Know Your Client: Capital Gains Hike Will Affect Millions

Evelyn Jacks

Millions of Canadian investors and their advisors must prepare themselves for lower dividend distributions and those once or twice-in-a-lifetime financial events as a result of the new capital gains inclusion rate of 66 2/3 percent on gains over $250,000.  Larry Frostiak, FCPA, FCA, CFP, TEP, RWM™, FDFS™,  founding partner of Frostiak & Leslie Chartered Professional Accountants Inc.  will discuss the broad implications from a Year End Planning perspective at the Acuity Conference for Distinguished Advisors in Montreal November 10-12.  But in the meantime, the June 25 deadline fast approaches and critical conversations must take place, for the reasons outlined below:

Know Your Client. In a recent Financial Post article, Dr. Jacks Mintz, a favorite DAC Faculty Alumni,  begins his analysis of the effects of the extent of this change on the broader base of middle class investors you may be working with: “The budget claims the capital gains hike only affects “the rich.” That is plain wrong.”  He also refutes the numbers of potential taxpayers affected by the new capital gains inclusion rate of 66 2/3%, as cited in the April 16 federal budget, with these facts:

• From 2011-21 an annual average of 44,664 tax filers reported capital gains in excess of $250,000, almost identical to the budget’s forecast of 44,000 for next year. But they were not the same 44,000 people every year: far from it.
• In fact, over the 11 years, 66.3 per cent of people who experienced gains this large at least once, experienced them only once. Another 15.4 per cent experienced them only twice.

Extrapolating from these figures, Dr. Mintz estimates that 1.25 million individuals — not just 44,000 — will make a capital gain greater than $250,000 at some time in their taxpaying life.  He also correctly notes that “many of these people will have relatively modest incomes and only earn extraordinary capital gains at retirement or death. Further, many of these gains will be paper gains, reflecting asset price increases driven by inflation, not real growth.”

Worse, he makes the case that this capital gains tax increase will in fact,  affect equity values and/or business investment which has the potential to affect investment strategies:  “Leaving aside small business and venture capital, which will surely be affected, equity values in large Canadian corporations are also bound to fall at least to some extent. Corporate capital gains are roughly $30 billion a year — about eight per cent of corporate taxable income. An increase in corporate capital gains taxes will result in lower profits available for dividend distributions or reinvestment,” he says, and that will reduce retirement incomes.

Finally, he asks this question:  “How many Canadian investors would be affected by higher capital gains taxes at both the personal and corporate level?”  Here are his answers:

• In 2021, 4.74 million tax filers (15.7 per cent) received distributed profits from Canadian corporations.
• Of those, 69 per cent — 3.29 million — had incomes below $100,000. 

Dr. Mintz’s conclusion?  “The increase in corporate capital gains tax is going to hurt many Canadians investors with middle or modest incomes.”

Inform Your Client.  For these compelling reasons, tax, financial and legal advisors will want to be proactive now until June 25, about discussing the effect of these broad based capital gains tax hikes and their effect on retirement income and estate planning decisions.

Knowledge Bureau has prepared an online certificate course to help you understand the rules.  Here is what’s covered, expert presentations by noted experts are included and available immediately to help you come up to speed.  This month only, save $100 by registering prior to June 30.

We also honor and thank Larry Frostiak, FCPA, FCA, CFP, TEP, RWM™, FDFS™,  founding partner of Frostiak & Leslie Chartered Professional Accountants Inc. for their commitment to educational excellence at DAC.  Register by June 30 to take advantage of an early registration offer.