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Fredericton Daily Gleaner ~ Capital Appreciation ~ Economic Update ~ November 20, 2006 - 29 Nov 2006 by TaxHelp
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You may receive an early Christmas present later this week. Federal Finance Minister Jim Flaherty has announced that he will present his fall economic update in Ottawa this Thursday. Normally these occasions report on the general health of the country’s economy, while tax cuts traditionally come in the spring budget. However, getting relief at this time of year is not unusual.
Without a doubt the people at Finance are still dealing with the fall out of the Halloween announcement to levy competitive taxation on income trusts. The outcry is particularly significant considering that during the election campaign the Tories indicated that they would not tax these entities. A number of companies since that time have either migrated their business like Aliant, or have announced their intentions like Telus. Going hand-in-hand with this, large institutional players like mutual funds have stocked their portfolios with income trusts.
Mom and pop investors buy these funds and as a result have seen their investments take a hit as of late. While seniors will experience some relief with the announced income splitting measures, there are still those individuals who are reeling from the abrupt and blindsiding measures. Five years ago, BCE was trading in the $40 neighbourhood. Over the past year it’s traded as low as $25.32. As of late it’s been over $34 – that is until the announcement. BCE were planning on structuring an income trust deal. Now with the benefits negated, the plan is in limbo. And as a result, BCE closed last Friday at $27.25.
So Mr. Flaherty and his team might be thinking about offering up a carrot. And the one many people are hoping to sink their collective teeth into is in the capital gains area. One of the election promises Prime Minister Stephen Harper made was to eliminate capital gains (and it’s resulting taxes) when the funds from the divestiture are reinvested within six months. This is seen as a great method to unlock Canadians wealth, in order to make additional capital available. It specifically assists the investing community as well as those who have real property that they may wish to trade up – selling a duplex in order to buy a triplex for example.
And as I said, while most tax relief comes in the spring, the fall works just as well. Last year, during the heat of trying to maintain a minority government, then Finance Minster Ralph Goodale announced a reduction in the lowest federal tax rate from 16 to 15 per cent plus a $500 increase in the basic personal amount. Those two measures alone could have saved a federal taxpayer about $350. As it came at the end of the year and applied to all of 2005, most of us experienced refunds hundreds of dollars greater on average then usual.
In the 2000 fall update, the feds cut all the tax rates by one per cent, enhancing the earlier budget promise. In addition, and to great confusion they also cut the capital gains inclusion rate. When the year began 75 per cent of any profit from a capital sale was subject to tax. The February 2000 budget lowered that inclusion rate to two-thirds. The October statement further reduced it to 50 per cent. Put another way an individual at the highest marginal tax rate that had $1,000 of profit from the sale of shares in January attracted more than $217 in tax while the same sale in December generated a bill of only $145.
While Prime Minister Harper and Minister Flaherty may not want to make a habit of delivering tax relief twice in one year, they also know the best surprises, just like the worst, are those that are unexpected. While many people feel that they were tricked on Halloween, they may be hoping to receive a treat later this week. The capital gains re-investment initiative might be the thing to do. After all, it’ll give people an opportunity to help stimulate the economy, particularly in light of the winter months ahead and the reduction to government coffers from the cut in the GST. And as Canadian Press reports, Ottawa budgeted for a surplus of less than $4 billion in the spring while the fact of the matter is they are ahead almost $7 billion just five month into this fiscal year.
It will be interesting to see if there are any gift-wrapped goodies buried in the dry economic narrative will hear later this week.
Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1 (888) 450-1212. His column appears Mondays.
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