Shifting policy prompted investors to sell assets
While most investors breathed a sigh of relief after Prime Minister Mark Carney slashed capital gains tax reforms in one of his first moves as Canada’s leader, the fallout of a tumultuous year filled with flip-flopping policy decisions prompted many Canadian investors to make asset sales they now regret.
New capital gains tax reforms were introduced in last year’s federal budget, with former Prime Minister Justin Trudeau’s government hiking the inclusion rate for corporations and trusts with over $250,000 from one-half to two-thirds. But the reforms remained in limbo, then were eventually deferred until 2026 before being scrapped altogether by Carney’s new government.
Derek Benedet observed a significant number of investors rush to sell off assets such as secondary properties to shield themselves from the announced tax reforms. He says many are now regretting these asset sales which were made amid months of policy confusion.
“The biggest issue is for the people who pre-emptively tried to get ahead of this tax change,” said Benedet, portfolio manager at Purpose Investments. “They might have sold their business or disposed of some capital assets, which they had large gains on, to get ahead of this thinking that was smart tax planning.”
Though the debacle caused plenty of turmoil for investors, Benedet is happy that the Carney government was quick to reverse Trudeau’s tax policy, as investors and advisors are now able to create tax plans around a policy they are familiar with.
“Do I think it's a good move by the government? Absolutely. I think it is the right thing to do. But for those clients who went through with transactions to try to make the smart tax decisions, they're sort of stuck, you can't undo those transactions,” he said. “The good news is that it's just reverting back to the old playbook. You're going back to the old tax strategies.”
Benedet emphasized the need for advisors to check in with clients who rushed to sell during the months of chaos and ensure they are still on track to meet their financial goals. He says that in the bigger picture the debacle will be seen as “an annoyance” for investors and clients.
“In the future, I think they'll look back on this as a messy, messy period,” he said. “But right now, I think it's a matter of having those conversations with clients who've had to to deal with it, and make sure their plans are still on track.”
Benedet suggests the after-effects of the capital gains tax has severely hampered business sentiment, pointing to the monthly CFIB business barometer index, which measures small business confidence. At 25%, the barometer is the lowest it has been since 2000. Amid a full-fledged trade conflict with the US, Benedet says the government’s reversal gives the business community some kind of cushion against a potential recession.
“The business environment in Canada is not happy right now. So the government reversing this decision is the right move,” he said. “In the situation where in the worst-case scenario, tariffs are put in place, it's likely going to mean a recession for Canada, and then to have these additional restrictive taxes on business owners, on entrepreneurs, that is only going to be a hinderance.”
While Benedet acknowledges this lack of confidence is due to much bigger factors such as tariffs, he believes business sentiment has been low for years because of government policy like the proposed capital gains tax hike. With both frontrunners in the upcoming federal election “pro-business” according to Benedet, he hopes to see more business-friendly tax policy to spur international and domestic investment.
“Both parties are focusing on the economy as a major election issue, rightfully so, because I think that is the most pressing issue for most Canadians right now. I think in the broader scheme of things, we need to be a better place to do business. We need to be more attractive for international investment,” he said. “Had those taxes been in place, people would not have been as willing to open up new businesses or to expand their businesses, if it's going to become more cumbersome.”
