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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.
To read more about the 2024 Federal Budget, we recommend the iA Private Wealth Research Insight:
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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First of all, I would like to express my gratitude to all of you for your continued confidence in the ability of the Frost Wealth Management Team to be the steward of your capital.
Our overall principal of investment advice is always goal-focused and planning-driven. This is in contrast to common approaches that are market-focused and driven by current events.
Long-term investment success comes from continually acting on a plan. Investment failure often results from reacting to current events in the economy and the markets.
You and I are long-term equity investors, working steadily toward the achievement of most cherished lifetime goals. We make no attempt to forecast-- much less time-- the equity market. Indeed, we believe this to be a fool's errand.
2019 was practically a mirror-image of 2018
The previous year, we saw a dramatic 19.8% peak-to-trough decline through Christmas Eve 2018.
This past year, we saw the exact opposite with an exceptionally good year for the market. Even though the economy slowed somewhat, manufacturing went into decline and the earnings of the S&P 500 ended 2019 down slightly year-over-year.
Stay the course
A good portion of my time is spent in research.
All of my current reading and past experience suggest to me that meaningful market setbacks have not historically occurred during huge waves of public pessimism and fear-- quite the contrary.
This is not intended as a market forecast.
It is simply an invitation, as we look to the new year, to take some comfort from the rampant fear abroad in the land. Even after a decade or more of stellar returns-- let's hold off on the worrying. That is, until the stock market has become cocktail party conversation, your Uber driver starts giving stock recommendations and everyone around us gets excitedly bullish.
It is quite possible 2020 will not be as good for returns as 2019 has been. The fact-- or the truth-- is that those of us who are goal-focused, planning-driven investors enjoyed an exceptional year in 2019. We did so-- not by forecasting, nor jumping in and out of markets, but by patiently hewing to our long-term, balanced portfolios.
That is the lesson that I will carry into 2020.
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