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Slip into something more comfortable and delve into personal finance with Josh Sheluk and Colin White, experienced portfolio managers at Verecan Capital Management. Each episode demystifies complex financial topics, stripping them to their bare essentials. From investment strategies and financial planning to economic headlines and philanthropic giving, delivered with a blend of insight, transparency, and a touch of humour. Perfect for anyone looking to understand and navigate their financial future with confidence. Subscribe now to stay informed, empowered, and entertained.
Verecan Capital Management Inc. is registered as a Portfolio Manager in all provinces in Canada except Manitoba.
Welcome to Barenaked Money, the podcast where we strip down the complex world of finance to its bare essentials with your hosts, Josh Sheluk and Colin White, portfolio managers with VeriCann Capital Management, Inc.
Josh Sheluk:Colin and Josh here, Making 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:Well, the date is April 19th, which if we're gonna call this quick hitters and timely, we probably should give that information. I was terrified the other night when my phone news feed came up that there was more missiles flying across, the Middle East, and and Iran 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.
Colin White:Like, you're you're probably distracted with other things. But did you see the news hit in real time as that was going on?
Josh Sheluk:Yeah. I was getting the live feed from Bloomberg on that. So that's that's not happening. It's, are we getting numb to the whole this person this person attacked that person, this country attacked that country? Are we getting numb to that yet?
Colin White:I I think there's a case to be made that the financial markets have numbed to that. And but I I 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 to minimize the human cost to what's going on. It is a tragedy, and it's an unmitigated horror story in in every possible description. But we're here to in your world to give you financial advice.
Colin White:And a couple of points to be made, none of this is that you can make a decision on. You can't anticipate these things. And after they happen, they're already done. You what you need to do is accept the fact that this shit's gonna keep going on. Like, this this is reality.
Colin White: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 I was the other day to track it back over. What's going on in the last 5 years? What are all the major events of the last 5 years we've had?
Josh Sheluk:Global conflict or just best
Colin White:in general? Like, meaningful meaningful events. Yeah. Things we thought that would actually upend the market. So we had a pandemic.
Colin White:Yep. You know, we had Donald Trump storming the White House to to to stay in power. We had Russia invade Ukraine, our Surrey special military operation. Then we had, you know, we got Gaza and, you know, what's going on in Israel. And we've got Israel going at it with Yeah.
Colin White:Is the market up or down for the last 5
Josh Sheluk:years? Well, it's up a lot. And we there's probably some that you overlooked there. We didn't talk about China and Taiwan or the war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war war
Josh Sheluk:war war war war war
Josh Sheluk:war war war war war war war war war war war war war count that as a win. Haven't even talked about North Korea in 2 years, it seems, which I guess we'll count that as a win. Right?
Colin White:And and we also had inflation go to double digits or almost double digits and come back. Like, all of this has occurred in the last 5 years. Yep. And Markets up. Markets up.
Colin White:So, you know, that's not saying that it's always gonna 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.
Josh Sheluk:Yeah. You know?
Colin White:You know, the the the things that are truly horrific and truly terrifying and seeming to be truly important from a market return perspective maybe are not as important as the way we go on.
Josh Sheluk:Yep. And certainly market reaction this week from the Iran, Israel conflict has been muted if anything.
Colin White:But but, you know, the point to make, I think, is that it's also not monosyllabic. It's not one thing. Like, you don't look at one event, and that's what the market's gonna react to that day. Yeah. And we had this conversation earlier about the Canadian budget.
Colin White:They had people asking about the Canadian budget effects on the Canadian economy. Well, the the missile hitting Iran probably is gonna do more oil prices, which is probably gonna be more of the Canadian market than any perception of what the Canadian budget is 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 gonna be all that affects the market movements in a day. Mhmm. There's there's gonna be other headline items, and there's gonna be other byline items or subline or rest of line items.
Colin White:I don't know. I I hate when I get partway down a a road, and I just, like, I can't bail. I can't I I don't know how to continue that metaphor.
Josh Sheluk:Yeah. 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, kinda coming to head the last couple 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.
Josh Sheluk:The 10 year bonds up about 65 basis points 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:The the fairy tale of the rate cut seems to be getting long in the tooth because we've been certain of rate cuts now going on 18 months. There was almost this logic bomb that everybody said was like, well, rates go up. They must come down. I'm
Josh Sheluk:like, no.
Colin White:No. They don't. Rates go up and then data happens, and then future decisions are made as to where rates should go. It's it's not a it's not a zero sum game. They go up.
Colin White:They must come down. And, I mean, I've I've been absolutely gobsmacked with the the strength of some of the numbers coming out of the US. And I don't I haven't seen anybody come close to projecting the kind of strength that the numbers are indicating. And that's that has a whole bunch of ramifications. For Canadians, you know, one of the we're gonna be in a situation where we might be cutting rates before the US, which is not good for the loony, and it's already getting priced in.
Colin White:Sorry. This isn't see that. This isn't gonna help you. But, you know, this is gonna turn into a currency conversation, which TIF hasn't really been addressing yet. And at a certain point, it's gonna be you gotta defend the currency.
Colin White:That's when he really gets into a a sticky wicket, as I say. It's like, well, the economy needs to cut rates, but we don't wanna make the currency because, you know, that'll be, you know, inflationary. So, you know, wouldn't want his job.
Josh Sheluk:Yeah. And, certainly, we were looking at the budget earlier this week, and that hasn't seemed to help his job either. So throwing at, throwing a lot of rocks at him at the moment and seeing if he can dodge him.
Colin White:Okay. Now remember, we're staying away from social commentary or political commentary. Right? We had we had the conversation about how, you know, the 1st year economic students really disappointed, but the 1st year policy side of the students probably very happy with the budget. You know, there's different ways to score it.
Josh Sheluk:Yep. Yep. That's for sure.
Colin White: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, 2 regular contributors to the, VeriCann Voice. We've been having some great conversations about the budget, which surprisingly had a lot in it. We thought we should share some of that with everybody. So capital gains inclusion.
Colin White:Who would have thought?
Josh Sheluk:Like, the boy who cried wolf almost day. He's like, year after year, we think that this is gonna be included, and then, you never have it. And just when we think that it's never gonna be included, sure enough. They hit us, over the back of the head with it.
Colin White:The headline news is not quite as bad as the details, do you think, Matt?
Josh Sheluk:Yes. When you when you dive into the details, I think that's when you you really find out they they went in the direction that I I wasn't expecting them to. And and I think a bit to that boy called boy called Wolf, I was this was the year I I almost had my back up the least for it. No. No.
Josh Sheluk:You know? 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.
Josh Sheluk:If they haven't done it by now, I think we're safe, and, we were hit with it.
Colin White:Yeah. But then, 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 2 thirds, which is material, but they've also put some limits on it. And then 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, you know, that's not the same for all other, inclusion rates for different structures.
Josh Sheluk:Yeah. So corporate accounts, corporations, trusts, will immediately from dollar 1 be hit with the higher inclusion rate. So it is definitely material for those, for the individuals like you said, Colin, not until you get 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 to see an impact whatsoever. I think it's more of those one off situations where your quote, unquote 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.
Josh Sheluk:That that's where I see this having the most material impact. Do you do you think that's fair matter? Are there other aspects where you think that this is gonna definitely have a material impact for a large number of people?
Josh Sheluk:I think that's fair, you know, in the average case, but then, you know, when we think to those the business owners in our community who I, you know, I like to see as our peers, our, you know, our average people, they they're being hit in a different way. I mean, the planning for a business owner has, you know, for the longest time, largely been, know, 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 than, you know, the average person. And that, you know, that's gonna be material in many cases. I think we'll have to rethink some planning in around, around the business owner.
Josh Sheluk:The
Colin White:only other thing that we haven't mentioned yet, I wanna make sure we get on the record, is none of this is in in force until June 25th. So there there is a period of time here that, you know, people can react. And and this is, you know, Josh, you and I had this conversation for a few years now. Previous budgets as to, you know, the capital gains inclusion rate may change. But if they do, then it's it's not gonna be a retroactive thing.
Colin White:So that that part's kinda come true. That there there is a little bit of a last kick at the can that you can have. But to Matt's point, yeah, this is a tremendous potentially a tremendous changer when it comes to the planning aspect of things.
Josh Sheluk:Mhmm.
Colin White:Josh, to take you back. I mean, Josh was quoted in in The Wall Street Journal today or was interviewed by The Wall Street Journal about the impact of of the budget on the Canadian markets. Josh, do you wanna revisit that conversation with everybody?
Josh Sheluk:Well, yeah. So we we've had I think one of the reasons why we're doing this conversation, having this conversation now is we've had a a few sort of knee jerk reactions or knee jerk questions, if you wanna 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 gonna do for the Canadian equity market? And I said, well, probably not a whole lot of anything. It's just not that material.
Josh Sheluk: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 gonna be a slightly higher, capital gains inclusion rate. So, yes, a very fine margin or very thin margin, it's gonna 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 it's, going to actually move the market in any way, I don't think.
Josh Sheluk:I'd be curious about that, though, because when you think about the next 2 months that we have for some planning to occur and some of the some of the areas where a lot of wealth has been built in the stock market. I think your long held positions in BCE, your long held positions in some utility companies for those that are there to collect the income. And they might they might be looking at of those positions, you know, between it might be a well, if I held to my estate value, it it's it might be this. Or if I pay the taxes today, it becomes a slightly lesser value that that goes out of the door. So at that margin, there may be an increase in just outflow, though it may be repurchased immediately.
Josh Sheluk:And then we see a bit of a wash. So it may ultimately be a sort of in and out type transaction.
Colin White:Well, I think you're dead on that. I think some of those conversations absolutely should happen because you're looking at, like, close to an 8% increase in tax payable, which is is that's material. But to Josh's point, I don't think that it's material in in the overall market. You know, as far as, like, they're moving the entire equity market. I'd be I would be surprised.
Colin White: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 major way. I think that, you know, budgets don't really have that because we live in a democracy, a budget's not gonna do something that's gonna take the market, at least not knowingly, because then that's gonna get people, you know, unelected. It's more likely that there'd be a really good news budget that would be positive for the overall Canadian economy and therefore cause a bit of a bump the market. That's certainly certainly wasn't that budget. But it's it's odd.
Colin White:I was flabbergasted, Josh, to be honest. That was the question that was asked of you because it's not the only time that that question has been asked today. It was a real concern that somehow this was gonna take the Canadian market now. And I had to stop for a second and just try to follow the logic. But I I I I can't back that up.
Colin White:I can't see it as being a big deal.
Josh Sheluk: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. Right? I I think that's true. Yep.
Josh Sheluk:And I think that that's factually true. I don't think that's debatable. But the thing where I I think there's a couple more areas that are shades of gray is if you're deciding to take the capital gains hit now, you're accelerating your your tax payable. So there's 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.
Josh Sheluk:So 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 gonna die like most of us, then, or are unclear when you're gonna sell asset x, whatever it is, shares of BCE or your cottage or something else, then it it's less clear to me that there'd be any whatsoever of accelerating that tax
Colin White:hit. Well, then, you know, if you're gonna get to portfolio management, I'll throw out the whole idea about properly allocating a portfolio. And if you're holding on to a legacy position, that's maybe the strongest investment. But then we get on the merry-go-round, and it's gonna take us longer than we have here. Right, Josh?
Josh Sheluk:Matt Matt has 20 minutes. He was very clear.
Josh Sheluk:But to that portfolio construction piece in 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, you know, place to be. The math is slightly different now. Dividends have, you know, the dividends have encroached a bit there on an, on a after tax basis. So can it it just there's a lot of areas where the math is different now when it comes to planning, just on this on this one adjustment. And and so, I mean, I'm still digesting.
Josh Sheluk: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:To a certain extent that we're letting people watch how the sausage gets made because that the dividend inclusion, like, that's specific to Canadian dividends as well. Right? So foreign foreign income is different as well. Right? So how much do we really care about a Canadian dividend income, you know, in a in a properly diversified portfolio?
Colin White:Yeah. The this money trails off for for sure. My 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. Yeah. That that this is this is gonna push a bunch of people to be susceptible to questionable tax planning strategies, because fear is gonna find a home.
Colin White:And people get afraid And, you know, somebody's going, hey. You heard about those inclusion rates. I could fix it. You should do this. And, again, tax planning fraud is, like, it's always been a bad thing, but I think this is gonna really open up the floodgates and create a whole bunch of people stampeding towards the cliff.
Colin White:And there's gonna be more than enough promoters out there that are gonna promote things and start suggesting strategies that are not well understood, well thought out, and cause a lot of harm. So I think there's a I think that's my biggest fear coming that this budget is gonna cause that kind of stampede.
Josh Sheluk: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 because 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 $100,000 of capital gains, for example, you would have had to in the past or up to June 24th this year, include 50% of that as taxable income.
Josh Sheluk:So if you have a $100,000 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 2 thirds percent or 2 thirds overall. So instead of reporting $50,000 of taxable income, you're reporting 66,000 6 67 of taxable income. So just to make sure that that's clear because it's it's a hard kinda nuance concept for some.
Colin White:Yeah. The other other group, and and I think Matt alluded to it, but the other group out there that's being affected, and this group has had a few hits is are those people who've gone into retirement or built their financial independence on real estate, or 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 kinda screwed with that.
Colin White: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 another notch against those people. And hate to be the kind of and we've been talk Josh and I've been talking about this for years now about the danger of overemphasizing an asset class or strategy in your in your situation. If your whole your whole life is rentals, that's where you've built the vast majority of your wealth because you understand it. This is yet another blow to to that strategy that's going to make it less effective, more painful and be more complicated from a planning perspective.
Colin White:So it it it was one of the different reactions we had. Ainsley and our team who produced our market minute today was like, hey. Budget come out. All good. Market's not gonna do anything.
Colin White:Matt went the other direction with it. Lizzie's hair on fire and went went to all of the planning that was was was coming out of it. And both reactions, I think, are true. Matt, you're absolutely right. Yeah.
Colin White:This this changes the planning. This is a huge, huge, huge, bigly. It's a bigly budget when it comes to the changes that caused on planning side. On the market side, maybe not so much.
Josh Sheluk:Yeah. Well, I mean, as much as we never let the tax planning drive the investment strategy, it's probably item 2 is the tax planning. And so it's very important to to all of these or item 3, you know, it's it's way up there. So it matters a lot to many of these plans. And when you you know, we haven't touched a whole lot on trust, but, you know, those get utilized in Nova Scotia, especially in 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 to do so to largely to avoid that probate piece, often for privacy and there are other advantages of it.
Josh Sheluk: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 you know, I've thought about before is there's maybe a floor of, you know, nonregistered 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 a higher value? And maybe that's the case.
Josh Sheluk:There's there's a lot of this on a planning perspective that just changes immediately when the math changes.
Colin White:Yep. What's what's everybody else's favorite thing other than capital gains inclusion rate that they they saw in this budget? I mean, what what's what's the best of for you guys?
Josh Sheluk:What? 0 positive or nothing.
Colin White:On a
Josh Sheluk:positive basis, the the clarification may be around AMT and the the alternative minimum tax and allowing for more charitable giving without Yeah. Sort of
Colin White:Well, let me
Josh Sheluk:with the with the deduction to the donor, I think, is good to clarify and and hopefully good for charities as well to ensure that people don't sort of backtrack on maybe where they would have been for gifts.
Colin White:No. Then then then that's largely been looked at as a correction of a mistake because I don't think that the governments was was looking to penalize charities the way that the inevitably did. And so kudos for them. I mean, my least favorite thing and it's, you know, 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 homebuyers only buying new construction, which I think is a terrible expectation to set for first time homebuyers that they're gonna get to buy a new house.
Colin White:And even worse to say that in order to do it, we're gonna let you take out a 30 year mortgage, which by definition means that they're gonna 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. Yeah. I don't think that I'd ask anybody who was thinking about, hey. This is my key to the promised land.
Colin White:I'm gonna do it to be super, super careful because it is, you know, my opinion, advocating for a a financial strategy that is really, really super dangerous. It should be avoided.
Josh Sheluk:So so is it just because I know we talked about this earlier, Colin. Is it just new homes? Because 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 $1,000,000. Yeah.
Colin White:Yeah. The only one I the only one I read was very explicit. Yeah. It had to be new builds. And that was that was the program.
Colin White:I think it was talked to another. This is the 30 year mortgage that's coming on as far as the conversation in Canada about a way to deal with, you know, the the issues that we're having now.
Josh Sheluk:Well, was there what? It's like 4 or 5 years ago, you could have a 30 year mortgage. So it's it has come and gone.
Colin White:Yeah. I know. It's shifted in and out. But I mean, recently, there's because the well, I think Canada, specifically the Canadian consumer, so overstretched, there's been some legitimate worry about that. They've been ratcheting up the requirements for mortgages, which has been good.
Colin White:And this seems to roll back some of that and aiming it at a group of people. And again, there's 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 homebuyers do. I think that's that's that's not anything that would do that you should expect. If it happens, great. But, you know, many, many people get started in a much more modest way in in the homeownership.
Colin White: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 I'll beat the drum on. There was very, very little support for open banking. Open banking is one of
Josh Sheluk:the things we talk
Colin White:about going into this and they set aside, like, $4,000,000 or $5,000,000 to study it or set up a group or something. It was a really it was mentioned. Yeah. But it was a bit of an afterthought. It didn't really have the gumption behind it.
Colin White:That was hoping because that is something that would truly benefit the Canadian consumer to have the adoption of open banking. That that would have 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 and re rein some of that in, which is long overdue, and I am just a way of doing it.
Josh Sheluk:Yeah. I guess for for me, the open banging thing would be a better way perhaps to accomplish some of those stupid fees and things like that that you get dinged with. Right? It just it 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:We're just open up to foreign banks getting situated in Canada and introduce more more competition. I mean, that that could solve it too. Right, Josh?
Josh Sheluk:Maybe. Too much
Colin White:to hope for?
Josh Sheluk:That's that's a lot that's a lot to ask for for sure.
Colin White:What else do we wanna comment on, Matt? What was what was your next favorite thing?
Josh Sheluk:Well, I mean, we talked a lot about how they're gonna pay for things, but then the question is, well, what are they paying for? There's big deficit that's a 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 and building more stock? Do we, what do we think about their approach here?
Josh Sheluk:That's another deficit coming our way.
Colin White:Well, I mean, again, from from an individual's perspective, I don't think it really matters to hello beans other than it for me, the there's there's 2 things that matter at the end of the day to, you know, anybody in Canada. What is the strength of your, you know, 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 they've increased some Canada pension benefits. And I'll be interested to see what CPPIB comes out with as far as whether that affects their confidence in funding, but the CPP has always been a very consistent thing.
Colin White:But the OAS comes out of revenue. And, you know, to the extent that these, basically perpetual deficits are going to cause, you know, financial stress down the road, I guess I would score it as being less likely. I would put less on onus on expecting that the OAS as it exists today would exist for somebody who's gonna retire in 10 years. Mhmm. Because it's one of the things that perpetual deficits is going to affect.
Colin White:So if I was gonna take anything from that and not passing any judgment on policy, I would be less confident that the OAS is gonna be there in its current form, say, 10 years from now. So if you're planning a retirement and that's part of your calculation, maybe take that out of your calculation or put it in there at a at a reduced amount.
Josh Sheluk:What do we think about the other taxes that are coming in as part of this? The the digital services taxes, I may have that name incorrect, but there's a tax being applied to to tech companies, essentially. And then, the the the digital services tax. And then a global minimum corporate tax also coming in. So are these are these a message to big companies that from 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?
Colin White:The new cost? Yeah. Yeah. I mean, like, that gets into, you know, 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 things so that, you know, companies that are countries that are actually generated the market for all of these products and services get to see some of the tax revenue out of it.
Colin White:The digital tax one, I 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?
Josh Sheluk:No. Big, big companies and retroactive as well to what I read to to go back even not just 20 not this this year, but they'll go back in taxes to be levied for prior years. So you know?
Colin White:Hey, Josh. What do you think? Is this gonna 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 the the decisions of the Bank of Canada? Well, you
Josh Sheluk:both you 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 have expected or was rumored on the tax side of things.
Josh Sheluk: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're 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 with, the the other taxes that they've imposed as well. So, yes, making the 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.
Josh Sheluk:Whether we can call that a good job out of 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 it's definitely, you know, 2 2 forces pushing in opposite directions, I would say.
Josh Sheluk:Just the other force that can improve inflation is 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 even in a deficit scenario that we're really hitting an area that's just so important here in Canada is our is our waning productivity.
Colin White:Oh, yeah. And you start adding up, you know, the increased cost on capital gains, ostensibly making it less attractive to invest, in make a capital investment in a Canadian business. And, you know, the other measures that are taken in there to make things less hospitable, You know, that could slow down, you know, business growth in Canada, cause countries, cause companies to locate other places, which was to my other point to Josh, was that, you know, maybe a few of these companies pull out and, you know, there's fewer jobs, which is going to lead to, again, helping maybe bring, you know, 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, yeah, that that's kind of an existential thing as to whether it gets to that level.
Colin White:But I 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 gonna do changing going forward that'll cause the Bank of Canada to react.
Josh Sheluk:Yeah. The the rumors ahead of the budget were actually, I think, going to be a little bit more challenging even than, than this for the Bank of Canada, specifically on inflation. Because I was hearing more about tax rates increasing more broadly, for companies and, potentially even having higher spending. So in a in a weird way, maybe 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:Hey. One of the other things that was kinda hidden in there is that they've provided more funding to Revenue Canada, asset part. But they're gonna pilot, self filing of tax returns or or automatic tax returns
Josh Sheluk:Yeah.
Colin White:You know, this this summer. So I think that's a step that's 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. Gonna wait for the execution.
Colin White:I I never have a lot of faith in their execution, but it's a nice thought. In the thoughts in the right direction, execution can come second.
Josh Sheluk:Yeah. Well, call center times we're gonna go way down
Colin White:to a
Josh Sheluk:call center times are gonna go way down to. That's another thing that that was
Colin White:that was mentioned. Well, everybody's good automatic tax returns, they're not calling in. So
Josh Sheluk:Well, our CRA has 34% more staff since, 2019, I 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:It's a this is a really tough room for me to be happy about something, and you guys are just ready to to to jump all over it.
Josh Sheluk:Couple of 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 gonna implement it, but it seems like it should be fairly straightforward. And then the other thing is there and this one's gonna be very confusing, I'm sure, but, automatically opening RESPs for those that are eligible for the Canada Learning Bond.
Colin White:I I was waiting for you to get to that one.
Josh Sheluk:Yeah. It it seems 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 Yep. Because these are in some cases, individuals who wouldn't even consider opening in an RESP if they're never gonna deposit money to it.
Colin White:Yep. Well, no. And then this is one of those ones that we have to we should go back to because there's a bit of a let's talk about trust disclosures. You know, there's there's lots of things that get announced as government policy through a budget or what have you that kinda go through the finance department. And by the time it gets to CRA, it's just an unmitigated cluster devil.
Colin White:And, you know, 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 out to do is just so ham fisted. It's like, how the jeez is you actually gonna pull this off and keep any of it straight?
Colin White:I just like, I can't imagine. So I I guarantee you that somewhere, there's there's a group of bureaucrats sitting in a room going like, what the hell do you want us to do with this? Like, there's just there's no way forward.
Josh Sheluk:Well, do you think that they asked any financial adviser on the planet when when they decided to put this in place, whether the implementation was a good idea? Because, like, I the first thing I thought was, how are they gonna do this? Like, where are these RESPs gonna be open? So are they just gonna pick a financial firm and then open them there? Or are they gonna have a, you know, Service Canada type of RESP?
Josh Sheluk:It's it's crazy. But, like a lot of things, end to end wasn't maybe executed as as good as it could have been.
Colin White:No. But yeah. And, again, a part of it is our lens as 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 gotta go through a set of processes before it gets acclaimed. And, you know, some of this stuff is going to be different.
Colin White:It gets all the way through the process. Yeah. But Matt Matt's looking at his notes. Do we miss anything, Matt?
Josh Sheluk:Well, just look at it.
Josh Sheluk:It's another in that category of interesting idea that we'll wait and see how it gets executed. This employee ownership trust and the the ability to transition a business to a group of employees who will own it through a trust, and, you know, tax exemptions that come the way to the business owner. Sounds interesting, but let's watch what happen. Who's gonna find who's financing it? Who's in who how can this how's this gonna work?
Josh Sheluk:So I don't wanna be the first one to put to try and move this through, but it it is an interesting idea. Just another option for a business.
Colin White:But this isn't new. This was announced 2 budgets ago, last budget. Like, this is I think that there's a new iteration.
Josh Sheluk:There's further details.
Colin White:Yeah. Like the because they they haven't actually been able to pull one off yet since they got they're taking another run at it. Yeah. And and, again, I I I'm 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 the a situation that would fit this. You know, a founding business owner that has a group of capable, qualified, interested people that wanted to go through the quagmire of of of rules and regulations to set one of these up.
Colin White:It's one of those ones that, again, it sounds really, really wholesome, but, you know, they they get it to falls apart on the implementation.
Josh Sheluk:Yeah. Solution looking for a problem.
Colin White:See? You know what? I talk for hours and hours now, and Josh just comes out with 1 comment that sums up everything I had to say.
Josh Sheluk:Yeah. Last thing I would highlight is there have made a couple changes to capital gains exemptions on selling a business, increasing the lifetime capital gains exemption from 11 to 1,250,000, give or take. And, what do they call it? The entrepreneur
Colin White:Entrepreneur incentive program,
Josh Sheluk:I think they called it.
Josh Sheluk:So if you're a founder of a business, you you might you might get up to $2,000,000 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:Finance, insurance, hospitality, hotels, home care, private corporations, consultants.
Josh Sheluk:Real estate. Yeah.
Colin White:Real estate. Real estate. Yeah.
Josh Sheluk:Arts, I think, is in there too.
Colin White:But why are we shitting
Josh Sheluk:on the arts? What did the arts do to anybody?
Colin White:Who makes money at the arts?
Josh Sheluk:If you made a capital gain in the arts, you deserve to be like tax credits.
Colin White:Anyway, no. But this is the danger, and this, I guess, the time the reason we're spending this time at it. You know, the danger is, oh my god. Capital gains are bad, and that's all people are gonna hear. They're gonna run with it, and they're gonna run to their advisers.
Colin White:And I'm terrified. I I'm legitimately terrified right now what the next 6 months is gonna hold for for the kind of planning that's gonna get thrown out there. And then there were 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, you know, some of those some of those motivations out there.
Colin White:To to Josh's point, to the The Wall Street Journal, nah, 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.
Colin White:But it's not likely going to affect equity markets in any kind of a direct way.
Josh Sheluk:Great way to sum it up.
Colin White:So we're going to call this done. If you're breaking a sweat trying to figure out what your financial advisor is talking about, you're not getting the service you need. You probably hate trying to get an answer from them, but you also think moving your accounts will be a headache. And it might be. But working with Dontrocktheboatwealthplanning.comor.ru isn't exactly stress free, is it?
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