What the Liberal-NDP co-operation pact could mean for tax changes in the budget – The Globe and Mail

In February, finance minister Chrystia Freeland said the government had no intention to change its position on the capital gains tax related to equity markets or principal residences. But, that was before the Liberal-NDP parliamentary co-operation agreement.PATRICK DOYLE/Reuters

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Advisors are fielding a fresh round of investor questions on potential tax changes in the upcoming federal budget as the Liberal government looks for ways to pay for billions in promised spending including costs that come with its recent parliamentary co-operation agreement with the NDP.

Conversations are resurfacing with clients about the possibility of an increase in the capital gains inclusion rate, advisors say. Some wonder if Ottawa will go as far as taxing inheritances, which happens in other countries, or even the seemingly untouchable profits from selling a principal residence.

The pre-budget conversations are all speculative, advisors caution, as the government hasnt said it plans to make any of these moves. Its expected to introduce an anti-flipping tax, based on a campaign platform last year, that would affect Canadians who sell their residences within a year after buying them.

Still, advisors note governments have made surprise tax announcements in the past and, with some clients, it may make sense to plan ahead.

What were saying to clients is, We cant predict the future, but Im relatively certain that were going to see very interesting innovation in taxation, says Darren Coleman, senior vice president, private client group and portfolio manager with Coleman Wealth at Raymond James Ltd. in Toronto

The Liberal Partys recent deal with the NDP which prevents another election until mid-2025 in exchange for action on NDP priorities such as dental care, pharmacare and increased federal transfers to the provinces for health care has some investors worried that major tax changes are coming to foot the bill.

Anytime you have a collaboration between two parties, it opens up a higher probability of tax changes, says Wes Ashton, co-founder, director of growth strategy and portfolio manager at Harbourfront Wealth Management Inc. in Vancouver.

Theres a little bit of anxiety with clients, where they ask: Should I be doing anything proactively? he says.

Mr. Coleman has been discussing the potential for a higher capital gains inclusion rate with clients during the past couple of years. It was first introduced 50 years ago at 50 per cent, then increased to 66.7 per cent in the late 1980s, and went as high as 75 per cent in the 1990s. It has been back at 50 per cent since 2000.

Mr. Coleman says some of his clients who were ready to take profits have sold their shares in anticipation of a higher tax rate.

Some said they wanted to do it now, so at least they know what their taxes are, while others were willing to wait and see what happens, he says.

Ottawas decision to force Canadians to record the sale of their principal residence on their tax return, even if its not taxed, also has some clients concerned, Mr. Coleman says.

Whats really created that wobble for clients is, Why is it on the tax return? he says.

Clients arent selling their properties in anticipation of a tax, he says, but some are asking him to run the numbers of what the impact could be on their broader wealth plan.

For many people, the bulk of their equity is in their homes, so I think its dangerous to plan on that being tax-free forever. If you plan [on paying more tax] and its wrong, thats okay; thats more [money] for you, says Mr. Coleman. But if you didnt [and] didnt think this might be coming, you may be in for an interesting surprise.

Some people have the view that taxing a principal residence is a sacred cow, he says, but hes not sure thats true anymore.

Mr. Coleman speculates the tax could be on principal residences over a certain high amount, in the multimillion or billions, which is in place in the U.S. It would be less controversial because it would only impact the wealthiest Canadians.

Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management, notes the NDP did propose an increase in the capital gains inclusion rate to 75 per cent in its election platform last year.

The NDP didnt win, of course, but this recent non-coalition coalition obviously makes things a lot more interesting, he says.

Mr. Golombek notes that finance minister Chrystia Freeland said in an interview in February that the government had no intention to change its position on the capital gains related to equity markets or principal residences of Canadians. Still, that was before the Liberal-NDP parliamentary co-operation agreement was made.

The question is, could the NDP have the influence to bump up the inclusion rate? he says.

I personally dont think that will happen, at least in the short term, Mr. Golombek adds, expecting the NDP to focus on its proposals for dental care and pharmacare.

Past CIBC research has shown that only about 10 per cent of Canadian taxpayers would be affected by a rise in the capital gains inclusion rate, which could make it less risky, politically.

Still, Mr. Golombek says investors should never sell assets for tax reasons alone. But if they have a strong reason to do so, such as a portfolio that needs to be rebalanced, and are worried about an increase, now might be a good time to do some selling.

At the end of the day, you have to determine your level of comfort with [potential] tax changes, he says. If you werent going to sell anytime in the near future, then you wouldnt worry about it.

A higher tax rate for Canadians in the top tax bracket another NDP election proposal may be a more likely change in the upcoming budget, he says, especially as the Liberal government has been putting forward increases on high-income Canadians in recent years. Theres nothing Canadians who would be affected can do to avoid that change, especially as it could be made retroactive to the start of the year, he says.

Mr. Golombek says he believes any tax on principal residences is highly unlikely, describing it as a political mess, especially as many Canadians have relied on that asset growth for retirement.

[Ottawa] may crack down on some other, more complex type of corporate tax planning, he says.

Mr. Coleman says advisors should discuss potential tax changes with clients, even if they think theyre a long shot.

As an advisor, if Im wrong on any of those, you have a happier life. But if I underestimate, youre going to have a problem later. Thats not good, he says.

I would rather plan from the position of prudence and conservatism and have happiness than the opposite.

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What the Liberal-NDP co-operation pact could mean for tax changes in the budget - The Globe and Mail