Tax Matters for Canadian Businesses
Your Business, Your Money: tax advice to help you keep more of what you earn
With Canadian top tax rate over 50%, a dollar of tax saved is now more than two dollars earned. Each month we translate the complexities of tax news into actions for Canadian businesses. This month we change from our usual focus on cross-border trade to address the rumours on what tax changes could be contained in the upcoming federal budget.
To increase or not to increase: Capital Gains tax rates
Rumour has it that the tax rate on capital gains will increase. What does that mean for you, your business, and your investments?
We are expecting the federal budget announcement any day now. With the impending date looming, so too comes much speculation about what will be included, what will be shut out, and more importantly, what will affect your business and your personal bottom line. One of the most-speculated-upon topics of conversation lately is the rumoured increases to the capital gains tax rate.
The Liberals campaigned on a promise to strengthen the middle and lower classes. While there was little to no mention of capital gains directly in 2015, it’s shouldn’t be ruled out that they are contemplating this rate change now, especially given other tax changes they’ve since made which directly affect the higher-earning class in Canada. The last time the rate was changed in Canada was in 1988 and 1990. While not part of the Federal budget back then, it was introduced in a white paper as part of a special tax reform package. This time it is speculated to be included within the budget and, like before, be enacted by changing the capital gains inclusion rate from 50% to 66% or 75%. This would change the top tax rate for capital gains to increase from 26.8% to 40.1% (in Ontario, for example).
Here’s what’s being said:
- “That’s a question being asked these days by some nervous investors, worried that a government that has already targeted higher-income Canadians with new tax measures may also — perhaps as soon as the upcoming budget — choose to increase the capital gains inclusion rate.” - Financial Post – January, 2017
- “Trudeau told [an]… audience ... that for too long, executives have been putting their shareholders ahead of their employees, their workers’ families, and the communities in which they operate. “It’s time to pay a living wage, to pay your taxes and to give your workers the peace of mind that comes with stable, full-time contracts,” Trudeau said.” – Canadian Business, February, 2017
- “As the Liberal government finalizes its 2017 budget, there are increasing rumours that it may increase capital gains taxes.” – The Fraser Institute – February, 2017
- “The odds of a federal budget that targets investors with higher taxes on capital gains or even dividends are rising.” – The Globe and Mail - February, 2017
The Richter take:
With the Toronto Stock Exchange up about 25% in the past 14 months, if taxes on capital gains were to increase, big money could be at risk. While the tax rates shouldn’t dictate your investment decisions, tax efficiency in your investment strategy must be considered.
Faced with these rumours, investors need to manage the tax risk on unrealized capital gains; both portfolio – stocks – and owners of private businesses. In this environment, and irrespective of investment considerations, one could crystalize gains before the tax-rate hike. However, if the rumours prove false, you’d be accelerating a tax payment needlessly. Moreover, even if the rumours materialize, the capital gains inclusion rate might be decreased in the future, as happened in 2000 when the inclusion rate dropped back down after about 10 years of being at the higher rate. So if you are a business owner with no plans to divest for decades, or are a “buy and hold forever” investor, crystalizing gains early may not be the way to go as it would needlessly accelerate tax payments.
Analyzing your current situation and projections with a professional could help you navigate any imposed changes and reaffirm that you are meeting your long-term goals and maximizing your after-tax wealth. From our experience in working with high net worth families, there are always specific considerations that need to be addressed when determining which path is best for you and your investments. In today’s environment, having a properly structured tax plan to hedge tax policy risks is a prudent action in this environment.
David Hogan, Partner – Tax
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About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.