NOW IS A GOOD TIME TO REASSESS YOUR INVESTMENT PORTFOLIO
Higher taxes will be aimed at small firms, high-net-worth folks, says Martin Pelletier.
Canadian investors have a lot of options when it comes to mapping out portfolio risks and finding ways to mitigate them, such as diversifying their portfolios into larger, faster-growing and more innovative markets, but there are some risks on the immediate horizon where this exercise will do little to help, especially for professionals, entrepreneurs, small-business owners and retirees.
As the economic lockdown comes to an end, municipal, provincial and federal governments will have to account for the billions of dollars they’ve spent over the past few months and find a way to start paying for it. This means a reduction in normalized spending and/or the introduction of new taxes to cover higher debt-servicing costs.
The problem is that the average population benefits from spending increases, but the entire tax burden often falls on a minority. For example, is it really surprising that three in four Canadians are in favour of introducing a wealth tax when these three in four Canadians won’t be paying for it? Idealism is easy when someone else foots the bill.
Politicians are highly motivated by what voters want so we worry about what lies ahead, especially given the huge rise in Justin Trudeau’s popularity coming out of his office’s spending spree that could result in a deficit that exceeds a quarter-trillion dollars. More troubling, though, is his government’s numerous attempts to use this time of uncertainty to obtain more powers and less oversight.
At the end of March, the government tried unsuccessfully to give itself sweeping powers to spend, borrow and change taxes as it so chose, without parliamentary approval, through to December 2021, but this was too much for opposition parties.
Since then, the government has been operating under the oversight of an all-party COVID-19 special committee that meets twice a week via video conference and one day a week in the House of Commons. Well, even this was too much for Trudeau’s party, and with surprising support from the NDP, it was able to shut down this committee as of June 18, while Parliament will remain suspended until Sept. 21.
As a result, high-net-worth Canadians, small businesses and corporations better get ready as this government is strategically very well positioned to start implementing massive tax hikes aimed directly at them.
Unfortunately, it doesn’t get much better at the local level, since municipalities are in dire shape and running large deficits with little options to borrow. Some cities such as Calgary have already started to introduce double-digit tax hikes on residents (I know, as I got one this year) and high double-digit tax increases on business owners.
Other cities, like Vancouver and Toronto, despite having very robust housing markets, are lobbying for support from both provincial and federal governments.
That said, I’m sure Canadians living in cities such as Saskatoon, Edmonton and Winnipeg don’t want to be subsidizing cities like Vancouver where the average two-storey house is worth more than $2.1 million.
The only good news in all of this is that interest rates remain quite low, so debt-servicing costs could be a lot worse than they are now. In the interim, we think governments will have a hard time turning off the taps and even low interest rates won’t be enough to get their finances in order without some form of tax hikes.
The big questions are how much of a hike, who will it be focused on, and what can be done about it?
For those wanting to be proactive, now is a great time to map out your family’s positioning via a financial plan, and identify
potential tax strategies on how best to respond when the taxman comes calling.
Financial Post
Martin Pelletier, CFA, is a portfolio manager at Wellington-altus Private Counsel Inc. ( formerly Trivest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.