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Capital Gains Tax and Budget in 2024

The Trudeau government's decision to increase capital gains taxes, as outlined in the 2024 federal budget, has drawn significant criticism and concern over its potential negative impact on Canada's economic growth and investment climate. The move entails raising the inclusion rate for capital gains from 50% to 66.6% for businesses, trusts, and individuals with capital gains exceeding $250,000. One major issue highlighted is the "lock-in" effect caused by taxing gains only upon asset sale. This means investors delay selling assets, anticipating a reversal of tax policies under future governments. Consequently, the Trudeau government's revenue projections from the tax hike might be overly optimistic.

Moreover, higher capital gains taxes discourage investment and innovation, impacting economic growth negatively. Canada's GDP per person growth is among the lowest in the OECD, and business investment has declined significantly. Critics argue that raising capital taxes exacerbates these challenges. Despite the government's focus on taxing the wealthy, the broader impacts on economic growth affect all Canadians, lowering incomes and living standards. Previous governments recognized the negative impact of capital gains taxes and took steps to reduce them, understanding the importance of fostering a robust investment climate. In summary, the increased capital gains tax is seen as counterproductive to Canada's economic recovery and growth. Critics argue that it discourages investment, innovation, and economic competitiveness while contributing to a deteriorating fiscal outlook.

David Rosenberg, Founder of Rosenberg Research & author of the daily economic report sharply criticizes Canada's 2024 budget for its excessive spending, projecting a $53 billion increase over five years compared to the Fall Economic Statement 6 months prior. He highlights concerns about persistent fiscal slippage under Prime Minister Justin Trudeau's leadership, compounded by tax hikes that hinder business competitiveness. Rosenberg warns that the budget's structural deficits will lead to escalating public debt charges, exceeding $57 billion by 2026. The budget's expansion of program spending to 16% of GDP and lack of fiscal restraint raise further alarms. He argues against increased capital gains taxes, which he believes will discourage investment. Overall, Rosenberg predicts negative economic impacts and deems the budget a failure.

Former Liberal finance minister Bill Morneau expressed significant concern over the proposed increase in the inclusion rate on capital gains exceeding $250,000 in Finance Minister Chrystia Freeland's recent budget. Morneau, speaking at a webcast hosted by KPMG to react to the budget, described the move as "very troubling for many investors." He emphasized that during his tenure as finance minister, any notion of heightening capital gains taxes was staunchly opposed due to its potential negative impact on economic growth and investment.

Morneau stressed that the resistance against such tax increases was driven by a clear understanding of their chilling effect on economic expansion. He firmly believes that the proposed changes will hinder Canada's long-term goal of achieving robust economic growth through productive investment. This criticism from Morneau, a former member of the Liberal government, underscores the concerns within the business community regarding the budget's approach to capital gains taxation.

Over the last couple of days we've received many calls from concerned investors regarding realization of capital gains on inherited properties and estate sales. This new tax policy has created additional stress to investors and begs the question what happens next?

We are currently working with our clients to help them navigate through this new tax policy and plan for the future ahead.

If you have questions or concerns about your particular situation, please reach out to the team.

Frost Wealth Team

To read more about the 2024 Federal Budget, we recommend the iA Private Wealth Research Insight:

Highlights of Budget 2024

Sources:

Opinion: Higher capital gains taxes won’t work as claimed, but will harm the economy - The Globe and Mail

(April 16, 2024) - The Globe and Mail

David Rosenberg: The budget deserves a failing grade and will make the fight against inflation even harder - The Globe and Mail

April 18, 2024 - The Globe and Mail

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What can we do during periods of volatility?

by: Greg Frost | 2022.03.17

There a many things that we, as investment professionals, cannot control:

We cannot make Russia behave-- although we wish we could.
We cannot make the economy stronger-- although it seems to be doing that by itself.
We cannot control the rate at which the central banks increase interest rates-- althought the decisions they make will affect all capital markets profoundly.

So what can we do-- and what matters about what we do?

Our job is to find good companies and good fund managers in which to invest our clients' assets. We do this by:

Constantly researching into new names.
Constantly monitoring the names we already own.
Constantly reading the financial press to understand what is going on in the market in order to find new themes and new ideas.

Warren Buffett says he spends most of his time sitting in a chair reading. It seems to have worked out pretty well as a strategy. We are also voracious consumers of information, and-- for the most part-- it has worked out pretty well for our clients too.

One way of knowing if we are doing our job well, is to look at the performance of the companies in our portfolios. We should surely not be looking only at the performance of the stock prices, which, over the short term, have an element of randomness and volatility caused by any number of things.

What matters-- and what we should be looking at-- is the actual revenue and earnings of each company and the prospects for increased revenues going forward. We believe-- and history has shown-- that companies that grow their earnings increase in value and, that over time, that value shows up in the stock price.

The essence of our job?

Building a diversified portfolio of leading companies.
Paying attention on a day-by-day basis to the progress of each one.
Making changes as required.

That is what matters.

"Investor returns are primarily derived by what you do in down markets-- NOT up markets"

-- Greg Frost

Learnings from the iAS Advisor Summit September 2019

by: Greg Frost | 2019.10.02

Recently, I attended the iA Securities Advisor Summit in Quebec City.

While there were many fascinating topics and speakers, I would like to share highlights from Clement Gignac's presentation. Clement is Senior Vice-President and Chief Economist at our parent company iA Financial Group.

Summarized from Clement Gignac’s presentation on September 23, 2019 at the iAS Advisor Summit:

We are currently experiencing the longest bull market in history, but bull markets do not die of old age
The service sector is resilient however, the manufacturing sector is slowing down
ISM Manufacturing Index is at 50, signalling a slowdown, which is confirmed by a CEO survey indicating that 60-70% expect a slowdown
GDP expected to end at 2.9%, down from 3.6% in 2018
Policy mistakes or external market shocks could jeopardize business cycle
Financial markets are very sensitive to trade settlements developing in USA
Global trade contraction outside of recession is a first, due to the rise in protectionism
Analysts are not calling a recession yet, however, if USA imposes additional tariffs in December, this will have a significant impact
Historically, a US president has never been re-elected in a recession. The emphasis will be on President Trump to get changes enacted before additional tariffs are enacted in mid-December
The labour market is posting its best results in 16 years
Canada has the highest immigration growth of the OECD countries and the highest level of education with 65% of immigrants aged 25-45 having post-secondary education
Fair value of the Canadian dollar is closer to 80 cents
Bond yields are very low. Global bond yields have hit a record low. There are now 14 trillion bonds in the world with negative interest rates—this means that citizens are financing government funds to borrow from them

International perspectives—bottom line

Risk factors:

The trade relationship between China and the US remains tense and brings significant uncertainty to global supply chains
The weakness of manufacturing activity could lead to larger global economic downturn, especially in Europe with Germany
Geopolitical risks remain high (tensions in the middle east)
Political uncertainty around Brexit

Positive elements:

The US consumer remains confident and has an adequate level of savings
China is using its fiscal policy in a recession scenario
Germany is open to using its fiscal policy in a recession scenario
Many central banks are now pointing to further monetary easing

This information has been prepared by Greg Frost who is an Investment Advisor for HollisWealth®. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of HollisWealth. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.