Why investors should prepare before election called
Possible Liberal government majority win a cause of concern, Martin Pelletier writes.
It doesn't take a rocket scientist to figure out Prime Minister Justin Trudeau's desire to trigger an election this summer/fall, since he'll be hoping to capitalize on the upbeat attitude among voters as we head into a POST-COVID world.
Investors should be paying particular attention, given that the Liberals' policies are as left-leaning as the NDP'S — if not more so — essentially making them one and the same party and because a recent Abacus Data poll showed that Trudeau may finally get the majority government he so very much desires.
To get an idea of what's ahead, simply take a look at what transpired after the 2015 election, the last time the Liberals had a majority government. They immediately raised income taxes, pushing the high-end combined rate above 50 per cent in most provinces. Trudeau then aggressively went after small-business owners, labelling them tax cheats.
More recently, we were the only G7 country not to release a budget for at least two years, and Canada also ran the largest fiscal deficit as a percentage of GDP among Organisation for Economic Co-operation and Development members, according to International Monetary Fund data.
The Bank of Canada has been the primary buyer of this debt, putting it in a precarious position as it looks to wind down this program along with other global central banks.
The BOC needs to suppress interest rates in order to keep the government's debt-servicing costs down long enough to provide the necessary time for the economy to show signs of non-transitory growth.
However, this largesse has had the profound unintended consequence of throwing rocket fuel on our housing market, further transforming Canada's economy into a one-trick wonder, so much so that housing accounted for a whopping 54 per cent of Q1 GDP growth.
Our collective investment in real estate, when measured as a percentage of gross fixed-capital formation, is now the highest in the G7. It's even higher than what the United States had during the peak of its housing bubble. Three Canadian cities — Vancouver, Toronto and Hamilton — are now the most expensive in North America.
The problem is that all this levered household capital is being put into a non-producing asset. It isn't planting the seeds for the kind of future the government needs to grow its way out of debt. Our finance minister seems oblivious to this, since her department is overseeing a level of spending never undertaken before, all under the guise of Build Back Better.
Eventually, someone is going to have to pay for this when the Bank of Canada stops printing money to fund record deficits, and international investors may no longer be keen on buying Canadian dollar-denominated debt backstopped by a real-estate fuelled economy. The only caveat to this is our nation's oil and gas exposure, which ironically could come to the rescue of a government so vehemently opposed to it.
That someone is likely you, the taxpayer. It's just a matter of time before the government comes knocking, and, as history shows, it's much easier to do so post-election with a majority government in hand.
Don't get me wrong. This is not a clear and present danger, but it's one that nonetheless looks to be on the horizon. This means investors have some time to undertake extensive wealth and tax planning by mapping out their overall financial picture and identifying potential areas of exposure.
Unfortunately, most of the plans we've seen out there could be called “comfort” ones, often revolving around short-term performance gains, used as a means to secure business.
Your plan should involve more than just moving an asset here or there. Instead, look to work with a team that includes a chartered accountant specializing in tax. The team should identify actionable areas where investors can eliminate their exposure to current and longer-term tax consequences.
At a minimum, proactively trying to mitigate the idiosyncratic risks that are rapidly taking shape within our country should provide a bit of control if things really do go awry.