Feds leave uncertainty on tax cut timing

Investment advisors who attended this morning’s breakfast meeting with Minister of Finance Jim Flaherty might conclude that their clients will soon have more investment dollars available and increased flexibility in their retirement planning. However, the same advisors might feel reticent about long-term tax-planning strategies, thanks to uncertain timelines in the Conservative government’s plans regarding capital gains tax cuts.

“We are in the second-longest period of economic expansion in the history of Canada since the period after the Second World War,” he said, speaking to Toronto’s Economic Club at a meeting clearly designed to build support for the Conservative government’s budget update released yesterday afternoon.

Flaherty listed his government’s plans to leave more money in the hands of individual Canadians through reduced government spending, government debt reduction and income tax cuts, alongside Canada’s emergence as an energy superpower with the world’s second-largest oil reserves and exports of natural gas and uranium, as advantages that implicitly guarantee future prosperity.

If the Conservative government manages to deliver on the promises outlined in its Economic Update, Canadians will have more cash at their disposal for uses such as retirement planning, he suggested in response to a question from Advisor.ca during a media briefing after his presentation.

“Yesterday we announced the renewal for five years of our agreement — the Department of Finance–Government of Canada agreement with the Bank of Canada — again targeting inflation at the mid-point of the 1% to 3% range. That is 2% over the next five years,” he said, also pointing to the income-splitting provisions as help for pensioners.

Advisors and clients can make the most of the minister’s recent pronouncements and those made on October 31 regarding the new tax structure on income trusts and his plan to allow income-splitting for senior citizen couples, by dividing income into at least two categories: definite-short-term and medium- to longer-term.

In the definite-short-term category, Flaherty says the government regrets losses sustained by income trust investors, but says he has no intention of backtracking on changes to taxation of income trusts announced in October.

In the medium- and longer-term, the Economic Update may lead to new planning strategies and product opportunities for advisors, suggests Susan St. Amand, president and CEO of Ottawa-based Sirius Financial Services.

In the insurance category, the possibility of capital gains tax cuts could lead to greater use of permanent life insurance products to pay expenses at the time of a client’s death, she suggested. “Eventually you would have to pay the tax. That would be at death, which would mean there would be probably more insurance funding for that,” she says, explaining that the potential capital gains tax cut as currently conceived appears to involve tax deferment until death.

St. Amand says this possibility is something advisors should watch closely. “If in fact [the capital gains cut] does happen and goes through, then you’ll find that there will probably be more of a funding of taxes at death because the tax bill will be so much higher.” St. Amand also suggests that the government’s plan for income-splitting between seniors may lead to some reduction in the importance of spousal RRSPs, since the new approach to income-splitting would apply to taxable income as received.

Investors may also get to keep more of their hard-earned investment payouts if the government follows through on tax cuts and other measures outlined in the update, suggests John Johnston, chief strategist at the Harbour Group, RBC Financial’s high-net-worth boutique planning unit.

“Certainly it looks like we’re moving in a steady but slow direction towards reducing the double taxation of savings,” he said, referring to the initial tax on non-registered income followed by tax on income yields. However, advisors and clients will have to keep expectations under control, given the government’s commitment to pay down its debt. This means a real danger in overestimating the size of tax cuts, he says.

Al Emid is a Toronto-based financial services journalist.

(11/24/06)