Taxes under the Tories

Advisors and tax planners are facing a number of new planning opportunities once the new minority government begins enacting election promises and proposed changes to the Income Tax Act.

Two of the biggest Conservative promises include plans to essentially scrap capital gains taxes and to reduce the goods and services tax (GST).

Although Liberal plans to increase the basic personal exemption in 2006 and reduce taxes in the lowest income brackets will likely be shelved in favour of a $1,200 child care allowance for children under six, other initiatives like increasing the capital gains exemption for small business owners could possibly be adopted by the Conservatives once Stephen Harper forms his government and reconvenes the House of Commons.

Any proposals related to capital gains exemptions will be closely watched by investors and industry participants once the waiting game is over and the conservatives deliver their first budget.

“We don’t have all the details yet, and of course the devil is in the details sometimes,” says Tim Cestnick, principal at the WaterStreet Group, but the proposed changes allow investors to defer paying capital gains taxes if they reinvest proceeds from the sale of assets within six months.

“In my mind that is probably the biggest change, certainly in the capital gains tax rules, since the mid 1980s when the Conservatives brought in the $500,000 capital gains exemption. You might even argue that it’s a bigger change than that.”

Under that scenario, Cestnick says the gains would probably be used to reduce the adjusted cost base of a newly purchased investment, deferring the capital gains tax until the day when clients sell and fail to reinvest the proceeds.

“If that comes to pass and there is a deferral on capital gains, that could radically change how people invest their money. It would not only change the kinds of investments they choose, but change whether they hold them inside an RRSP or outside an RRSP,” he says. “It’s not clear whether or not that’s actually going to pass. As an investor I hope it does and as a tax professional I hope it does because it means lots of work and lots of opportunity, but it’s not entirely sure.”

Although average Canadians will likely continue to invest heavily in their RRSPs, he says the provision, coupled with dividend tax changes, makes investing outside of an RRSP “look like a pretty good option” from a tax planning point of view.

In other areas of tax planning, Cestnick says the Liberals and the Conservatives have very similar view points that should ultimately benefit small business owner clients. Both had committed to cutting general corporate tax rates, eliminating the surtax on corporations and raising limits that will allow small private companies to claim the first $400,000 at a lower rate of tax, up from the original $300,000 limit.

“Our small business owner clients are going to have a good time over the next four or five years with their corporate tax rates,” says Cestnick. “They’re going to be falling quite a bit, which is good for business.”

As well, the Conservatives will likely carry on with an earlier Liberal suggestion to raise the one-time, small business capital gains exemption from $500,000 to $750,000.

“I think we’ll see a lot of stuff in the budget this year because there have been a lot of promises. I think these are the next things to watch for.”

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com