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.
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