Delay in tabling investment tax has Canadians facing costly conundrums

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Anyone who’s ever procrastinated on a term paper will sympathize with the Liberal government’s excuses about why it hasn’t introduced promised legislation to increase the capital gains inclusion rate. The trouble is Canadians are waiting on the details of the policy before they make huge financial decisions while the government drags its heels.

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After the April budget, the government revealed it would give the signature policy its own bill, rather than including it in the main budget bill, and strongly implied that the separation tactic was meant to catch the opposition Conservatives in a political trap by forcing them to either support it or face accusations of fighting for stock-portfolio fat cats. Finance Minister Chrystia Freeland has only said that the inclusion rate will rise from 50 per cent of capital gains profits to 66.5 per cent. For individuals the increase will apply only to an annual gain over $250,000.

But, as the weeks passed, the government kept putting off tabling the capital gains bill, and now it could be summer before Canadians learn about the details of the new tax policy.

“In the coming weeks and certainly before the House rises, we will begin the legislative process to increase the capital gains inclusion rate,” said Freeland, to reporters this week who questioned her on the government’s procrastination.

Freeland’s comments only promise that the legislative process will “begin” before the House of Commons rises for the summer on June 21 and MPs go back to their ridings until September.

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The problem? The new tax policy comes into effect on June 25, leaving individuals and businesses unclear about how the policy might affect their tax bill. People are being forced to make sell-or-hold decisions about their businesses, their investments and their properties based on a tax change they don’t yet know the details of, especially regarding any exemptions there may be for certain professional corporations (say, for doctors), or certain assets (like second homes).

“It’s very hard for people to make decisions when you can’t clarify what the rules are. There’s all sorts of things that are unknown,” said economist Jack Mintz, a specialist in tax policy who also writes for Financial Post.

With industry and advocacy groups, like the Canadian Medical Association, using the delay to lobby for a break for their members, Mintz said there are rumours flying around about who might be granted a reprieve from the tax hike.

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“So, there will be people selling their assets now, but when you have rumours like the government will relent on cottages and things like that, it puts people in a real bind. And they’re going to be mad no matter what happens. People who sell their assets and then they find out they didn’t have to do it, they’re going to be pretty angry,” said Mintz.

And even if the government doesn’t end up offering exemptions, it still leaves people with uncertainty as the deadline approaches, and a tough decision about what to do with their nest eggs.

Right now, people are “planning in the dark,” said Kim Moody, the founder of Moodys Private Client, who specializes in tax and estate planning.

“I mean, my phone’s been ringing off the hook ever since budget day. And a lot of times the answer I give is: ‘I don’t know.’ And for a geek like me to say ‘I don’t know’ is painful because I want to give my clients the best advice I can,” said Moody.

The uncertainty may continue, because the delays almost certainly mean the bill will have to be passed in the fall sitting of Parliament. The Conservatives have also been very effective at tying up government bills. For example, the legislation implementing last year’s fall economic statement still hasn’t cleared the House of Commons, while the Conservatives have successfully tied up the finance committee for a month with a filibuster about inviting to testify former Bank of Canada governor — and rumoured replacement for Prime Minister Justin Trudeau — Mark Carney.

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Canadian businesses, especially tech companies that use stock options as a way to lure high-value employees to their firms, are increasingly fed up with being caught in the middle of what they see as needless political theatre as the government wages a class war in the face of plummeting poll numbers.

Some businesses are responding by pausing investments in Canada, said Benjamin Bergen, the president of the Council of Canadian Innovators.

“With that uncertainty, they’ve definitely caused a slamming of the brakes in terms of firms knowing which way to proceed from a growth perspective,” said Bergen.

The government’s delays mean Canadians may only get to see a piece of draft legislation, which could be entirely subject to change, for a few days before making huge decisions about how and when to sell major assets, like cottages, by June 25.

Moody said the government is expecting a big windfall in the first year of the capital gains tax hike, on the assumption that people are hastily selling off their assets before June 25. But he thinks the opposite could just as easily happen: the uncertainty of not knowing what the policy is might make it tough for Canadians to pull the trigger and sell.

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“Frankly, they’re counting on $6.5 billion, roughly, for this coming year of free extra cash. Well, I’m not sure how many people are going to actually do that (and sell this year), to be frank with you, especially when they don’t have the details,” said Moody.

Mintz said the government has been trying to keep deficits from rising and was counting on the tax revenue to accomplish that. He suspects that organizations lobbying for exemptions might be out of luck, partly because the government can’t afford it and partly because any exemption would create a demand for more exemptions from other interest groups.

“They’re trying to keep to that $40-billion deficit number, right? And it may have been this is one way of doing it,” said Mintz.

The government now finds itself in the unenviable position of choosing between infuriating people by offering exemptions or outraging others by not offering them. If the Liberals meant this to be a trap, it’s starting to look like one with a serious risk of backfiring.

National Post

stthomson@postmedia.com

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