Episode Transcript
[00:00:00] Speaker A: You were listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your host Richard Canhield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
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[00:00:40] Speaker B: Just when we thought the government could get any dumber, they go and do this and totally redeem themselves.
So let's dive in, guys. We're going to talk about one of the elements of the, the budget that involves additional taxation. Shocker. So with that, why don't we get into it? Who wants to dive in and sort of give us an overview of this impending change?
[00:01:10] Speaker A: Well, I think we should be clear with the listeners is that what we're referencing is the 2024 canadian federal government budget. And so for our american friends, feel free to laugh repeatedly as you listen to the absolute squeeze and pain that canadian consumers and business owners are going to have to go through.
And I think it will be very telling and interesting for you to have some insight into how the canadian tax system works to some degree. And of course, joined with our resident tax expert here, Henry Wong. We're going to have some fun unpacking, I think.
[00:01:44] Speaker B: Henry, there's a lot. Wong with this, a lot wrong here.
[00:01:50] Speaker A: It's kind of like going into like, uh, you know, at the fair, they have the, the horror, you know, the scary fun house or whatever with all the, you know, around every corner there's something that makes you freak out and that, that. I think that's what a good way to look at or describe this federal budget is like.
[00:02:06] Speaker C: Yeah, I mean, the part that I just want to add is in this proposed budget, there's a flurry of changes and things that have been proposed and it isn't conclusive yet. Uh, the conclusion of it is going to come out on June 25, 2024, which is at the time of this recording, probably about two months from now. And the one we're going to really, I suggest us talk about is more specifically around building your warehouse of wealth and also just the consequences of giving clarification of this proposal so that our listeners have the ability to understand the main change that has happened and also the impact around your own wealth as it relates to that.
[00:02:49] Speaker B: Yeah, sounds great. And maybe we should lead in with, because theres obviously been just a lot of extremely high emotional sensitivity around this particular increase to capital gains inclusion rates. And I think we just bring just some cooler heads prevail. Lets just take a look at it and see what it actually represents. I think that'll be really valued by our listeners so that they can sort through all of the noise and really understand a, does this impact me? And b, if it does, to what degree? And is there anything that I can do proactively, retroactively to address it? So as you look ahead at whatever your future financial objectives are and where you are actually building that warehouse of wealth, so where that that wealth actually resides, just really, truly understanding that, it sort of reminded me of what Nelson often said, the late R. Nelson Nash, who wrote the book titled becoming your own banker. And he often said that wherever wealth resides, somebody will try to steal it. And this, I think, is another sharp example of that. But itll be really helpful to go into it. So Henry, from your vantage point, can you sort of give us a bit of a construct of the before the proposed change and now what that looks like with the proposed change, should everything go through and be fully implemented, what that would look like?
[00:04:29] Speaker C: Yeah, I first have prepared something just as a really quick summary. It's not, again meant for us in terms of our discussion today to dive into each of the nitty gritty mechanics of what their proposed flush through will look like. But it's really just to talk about directionally the implications and what those implications are as it relates to it at a very high level. So what I'm going to, I'm just going to share my screen or, sorry, before I share my screen, what I just wanted to share is how capital gains were taxed, or are those to change where if you were to earn any amount of income above the adjusted cost basis. So using really simple examples, you have $100,000 and the cost, or, sorry, the value of the asset that you've sold or liquidated now is $500,000. Then the gain or the difference is $400,000. That gain, 50% is excluded or in this case included for tax purposes, and then that would be included on your income to then get taxed at your current marginal tax bracket. So there was a percent exclusion or 50% inclusion, depending on how you look at it.
[00:05:43] Speaker A: In other words, 50% of it, you get tax free. 50%, you're going to get hammered on.
[00:05:48] Speaker C: Exactly.
So now the change is, there's a little bit of a tiered structure on the personal side there's actually a difference between how things have. What has happened on the personal side and then what has happened on the corporate side. Okay. The personal side, there is essentially a ceiling where on up to 250,000 still holds the same 50% exclusion rule with the marginal tax rate. So 125 would get included in your income if the difference of what you sold for the price and the cost becomes that would be included in your income. So up until 250, that's pretty much what the calculation would be. Anything in excess of the 250 is where this new provision of a change, where the inclusion is not 50% anymore, it's 67%. And then that's what kind of goes into your new income. Again, not going to go through the mechanics of the calculation, but I wanted to show just a rough schedule for everyone to see what that difference or that change, how that impacts people. Just so again, just a rough one. And again, I'm using Ontario as the example because I'm located in Ontario. And we'll dive into also talking about who the implications of this budget change and who the ones were impacted most. But before we dive into that, just to kind of set that stage here. So just as a very quick walkthrough, what everyone will see is on the side over here is the gain amount. So just any schedule just to look at that, the second thing you will see is there's a blended rate and existing rate. So this is kind of what the general tax rate, if everything still remained at the 50% inclusion, what that would look like. And then here's that new blended rate, assuming a very particular marginal tax bracket. And you'll see where all of that starts kind of showing a difference in what that blended tax rate is. So again, it's oversimplified. The way that it should be looked at is 250 goes considered as taxed at the 50% inclusion with the marginal tax rate, then anything above that is including the 67% inclusion, which then makes a blended rate. It doesn't look that bad, but yeah.
[00:08:05] Speaker B: Well, and this is where a lot of the emotional sensitivity, I think, has come into play, because people, all that people initially looked at, at least from all of the social media frenzy and YouTube videos that are coming out, is people looked at 50% to 67 without maybe even having clarity on exactly what you're describing. So this is going to be very helpful for viewers and listeners to really maybe even go back and rewind and just listen to it again so that you really understand whats actually happening. Jeff?
[00:08:37] Speaker C: Yeah. And just to jump on that on some of the things I was seeing on social media, people were thinking it was 67% tax now, which as an example, $100,000. Our american friends would hear $100,000 like, oh, congratulations Canada, now youve got 67%. I mean, not to say our taxes are not high, im just saying theres still a little bit of, uh, the correct calculation that needs to be unpacked to look at. So the purpose of need really showing this illustration is to show what that difference on that impact is. Again, this is just applied personally just for a frame of reference point.
[00:09:12] Speaker A: Yeah, I love that, Henry. Just like this last column that you're showing is literally the difference, the old tax versus the new tax. And in your example of 400,000, the additional tax payable, uh, in the new, in the new tax system, assuming it goes through, is $13,383. So still it's, I mean, that 13, almost 14 grand is certainly nothing that you want to be seeing disappear out of your family's life. But it's not, you know, it could be a lot worse, as I think, of what it boils down to.
[00:09:44] Speaker C: Yeah, it's not as bad as it sounds off a headline standpoint, however, it is still bad from an absolute dollar standpoint, in my opinion, in terms of what the impact is. And mainly the reason why I say it's bad, in my opinion, is because we don't really have, I didn't have control over making this designation whether I got to accept it or not.
[00:10:08] Speaker B: Right.
[00:10:09] Speaker C: That's the part that I wanted to highlight.
[00:10:11] Speaker B: Yeah, thank you for highlighting that. Because listening to and hearing all of the social media frenzy, as I mentioned earlier, people are actually discussing leaving the country, taking their capital with them, focusing all of their investment resources to the United States versus Canada. And so when theres an absence of clarity, so when people feel anger, they feel that sense of anger when they're either not getting what they want. Right. If you've ever felt angry or you're just really feeling an absence of clarity, like you don't really understand what's happening, so you don't know what to do. And when emotional sensitivity kicks in, it's easy to begin pulling the levers of, I'm going to leave the country, I'm going to take all my investment capital with me, I'm not going to invest here any longer. So you would think that there would be some more communication and clarifying and helping people understand.
Now, we know that getting that from government, we have a better chance of getting hit by lightning. But this is why we do what we do. And this is why we get together and educate the general public, because, Henry, you know that a person's money has to reside somewhere. And what were really talking about here is primarily the real estate investor community where theyre dealing with equity.
Hey, look, ive got equity, but its not really realized until a transaction happens. I either borrow against it, I sell the property. If I sell the property and trigger a capital gain, how is that capital gain going to be treated exactly the way that you just walked us through? Well, if I'm thinking about accumulating wealth and I understand that my wealth, my money has to reside somewhere, well, then I think what we want to introduce is that your equity should reside somewhere, too.
Would you agree with that?
[00:12:25] Speaker A: And you might not want to have it stored in a place where the rules of how it's taxed can change very, very easily.
[00:12:32] Speaker B: Exactly.
[00:12:33] Speaker A: And one thing I'm looking forward to discussing here is what are some of the ramifications and the impact of this? And again, who are we targeting? So a capital gain is going to happen when you sell, but sometimes you don't control the reasons why you have to sell. You could get sick, someone might die, and then it's considered sold on that day. So the people that are going to be really impacted by this is boomers, I think, I mean, many people, but boomers, theyre at an age where theyre starting to disappear.
And as that happens, theres a natural transition. And real estate that is owned and maybe has been owned for a really long time is going to be sold. And now its going to be sold in an environment outside of their control. So this is an attack on a lot of people. But I really think its fundamentally its an attack on boomers. Ive known a lot of people who, especially in the Ontario market, they come and reach out to us. And, you know, their grandparents now they're in their, you know, they're in their sixties or even in their seventies. Maybe they bought a fourplex or a three plex or they got a couple suited houses and they bought them a long, long time ago. I mean, maybe they've had them for 30 years. And so they, they might have paid 300,000, 200,000, 400,000 for them, and now they're worth like 2 million, 3 million.
That gain is drastic. They are going to get hammered by this. And the amount of legacy that's going to pass on to the next generation that needs it in an overinflated monetary system won't receive as much.
This legacy that they've been building and planning for outside of their control is going to get stripped away because of these new rules.
[00:14:12] Speaker D: Become your own banker and take back control over your financial life. Hey, is this even possible? You may be asking, can I even do this? Well, you better believe it. In fact, it's easy to get going. So easy that we've put together a free report. Seven simple steps to becoming your own banker. Download it right now. Go to Sevensteps ca. That's seven steps ca. Now let's get back to the episode.
[00:14:42] Speaker C: Yeah, no, I was just going to say I definitely agree with both of what you're saying, and we're just really trying to. One thing is show that it's really important that this, something like this that was introduced, you didn't really have any control over. The best way to get into that is control what you can and what you're able to. And then the other part is also adding getting educated and being surrounded with the right people, right team, so that you can actually not go into frenzy, scrambling, but work with people like ourselves to know how to navigate these new waters. Because some of the things we'll dive into a little bit more further is talking about how to tactfully respond to something like this. And it's just about positioning yourself in the right place so that it's not your capital and your wealth isn't shooting ducks for the government to take.
[00:15:47] Speaker B: Yeah, this is just another sharp example of government hovering over assets with a giant knife and fork, just waiting to devour them and figuring out using the boiling frog syndrome of how to do that. And Nelson would, again, I credit Nelson for just helping us all to rethink our thinking, he would say, and you just sit there and take it.
And I think there's a bit of an upheaval, understandably so.
But more of what I read about this is all under the guise of making sure that the wealthy pay their fair share. And when you're dealing with somebody who maybe they have their principal residence that's, you know, unencumbered, which is not subjected to what we're describing here yet presently. And then you have the familys worked extremely hard and theyve purchased that cottage on the lake and theyve maybe invested in some properties. Look at all the people who have Airbnbs that are trying to sell right now. And so this list of unintended consequences that just keeps piling up because these government bureaucrats that get so focused on heres how much more we can generate.
And lets just let the public know that its the villains, the wealthy that were after when most Canadians are simply unaware that the wealthy represent more than 50% of the money that ends up in the coffers of the federal government.
Nobody in the federal government would ever say that because they wouldnt even get through half a sentence without being literally vaporized.
[00:17:34] Speaker A: And you always say, Jay, that money is going to go to where it's best treated.
[00:17:38] Speaker B: That's right.
[00:17:41] Speaker A: We have lots of Canadians that are struggling in different ways today. And one thing that those Canadians need is they need jobs. They need a place to go to work, they need an employer.
They're hoping that employer has enough money available to maybe afford a raise. These kinds of things is what they're looking for. Well, if you take the people who are employing everyone, and then you say, we don't actually care about you, we're going to make your life absolutely miserable and take everything that you're working really hard for and all the risk that you're taking on to make sure that you can employ other people, and we're just going to throw a little bomb on it. I mean, that doesn't incentivize people very effectively. And so if people start taking their money and their investments elsewhere, which many people are saying that already, what does that do for the rest of the canadian economy?
It doesn't make it completely illogical that it could add any benefit, that it could help anyone in that scenario.
[00:18:34] Speaker B: Well, it didn't work when it was introduced. We were just having this discussion before we hit the record button, when Prime Minister Mulroney was in office, and this was attempted where I think we reviewed it, we went from 50% to where.
[00:18:53] Speaker A: We are about 67% or whatever, but there wasnt a 250 cap. It was on everything, Preston.
[00:18:58] Speaker B: And then it went up to 75%. And recognizing that we were dealing with much higher interest rates, double digit interest rates, and the economy, the landscape was different. But if it was so effective, then why was it reverted when we, you.
[00:19:19] Speaker A: Know, I was around ten years old when that happened. I remember that on the news and not knowing anything about it, not understanding at ten what that meant. Yeah, but remember, like, that just sounds really. Like, that just fundamentally sounds really weird. Like, that sounds really. And, you know, seeing my parents stress about that change and how ridiculous it was and how, you know, it brought up a lot of frustration and pain in the household. And I just thought, well, like, why are they doing this to people? Like, why are they doing this to families? And so as a kid, my perspective of that change is very different than it is today as an adult. But we are seeing, again, history repeating itself, going through a cycle. And its, well, we have an economic problem mostly because of spending. And now were going to fix that problem by making it so that no one else has anything to spend. It doesnt make any sense.
[00:20:05] Speaker C: Yeah. I mean, if we look at a very big source of economic activity, lets just call, it includes the role of the government and similar to those times. And actually, let me take a step back. When people are building their wealth and looking at their journey, theyre just looking at one side. Just how much can I get in terms of more return on capital? But theres other equations to look at, which is the positioning of your capital and then also whats involved in what can influence the positioning of your capital. So the positioning of where the government is right now, its something definitely not to forget. Back in 2020, the level of spending and the level of debt that was entered into was very high and just common logical sense. Some point those debts that theyve gotten wants to get paid or needs to be serviced and who are they actually going to target or get that? How is it going to get paid back? Its going to get paid back by either creating more debt to pay for that spending or increase their revenue. And just being very honest in how I would say things is if how this policy release came out, they're going to places where they know they can get tax revenue from. And we'll definitely dive into that in a bit.
[00:21:34] Speaker B: Yeah. Well, let's, let's dive into that. That somebody's got to pay the bill and we have short term memory.
You know, Nelson, again, I'm going to trumpet him today. He would say everything begins with the way that we think.
And he said most people can't think past this weekend.
And so when we think back to how governments responded and all the money that flowed into the economy and then the subsequent change in interest rates, each basis point of increase in interest rates was tumultuous to the future debt servicing.
And look at the situation we find ourselves in.
[00:22:38] Speaker A: Yeah. Not just the governments debt servicing, but the economic debt servicing of the population, which creates economic struggle. And we're hearing about it in the news everywhere. And Canada's debt to income ratios, I mean, us has similar issues. I think presently Canadas numbers are faring worse than our southern neighbors, but far worse.
[00:23:01] Speaker B: Yeah, far worse. And so when you take all of that into account and your focus within your immediate family is to provide for your family in all aspects of your life and at each step along that journey, you've got onerous taxation.
How do you address that?
Well, if you're a government, you get the population to turn away from the creator of the problem, the government, and you get the population focused on the villains, because all of the wealthy people who gainfully employ so many Canadians and create so many job opportunities and profit sharing, and they would much rather have money available to expand their companies and gainfully employ more people. Boy, do they ever need to be disciplined, because God forbid, they try to take advantage of every method available legally to mitigate their taxable situation so that they can grow their business and employ more people as a result.
But I haven't met anyone in government yet who knows anything about business other than how to spell the word.
[00:24:29] Speaker A: Probably some of them get that wrong, too.
[00:24:33] Speaker C: So they villainize the wealthy to present their proposal. And I don't think people even realize that even though they're saying they're targeting the wealthy, the ones who are gainfully employing, if money wasn't sent to the government in that way, they're kind of stepping in that role to, let's call it, try to reallocate the wealth. But if you've already impacted the business owners, which we'll talk about again, who they're who, in my opinion, the structure of this proposal has targeted. Yeah, that's less money for the business owner. And then how is that going to translate in the business owner's ability to pay you or invest in further production or anything as it relates to growing their business? And so it's not just.
It may not directly impact, let's call it the middle class or the lower income earners.
It does impact them just very indirectly that you don't see.
[00:25:36] Speaker B: That's precisely correct. And the conversation that occurs on, you know, between the four parliamentary walls, regardless of what jurisdiction in between four parliamentary walls, the conversation is the business owner is trying to avoid the payment of tax. The sentence is never completed.
The business owner is trying to avoid the payment of tax so they can gainfully employ more people, grow their business, buy more business equipment, expand the economy.
Because the problem is the business owner, not the fact that you're trying to tax them into oblivion. No, no. Heaven forbid, if we address the real root cause of the issue, Trey, hide.
[00:26:26] Speaker C: The fact that you overspent money.
[00:26:27] Speaker B: Right. And just look at the massive growth in the public sector versus the private sector over the last five years. And I rest my case.
Just examine it for yourself. Don't take my word for it. Just go and examine it for yourself. Because one curve is going this way, the other one has gone that way.
[00:26:49] Speaker A: Robert there will be one type of business that probably will excel in this environment, and that'll be the accounting firms, because we're going to need to pay them for more advice and more strategy. And, I mean, reality is they're going to have to work really hard, though, to help navigate all their, all their clients through this turmoil. I think its really important, too, that we identified how does these changes, and were going to get more into the business owner situation. But how do these changes impact the rest of the population? How does it impact the economy? I mean, we can just spitball those ideas. But I have a number of ideas, and I think back again, 1988 to 1990 when these changes happened. Well, one of the things that they wanted to do is housing has always been an issue needed more housing, more affordable housing, more of this, more of that. Well, if the market, if everyones holding onto things and theyre not selling anything, it doesnt allow for the market, that money to be reinvested in anything else.
And what you end up creating is a different environment. Everything, its just stuck. People are holding on, waiting for the rule to change before they sell. And so youre going to have a combination of people who are going to try to sell now before the rule comes into effect.
And then youre going to have a bunch of people who, after that, theyre just going to say, you know what? Im going to do everything I can, my power to avoid from selling anything, and Im just going to wait it out. And hopefully I wont need the money. And Im not going to get pushed or pressured into an environment where I have to sell. And Im just going to do my best to wait it out. And maybe there will be an opportunity a few years from now where ill be able to sell then. And then I can not have to worry about this stupid problem. Even though its going to impact all my plans and its going to change. Im going to have to hold on and hoard these properties, these investments, these other things that I have so I can avoid triggering this aggressive tax system that's going to tear down everything I've spent my life building for.
And it's going to directly impact my retirement. If it directly impacts my retirement, it's going to make me more dependent on the government for their money, which isn't even theirs because it all came from me anyway.
[00:28:49] Speaker B: This is one sharp example among many as to why it would be so beneficial to understand not only that your money must reside somewhere, but if that money can reside inside of an entity that is shielded from this type of nonsense. How much of your capital do you not want residing there and to share a different track? Henry, so this is why. This was one of the reasons why I decided to share and sort of let people know that I have been doing dividend reinvestment planning the last 25, soon to be 26 years. In June of this year it would be 26 years. Well, why have I done that and not sold any of the stock?
Because when stuff like this happens or when theres volatility in the markets, I dont feel pressured to sell any of the stock because the dividends just keep coming.
And people may not even be aware.
Like when you invest in canadian publicly traded companies that pay dividends, when it comes time to switching that dividend election from purchasing more shares to receiving those dividends as income, both you and your spouse can structure yourself in such a way where you can receive up to somewhere in the neighborhood of $55,000 each a year in dividends and not pay any income on tax on it.
Isn't that good?
[00:30:27] Speaker C: Well, especially on this type of policy change.
What was more favorable for people to try to get, which was capital gains. Yeah, they've essentially favored now dividends. And what we do on a daily basis specialize in the placement of properly designed whole life insurance policies. And this is where were going to talk about building that warehouse of wealth and getting it out of those locations that they have on their targets.
[00:30:58] Speaker B: Well, take us down that path. Where would you like to go?
[00:31:02] Speaker C: Yeah, I think first is getting some good context on the policy behavior decisions that were made in the past. So capital gains were introduced in 1972 at 50%. So 1972 is when they first introduced a new way of taxing Canadians. And then in 1988 is when they made it 67%. So this is not the first time that they've done it. What's important, whether they do it or not, is in 1990 is when they raised it to 75%. And then just to give you another bit of the track record, down to 2000, 2001 is when they cut it back down to 50%. So it took about 1011 years for it to come back down. So this is just some context. Not by the quantity of years is important. It's actually, if you look into the, I'll call the fundamentals of, or the patterns or behaviors of the government and where they were in their economic situation, that's when you can probably draw some good conclusions around for yourself. Preparation and planning.
The second part is, as it relates to this proposal, they were, in my opinion, looking for ways to start covering for actually not even paying for debts or expenses, but actually more of their spending. So they were looking for a base to look for that spending. And the ones who got hit really hard, very specifically, and now, not from a situational standpoint yet, we'll just talk about specifically. They were looking at people like incorporated professionals, who, instead of initially were taking income personally, they were in a position to tax plan to incorporate themselves, to be able to take advantage of that. Let's call small business deduction to have lower business taxes. And what that ended up doing is a lot of the retained profits or earnings were put somewhere. And a lot of people before, let's say, getting introduced to the concept of becoming your own banker, as an example, would put them into investment accounts. And again, within that 2017, just starting using 2017 as reference, that's when they introduced the 50% passive income tax rate, they started introducing the grind down against the small business deduction. So these were examples where people were just trying to park their money, and they started to go after that, too.
So, as part of that rest of that plant, what I would just share is now, it heavily impacted someone who was incorporated professionally for tax or income managing purposes, to defer their capital or build retained earnings, in short. So that's just something to recognize. The second group that really got impacted by this is people who, like real estate investors, may have followed a wave where they were building their real estate portfolio, especially when credit was a lot cheaper to get in that period of time, they started to incorporate assets. So the government decided to, in my opinion, slap on this. That's why this kind of tax hit so many people. Because the next pool of wealth people think of maybe traditional government plans like RRSPs or TFSAs. But this one was, let's just call it corporate wealth. That was over there in the form of a legal structure that initially allowed for deferral, like an RRSP, but now they've put it, they've targeted there. So it's become a lot less of an attractive tool to incorporate real estate. Mainly also because realist corporations, as it relates to capital gains, doesn't have that 250,000 tier mark that personals get to enjoy. They only have the full flat of 67%. And that actually will grind against things like small business deductions, and don't want to go through the whole complexity of the corporate side of things, but things get triggered a lot faster and you're going to lose. You could potentially threaten your small business deductions and a whole bunch of other things. So those are the two places. People who had assets in a corporation and the people who were accumulating income, trying to plan their annual tax, and then building that reserve of retained earnings that fell into that target there.
[00:35:20] Speaker B: Very interesting. Yeah, that is going to be really enlightening to people with corporations.
[00:35:27] Speaker A: Clay, the grind down to the small business tax deduction, I think is like the silent killer that's in there a little bit, because it's not like directly necessarily stated. You have to have the accounting professional kind of interpret how these changes are going to impact things. And I think our listeners really, really need to recognize what you just stated. It has such a tremendous impact. And just, just thinking about, okay, low interest rate environment leads to buying Frenzy and increased real estate prices in several hot markets and became overinflated globally. Markets as far as real estate is considered in the world. The Toronto marketplace, the Vancouver marketplace, you see a spike in asset values of these types of things.
The introduction of things like crypto over the last ten years, and the expansion of those things, all of which are capital gain oriented things, unless you're like a day trader type situation. So there's a lot of asset classes that are going to see the impact of this type of calculation interfering with Joe average canadian. Joe Average citizen, not Mister wealthy, wears a monocle and a top hat type citizen.
It's going to happen. This is going to really affect everyday canadians.
[00:36:46] Speaker C: Or the scapegoat that they like to use is loblaws.
The main thing that I want to speak to in terms of the audience who's listening is really the ones who had the ability to incorporate as a professional and put money in there. This includes people like engineers, accountants, actually, let's say life insurance advisors, real estate investors, physicians. So these are examples of just those type of occupation professions that fell straight into this limelight for the target, for them to introduce this policy, to tap into some more money from those types of occupations. Now, the other part to highlight is just on a relative context. Sorry, just on specific comment here is when people who are starting their business, or in this type of like a physician who's incorporating themselves for tax planning reasons, for fair tax planning reasons, to run their own clinic and shop, and how they run their business, as an example, well, they don't enjoy the same benefits that an employee does. They are taking on risk to start their own clinic. And they're not getting things like health insurance, or things like other ways to help plan for themselves.
But they don't get the workplace insurance, extended health. But now they're getting. They were starting in the past five years. They've also then from them taking on the risk, it ends up taking on being punished. With the government introducing rules like tax on split income in 2017, the passive income grind as it relates to small business deductions. So this professional group, or this, as we call it, the wealthy, apparently is the ones getting really hammered because of some things like this capital gains rate, because they're accumulating all of their capital, their retained earnings, for really to build their own retirement fund also.
[00:38:51] Speaker B: That's right.
[00:38:52] Speaker C: And the corporation was used as another vehicle for them to build up that capital. So one thing is maybe most people will put it into RRSP, which is another government designed warehouse. I'll say. And then they initially didn't have the territory as it relates to the legal structure of their corporations. Well, now the government has step their foot into that too. So just wanted to highlight that.
[00:39:16] Speaker B: And you know what's interesting? I'll say there's plenty interesting. We could talk about this for five days. But thank goodness there is a solution to the problem, at least to the degree that while a person could approach this two ways. So if you, if you have surplus capital inside of a corporation and it needs to reside somewhere, and the objective is to either utilize some of that while you're still working within your profession, and then have accumulated enough where you've created, where your retirement income is assured, in the sense that, okay, I've piled up enough, my retirement income is in place, I'm good to go. Well, there's a variety of different ways that you could do that. And one of those ways that any of our viewers and listeners are acutely aware of is through the use of dividend paying whole life insurance contracts that presently are exempt from the passive investment income tax rules that allow for the daily accumulation of cash value without triggering a taxable event that allow you to chunk dividends back in to purchase fully paid up additions of death benefit that must accumulate their equivalent in cash value, where no taxable event is triggered to receive death benefit proceeds to the corporation, where dependent upon when death occurs and at what stage of maturity the insurance contract is in, either very minimal or no taxable event triggered the capital dividend account, which is a notional account, death of a shareholder gives rise to that capital dividend account in most cases where tax free capital dividends can be paid to surviving shareholders. So you start to check the box on all of these attributes, and you also examine the fact that youre not trapping your money in a vice where if you have money inside of a registered account and you need to get access to it, so you need to turn an account value into money. Because when you receive your registered retirement account savings statement, that's not money, that's an account value.
So if you want to convert some or all of that account value back into money, you are triggering an unavoidable taxable event. Withholding tax is not based on income.
That's why they refer to it as withholding.
We don't care what your income is, we're withholding tax. And so whereas inside of the policy, even at the corporate level, the corporation can exercise the same policy loan provision that an individual can, the corporation can lend capital to shareholders. The corporation can issue dividends which are taxable to shareholders, but the corporation can use the life insurance company money to do that, not the corporate surplus.
So knowing that to be true and knowing that from that place you can go do other things, the corporation can invest in people, equipment, buildings, resources.
And you know that you've put this big shield, this giant moat around your surplus.
How much of the surplus do you want residing outside of the moat?
It's really purely logical because it's the greatest exemption that exists in our canadian tax code and in the US tax code, there's no greater exemption.
So why not capitalize on that exemption while you still can?
What would the disadvantages be of capitalizing on that exemption?
Take all the time you need to list them.
[00:43:22] Speaker C: If we were at a place we bring in capital doesn't matter if you're a business owner incorporated individual, you have your choices to where you want to store it. Storage, warehouse storage in the bank's vaults, the government's vaults. A legal environment vault like a corporation or this in terms of being properly structured so it can be utilized not just, even just also for within the business, for investing in equipment. And the most powerful thing that people don't realize is the growth of the cash value is still happening. While you've used capital to acquire equipment, inventory and pay for things like you.
[00:44:01] Speaker B: Just mentioned earlier, Jason, so nicely correct.
[00:44:04] Speaker A: You know, something that comes up for me thinking about where the, where wealth is residing for a lot of people, like say in real estate or in certain other asset classes, many of which are not normally utilized to borrow against, theyre not generally pledged or, or welcome forms of collateral like a stock portfolio. Sure, you can get a margin account, but not a lot of lenders want to lend money against a volatile market. You know, it's hard to borrow against a lot of like cryptocurrency, things of this nature. Real estate is the most common place that people will go to borrow against stuff. But in an environment where people aren't being incentivized to sell, they're actually being de incentivized. They're being incentivized to hold things and not put them back on the market, the need of capital is still going to exist. And so the things like private lending or taking security on those types of, you know, other types of asset classes is going to become probably a higher demand area. Given these new rules, I could see that being. And so theres someone who has readily available access to capital and understands how to take security. There might be some possible opportunities there. So its good to look at where are all the problems with this budget, but also its nice to. Okay, so where might some of the opportunities lie for sure.
[00:45:18] Speaker B: And again, Nelson said, interest rates rise, interest rates fall, and all include taxing capital gain, inclusion rates rise, capital gain, inclusion rates fall. But the process of banking goes on.
[00:45:30] Speaker A: No matter what, and the need for it. And so the need for the banking function and the transactional aspect to those who have capital, banks or bankers that have money saved and stored and know how that process works, to be able to put that into motion, because, you know, money needs to be in motion. And if it's locked up in, you know, real estate or some other thing that we, you would purposely don't want to sell even though you need it and you need access to it, well, you need to go to someone that has that money. So the people that are in that position, these rules are essentially going to make bankers or the banking system more wealthy. It's turning the wheels of the banking system even further and it's actually going to expediate them to some degree because of the tax rules. So that might be looked at as an unintended consequence to some degree.
[00:46:17] Speaker B: Yeah, interesting point.
[00:46:19] Speaker C: And it's just about we don't have control on what they do. We can set go down with our pitchforks to Parliament Hill or decide to reevaluate the situation, get put to put, put yourself in a good position with great team members who can be a huge addition to your wealth building journey and evaluate what can I do next especially, and what options you have increase so much more when it's residing in a place in which you have much more control over instead of someone else.
[00:46:55] Speaker B: 1000%.
Anything else, guys, that we want to add? I think this was a pretty good overview. Henry, was there anything else that you wanted to cover?
[00:47:05] Speaker C: I would just say, again, based on what was issued in terms of this budget, conclusively will come out June 25, 2024. And so that leaves a very narrow margin of time to do something. And I would just say, from a strategic standpoint, I would say they were expect. They're expecting some people to make rash decisions, to jump off a cliff and realize real capital gains as early as they can to not overpay the taxes, which is why I showed that type of schedule for people to make their informed decisions. The other part is, so really get yourself surrounded with the right team of professionals for yourself and make those type of decisions. Because especially on capital gains, the nature of what you have to sell, it's not something like you can sell in a week, and it happens right away. It takes time, and two months of time is very narrow, and you don't want to compromise or put yourself in a negative situation and just think about these types of things can change. We don't know whether or not it can change, like taking ten plus years for it to resort back to 50%. So these are just some additional information for the listeners just to grab into context. Now you have some important data. Now apply it to your situation. Work with the right team so that you can make the most tactical move logically instead of emotionally for your own decisions.
[00:48:31] Speaker B: That's the key, logically versus emotionally, because one track, you'll end up regretting the decision. The other track, you'll thank yourself for it.
[00:48:41] Speaker A: I would further encourage our listeners to consider, given these changes, look at and assess and think through what might some of the possible outcomes be, not just for your own situation, but aggregately, in the economy, in your province, in your community? Uh, if you own a business, well, how that might affect your business, how it might affect your employees, what are the people? What are the people that are going to be, you know, parents, grandparents, how is it going to affect them? Consider how this ripple effect might think about how money is going to move throughout the economic machine.
Where is it going to be stalled? Where is it going to be greased?
Are there going to be places where that happens? And if you take some time to consider that, you will find both opportunities. But also youll recognize a little bit more about how that might have an overall aggregate effect. Those things economic changes like this dont have. There are certain things that are short term and immediate impact, but many of them are much more long term impact, and we wont really see or feel the impact of those changes for probably another five or six years as they move their way through the economy with the lack of things being sold, the lack of movement of money. So consider the length of time that a change like this could actually impact the societal environment as far as how the economy and the country is going to move.
[00:50:01] Speaker B: On that note, that's great advice and thank you to all of our viewers and listeners. And much like we always do, we always display the next video and sequence that we think would be really helpful for you to continue your journey of learning. But one thing you can expect, because this was actually a lot of fun. So as, as more changes come, which there will be more, you can expect that, well hop on and, and work to bring clarity and a deeper degree of understanding so that we can, we can help maybe cool the emotional sensitivity, set that aside and say, let's just focus on what's really happening so that we can develop a plan on what to do that's logical, that, that is based on logic and rationale versus, you know, just emotional sensitivity, which, it's okay to go through that phase, but you don't want to make any rash decisions while you're in that phase. And I think people are really riled up right now, which should send a clear message to government that people are beyond sick and tired of just this never ending barrage of reaching into their pocketbooks for more. Like, enough is enough already. And guys, this was fun.
[00:51:20] Speaker A: Thanks for listening to the wealth without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies and the mindsets that maximize your wealth.
