facing pressure to invest abroad
For retired investors, shares in banks, telecommunications and energy companies are golden geese. They dependably crank out ever-increasing dividends, funding the lifestyles of those who have left the workforce. But the golden geese are ailing. A series of government policy shifts – a higher capital gains inclusion rate, hikes in capital requirements at banks, carbon taxes and telecom regulation – are reducing the returns investors can expect from Canada’s flagship public companies. Andrew Willis reports.
Class-action lawsuit against Emerge ETFs abandoned because fund company has no money
A proposed class-action lawsuit against asset manager Emerge Canada Inc. will no longer advance in court because lawyers representing harmed investors have found the fund company has no assets to recover. Toronto-based law firm Kalloghlian Myers LLP sent a motion to the Ontario Superior Court of Justice on April 26 asking for a discontinuance of a proposed class action against Emerge Canada. The reason, said Garth Myers, a partner with Kalloghlian Myers, does not lie in the merit of allegations against the company, but rather in a lack of insurance and financial resources at Emerge Canada. Clare O’Hara reports.
Capital gains change separated from budget bill in calculated move to corner Conservatives, observers say
The Liberal government is separating proposed capital gains tax measures from its budget bill in what some say is a political attempt to force the opposition Conservatives to take a stand on the controversial measure. Conservative Leader Pierre Poilievre has said his party, which is polling far ahead of the governing Liberals, would vote against the budget but hasn’t addressed the capital gains tax move explicitly. Sean Silcoff reports.
– Globe Advisor Staff