Tax Changes That Could Affect Your HNW Clients
As we inch closer to 2022, tax expert John Waters sheds light on potential tax changes that may impact your high-net-worth clients, so you can get ahead of planning conversations NOW.
In the wake of the recent federal election, John Waters, Vice President, Director of Tax Consulting Services, BMO Wealth Planning & Advisory Services, offers a primer on some of the proposed individual and corporate tax measures that could impact your high-net-worth clients. Familiarizing yourself with these checklists presents an opportunity to educate – and to consider optimal strategies to help minimize the future tax burden.
Five Potential Tax Changes You Should Know About
During the lead-up to the recent federal election there was a great deal of discussion about potential tax measures designed, in part, to offset the deficit attributed to various Pandemic relief programs introduced in the past year and a half. To serve as a roadmap for the months ahead, here are five proposed changes that could prove significant to the high-net-worth individuals and business owners in your book.
- Alternative Minimum Tax (AMT): The Liberal platform included an expansion to the AMT, whereby top-tax-bracket individuals would be subject to tax of at least 15% federally each year – specifically removing the ability to “artificially pay no tax through excessive use of deductions and credits.”1 Although there wasn’t a great deal of detail proffered, these changes may impact the current AMT calculations.
- Luxury Tax: Originally in the 2021 federal budget, a proposed tax on the purchase of luxury cars, boats (>$100,000) and private aircraft (>$250,000) was reiterated. Specifically, this new tax would be calculated as the lesser of 20% of the value above the threshold – or 10% of the full value of these goods. A consultation paper was released this summer to allow for commentary in advance of the introduction of this law – expected to take effect as early as January 1, 2022.2
- Anti-Flipping Tax: The Canadian housing crisis spurred discussion during the election on how tax policies might be used to assist in solving the affordability problem. Of note is a proposal to implement an “anti-flipping” tax to focus on those who buy and sell a home for financial gain within a one-year period – barring exemptions for significant life events, such as pregnancy, death, divorce, disability or change of employment. (In addition, there was acknowledgement to allow for legitimate renovation costs to reduce the gain.)
- 1% Tax on Non-Resident/Non-Canadian Unproductive Housing: Slated to commence January 1, 2022, a consultation paper on this proposal was distributed in September to solicit feedback on a national tax on foreign-owned residential real estate considered underused – and on vacant land, particularly in large urban areas. According to the federal budget, the aim is that non-resident owners who “use Canada as a place to passively store their wealth in housing, pay their fair share.”3
- Increasing Canada Revenue Agency Resources (By Up to $1 Billion): Against the backdrop of a Liberal promise to increase CRA resources to address aggressive tax planning and avoidance, your clients and their tax advisors may be required to self-report transactions deemed aggressive within a specified time for CRA review – potentially incurring penalties for non-compliance.4
NDP Proposals Aimed at the Affluent: Will the Liberals Sign On?
Should the New Democratic Party (NDP) influence policy decisions by working with the Liberal minority government to pass legislation and budgets – as they’ve done in the past – there are a few NDP election campaign promises to be aware of, such as a proposal to increase the capital gains inclusion rate from 50% to 75%. Although the Liberal government has never specifically identified a formal review or possible change to this rate, an increased rate remains a possibility, given the sizable post-pandemic deficits confronting the federal government.
Two other NDP proposals are noteworthy, though perhaps less likely to be implemented, for various reasons. A 1% wealth tax for those with wealth over $10 million, would be subject to the complexities of reporting and ascribing value to certain aspects of wealth. The NDP also proposed to increase the top federal marginal personal tax rate by 2%, however it is worth noting that the Liberal government previously raised it from 29% to 33% five years ago.
Finally, the NDP also put forth a proposal to increase the federal corporate income tax rate by 3% to 18%, though they asserted they would maintain the small business deduction at its current rate.
! Pro Tips
Tax Loss Harvesting: At this time of year, we recommend a review of clients’ non-registered portfolios to consider disposing of securities with accrued losses to offset capital gains. Should this strategy make investment sense for your clients, proceeds can then be reinvested in another security, with a high correlation to what you’ve “harvested,” to maintain market exposure. NOTE: The last day for Canadian and U.S. tax loss selling is December 29, 2021.
Canadians with U.S. Interests: Though Canadians are entitled to a unified credit to reduce exposure, those with as little as US$60,000 (real estate or investments directly held in a non-registered or registered account) can be affected by U.S. estate tax laws, which are currently in flux. NOTE: Canadian-based mutual funds or ETFs provide U.S. exposure – without U.S. estate tax concerns
Brush Up on Proposed Corporate Tax Measures with This Checklist
For your entrepreneurial clients, several notable proposed measures came out of the Liberal election platform that may prove beneficial to keep on the radar, including:
- Canada Recovery Hiring Program (CRHP): Extend subsidy from November 2021 to May 2022.
- Tourism and Hospitality Industry Relief: Extend wage and rent support to May 2022.
- Canadian-Controlled Private Companies (CCPC): Allow CCPCs to expense up to $1.5 million of growth-enhancing investments (e.g., software, patents, machinery) up front, versus ongoing deductions as depreciation charges.
- Scientific Research and Experimental Development (SR&ED): Reform to reduce administration and better promote innovation, productivity, and new jobs.
- Healthcare Professionals: Establish a one-time income tax deduction (up to $15,000) in the first 3 years to help get a practice up and running.
- Next-Gen Transfer of Family Businesses: Private Members’ Bill (C-208) – intended to equalize the intergenerational transfer of a business with a more favourable tax treatment accorded to arm’s length sales – received royal assent this summer. It addresses some of the anti-avoidance rules in the tax law that could potentially treat what would otherwise be a capital gain on the sale of a business as a dividend. Stay tuned as this law may be amended in the coming months.
Advisors can also add value by making clients aware of the array of tax planning and wealth preservation strategies that prove invaluable every year.
Back to Basics: Wealth Preservation for HNW and UHNW Families
In addition to the plethora of possible tax law changes to look out for in the new year, Advisors can also add value by making clients aware of the array of tax planning and wealth preservation strategies that prove invaluable every year.
For example, consider all family members – not only spouses – when contemplating income splitting. Tax specialists often factor in the marginal tax rates of the next generation(s), to potentially lessen the family’s overall tax burden. One common strategy is a prescribed rate loan of 1% from a higher to lower-income earner – often facilitated with a family trust, which can be beneficial from a control and protection perspective, particularly as it pertains to very young children. Note: at the end of the 2021 tax year, it’s expected there will be expanded family trust reporting to increase the requisite transparency.
Ask your clients if their wills, powers of attorney and beneficiary designations are current. Changes within a family – births, deaths, marriages – as well as evolving tax, trust and estate laws also increase the importance of ensuring that all aspects of the estate planning process are up-to-date and tax efficient.
Whether it’s by direct donations or private foundations, high-net-worth families can elect to support important causes, and reduce their tax bill, through charitable giving. It’s worth mentioning that disbursement quotas (to maintain charitable status) may soon be increasing – of potential impact to private foundations.
When it comes to tax and estate planning, it is important to consider possible insurance strategies, such as segregated (seg) funds, for a portion of your clients’ non-registered assets. When the time comes, the fund’s guaranteed death benefit will pay out a lump sum, similar to a life insurance policy. Introducing seg funds to bypass probate is another way to demonstrate your value-add and help to foster a next-gen relationship.
With change in the air, it’s more critical than ever for Advisors to remain well informed about tax challenges and opportunities. In fact, we expect a throne speech in short order, and possibly an economic update that could trigger tax measures by year end. Certainly, as we move into 2022, and look to the next federal budget, we could see many of these proposals introduced as new tax measures.
As with all tax-related investment decisions your clients should consult with a professional tax advisor for specific advice and direction as to which unique strategies make sense for them.
To discuss investment solutions that offer greater tax efficiency, contact your BMO Global Asset Management Regional Sales Representative, and access the resources below.
BMO Private Wealth Disclosure:
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
BMO Private Wealth is a brand name for a business group consisting of Bank of Montreal and certain of its affiliates in providing private wealth management products and services. Not all products and services are offered by all legal entities within BMO Private Wealth. Banking services are offered through Bank of Montreal. Investment management, wealth planning, tax planning, philanthropy planning services are offered through BMO Nesbitt Burns Inc. and BMO Private Investment Counsel Inc. If you are already a client of BMO Nesbitt Burns Inc., please contact your Investment Advisor for more information. Estate, trust, and custodial services are offered through BMO Trust Company. BMO Private Wealth legal entities do not offer tax advice.
BMO Trust Company and BMO Bank of Montreal are Members of CDIC.
® Registered trademark of Bank of Montreal, used under license.
All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Private Wealth.
BMO Global Asset Management Disclosures:
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. Any statement that necessarily depends on future events may be a forward-looking statement. Past performance is no guarantee of future results. Investments should be evaluated according to the individual’s investment objectives. Professional advice should be obtained with respect to any circumstance.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., and BMO Asset Management Corp.
®/TM Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
* As compared to an investment that generates an equivalent amount of interest income.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.