How can advisors help clients manage Trudeau's new budget

The federal government’s latest budget offers a new slate of challenges, and a few glimmers of hope, for advisors and their clients. The promised $52.9 billion in new spending is set to be covered, in part, by an increase in the capital gains tax inclusion rate. That hike is likely the first of many concerns that advisors are already fielding from their clients.

Given that this is the first increase in the capital gains inclusion rate since the year 2000, that change was the primary focus raised by experts in the wake of the news. As well, some of the other impacts on business owners and entrepreneurs were brought into focus. Overall, while the new budget seems set to give clients a great degree of concern, there are opportunities for advisors to demonstrate their value and help clients adjust to some of the new realities proposed by the feds.

“This certainly presents some interesting planning opportunities, because historically there has been a gap between the taxation of dividend income and the taxation of capital gains income and that gap has widened,” says Aurèle Courcelles AVP of tax and estate planning at IG Wealth Management. “Now because of the capital gains inclusion rate going up, that gap between earning dividend income and capital gains has narrowed.”

Courcelles notes that the inclusion rate on individuals only rises to 66 per cent above a $250,000 threshold, below that threshold it’s still 50 per cent. However, capital gains inside a corporation or a trust are not eligible for that grace amount. 66 per cent will be taxable from the first dollar.

Dan Kelly, President of the Canadian Federation of Independent Businesses, notes that businesses use capital gains for a range of purposes. Raising the taxable portion of those capital gains within the business from the outset is, in his words, “not good for anybody.”

With the increase in the inclusion rate, this budget does increase the lifetime capital gains exemption for the sale of small businesses from $1 million to $1.25 million, with the next $2 million only taxed at a 33 per cent inclusion rate for certain businesses. While Kelly welcomes that move for business owners, he highlights one issue with the lower tax rate on the $2 million proceeds.

“One of the big problems we see in the budget is that they’ve picked winners and losers,” Kelly says. “If you’re a consultant, if you’re in finance, real estate, insurance, or even running a restaurant or hotel, you won’t have access to this lower inclusion rate on that next $2 million. That is deeply unfair.”

Where budget leaves economy, interest rates

While changes in inclusion rates may leave small business owners and advisors scrambling, Jules Boudreau, Senior Economist at Mackenzie Investments, notes that the budget will likely not have a huge impact on the Canadian economy, one way or the other.

Boudreau says that in the short-term, the net new spending is not much greater than in previous years’ budgets, and there lacks any massive stimulus akin to last year’s ‘grocery rebate.’ The tax increases, he says, shouldn’t have an immediate impact on the economy or derail the Bank of Canada’s plans to cut interest rates later this year.

For all the noise made about housing in this budget, Boudreau doesn’t see enough to move the needle.

“The impacts on long-term prospects for the Canadian economy are more interesting, but also muted. The housing plan is a nothingburger and won’t do much to loosen land and housing constraints in Canada, the chief force holding back productivity growth,” Boudreau says. “The federal government can’t do much on the housing supply side, which is mostly in the hands of provincial and local governments.”

How advisors can help

As they approach clients worried about the new capital gains inclusion rates and other tax implications emerging from this budget, Courcelles believes that advisors can offer some strategic shifts in line with what this new budget incentivizes. The 50 per cent inclusion rate incentivized more tax deferral for clients and while tax deferral is still a valid and effective planning strategy, the new $250,000 threshold will be a concern.

Courcelles notes that every client will be in a different situation, but that there may be more merit now in ensuring that threshold is not exceeded in any given year unless it absolutely has to be. From an asset allocation standpoint that may make more liquid assets like public securities more attractive than something like real estate, which would function as far more of an all-or-nothing contribution to an annual capital gain.

While the changes will have many clients worried and advisors hard at work, Courcelles says that in their conversations with clients advisors need to emphasize that there is still time to adjust and ensure portfolios are as tax efficient as possible.

“When it comes to the capital gains inclusion rate, which is probably the one that's top of mind for most individuals and business owners the first thing that you probably want to say is that we have time,” Courcelles says. “A lot of measures are often effective budget day, this one does not take effect until June. I wouldn't say wait till the last minute, but you don't have to react today.”