“Nothing is certain but death and taxes.” Ben Franklin.
This month we looked at the overstated risks to the economy of the new capital gains inclusion rate. The first point to note is the rate that changed is the percentage of the gain that is taxed not the tax rate on the gain. The 66.6% inclusion rate would mean a tax rate of approximately 33.3% at the top tax bracket which compares favourably to the 50% tax rate on wages and interest. Some forecast a rush to sell cottages to avoid the increase in taxes. The flaw in that logic is the commission on the sale would almost fully offset the taxes saved. Others indicate doctors will close up their practices if the gains rate increases. The tax on the doctors’ income from their practices does not change with this budget. The gains they already have on their investments will be taxed at the new rate whether they practice medicine or not, so I think this is overstated. One factor most people forget is there is an election in a couple of years and the current government could be voted out, do you think the axe the tax party will keep capital gains taxes at the new higher level? The problem may solve itself with the passage of time.
What are we doing about this tax change and our view on the markets. We have an extremely low portfolio turnover which means we do not trade frequently. Active traders lock in capital gains and make it a taxable event. If you have a stock that has gone up and have not sold you continue to delay paying tax. Giving the government tax dollars earlier than you have to is not the best strategy. We continue to like dividend paying stocks. Dividends are taxed at a lower rate than wages and interest. We like the ability to use the cash from dividends to allow clients to meet their cash flow needs or allow us to rebalance the portfolio by deploying the cash in undervalued securities. In short, we have not changed our strategy.
