Podcast - April 24, 2024
Latest Episode: The Canadian Federal Budget
In this gripping episode of Barenaked Money, hosts Josh and Colin delve into the ramifications of global events on financial markets. From geopolitical tensions to economic policies, they unpack complex topics with easy-to-understand advice. Then, they’re joined by Matthew Kempton and the three discuss the Canadian budget and what it means to you. Tune in to stay informed and navigate your investments wisely.
The transcript is automatically generated
Announcer (00:01):
Welcome to Barenaked Money, the podcast where we stripped down the complex world of finance to its bear essentials. With your hosts Josh Sheluk and Colin White, portfolio managers with Verecan Capital Management Inc.
Josh Sheluk (00:13):
Colin and Josh here, Barenaked Money. We’re here to give you some quick hitters on the market and news cycle for this week. What are you looking at, Colin?
Colin White (00:22):
Well, the date is April the 19th, which if we’re going to call this quick hitters and timely, we probably should give that information. I was terrified the other night when my phone newsfeed came up that there was more missiles flying across the Middle East and I ran May or may not have been involved. Nuclear sites may or may not have been involved. That news is truly terrifying. I don’t know, you’re probably distracted with other things, but did you see the news hit in real time as that was going on?
Josh Sheluk (00:46):
Yeah, I was getting the live feed from Bloomberg on that, so that saw it happening. Are we getting numb to the whole this person, this person attacked that person, this country attack that country? Are we getting numb to that yet?
Colin White (00:59):
I think there’s a case to be made that the financial markets have numbed to that, but I think that the bigger point is the financial markets have always been somewhat numb to that. And again, I don’t want for a second to minimize the human cost of what’s going on. It is a tragedy and it’s an unmitigated horror story in every possible description, but we’re here in your world to give you financial advice and a couple of points we made. None of this is you can make a decision on you can’t anticipate these things and after they happen, they’re already done. What you need to do is accept the fact that this shit’s going to keep going on. This is reality, and if somehow this makes you too uncomfortable, then maybe you shouldn’t be investing. But I think there’s a good soft track. I was thinking the other day, Josh, back over what’s gone on in the last five years. What are all the major events of the last five years? We’ve had
Josh Sheluk (01:44):
Global conflict or just events in general, like
Colin White (01:46):
Meaningful events, things we thought that would actually upend the market. So we had a pandemic. We had Donald Trump storming the White House to stay in power. We had Russia and invade Ukraine, our sorry, special military operation. Then we had the Gaza and what’s going on in Israel now we’ve got Israel going at it with Iran. Is the market up or down for the last five years?
Josh Sheluk (02:09):
Well, it’s up a lot and there’s probably some that you overlooked there. We didn’t talk about China and Taiwan or the warm words, excuse me, between China and the US or anything with North Korea. We haven’t even talked about North Korea in two years it seems, which I guess we’ll count that as a win.
Colin White (02:27):
And we also had inflation go to double digits for almost double digits and come back. All of this has occurred in the last five years.
Josh Sheluk (02:33):
Mark’s
Colin White (02:33):
Up. Mark’s up. So that’s not saying that it’s always going to be up, but I do think that it’s a really great case study to point out. You might not be paying attention to the right ship, the things that are truly horrific and truly terrifying and seeming to be truly important from a market return perspective, maybe you’re not as important as the weight we went on
Josh Sheluk (02:53):
And certainly market reaction this week from the Iranis Israel conflict has been muted, if anything.
Colin White (03:00):
But the other point to make I think, is that it’s also not mono symbolic. It’s not one thing. You don’t look at one event and that’s what the market’s going to react to that day. We had this conversation earlier about the Canadian budget and people asking about the Canadian budget effect on the Canadian economy. Well, the missile hitting Iran probably is going to do more oil prices, which is probably going to do more in the Canadian market than any perception of what the Canadian budget’s going to do. So you can say the budget was maybe not good for business in Canada and therefore maybe tangentially not good for the market, but that’s not going to be all that affects the market movements in a day. There’s going to be other headline items and there’s going to be other eyeline items or subline or rest of line items. I dunno, I hate when I get partway down a road and I just like I can’t bail. I don’t know how to continue that metaphor.
Josh Sheluk (03:43):
So from conflicts and budgets to something that’s a little bit more close to home. When it comes to markets, inflation, we’ve seen consistent numbers coming out so far this year kind of coming to head the last couple of weeks where inflation’s been stubborn is the word of the day, stubborn inflation. And we’ve seen interest rates come up quite a bit I’d say since the start of the year in Canada, I was looking today the 10 year bonds up about 65 basis points from the start of the year. So this is material. We’re seeing material moves and I think you said earlier that it just seems that people are pricing in maybe more reasonable expectations of interest rate cuts that are coming this year.
Colin White (04:16):
The fairy tale of the rate cut seems to be getting long in the tooth because we’ve been certain the rate cuts now going on 18 months. There was almost this logic bomb that everybody said is like, well, rates go up. They must come down like no, no, they don’t. Rates go up and then data happens and then future decisions are made as to where we should go. It’s not a zero sum game. They go up, they must come down and I mean I’ve been absolutely gobsmacked with the strength of some of the numbers coming out of the US and I haven’t seen anybody come close to projecting the kind of strength that the numbers are indicating. And that is a whole bunch of ramifications for Canadians. We’re going to be in a situation where we might be cutting rates before the us, which is not good for the loonie, it’s already getting priced in. Sorry, you can see that this isn’t going to help you, but this is going to turn into a currency conversation, which Tiff hasn’t really been addressing it and at a certain point it’s going to be you got to defend the currency. That’s what he really gets into a sticky wicket. As I say, it’s like, well, the economy needs to be cut rates, but how we want to make the currency that’ll be inflationary. So I wouldn’t want his job.
Josh Sheluk (05:22):
And certainly we were looking at the budget earlier this week and that hasn’t seemed to help his job either. So throwing a lot of rocks at him at the moment and seeing if he can dodge ’em.
Colin White (05:31):
Okay, now remember we’re staying away from social political commentary. We had the conversation about how the first year economic students really disappointed, but the first year always saw side with students. Probably very happy with the budget. There’s different ways to score it. Yeah,
Josh Sheluk (05:45):
That’s for sure.
Colin White (05:47):
Welcome to the magnificent, the one, the only, the 2024 budget palooza. Anyway, we thought we would hit record and here with Josh and Matt to regular contributors to the Verecan voice. We’ve been having some great conversations about the budget, which surprisingly had a lot in it and we thought we should share some of that with everybody. So capital gains inclusion, who would’ve
Josh Sheluk (06:12):
Fought like the boy who cried wolf almost day is like year after year. We think that this is going to be included and then you never have it. And just when we think that it’s never going to be included, sure enough, they hit us over the back of the head with it. The
Colin White (06:26):
Headline news is not quite as bad as the details. Do you think Matt?
Matthew Kempton (06:29):
Yes. When you dive into the details, I think that’s when you really find out they went in the direction that I wasn’t expecting them to. And I think to that boy, boy called Wolf, this was the year I almost had my backup, the lease for it. No, no. The last few years was having more conversations around it. This is something to be mindful of. This year was the year of no, it can’t happen this year if they haven’t done it by now, I think we’re safe and we were hit with it.
Colin White (06:56):
But again, I don’t think we were hit with it as much as we could have been hit with it. So they’ve just increased the inclusion from 50% to two thirds, which is material, but they’ve also put some limits on it and an individual can still have up to $250,000 of capital gains per year and not attract the new inclusion rate, which is a big deal. But that’s not the same for all other inclusion rates for different structures.
Josh Sheluk (07:23):
So corporate accounts, corporations, trusts will immediately from dollar one be hit with the higher inclusion rate. So it is definitely material for those for the individuals. Like you said, Colin, not until you got above $250,000 of capital gains in a calendar year are you going to be hit with this. So for the most part, even if you have regular capital gains on your investment portfolio, for most people, most of us, it’s not going to see an impact whatsoever. I think it’s more of those one-off situations where your average person might see an effect where you’re selling a cottage or selling a second property or potentially selling a business or something like that. That’s where I see this having the most material impact. Do you think that’s fair, Matt, or are there other aspects where you think that this is going to definitely have a material impact for a large number of people?
Matthew Kempton (08:17):
I think that’s fair in the average case, but then when we think to the business owners in our community who I like to see as our peers, our average people, they’re being hit in a different way. I mean the planning for a business owner has for the longest time largely been once your business gets to an established point, you’re likely trying to keep more value in your business, whether through the operating or the holding company. And that’s part of your retirement plan. And now those people I’ve now faced, they’re now set with a higher inclusion rate than the average person and that’s going to be material in many cases. I think we’ll have to rethink some planning around the business owner.
Colin White (09:02):
The only other thing that we haven’t mentioned yet, I want to make sure we get on the record, is none of this is enforced until June 25th. So there is a period of time here that people can react. And this is Josh. You and I had this conversation for a few years now, previous budgets as to the capital gains inclusion rate may change, but if they do, then it’s not going to be a retroactive thing. So that part’s kind of come true that there is a little bit of a last kick at the can that you can have. But to Matt’s point, yeah, this is potentially a tremendous changer when it comes to the planning aspect of things. Josh, to take you back, I mean Josh was quoted in the Wall Street Journal today or was interviewed by the Wall Street Journal about the impact of the budget on the Canadian markets. Josh, do you want to revisit that conversation with everybody?
Josh Sheluk (09:51):
Well, yeah. So we’ve had, I think one of the reasons why we’re doing this conversation or having this conversation now is we’ve had a few sort of knee jerk reactions or knee jerk questions if you want to call it that, asked of us from not only clients but media personnel as well. And the media personnel to me asked today, what’s this going to do for the Canadian equity market? And I said, well, probably not a whole lot of anything, it’s just not that material material on an individual basis, but on a big picture level, probably not so much. I don’t think people are going to stop investing in Canadian stocks because potentially a higher inclusion rate is going to hit them. I don’t think there’s going to be less incentive, maybe very slightly at the margin, but not less incentive for businesses or corporations to invest in profitable projects just because there’s going to be a slightly higher capital gains inclusion rate. So yes, the very fine margin or very thin margin, it’s going to have an impact, but I can’t imagine it’s going to be hugely material for the market at large and not in a way that it’s going to actually move the market in any way. I don’t think
Matthew Kempton (11:04):
I’d be curious about that though because when you think about the next two months that we have for some planning to occur and some of the areas where a lot of wealth has been built in the stock market, think you are long held positions in BCE or long held positions in some utility companies for those that are there to collect the income. And there might be a looking at of those positions between, it might be, well, if I held to my estate value it might be this, or if I pay the taxes today, it becomes a slightly lesser value that goes out of the door. So at that margin there may be an increase in just outflow though it may be repurchased immediately and then we see a bit of a wash. So it may ultimately be a sort of in and out type transaction.
Colin White (11:49):
Well, I think you’re dead on Matt. I think some of those conversations absolutely should happen because looking at close to an 8% increase in tax payable, which is that’s material, but to Josh’s point, I don’t think that it’s material in the overall market as far as think moving the entire equity market. I would be surprised, I don’t have any data to back that up, but I would be surprised if it was material enough to cause any kind of an equity market reaction in any kind of a major way. I think that budgets don’t really have, because we live in a democracy, a budget’s not going to do something that’s going to tank the market, at least not knowingly because then that’s going to get people unelect. It’s more likely that there would be a really good news budget that would be positive for the overall Canadian economy and therefore cause a bit of a bump in the market. This certainly wasn’t that budget, but it’s odd. I was flabbergasted Josh, to be honest, that was the question that was asked of you because it’s not the only time that question’s been asked today. It was a real concern that somehow this was going to tank the Canadian market and I had to stop for a second and just try to follow the logic, but I can’t back that up. I can’t see it as being a big deal.
Josh Sheluk (12:58):
Yeah, well as Matt said, there are probably some individual situations where maybe it makes sense to take some capital gains now and sell a position. I think that’s true and I think that that’s factually true. I don’t think that’s debatable, but the thing where I think there’s a couple more areas or shades of gray is if you are deciding to take the capital gains hit now you’re accelerating your tax payable. So there’s a clear trade off here as well. You might pay a slightly lower inclusion rate over the next 10 weeks or whatever it is, but you’re paying the tax now versus deferring it to some point in the future, which everybody individually is going to make that determination for when that would be. If you plan to die on August 1st, then yeah, you should probably make the change now. But if you don’t know when you’re going to die most of us or are unclear when you’re going to sell asset X, whatever it is, shares of BCE or your cottage or something else, then it is less clear to me that there’d be any advantage whatsoever of accelerating that tax.
Colin White (14:06):
Well then I was going to get to portfolio management. I’ll throw out the whole idea of a properly allocating a portfolio and if you’re holding onto a legacy position, that’s maybe not the strongest investment, but then we get on the merry-go-round and it’s going to take us longer than we have here, right? Josh,
Josh Sheluk (14:19):
Matt has 20 minutes. He was very clear about that.
Matthew Kempton (14:23):
But to that portfolio construction piece in a taxable account, especially when you think about the role of capital gains and on an after tax basis, it’s been one for 20 plus years of capital gains or that’s the most tax favorable place to be. The math is slightly different now. Dividends have encroached a bit there on an after tax basis. So there’s a lot of areas where the math is different now when it comes to planning just on this one adjustment. So I mean I’m still digesting, I was laying in bed last night, just wait a minute, what about this and what about this? So I’m not there yet in terms of all the areas because we’re so used to thinking about things under this one regime, but it’s slightly different now. And now what
Colin White (15:07):
To a certain extent that we’re letting people watch how the sausage gets made because the dividend inclusion, that’s specific to Canadian dividends as well. So foreign income is different as well. So how much do we really care about a Canadian dividend income in a properly diversified portfolio? This bunny trails off for sure. My true absolute terror right now is, and we’ve already had calls come into the office where this doesn’t really affect anything in people’s lives, but they’re panicked that this is going to push a bunch of people to be susceptible to questionable tax planning strategies because fear is going to find a home and people get afraid, then somebody’s going, Hey, you heard about those inclusion rates? I can fix it. You should do this. And again, tax planning fraud is, it’s always been a bad thing, but I think this is going to really open up the floodgates and create a whole bunch of people stampeding towards the cliff. There’s going to be more than enough promoters out there that are going to promote things and start suggesting strategies that are not well understood, well thought out and cause a lot of harm. So I think that’s my biggest fear coming into this budget is going to cause that kind of stampede.
Josh Sheluk (16:23):
Yeah. One other thing I think we should get on the record is just what the inclusion rate actually is. So just to give an example for everybody, I think it’s often misunderstood. It’s not an actual explicit increase in the tax rate on capital gains. What it is is if you have a hundred thousand dollars of capital gains, for example, you would’ve had to in the past or up to June 24th of this year, include 50% of that as taxable income. So if you have a hundred thousand dollars of capital gains, you’re reporting $50,000 of taxable income taxed at whatever your marginal tax rate is, this change increases that inclusion rate to 66 and two thirds percent or two thirds overall. So instead of reporting $50,000 of taxable income, you’re reporting 66,067 of taxable income. So just to make sure that that’s clear because a hard kind of nuanced concept for some,
Colin White (17:17):
Yeah. The other group, and I think Matt alluded to it, but the other group out there that’s being affected, this group that’s had a few hits is there are those people who have gone into retirement or built their financial independence on real estate where they’ve picked up a few rental properties and all of a sudden they got shut down. They couldn’t do short-term rentals anymore, and then they went long-term and then there was rent controls went in and they couldn’t raise the rent and then interest rates went up and they were kind of screwed with that. These people are the kind of people who on sale of assets could generate more than a $250,000 capital gain in a year. So this is just another notch against those people and hate to be the kind of, and we’ve, Josh and I have been talking about this for years now, about the danger of over-emphasizing an asset class or strategy in your situation.
(18:03):
If your whole life is rentals or that’s where you’ve built the vast majority of your wealth, you understand it, this is yet another blow to that strategy that’s going to make it less effective, more painful, and be more complicated from a planning perspective. So it was funny, the different reactions, we had a Z and our team who produced our market minute today was like, Hey, budget came out, we’re all good. Parker’s not going to do anything. Matt went the other direction with it, Liz hair on fire, and went to all of the planning that was coming out of it. And both reactions I think are true. Matt, you’re absolutely right. This changes the planning. This is a huge, huge, huge bigly. It’s a bigly budget when it comes to the changes cause on planning side on the market side, maybe not so much.
Matthew Kempton (18:50):
Yeah, well, I mean as much as we never let the tax planning drive the investment strategy, it’s probably item two is the tax planning. And so it’s very important to all of these, or item three, it’s way up there. So it matters a lot to many of these plans and we haven’t touched a whole lot on trust, but those get utilized in Nova Scotia, especially in Ontario as well, where probate rates are so high to bring in the usage of an alter ego trust, a joint partner trust and do so to largely to avoid that probate piece often for privacy and their other advantages of it. Well now to any asset sitting in those structures, you’ve got a new way you’re going to be taxed. And so does that change, thought about it before is there’s maybe a floor of non-registered assets that you should have before thinking about that structure. Does the floor jump now? Does the math just say it’s only appropriate now in a case of a higher value and maybe that’s the case. So there’s a lot of this on a planning perspective that just changes immediate when the math changes.
Colin White (19:52):
Yeah. What’s everybody else’s favorite thing other than capital gains inclusion rate that they saw in this budget? I mean, what’s the best of for you guys?
Matthew Kempton (20:05):
Well, zero positive, nothing on a positive basis. The clarification maybe around a MT and the alternative minimum tax and allowing for more charitable giving without with the deduction to the donor, I think is good to clarify and hopefully good for charities as well to ensure that people don’t sort of backtrack on maybe where they would’ve been for gifts.
Colin White (20:31):
No, that’s largely been looked at as a correction of a mistake because I don’t think that the government was looking to penalize charities the way that inevitably did. And so kudos for them. I mean, my least favorite thing, and it’s not to talk about the policy, but just to talk about the incentives. I mean, they’ve launched the 30 year mortgage for first time home buyers only buying new construction, which I think is a terrible expectation to set for first time home buyers that they’re going to get to buy a new host. And even worse to say that in order to do it, we’re going to let you take out a 30 year mortgage, which by definition means that they’re going to be further stretched. So they were quite proud of this when they rolled it out, but I think that it’s incentivizing a really, really bad situation. And I don’t think that I’d ask anybody who was thinking about, Hey, this is my key to the promised land. I’m going to do it to be super, super careful because it is, in my opinion, advocating for a financial strategy that is really, really super dangerous and should be avoided.
Josh Sheluk (21:35):
I know we talked about this earlier, Colin, is it just new homes? I thought I saw something else that was talking about other scenarios where there could be an extended 30 year amortization on mortgages as well under million dollars. Yeah,
Colin White (21:47):
The only one I read was very explicit and it had to be new builds, and that was the program, I think it was talked about another, the 30 year mortgage has come and gone as far as the conversation in Canada about a way to deal with the issues that we’re having now. What
Josh Sheluk (22:01):
Was there, what, four or five years ago you could have a 30 year mortgage, so it has come and gone.
Colin White (22:07):
Yeah, yeah. No, it’s drifted in and out. But I mean recently there’s, because the, well, I think Canada specifically the Canadian consumers so overstretched and there’s been some legitimate worry about that. They’ve been ratcheting up the requirements for mortgages, which has been good. And this seems to roll back some of that and aiming it at a group of people. And again, to an audience who’s listening to that going, oh my god, I have to hold out and buy a new home because that’s what first time home buyers do. That’s not anything that you should expect. If it happens, great. But many, many people get started in a much more modest way into home ownership. So I was a little concerned about that. The other one that disappointed me, if you will, and this is kind of one of the ones that I’ll beat the drum on, there was very, very little support for open banking.
(22:52):
Open banking is one of the things they talked about going into this budget and they set aside like $4 million or 5 million to study it or set up a group or something. It was mentioned, yay. But it was a bit of an afterthought and it didn’t really have the gumption behind it that I was hoping that is something that would truly benefit the Canadian consumer to have the adoption of open banking. That would’ve been a big thing. So that was a bit of a disappointment because open banking would allow all kinds of services that are just not currently thought about. Now. They did go after NSF fees and a few other nuisance charges from the banks and rein some of that in which is long overdue and a ham fisted way of doing it.
Josh Sheluk (23:34):
I guess for me, the open banking thing would be a better way perhaps to accomplish some of those stupid fees and things like that that you get dinged with just might be a little bit more of a competitive marketplace where you start to see some of those things naturally disappear rather than trying to legislate that
Colin White (23:53):
Or just open up to foreign banks getting situated in Canada and introduce more competition. I mean that could solve it too, right, Josh,
Josh Sheluk (24:01):
Maybe
Colin White (24:02):
You hope for,
Josh Sheluk (24:04):
That’s a lot to ask for sure.
Colin White (24:08):
What else do we want to comment on? Matt, what was your next favorite thing?
Matthew Kempton (24:12):
Well, I mean we talked a lot about how they’re going to pay for things, but then the question is, well what are they paying for? There’s a big deficit as part of this and housing seems to be one of the big initiatives for them. So housing is going to be funded by these extra taxes. I mean, how do we believe in their strategy to it to adding more affordable housing and building more stock? What do we think about their approach here? Another deficit coming our way? Well,
Colin White (24:39):
I mean again, from an individual perspective, I don’t think it really matters a hill of beans other than for me, there’s two things that matter at the end of the day to anybody in Canada. What is the strength of your social benefits? Canada pension is a fully funded pension. They did introduce some stuff in here which may put some pressure on that because increased some Canada pension benefits and it’d be interesting to see what the CPP IB comes out with as far as whether that affects their confidence in funding. But the C PPP has always been a very consistent thing, but the OAS comes out of revenue and to the extent that these basically perpetual deficits are going to cause financial stress down the road, I guess I would score it as being less likely. I would put less onus on expecting that the OAS as it exists today would exist for somebody who’s going to retire in 10 years because it’s one of the things that perpetual deficits is going to affect. So if I was going to take anything from that, the not passing any judgment on policy, I would be less confident that the OAS is going to be there in its current form, say 10 years from now. So if you’re planning your retirement and that’s part of your calculation, maybe take that out of your calculation or put it in there at a reduced amount.
Matthew Kempton (25:56):
Well, why don’t we think about the other taxes that are coming in as part of this, the digital services taxes, I may have that name incorrect, but there’s a tax being applied to tech companies essentially, and then the digital services tax and then a global minimum corporate tax also coming in. So are these a message to big companies that may be looking to set up shop here that it’s not as friendly of a place to do business based on the cost to do business here? A new cost?
Colin White (26:29):
Yeah, I mean that gets into the health of Canada as a country. I think the global minimum tax thing has been something that’s been circulating the planet for years. And I don’t think that’s country specific because they’re trying to get away from the tax saving thing so that companies that, or countries that are actually generating the market for all of these products and services get to see some of the tax revenue out of it. The digital tax one, I didn’t read anything on that one yet. I didn’t get to that. Digital services tax, is that something paid by the consumer on or is that the company tax? No
Matthew Kempton (27:00):
Big companies and retroactive as well to what I read to go back even not just not this year, but they’ll go back in taxes to be levied for prior years. So
Colin White (27:12):
Hey Josh, what do you think? Is this going to be deflationary and take some of the pressure off the Bank of Canada? Do you think it’s gone so far that it’ll affect the decisions of the Bank of Canada at the upside?
Josh Sheluk (27:23):
Well, you’ve both brought up interesting points that would seem to be inflationary to me on the surface, right? Fairly substantial deficits still and higher tax rates. Higher tax rates on various things. And I don’t think they went quite as broadly as we would’ve expected or was rumored on the tax side of things. But certainly anytime you impose a tax on something, economic theory would tell you that the price of that thing is going to go up for the end consumer in some way, shape or form. So if you are taxing some of these digital services that previously haven’t had a tax on them, then yeah, you’d expect that to be at least moderately inflationary at the end of the day. And same thing with the other taxes that they’ve imposed as well. So yes, making the situation more difficult for the Bank of Canada and their fight against inflation, they seem to have done a reasonably good job getting it under control or it is coming under control. Whether we can call that a good job on the Bank of Canada or not, I don’t know, but it is coming under control and this might make that inflation a little bit more stubborn and we’ve already seen that over the last few months. So it’s definitely two forces pushing in opposite directions. I would say
Matthew Kempton (28:48):
Just the other force that can improve inflation is productivity and growth in a country. And does this budget feel like one that is going to get to that area? That’s been so challenging in Canada, the area of productivity where we have certainly been slipping for some time, I’m not sure even in a deficit scenario, that we’re really hitting an area that’s just so important here in Canada is our waning productivity.
Colin White (29:16):
Well, yeah, and you start adding up the increased cost on capital gains, ostensibly making it less attractive to invest, make a capital investment in a Canadian business and the other measures that are taken in there to make things less hospitable that could slow down business growth in Canada and cause companies to locate other places, which was to my earlier point to Josh, was that maybe a few of these companies pull out and there’s fewer jobs, which is going to lead to again, helping maybe bring the economy under control such as it were, and letting the Bank of Canada act quicker on the rate, the obvious rate cut that’s coming this year, just like the obvious rate cut from last year. But that’s kind of an existential thing as to whether it gets to that level. But I don’t think that this budget could be considered to be something that’s aimed at improving productivity in Canada or improving global competitiveness. I don’t think anybody could construe it that way. It’ll be interesting to see how the Bank of Canada reacts to this both in real time and what the data is going to do changing going forward. That’ll cause the Bank of Canada to react.
Josh Sheluk (30:27):
Yeah, the rumors ahead of the budget were actually I think going to be a little bit more challenging even than this for the Bank of Canada specifically on inflation, I was hearing more about tax rates increasing more broadly for companies and potentially even having higher spending. So in a weird way, maybe tiff’s a little bit happy with this based on what was leaked there. It’s like one of those things where you leak a bunch of bad news and then come in slightly better than expected and call it a win.
Colin White (30:59):
Hey, one of the other things that was kind of hidden in there is that they’ve provided more funding to Revenue Canada pass that part, but they’re going to pilot self filing of tax returns or automatic tax returns this summer or so. I think that’s a status long overdue and it was nice to see that. And I do think that there’s a lot of efficacy to that, especially for lower income earners and people in more simple situations to have an automatic option from CRA, got to wait for the execution. I never have a lot of faith in their execution, but it’s a nice thought. The thoughts in the right direction. Execution can come second.
Josh Sheluk (31:34):
Yeah, well call times are going to go way down too.
Colin White (31:38):
That
Josh Sheluk (31:39):
Call center times are going to go way down too. That’s another thing that was
Colin White (31:41):
In there that was mentioned. While everybody’s good automatic tax returns, they’re not calling in so
Matthew Kempton (31:46):
Well, CRA has 34% more staff since 2019 and just read. So one way or the other, I hope this means easier call center times and people get the tax done easier.
Colin White (31:58):
This is a really tough room for me to be happy about something and you guys are just ready to jump all over it.
Josh Sheluk (32:04):
A couple minor positives that will affect the subset of the population. The disability support payments are in there. So they first started by expanding access to the disability tax credit over the last few years and now they’re increasing the support payments that are available for those that are eligible for the disability tax credit. So I’d say that’s a win and something, it wasn’t exactly clear how they’re going to implement it, but it seems like it should be fairly straightforward. And then the other thing is there, and this one’s going to be very confusing I’m sure, but automatically opening RESPs for those that are eligible for the Canada Learning Bond.
Colin White (32:45):
I was waiting for you to get to that one
Josh Sheluk (32:49):
Seems like a stupid implementation, but the idea of making sure that the Canada Learning bond is available for those that are eligible for it, I think is a very positive thing because these are in some cases individuals who wouldn’t even consider opening an RESP if they’re never going to deposit money to it.
Colin White (33:09):
Well, no, and this is one of those ones that we should go back to because there’s a bit of a, let’s talk about trust closures. There’s lots of things that get announced as government policy through a budget or what have you that kind of go through the finance department. And by the time it gets to CRA, it’s just an unmitigated cluster gavel. And you’re right, Josh, I’m with you. I think it’s a spectacularly generous and right thing to set out to do, but the way they set it to do it was just so ham fist, it was like, how did Jesus, you actually going to pull this off and keep any of it straight? I can’t imagine. So I guarantee you that somewhere there’s a group of bureaucrats sitting in a room going like, what the hell do you want us to do with this? There’s no way forward.
Josh Sheluk (33:49):
Well, do you think that they asked any financial advisor on the planet when they decided to put this in place, whether the implementation was a good idea? Because the first thing I thought was how are they going to do this? Where are these ESPs going to be open? So are they just going to pick a financial firm and then open them there? Are they going to have a Service Canada type of RESP? It’s crazy, but a lot of things end to end wasn’t maybe executed as good as it could have been.
Colin White (34:23):
No. And again, part of it is in our lens is we’ve watched things fall apart and we’ve watched things very recently fall apart. So again, it’s important to remember this is the budget and it’s got to go through a set of processes before it gets acclaimed. And some of this stuff is going to be different by the time it gets all the way through the process. But Matt’s looking at his notes. Did we miss anything Matt?
Josh Sheluk (34:46):
Well, just he’s looking at us. Another
Matthew Kempton (34:47):
In that category of interesting idea that we’ll wait and see how it gets executed. This employee ownership trust and the ability to transition a business to a group of employees who will own it through a trust and tax exemptions that come the way to the business owner. Sounds interesting, but let’s watch one happen. Who’s going to find who’s financing it? How how’s this going to work? So I don’t want to be the first one to try and move this through, but it is an interesting idea. Just another option for a
Colin White (35:17):
Business owner. This isn’t new. This was announced two budgets ago, last budget. I think that there’s a new iteration.
Matthew Kempton (35:23):
I think it’s further details around
Colin White (35:26):
Because they haven’t actually been able to pull one off yet, so they’re taking another run at it. And again, I’m confused because working with a lot of business owners over the years, I can’t remember a situation where I really ever came across a situation that would fit this. A founding business owner that has a group of capable, qualified, interested people that wanted to go through the quagmire of rules and regulations is set one of these up. It’s one of those ones that, again, it sounds really, really wholesome, but again, it falls apart on the implementation.
Josh Sheluk (36:00):
Yeah, solution. Looking for a problem.
Colin White (36:03):
See, you know what? I talk for hours and hours and hours and Josh just comes out with one pithy comment that sums up everything I had to say.
Josh Sheluk (36:11):
Yeah, last thing I would highlight is they have made a couple changes to capital gains exemptions on selling a business, increasing the lifetime capital gains exemption from one to 1.25 million, give or take, and what do they call it? The Entrepreneurial
Colin White (36:27):
Entrepreneur Incentive Program, I think they called it.
Josh Sheluk (36:30):
So if you’re a founder of a business, you might get up to $2 million exempt from capital gains when you sell your business. Sorry, I shouldn’t say exempt. It’s a lower capital gains inclusion rate. But lucky for us, they’ve excluded finance companies and a number of other companies and almost everything that I can think of as a reasonable business.
Colin White (36:54):
Finance, insurance, hospitality, hotels, home care, private corporations, consultants,
Josh Sheluk (37:02):
Real estate,
Colin White (37:03):
Real estate, go
Josh Sheluk (37:04):
Estate arts I think was in there too. Why are we sitting on the arts? What did the arts do to anybody
Colin White (37:10):
Who makes money at the arts? If you made
Josh Sheluk (37:12):
A capital gain in the arts, you deserve it. Take it tax free.
Colin White (37:18):
Anyway. This is the danger, and this is, I guess the reason we’re spending this time at it. The danger is, oh my God, capital gains are bad, and that’s all people are going to hear and they’re going to run with it and they’re going to run to their advisors. And I’m terrified. I’m legitimately terrified right now what the next six months is going to hold for the kind of planning that’s going to get thrown out there. And the number of people who are, when you’re afraid, you’re much more likely to go do something like fear is a very powerful motivator. So hopefully this could do a little bit towards fighting back against some of those motivations out there. To Josh’s point to the Wall Street Journal, this isn’t a big deal. To Matt’s point, it’s a big deal. So it really depends on how you’re looking at it from a planning perspective. This changes. The math may or may not be a big deal, but it does change the math, but it’s not likely going to affect equity markets in any kind of a direct way.
Josh Sheluk (38:10):
Great way to sum it up.
Colin White (38:14):
So we’re going to call this done.
Colin White (38:16):
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