Too late to sell before budget?

[Cardboard]

I looked back in 2000 or the last time when the capital gain/loss tax inclusion rate was changed and it was on February 28. However, the tax documents indicate that the new inclusion rate started from that day on. It was said that the budget was announced in the afternoon of the 28th but, I could not find time of day.

 

The 2017 budget will be announced on Wednesday at 16:00 or I would assume after markets are closed and a transaction made tomorrow would settle just prior. If the inclusion rate is changed and looking back at the 2000 example, will it apply to transactions made tomorrow assuming that the change is not retroactive?

 

Cardboard

[RichardGibbons]

My bet is that it's too late.  My reasoning is that the settlement date isn't 72 work hours, but rather three work days.  Thus, the settlement date is Wednesday, not "Wednesday before the budget was read."

 

If they didn't have this, then in theory, you could sell, say, a house, an hour after the budget was read, settle it immediately, and still pay the lower capital gains tax.  Thus, I'd bet that anything that settles on the 22nd or later will be at the new inclusion rate.

 

[EliG]

Are you married? You can transfer positions to a spouse before Wednesday, effective immediately (assuming you have separate accounts at the same brokerage).

 

You can choose to transfer at the market price or ACB. You can make that election retroactively after the budget is announced. Transferring at the market price triggers a capital gain for you.

[Cardboard]

I have one security left where it could be worth doing and I could do a transfer before Wednesday between my corporation and myself using a tax election (article 85) and do the FMV or ACB after or similar to your suggestion. Could be even better than selling since it is not that liquid.

 

This is not a big deal for me but, I was wondering if others had done some tax planning regarding that possibility.

[KCLarkin]

This is not a big deal for me but, I was wondering if others had done some tax planning regarding that possibility.

 

I made some changes to my portfolio with the assumption that yesterday was the last chance for a T+3 sale.

[RichardGibbons]

This is not a big deal for me but, I was wondering if others had done some tax planning regarding that possibility.

 

I made some changes to my portfolio with the assumption that yesterday was the last chance for a T+3 sale.

 

Me too (well, I did it in February because I wasn't sure how much notice we'd have for budget day).

[rb]

I didn't make any changes for a couple of reasons.

 

1. I actually don't know if there's gonna be any change.

2. I can't actually do much because I'm sitting on huge capital gains. It doesn't really make sense to have a huge tax bill right now. It makes more sense to keep compounding the capital even if I have to pay tax at a higher inclusion rate in the future.

[EliG]

I didn't make any changes. I plan to retire within 5 years, at which point my income will drop a few brackets. With 66% inclusion rate, I may end up paying 1% - 2% less than I would pay now. With 75% inclusion, I may end up paying 0.5% - 2% more.

 

I'd be very surprised if they jack up the inclusion to 75%. 66% is a more likely number, if they change anything at all.

[Uccmal]

I already try to minimize my cap. gains taxes.  I have been deleveraging for months.  This might make me more selective, and might make me more disciplined, when I buy, which isn't a bad thing. 

 

For my Wife's account I try not to trade at all, and when I do it is to get rid of losers, not winners. 

She has a good job, she shows no inkling of leaving for a few years yet. 

 

I had to leave my job nearly 3 years ago, because I was making 30,000 a year at my job, after capital gains taxes on my investments, in the 3 years prior.  My gross salary was 90 k.  Okay, the punishment wasn't that bad, but still, the system is so f'ed up I quit a job to save money. 

 

FWIW, if the government enacts this tax, I think it is collossally dumb.  What a way to kill investment. 

[scorpioncapital]

Many countries don't even have capital gains taxes. Living in Canada once again getting more expensive.

 

http://www.theglobeandmail.com/news/politics/world-should-follow-canadas-tax-the-rich-plan-morneau-tells-g20/article34319769/

 

While the world is lowering taxes, Canada is thinking a little more communist communally.

 

[rb]

FWIW, if the government enacts this tax, I think it is collossally dumb.  What a way to kill investment.

Al, I enjoy the benefits just as much as the next guy (maybe even more) but I think that that your premise of a hike in the inclusion rate will decrease investment is incorrect.

 

Remember that up until 2000 the inclusion rate was 75%. When it was dropped to 50% there wasn't a spike in investment. Conversely I don't see why there should be a drop if the inclusion rate is raised.

 

Also if we were to be cold and rational about this. A lot of lower cap gains inclusion doesn't have much to do with promoting investment in Canada. For example: if I buy US shares of BRK, the Canadian gov't gives me preferential taxation via a lower inclusion rate. But my action doesn't benefit Canada from an investment perspective at all.

[scorpioncapital]

But how do you explain that Canada would have the highest marginal capital gains tax in the world? They are clearly anti-wealth. Or anti-too-much wealth. I think it will have consequences but maybe not right now.

The rates are high when the country gets in trouble which it chronically does every decade or so and then over-reaches. I remember Rick Rule, a mining investor who once said the riskiest jurisdiction he ever did business in was BC. He said he was less afraid of confiscation and anti-wealth policies in the Congo than he was about the socialists in a Canadian province!

[rb]

Right. Because Canada has a long history of confiscating mines. You are free to go invest in Congo if Canada scares you so much. Good luck with that.

 

Other countries with fairly high capital gains taxes: Germany 30.5%, France 34.5%, Austria 27.5%, Denmark - up to 59%, UK 28%. By the way the wealthy in Canada are doing just fine.

[Cardboard]

Again some minimizing the impact of higher taxes... Has to be a positive and favour investment in Canada, right? Are these guys truly investors?

 

What about the U.S., Belgium? How many businesses and business people have left France to go next door because of this mantra of "let`s punish the rich!"?

 

Unreal!

 

Capital gains only arise because someone has taken a fair amount of risk to earn them. There is no guarantee and a wipe-out is always possible. The current tax structure made sense with interest being the highest taxed, then Canadian dividends (to favour Canadian investment vs other dividends), then capital gains. It really goes after the risk/reward chart when you think about it.

 

If you increase taxes on capital gains, then you add a cost to the equation or reduce reward. There is no way around it while the risk to earn said gains remains the same. And it does apply to bonds too since a capital gain only arise when you buy bonds under par (risky) or if interest rates go in your direction.

 

Cardboard

[scorpioncapital]

Folks talking about cap gains in Europe need to understand the system better. Belgium and Luxembourg is ZERO% capital gains for managing personal investments and capital gains. Netherlands is 1/3 of 4% per year flat rate or 1.3% (comes out to far less than regular cap gains taxes). UK and Ireland are ZERO% for non-domiciled residents which is probably anyone who isn't British or Irish by birth. Switzerland is also very very low if not zero. France is 50 to 65% off sale for holding shares 2 years (or 8 years at the higher rate) or more (easy for most investors) so effectively like 15 to 20% at the top rate. There are countless other examples like this, you have to read the fine print. Even the most socialist countries realize over-taxing capital is a big no-no. Probably Canada didn't get the memo, which is scary. And the Bill Morneau who keeps talking to the G20 about soaking the rich (realizing $150,000 US in cap gains is not rich!) and how we must make the upper middle class pay more, while the world is reducing taxes or has several reasonable exemptions like longer-term stock holdings, does not inspire confidence. As they say, socialism is great until you run out of other people's money - or those with the money reach the tipping point and decide to just leave.

 

 

 

 

[KinAlberta]

Folks talking about cap gains in Europe need to understand the system better. Belgium and Luxembourg is ZERO% capital gains for managing personal investments and capital gains. Netherlands is 1/3 of 4% per year flat rate or 1.3% (comes out to far less than regular cap gains taxes). UK and Ireland are ZERO% for non-domiciled residents which is probably anyone who isn't British or Irish by birth. Switzerland is also very very low if not zero. France is 50 to 65% off sale for holding shares 2 years (or 8 years at the higher rate) or more (easy for most investors) so effectively like 15 to 20% at the top rate. There are countless other examples like this. Even the most socialist countries realize over-taxing capital is a big no-no. Probably Canada didn't get the memo, which is scary. And the Bill Morneau who keeps talking to the G20 about soaking the rich (making over $150,000 US is considered rich) and how we must make the upper middle class pay more, while the world is reducing taxes or has several reasonable exemptions like long-term stock holdings, does not inspire confidence. As they say, socialism is great until you run out of other people's money - or those with the money reach the tipping point and decide to just leave.

 

 

Low taxes on the rich are often predicated on the assumption that the economy that generated the returns, and very likely assisted in generating those returns, will eventually see some benefit.  However, if you keep people's taxes really low and they accumulate a lot of wealth, and then pack up and leave in retirement, the tax jurisdiction basically lost its opportunity.

 

 

I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It is like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die." - Buffett

 

 

[KinAlberta]

Again some minimizing the impact of higher taxes... Has to be a positive and favour investment in Canada, right? Are these guys truly investors?

 

What about the U.S., Belgium? How many businesses and business people have left France to go next door because of this mantra of "let`s punish the rich!"?

 

Unreal!

 

Capital gains only arise because someone has taken a fair amount of risk to earn them. There is no guarantee and a wipe-out is always possible. The current tax structure made sense with interest being the highest taxed, then Canadian dividends (to favour Canadian investment vs other dividends), then capital gains. It really goes after the risk/reward chart when you think about it.

 

If you increase taxes on capital gains, then you add a cost to the equation or reduce reward. There is no way around it while the risk to earn said gains remains the same. And it does apply to bonds too since a capital gain only arise when you buy bonds under par (risky) or if interest rates go in your direction.

 

Cardboard

 

"Capital gains only arise because someone has taken a fair amount of risk to earn them."

 

Maybe. Based on the "risk/return dogma, best read the thoughts of the guy that in looking at his returns must have taken more risk than near anyone else on the planet:

 

 

A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention - Warren Buffett

 

 

Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.

 

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious.

 

The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course. - Warren Buffett

 

[Cigarbutt]

The topic is potential increase in the inclusion rate of capital gains. Hope it doesn't occur. Of course, this is a subjective topic.

An interesting angle is that it is a comparative game.

Here's a link that is representative of many. (see p.17-18, fig. 4)

http://www.theasi.org/assets/EY-ASI-2014-International-Comparison-of-Top-Dividend-and-Capital-Gains-Tax-Rates.pdf

The top integrated rates relate to the double taxation impact of capital gains.

The US stands out but many (controversial) suggest that the true effective rates are lower than statutory corporate rates.

For reference a Forbes article. (relatively objective article but some may want to look elsewhere perhaps for a more balanced discussion)

https://www.forbes.com/sites/taxanalysts/2015/03/25/the-truth-about-corporate-tax-rates/#76b94034742c

 

My opinion (personal opinions not worth very much) is that

-comparatively, there is little room to go up.

-at some point, a small or any increase may have a disproportionate net negative impact. (I think we're there)

 

As the famous economist (who won the Nobel prize for technical work) summarized: "There is no free lunch".

I say: "You can't have your cake and eat it too".

At some point, you can have too much of a good thing.

Let's at least hope that rates are kept where they are.

[EliG]

 

^^^ Trudeau's senior advisor.

 

I think it's a clear signal that CG or/and dividend taxes are going up.

[Cardboard]

"Low taxes on the rich are often predicated on the assumption that the economy that generated the returns, and very likely assisted in generating those returns, will eventually see some benefit.  However, if you keep people's taxes really low and they accumulate a lot of wealth, and then pack up and leave in retirement, the tax jurisdiction basically lost its opportunity."

 

Keep the system fair and honest and they will stay.

 

That is one of the problems with the Left: impatience. They want to get their hands on that money right now to distribute it as they see fit.

 

Have you ever asked yourself, where is Rockefeller's money? And the Vanderbilt's? It is mostly all gone. All gone back into society in one way or another. Because you don't take it with you. And the ones after you, charities, governments will deploy it in one way or another.

 

So if taxes are raised on capital gains, you will have less to reinvest on your next profitable sale. And it will be the same for all entrepreneurs, real estate developers, all people who put money to work in the economy. A bigger chunk will go to the government who will spend it on small to no return investments. Over time, the country will have less wealth than it would have had and all its citizens will be poorer. It is as simple as that.

 

Cardboard

[RichardGibbons]

So if taxes are raised on capital gains, you will have less to reinvest on your next profitable sale. And it will be the same for all entrepreneurs, real estate developers, all people who put money to work in the economy. A bigger chunk will go to the government who will spend it on small to no return investments. Over time, the country will have less wealth than it would have had and all its citizens will be poorer. It is as simple as that.

 

It really isn't as simple as that.  Capitalism naturally results in winners becoming even bigger winners because it's easier to make money when you have money, and because competitive advantages mean the corporations that win today are far more likely to win tomorrow too, and because the genetic lottery means winners can be more skilled than losers.  So, wealth naturally accumulates at the top end.

 

What's more, growing the wealth isn't necessarily good for most people.  Take society A with 100 people, with wealth of $1,000 distributed so the top 10 people get $40 each, the middle 50 get $10 each, and the bottom 30 get $3.30 each.  Now, compare it to society B that has more wealth, $1,200, but distributed so the top person gets $1101, and the bottom 99 people get $1.

 

Despite the greater wealth, Society B certainly isn't better of for the vast majority.

 

What's more, the economy largely rides on the spending of the majority.  If you give another dollar to the rich dude, he won't spend it, while the 99 people with $1 almost certainly will, driving the economy.  Thus, there's a decent chance that the economy will actually be bigger if you redistribute the wealth to people who will actually spend it. 

 

Capitalism naturally skews toward society B, and the irony is that even the rich dude is worse off in that society, because things like hospitals, movie theatres, sports arenas etc. don't get built if the vast majority is at subsistence living.  Thus, redistribution is good.

 

All that said, I agree with your earlier point:

 

Capital gains only arise because someone has taken a fair amount of risk to earn them. There is no guarantee and a wipe-out is always possible. The current tax structure made sense with interest being the highest taxed, then Canadian dividends (to favour Canadian investment vs other dividends), then capital gains. It really goes after the risk/reward chart when you think about it.

 

To me, the current taxation levels for investment income make sense to me.  One point people also haven't raised is that investment gains should be taxed at a lower level to take into account inflation.  Like, why should I pay full tax on my investment gains when I'm simply trying to maintain the value of my money as the government deliberately causes inflation to make its value shrink?  I'm being taxed on inflation, and that seems really wrong.

 

 

[scorpioncapital]

Didn't someone once say, if you believe all this "stuff" why don't you call CRA and offer to give them an extra large voluntary contribution?  Already there are so many companies offshore not paying taxes. Instead, let's make the common guy earning $100,000 pay 36% cap gains taxes. There are very few countries dumb enough to try this. I suppose if you want to live in a socialist society and think you get your money's worth, but I don't think in Canada you get what you pay for even in terms of basic services. Half the claims are denied, there are usage fees on top of taxes for everything, and the other half have a 2 year wait list with lines around the room to see the doctor. Keep paying 50% if you think it's worth it, I don't.

 

[RichardGibbons]

Didn't someone once say, if you believe all this "stuff" why don't you call CRA and offer to give them an extra large voluntary contribution?

 

Because that does nothing to address the issues that wealth redistribution is trying to address.

 

I suppose my red herring, equally invalid parallel counterargument is, "if you don't think you're getting value for you tax dollar in Canada, why do you move somewhere where you would get value for your tax dollars?"

[rb]

Didn't someone once say, if you believe all this "stuff" why don't you call CRA and offer to give them an extra large voluntary contribution?  Already there are so many companies offshore not paying taxes. Instead, let's make the common guy earning $100,000 pay 36% cap gains taxes. There are very few countries dumb enough to try this. I suppose if you want to live in a socialist society and think you get your money's worth, but I don't think in Canada you get what you pay for even in terms of basic services. Half the claims are denied, there are usage fees on top of taxes for everything, and the other half have a 2 year wait list with lines around the room to see the doctor. Keep paying 50% if you think it's worth it, I don't.

Dude I have no idea what you're talking about. "Half the claims are denied?" What claims? The only user fees I pay are for car license, driver's license, and passport and they're reasonable. When I go to the doctor I wait about 15-20 minutes in line. For a specialist there is a waiting period of around 5-6 weeks (less if your condition is serious) - I recently went through this with a family member.

 

In addition very few people pay 50% income tax. In 2013 people in the top 1% made an average of 455k and paid an average of 152k in income tax. That's 33% for the 1%. To get to 50% you have to be a serious 1 percenter.

 

Also gotta love it when to guy making 100k a year became the common man.

[Cigarbutt]

RichardGibbons,

I must say that my opinion here is different. That's OK.

I submit that you are making a very big assumption when you say:"Thus, there's a decent chance that the economy will actually be bigger if you redistribute the wealth to people who will actually spend it."

I agree on basic redistribution. But, perhaps a significant factor that should not be forgotten is that wealth has to be created before it is re-distributed.

Perhaps from personal experience, did you ever feel how easy it is to spend funds that does not come from your pockets. Noble intentions make this endeavor even more gratifying (on the surface).

G. Gekko said greed is good. The Great Allocator says redistribution is good. 

Funny but I feel uneasy about both characters. The balance must be somewhere in the middle. And the second one (my opinion) may even be more insidious.