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.
Are you asking the right questions when it comes to your taxes on an annual basis? I don't know. We're going to discuss that a little bit. And the purpose of our conversation today is to really get clear on helping us understand that developing a tax strategy is very different than having your taxes prepared. Often when we're thinking about, and not that we want to spend a lot of time thinking about our taxes, there are, there's a period of time when we need to make sure that we file them and that filing the process, getting the documents together, the receipt box, the shoebox full of receipts, all the things that are necessary so that, that preparation, which we need a qualified professional to do, preferably qualified professional to do, that's one part of the process. But that part of the process is very much a look back at what happened in the past versus a strategic platform of discovering what we might do, might change, might implement differently on a go forward basis. That's where strategy comes in, and there's a big distinction between those two things. So I'm joined with Henry Wong today. We were having a little bit of a discussion before we hit the live button on this. And Henry, I think it's so important what you're identifying, because as someone who's been around this CPA world for the better part of your life, I've learned so much from you. And I love our conversations. I love that we get to share them, of course, with our audience. Now, how would you really clarify and identify the distinction between developing a tax strategy and I want to remove the word plan, but we're thinking about, like really thinking in a strategic basis about what were going to do today and going forward versus, oh, my God, we need to file our taxes. Whats preparation like? Because in Canada, and I would imagine its much the same in the United States, many professionals who are in the accounting space, and theyre all wonderful, great people. We appreciate accountants, love working with accountants, by the way, but a lot of them are in a position where theyre so busy generating revenue the way that they need to, which is in preparation, they get paid for filing and preparing taxes. They don't often have the time, even, that they might want to, to spend on working on the strategic aspect with their clients. So how do you see that showing up in the world that we live in today?
[00:02:32] Speaker B: The main thing that I would just wanted to share is those activities that you've mentioned as it relates to, let's say, culminating all the receipts, or putting it onto a spreadsheet, or putting it into some software, and then all of that. Now centralizing and consolidating into these particular, whether Canada or us, their tax forms and those tax forms are related to this will be filled into this particular box number. This will be filled into this particular box number, and that box number gets translated into a specific I'll call tax policy. And that has a resulting impact to it. So if you have filled in information as it relates to meals and entertainment in the canadian tax code, you're allowed 50% of a deduction for it. So there's a whole menu of options that come out of it. And everything that I'm just sharing is that as it all encompasses together is really tax compliance or tax preparation. And that's really just administration to what has already happened. Now, the process in undergoing that administration is significantly high. I mean, with all of the tax code rules that come out for those individualized line items, whatever you want to name it to be, it's a pretty cumbersome task to essentially consolidate everything together. So that is the administration and the preparation component. Now where the parts that I probably want to spend a lot more time on, the emphasis on, is actually distinguishing the understanding of what you may have, understanding of what the actual duties or responsibilities when you're hiring a professional to work on that particular task, the administration or the preparation. Because there's a distinguished association that by virtue of this person being the expert in understanding this code, you have this natural translation to think that this person will provide you additional insights to help you save information. Sorry, save taxes. Because things could actually qualify for a different component on the tax code. Or maybe things were, could be organize it a little bit differently in a very particular way. And, you know, that couldn't lead to terminology where, oh yeah, I'm helping you tax plan, I'm helping you save taxes, I'm giving you strateg, I'm giving you insights. But all of that is also still maybe focused on the period of current. So at the current moment that you lasted. So there's not that there is a requirement for some regulation or for some standardization of proper definition and usage of terminology. It's really just understanding what is it that this professional is equipped for and what did you hire them for just because they have a designation like a CPA doesn't mean that the service that you're going to get, and based on what you're paying in terms of the professional fees that you're paying, what does the fee actually encompass? Overall is kind of the part that I wanted to have us explore today, especially with current events on what's going.
[00:05:56] Speaker A: On this September 12 is don't spread the wealth day. Get a copy of our new book, don't spread the wealth, how to leverage the family banking system to own all the gold, make all the rules, and enjoy generational riches. This book is jam packed full of incredible bonuses that we've put together, including our 15 page guide to hosting your own family banking meetings. Preorder your copy today using the link down in the description, or visit don'tspread wealth.com. that's don'tspreadwealth. Dot dot. Learn how to keep the money in the family so you can prosper together for generations to come. Having the need of an accountant, myself personally, and I love the ability to know what's going on. And, you know, I know for myself I've been much more proactive, personally taking cause at the end of the day, I'm the taxpayer. I'm the person, whether it's corporately or personally, who's responsible. And I need to have proactiveness and asking good questions. Now, an accounting professional, they're busy and they have an email inbox just like everyone else. And if it's anything like mine, it fills up very quickly. And they may not have an amazing person like, I have a Lynn on my team who helps filter and manage that crazy inbox, and she does an amazing job at it, but they may not have a team member that does it. So that email is filling up and they're getting questions for people who have different financial circumstances, different businesses, different rules that might apply to them. Maybe they're a farm, maybe they're not a farm. Maybe they have kids, maybe they qualify for this, maybe they qualify for that. They're in a different jurisdiction and they're getting bombarded with all that stuff. It becomes very difficult from a transactional email perspective to say, oh, hold on, let me go grab that giant tomb of the tax code off the shelf and flip through and check on Henry's question about this one isolated thing that probably doesn't matter. It might save them dollar ten.
You know, we have to recognize and respect that accountants are busy people. Like everyone else, they, they all want to do, and they're doing their best to do an amazing job. And so we, we do respect and we recognize the value of what they provide. But get clear that if you want more strategy, if you want to find ways to save and mitigate more taxes in an ever changing tax environment, we're going to talk a little bit about, you are the one that needs to take that proactive step and, or you need to engage with a professional who will help you take that proactive step, whether that's a tax professional or whether it's another financial professional who understands the right questions to ask or a coach, someone that can help you think through these things, not to provide you advice, but to help you think through the necessity of your own circumstance and sort of say, oh, well, what if we try this? Is this a good question I should ask my tax professional or my tax preparer? You know, if I'm doing a better job, should I have better records in this category based on my business model so that I might be able to have more savings when I provide that information to my tax preparer? Like, what are the things that you can be doing so that you can put yourself in the best possible light? I hope that maybe adds some clarity for everyone. And now where that's relevant, and I think why we wanted to have this topic of conversation, Henry, is that, you know, at the time of this recording, we, we literally just crossed the official date of the new capital gains tax deadline for anyone selling properties or incurring a capital gain in Canada. And we'll talk a little bit more than a second. And so at the time of our recording, it's the end of June. However, this will be released probably a little bit after that. But we need to really get clear that there's all these additional changes and moving parts in the cogs of the tax machine that's happening right now in Canada. And the complication of those things is enough to make people's heads spin to a large degree. And so as the consumer, as the taxpayer, you're wondering, well, where do I fit in this scenario? How does this going to impact me and your tax professional? Although they receive some updates about everything, they're learning about a lot of it in real time, as you are, and they have to figure out how they are going to adjust and connect and make adjustments for individual clients based on how they serve everyone. Am I on track with what you see taking place, Henry?
[00:10:09] Speaker B: Yeah, I mean, the parts that now, because of the complexity of the tax code and just the myriad of the situation and how it weaves into your life, just the relationship of all of that coming together. Usually the preparers are very, very knowledgeable on the specificity of specific code rules. If you ask me, as an example, what's the current standby charge rate for professional sales professionals who want to take advantage of that specific. What's deductible as an expense? I would have no clue. I don't know the specificity of the code to that level of detail. So you can probably, in a way of looking at it, grade certain technicians on their ability to see the specificity of those objective mechanic rules. I would not know every single one inside and out. Then you can look at certain layers from now you have income inclusions and deductions, and looking at it from that scope of view, then you can look at things from a structural standpoint. But ultimately, what it comes down to is the person's basis of experience and training. Because if we look at the Income Tax act, it has nothing to do with, I'm sorry, not too much to deal with just accounting and where something is being placed. Cause if it's meals and entertainment, if the receipt relates to meals and entertainment, the accountant or the bookkeeper is going to categorize something as meals and entertainment so that it can be properly reflected in the tax code to trigger those tax code attributions for 50% deductibility, as an example. So the Income Tax act is really more statute and interpretation. And actually the rules fall more specifically forward, in my opinion, since it's more legalese to a legal function rather than an accounting function. I'm not here to just put down any.
It's just trying to clarify the real interpretation that you're looking for someone who actually understands the interpretation of legal interpretation, because how these statutes are written is more legal oriented. So what most people maybe, again, I'm not. This is where I'm going to introduce, like, you're going to look for a tax lawyer. I'm not a tax lawyer. And when it comes to that concept of things, tax lawyers are also just as busy too. And then the main part is they're not in the preparation side. So there could be disconnecting in gaps too. And they will look at things from potentially, depending on their experience, a legalese standpoint, and then miss the component of the transaction part and the components of the numerical part again. So there's always a gap as it relates to assembling it. And it's not just one thing, and one person sees one thing, it's still a fragmented piece. So the puzzle is still very much broken, but it's really learning how to put those pieces together. And this is where I'll just say the integration is what's being missed, because not every professional will have those. Some professionals specialize in certain things, and. But if we look at the thing holistically to your situation, that's really where, again, asking the right question and aligning yourself with the right people is what helps you put the pieces together.
[00:13:42] Speaker A: Yeah. I mean, for how often? I get the question, like, hey, do you know a good accountant? I'm like, well, I know lots of good accountants. They're great people. They do really good at the work that they do, from what I understand. But for your specific need, your niche, your situation, your structure, you have three corporations. You have an active real estate portfolio.
Whatever is going on in your world, although I might know several great, let's say accountants, I don't necessarily, maybe not know the right person for you that's in your jurisdiction, that has the ability to serve clients because they're not tapped out. They could actually spend time with you. What your need is, what stage of life's journey. You're Athenae. What are you going to be selling down the road? How quick is that happening? Or is one of these businesses going to be prepared for an exit strategy or not? There's just so many moving components, but the questions around that you can already see, just based on the few things I listed, these are the kind of questions that someone maybe like, from our vantage point, we would want to be asking, because in order to help structure and put together a program around the implementation of Nelson's concept of becoming your own banker, these types of questions are asked. We need to understand a framework not only of where you're set up and structured today, but what are some of the things, the goals, objectives, the planning that you have going forward, that's in your mind. Although we can't, you know, the future is unknown. You know, every minute of the day, the future is developing for us. We can plan intentionally, and we can make good, directional movements towards a future that we are seeking or looking for or we expect. But we have to have room to maneuver if we make a change or if a change is made outside of our control. Changes that happen outside of our control tend to happen really effectively at the federal government level and potentially in other government levels. That's my opinion.
You can go put that in the bank if you want.
A lot of that happening in this year, but as far as whatever your objectives and plans are, you can have intention. And then we say, cool. Here's how we can build towards that. Here's how we can set you up in a certain way where that this can be a reasonable outcome as long as you continue down this path. But if this happens, or if that happens, we want to create a little bit of maneuverability. You have to have some flexibility. It's kind of like if you go across a bridge, a lot of people don't know what an expansion joint is. A bridge at the one end of the bridge, and often at different sections, they have a little, like, almost little accordion thing there where in between the sections of the bridge, there's room for some movement, for expansion and contraction to happen. That allows for the bridge not to crumble at those points because it's too rigid. Your life is like that. So we need to create some expansion joints in your financial life based on the things that you're trying to do and one of the ways that we do that. And, Henry, this is where I really think you're trying to drive the point home. The tax codes, the legalese around the tax situation, it's highly complex. It's highly detail oriented stuff, and it's not reasonable for any single human being to know all that specificity. It's not reasonable. There might be someone out there who's done, in which case, big shout out. Congratulations. High five. I know that's not me as an individual. And so where we can get simplistic is understanding the framework by which the codes operate, how you intersect with them, and then how does that relate to your future? So, a way I would look at it is like this. Imagine you're in a helicopter or an airplane. You're flying over and you're looking down at a forest. Okay? You can see where the forest ends. You can see one side or the other. You're high enough that you can get a look at those things. Maybe you can see a river flowing through it. You might even see, like, a cut line or a small path. Potentially. You might see a deer or a moose in there while you're flying over, depending on how high you are. But if you're the person who's in the forest and you're trying to find the path, all you see is the next tree that's in front of you. You might see, oh, I got to jig this way to go around that. You might not see that entire tiny little path that you're walking through the. From the higher up position, but you can see clearly if you know where that individual is, where the river is, where the exit is, how they can get back out of the forest. There's things that you can see from a high level perspective that if you're in the forest, you will not be able to see. That's the reference point I want to give around the tax scenario. And I think that, Henry, what you're really good at and what we rely on you for is the ability to say, look, let's get down to the core of what's taking place. Here's what's happening at the big level. Here's, roughly speaking, how it's going to impact you. And given that, if you understand that to be true, what questions should you be asking to get into the specifics that you need with the right person to be able to move through the forest?
[00:18:31] Speaker B: Yeah. Thank you, Richard. One of the things that I also wanted to add, just to infuse the situation even more, is social media is an amplified tool. Amplification tool is either amplification of good information or amplification of bad information. And what I just wanted to even add is we talk about professionals all the time, so the assumption is someone with a designation. However, what about someone who is sharing information on social media? Like, I've got to set up a trust this way, I've got to do things that way. So I'm just going to categorize that as amateur. So if you want to get your sources of information from amateurs, by all means, go do it. The key thing is that what is the objective you are trying to accomplish? At times when I'm meeting with clients who are in a position who wants to become their own banker, wants to take control of the banking function as it relates to their needs, but their circumstances may not afford the ability to be able to do it. And what I mean by is their current corporate structure may not be it. Maybe there's an evolution that they're trying to do an estate plan. Really what I flush out is they're trying to do an estate plan, and then maybe they'll do their research. And then again, social media influences the situation coming into it. And they're like, oh yeah, I need to trust this thing, and then I need to template hold, co op, co organize this way.
It doesn't work that way. But what I can tell from their circumstances, I can tell what the pieces that they're going to need, but how do I integrate the who's going to have the share ownership? Is it going to be personally owned, corporately owned, beneficiary owned, trust owned? There's very particular nuances that's going to come into it when you start individualizing the situation on where it needs to be. And so those are parts of now tying to what you're sharing, Richard, is the right questions to be asked. And I've been blessed with a very long career in my recovering life as an accountant, let's say, to build the necessary ideas and individuals who have even more skills and technical knowledge than I do. I'm not saying I have like, I'm like a guru or anything, but that I have that I can, on a speed dial, reach out to them and get the answers that I need. Not everyone can has that fortunate situation that they have. But at least by surrounding us and me with the right team, with ascending financial and everything like that, that by association can help everyone reach those situations, to dive into it and make sure that they're assigned with the right professional in their circumstance to do it. If there's, let's say, for me, having a gap of knowledge, that's okay. I know someone that can make sure that the execution of the plan and what is supposed to be designed, I can help ask the right questions to help lead you to get there to do that. So just kind of wanted to show, showcase a little bit more of just those nuances and details that just get, and you shouldn't be accepting amateur information.
[00:21:48] Speaker A: Well, it goes a little bit also to extend that one step further is, you know, then you got to throw in jurisdictions. So you've got people in different provinces, people in different states. I mean, we're not cross border anything here, but we have a great, you know, large amount of american listeners. So similarly, the same context that we're sharing, we're going to talk about some canadian specific things in a moment, but the context of the changes that we're facing, the same generalized impact of a change that seems to happen with a change of a new administration or the annual budget that's presented, there's always some little tweaking or sometimes massive tweaking that's taking place on the tax system. And that tax system is always impacting the taxpayer. If you're listening to this, you are a taxpayer. So, so recognize that those changes are going to take place. Get clear on the fundamentals where you want to be positioned, and then start to attract around you the right people, the right whos that can help you position yourself towards your niche, towards your specific environment, the way that you want to set up your objectives. Is it going to be absolutely perfect every time? Probably not. But if youre not putting any intention on it, its definitely not going to happen. Okay, so that's kind of the piece I would want to live with. And so now if we put this into more context to give people, like, some specifics, let's talk a little bit about the 2025 federal changes taking place.
[00:23:14] Speaker B: Henry.
[00:23:14] Speaker A: And we briefly mentioned the capital gains situation, but there's several other things in that budget that are probably even more impactful and more recognizable as an impact that people need to be aware of. So we can get a little bit specific. And then in the purpose of doing that for our listeners, they can kind of say, okay, I see what's being mentioned here. Now, you need to relate that information to how it might impact your life or someone that, you know, maybe you aren't directly impacted, but maybe a parent is a business partner or a colleague, a neighbor, and they might need to get access to this information. It would be another way of looking at.
[00:23:53] Speaker B: Yeah, I mean, I was still just pointing the point that why this is so important is when you're in Canada, you are probably paying up to 50% on income taxes already. This is including deductions. So this is income tax as that definition and deductions. Now you're going to layer in spending taxes like HST and then other tax mechanisms like carbon tax. So when you look at it, how much of the money that you're bringing in using a very simple number of $100,000, how much of that $100,000 is already going to the government. It doesn't matter what product label they want. You want to label it as it's money that's leaving you, that's going to the government, good or bad. That's not the conversation here. The next part is if you have a home and a mortgage, then you're paying payments for a mortgage. And if you ever unpacked a mortgage payment, a significant amount of that mortgage payment is interest. And if you actually, again, unpack it, it's probably anywhere from 50 to 70% to 90%, depending on what kind of interest you have. And if you have a variable mortgage, 100% of it is going to interest and 0% is going to the principal. Then you have living expenses, which are anywhere for maybe for some of you, 20%, which is $20,000 in the relative 100. And then, so how much of that is left for savings? So if we look at the money that you're working to bring in and how much that's going to go out, the positioning of your assessment is really to look at evaluation. Where is the spending going? How do I bring control into it. We don't operate like certain institutions who have an unlimited ability to spend money and enter into debt. We have a very fixed portion that we have to ration and look at. So if I just weighted it that way, wouldn't you want to evaluate from a legal standpoint that makes sense for you strategically how you can approach making sure you're not overpaying, what you're not paying, what you shouldn't be paying, and that's the strategic component now. So once you've positioned yourself very clearly from there, now I'm just going to put as an exception for people to recognize is everyone's very fragmented just by virtue of the marketplace. I have an investment guy and then I have this guy, and then you're trying to be the project manager to assemble the trades people together, and you're just hoping the outcome is you're getting the perfect house that you have. You need a project manager to help assemble it. And if your skills are not there, not saying that, you know, in a negative way, but just saying work with the, that's what the coach's ideal role is, to help you accelerate, to move from position one to position two. Whether it's from a tax standpoint, whether it's from your banking standpoint, whether it's from your spending standpoint, whatever that is, you're just looking for that position. So just going back to evaluating from, if I call that the center line, that's the center line to operate from. And then once you have new changes, how does that impact your center line? So going now to that budget of 2024, a big slew of changes have come in. If you were to even assess the environment of what happened ten years prior, there's been a pattern to where the target of all those changes have come in. So if you follow the pattern of behavior of all of the new legislations that have been coming in, you can reasonably assume that moving forward, where are they going to go next? So these are some of the things to really put into. And you can also measure from the actions of the legislations that's come in where they're actually targeting too, and who they're targeting.
If you are a business and you're looking at opportunities to generate revenue and have a business relationship, the people you can work with is someone who has money. So if we're looking from the specific standpoint, who has money in society is really where things are going to be targeted next, in my opinion, just as a entertaining conversation.
[00:28:17] Speaker A: And I think, yeah, so, like, where where the tax authority is being instructed to go and acquire monies from is the way I would relate that. And so, you know, in the, in the last decade, we've seen in certain parts of Canada, a rapid increase in real estate markets in, in real estate values and not in all markets of the country. Some have gone down, some have depressed, but in general, there's been a pretty good rise over a period of very low interest rates. How coincidental that might be. And so we've seen a rapid increase in several markets. And so that produces equity. And then for a lot of people that are maybe in rental, owning rental properties, owning cottages, family cottages, all these kind of things that will produce a capital gain upon the sale of those properties. Now, if you actively sell it because you're alive, yeah, you're going to have to deal with that capital gain, but you can also sell it because you're not alive. If you kick the bucket and you're the owner, then it automatically triggers the equivalent of a sale. From a tax perspective, it may not actually sell the property itself, but the triggering effect of that gain is taking place. So whether you wanted to do it or not, a gain can be occurred. And so theres a lot of people who are going to be impacted by this change of the capital gain tax, which is increasing for anything over and above $250,000 as a gain. And that is going to be a new source of increased revenue for the federal coffers. But that is just one of many changes. The other thing that you've mentioned, Henry, is really about the business owner. And there are certain things taking place around people who are in business and taking on those risks. There's a lot of risks to being a business owner. And ideally, the person who takes on the risk and has the risk of both failure and they have the opportunity for success, they should be rewarded if they have success, and likewise, if they took on the risk and they fail, that's kind of how it goes. That's, that's the, that's the whole situation. So there's some active things taking place to go after those individuals as well in this new budget. So what are some of the specificity around that that we should discuss?
[00:30:24] Speaker B: Yeah, I mean, yeah, I mean, the first thing is, let's just go with the main headline first is the new capital gains inclusion. So using that as an example, that makes a lot of headlines like, oh, you know, the government's taking more away from me, and then you have what? I hate seeing nothing I can do about it because I don't have control over it, which is there's a class warfare, there's sharing of, it's only impacting 0.13%. But I'm going to just share that specific to that circumstance, I'm just working with this elderly couple in their seventies, and we were preparing their situation to essentially for deemed disposition tax of about $300,000. Now with the new rule, and during that duration, just as a flip of a switch, just like that, their new deemed disposition obligation jumps to 100, an extra to 425.
[00:31:23] Speaker A: Just like that, an extra 125,000 for them in how much money is going to go to the federal government that will not be available for their heirs based on them no longer being here on planet Earth.
[00:31:36] Speaker B: So from the time I believe we started somewhere in March until now, they've just been obligated through the statutory framework of the Income Tax act for an extra 125,000. Just like that.
I don't know about you, Richard, but for me to make 125,000 working for that, I'd love it to be just as easy.
[00:32:00] Speaker A: It'd be interesting to consider for any of our listeners, position yourself thinking about someone that, you know, who's, who's passed away, or perhaps you've even experienced that, you've experienced an estate situation. You know, it's very trying, it's very emotional, it's very complex to get through. Nobody wants to do it. We all have to. It's going to happen. And to know that, you know, someone's received an inheritance, but now that inheritance, which was going to help manage some things and take care of a couple of things, hopefully in the, in the process, it just obliterated 125,000 out of the deal. And what does that mean for the remaining family members, whoever was going to receive it or the charities that would receive it, that's all capital that they can't plug back into the economy, they can't plug back into things that they could do for their own lives, and instead it's going to some black hole where someone else is going to choose how to spend it that may or may not benefit you. And I think thats really an overarching control mechanism, and its something that we should. I dont want to go down a rabbit hole here, but recognize in this particular situation as a real family, age 70, theyre planning properly for the strategic time when theyre not going to be here, and they want to be proactive in that decision. In the span of a few months, because of a decision by a federal government, $125,000 of what theyve worked hard for in their entire canadian life obliterated like that. And Henry, would you rank these people in the class warfare scenario of being in the top 0.13%?
[00:33:33] Speaker B: Absolutely not. They're working off of government benefit income and the odd jobs that the father has to work just to make ends meet as projects. And so it's like, if you look at the circumstances again now we're talking a lot more about strategy, where capital gains were introduced in 1972. If we look at the context of the introduction to it, that's just post recovery of World War two and other wars that have happened. And then so the families, everybody at that time from 1945, just imagine in your thirties going through work and you've just built up some new equity, and then it's like, oh, hello, we're introducing this new capital gains tax of 50%.
And then, you know, there's some history around it, going through 67% in 1988 and then 75% in 1990, and then in 2000 it goes down to 50% again. So what is important to recognize is it's not, you know, when it comes to tax policy, it's like you have to have skills in history, society, politics, economics, whatever, you name it. It's not just.
It's more of like understanding. If we centralize the whole common point, it comes down to your capital and where's your capital going, and there's all these forces that come into influencing where it's going. But if I look at this couple using them as the example, they've just again took time to build it.
And then, just like that, some new rules have come in where someone has decided to impose themselves into the situation, to say, we're going to redistribute it to make it more fair for other.
[00:35:25] Speaker A: People, not fair for your family or for you, but for everyone else.
[00:35:32] Speaker B: So these are examples of this example here is. That is just the main headline. Now imagine if you're a business owner. So this is where the depth of the detail is actually missed. On the corporate side, there is no 250,000 exemption, sorry, inclusion rate of 50%. There's. It's a straight 67%. 66.67%. So from that 66.67%, what people actually don't realize is that also impacts that when you have capital gains in a corporation. Initially there was a mechanism that you have capital dividends to come out on that other 50% tax free.
Well, now that has impacted the capital dividends account. That is also now from a 33% standpoint.
So the headlines were the gains on that side, but what about the back end of it? So there's the back end on the capital dividends. So these are examples where this code, all these rules are so complicated with different parts, and then they intersect in different areas. So when one easy change, apparently easy change like this, has a multitude of a ripple effect that goes down the road. So that's just one of those examples as it relates to those changes. But if you even look at it from a societal behavior standpoint, so this, again is introducing strategy as your capital to look at. And what you're protecting, in my opinion, in all honesty, is you have, from a philosophical standpoint, a family who's worked really hard, a couple, sorry. And who's built it up, and then it became a sitting duck. And boom, just like that, it was there, taken from those rules. Now you can argue, oh, yeah, maybe there's a new political party that'll come in and change things and hope for all of that.
There's no certainty that the change will happen.
And if we just look at it philosophically again, the person started from scratch, let's just say, built it to something, and then boom, here it comes, just like that.
[00:37:48] Speaker A: It reminds me of Nelson Nash's book when he talks about Willie Sutton's law.
And you know, Willie Sutton, famous bank robber. And they said, why do you keep robbing banks, Willie? He said, well, that's where they keep all the money. So when, wherever wealth is accumulated, someone will try to steal it. That's the premise of what Nelson is referring to. And in this scenario, a lot of wealth is being accumulated, in this case in certain corporations, and then it's also being accumulated in a lot of investment structures. And one of those areas is in a real estate market. So I mentioned that just because a lot of people will understand, that's what happened. Family bought a cottage. You know, you got the baby boomers, they bought a cottage long time ago, maybe they paid 50 grand for it. And it was a, you know, a box kind of, you know, shack. And then they built onto it and they tore it down and they built something new. And they had these family memories and they want to, they want to pass that down to their, to their kids, let's just say, and the grandkids and continue that tradition on. But now, even if they pass it down for a dollar, the value of that property is way higher and they're going to have to pay tax on the game. So it doesn't make sense for them to pass it to a dollar because they're going to get hit and hammered with the tax bill. And that's a scenario where this is going down to family life, family structure, family memories, joy, and all that joy that's there is now being almost deconstructed by a tax bill. So this is the type of impact. And so really I do feel like the boomers, there's lots of people who are affected by this, but, but boomers are very clearly affected regardless of if they've owned property and they have investments of any kind, which they likely do, they are heavily impacted by this change and they're a massive bulk of society still. And in fact, even if they don't actively sell these properties or investments and things, they are going to be sold at some point in time when death occurs. Thats an unavoidable scenario. And so if you want to go after the tax because you need to pay for all the spending, you go where all the money is so that you can ensure you can receive it. Its a logical conclusion to how you would solve that problem. You created a big fat problem. You need to solve the problem. Wheres the money? Oh, heres where all the money is. All these boomers have it. What can we do and change where we can get some of that money coming back in to pay for all the spending that we just did in the past? And I mean, like, I don't want to oversimplify it or anything, but I don't think it's difficult to reach a conclusion of that nature when you think it through.
[00:40:25] Speaker B: Yeah. And the key is not to get lost in all these tax codes and tax rules. You just stick your head out of the cornfield and you're looking, oh, that's where they're going next.
[00:40:36] Speaker A: The tractor's coming and it's cutting down all the corn. I might want to move out of the cornfield.
[00:40:42] Speaker B: So one of the other things is, let's just say when real estate got very booming during the low interest rate environments, one of the things that I've observed happened was people would get marketed quite often to say, oh, let's reorganize all of your assets, your real estate, and structure it into a corporation and all this wonderful things will happen. And some of them just did the work maybe a year or two ago. Well, I'll just say the professionals got paid very well to help execute the transaction of that investment.
But that only expired in the next two years afterwards.
[00:41:20] Speaker A: Yeah, now all those changes have just increased the capital gain tax bill for every property when it gets sold in that. And now the capital, like you mentioned, the capital dividend account. So upon the sale of a property, we'll say property, not as though physical real estate, but thats easy to understand. Lets just say it was a rental property and its own. In the corporation, you have a gain. That gain is now much less than it was before what you can keep. And so the amount that youre able to extract out of the corporation using the capital dividend account is a much smaller percentage. And unless you have a different mechanism that can come into play that can trigger a much larger capital dividend account, which can happen upon death using insurance, then you might create another extraction mechanism. But regardless, youve trapped everything into a situation where your biggest scenario is really just to sit, pray and hope that theres some modifications made to a future budget that says, hey, were going to take all those changes and were just going to scrap them and get rid of it.
[00:42:28] Speaker B: Yeah, I mean, the parts that then as countermeasures. This is now just jumping into a separate topic is, oh, yeah, capital gain, the lifetime capital gains exemption has increased. And for those of you who don't know, the lifetime capital gains exemption, that's the part where the business owner takes risks. The business owner starts the business, and if they originate holding the shares, they can sell their business. And when they do, they get an exemption of up to a million at that time, but now it's up to 1.2 million. But now if you put into the context, it's gone up to 1.2 million. And then you add the fact that there's that capital gains exempt new inclusion of 67%. So they've just made things so much more complicated just to get around the layer of, I'm trying to maybe not impact the capital gains exemption too much because of the new inclusion on you. So it looks like it's great, but we again need to put into the context that I'll just say a more prioritizing rule of capital gains completely blankets a lot of things as it relates to all of these changes. But this is important to take into consideration, to realize that now, depending on how you're structured and how you're set up, that appeal of that rule in isolation is not that attractive if you look at it on the grand scheme of things. And again, sometimes taxes are put into place depending on how you read into it as to discourage things. So that's why you may have heard messages. People were saying, like, if you're taxing capital gains, you're discouraging me from working hard for the future benefit, for innovating, or for all those type of reasons or passing things down, no question. That is no question.
[00:44:19] Speaker A: Yeah. And I would take discouragement, I think, one step further. There's, I think for a lot of people who, again, I'm going to emphasize on real estate, I just think it's easy for people to recognize, and you bought a place, you bought a property, a multifamily unit, whatever it is, you've had it for many, many years. You want to have that passive income that it generates. Maybe you get it paid for. It helps supplement your retirement income. What have you. Um, at some point in time you might have said, hey, I don't want to, you know, here's what I find, Henry. As people get older and older and older, my experience has been they're less and less interested and inclined to deal with managing tenants and people.
They want to simplify a lot of things in life and probabilities. If they've been in a rent a rental owner for 30 plus odd years, they've experienced a lot of challenges in that timeframe. And those challenges might build to a point where it's like, you know what? I think I've earned the right that I don't have to deal with this anymore. So to some degree, what they may do is they might say, you know, I'm just going to sell and take all that equity and I'm going to go put it into something else that's just dead simple, easy to manage, whatever a bond portfolio, whatever it is I'm going to do that's going to produce some cash flow. I'm going to do private lending, whatever I want to do there. But now I don't have to deal with, let's say, tenants and stuff. Well, now there's a discouragement of doing that because the amount that youve built up and worked for, youre going to get a lot less of it left over. And so youre positioning things where the market could maybe want to receive that property on the market to help the market condition of the real estate market in a given area. Maybe it needs that real estate to show back up on the market, but theres a lot less of it appearing because people are being disincentivized to sell. So we have a housing crisis and housing problem, but yet we just told everybody that maybe if you own rental housing or whatever, you don't want to sell it for new buyers. So, I mean, the good news is maybe there's always still places to rent, but there's not really like a clear, this one thing impacts decision making and that decision making then impacts a marketplace.
And we have a problem in the marketplace that we're also trying to solve. But now this change maybe isn't going to help solve it. It might actually add to the problem. Like all these things could be linked together. And I'm just not suggesting that that's the exact path that it goes down. But that is one possibility of how we could review this overarching situation. So there's so many factors. When you look at things from an economic standpoint and behavior, there's so many pieces. This little item right here has a trickle down effect, and often we don't even see the impact of that trickle down effect for several years until it begins to move its way through the market condition.
[00:47:00] Speaker B: Absolutely. I mean, that's why it's impossible to keep track of all these minor code sections that get added and changed and modified. It's just impossible. But when you can, when you stick your head out again out of the cornfield and you're looking at just directionally where things are headed, you can evaluate how government's influence or anyone's influence on certain circumstances. How does that impact you? Is really the key message to really look at. So if you look at something like a tax policy change on your specific circumstance, how many people can actually have, who actually has the literacy as it relates to the complicated tax code? To understand how that's going to imp theme it's to their specific level. It's very, very hard. And one of the main things is to really encourage you as a listener to start finding ways to educate yourself, not in the direction of diving into the specific tax codes, but to look at specific components of it. So the last part, I just want to just use the example of the capital gains exemption. And everything that came around in those changes is, yes, they've introduced a new incentive called the canadian entrepreneurs incentive. And that is where now, instead of the 67%, it's 33%, but it's getting phased in 200 grand at a time up until the 2 million.
And then what people don't realize is there's qualification criteria, qualitative standpoints, and it's actually very hard to qualify. So unless we have professional corporations. But what if you're not a professional corporation? The only way you'll get it is if you're someone who has a manufacturing, like a. I'm just using this as an example. A manufacturing business. You are the sweat equity. You started the business from ground up, completely grew up. From that standpoint, yeah, you'll probably, you may likely qualify for it, but then you can end up tainting it for some very arbitrary one line rule code in there. So the key part is, if you're making capital movements now, you layer in changes and announcements that come in. How does that impact your situation? And what's actually important to look at is, did your foundation that you started with, was it all just pieces just hammered together, or was there any good glue and everything that put it together first so that you can make adaptive changes that happen? And I'll just share with you, I'm seeing clients, and I see people every day. Not everyone's situation is always that way. And that's the value that I get the privilege being able to share and position them for so that they can be resilient. And then when some new change comes in, they get very good clarity where that impact is gonna happen to them, so that they know. So even some simple thing where when the capital gain, the budget gets announced on April 16, the people are wondering, should I sell my capital property today so that I get to the 50%? But what actually people didn't really realize is there's actually an alternative tax system called the alternative minimum tax, and it was designed to capture anyone who got significant capital gains or income so that they're trying to avoid taxes, let's say. So what they may, on the surface, look at, I'm going to take advantage of the 50% today and rush sell something. By the way, if you rush sell something, I don't think you'll get the optimal price for it. And at the same time, you run into, there's actually a back end kicker that's going to claw you for capital gains.
This stuff gets very messy.
[00:50:49] Speaker A: Yeah. And we did an episode where we talked about the alternative minimum tax. And I remember when you first told me that it existed, I had no idea it even was even existed. No one had ever indicated it to me before. And, I mean, it was astonishing to me to learn that basically, we're going to run you through two measuring sticks, and depending on whichever measuring sticks indicates that you owe more taxes on, that's the one we're going to get you with. And that's what Henry's referring to. So we have another episode on that. Perhaps we can link to it. But, you know, so if you've already sold property, I mean, it's too late now, and maybe it'll all work out, and hopefully that'll be the case. But just be aware, it's not as simple as making, you know, jumping into rash decisions, either. There's you really need to understand what's taking place. And there's no such thing as having arrived in knowledge. So, to summarize, there's a lot of little intricate details about the tax system. No one can really know them all, despite all the changes that happen, because every year there will be changes. If we get clear on the big picture and we can see around the forest the main, main structures running through it, we can better navigate someone who's in the forest, you can see it and you're also in the forest. You can be able to give yourself that context by asking good questions and seeking a team of people. I don't know how to fly a helicopter. I would hire a helicopter pilot to go and take me on a tour and I would want to make sure that they're well trained and that's the individual I would have operating that machinery. So use that as context around how you figure out your reference point, your cog in the giant machine of the tax world to position yourself so that as the cog is turning, you're getting the maximum energy out of your efforts and you're be able to maintain as much of that output as possible. You created the output. You should be able to retain as much of that output as possible as long as it's your fair share, which according to the tax code, I believe is what you're entitled to, so they say. With that in mind, uh, you should see brand new video just got recommended to you right there. Go ahead, click on that because I can guarantee you there's some great information inside of that video. Henry, thanks again. Appreciate you.
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