Weekend Reading: Tax Change Speculation Edition

Weekend Reading: Tax Change Speculation Edition

The federal budget plan is set to be delivered on March 28th, and that means it’s time for pundits to speculate about potential tax changes. We already know that the First Home Savings Account (FHSA) will be introduced and available at financial institutions some time this year. This account combines the best traits of the RRSP (tax deduction up front), with the best traits of the TFSA (tax-free withdrawal for a qualified home).

But what about other potential tax changes that we seem to talk about every year? 

Capital Gains Inclusion Rate

Changes to the capital gains inclusion rate, currently set at 50%, have been discussed for many years and the federal NDP had proposed an increase to 75% in its previous election platform. Those with a good memory might recall the capital gains inclusion rate was reduced from 75% to 50% back in 2000.

I have no insight into whether or not this will happen, but if you think there’s a good chance the capital gains inclusion rate will increase then I suppose you have a short window to trigger a capital gain in your taxable account.

Also, there’s a lot of confusion around the capital gains inclusion rate because we see big numbers like 50% or 75% thrown around. This doesn’t mean that you pay a 50% tax on a capital gain. It means that 50% of the gain is treated as taxable income at your highest marginal rate.

For example, if you have an income of $100,000 in Alberta then your marginal tax rate is 30.50%. Let’s say you trigger a capital gain in your taxable investment account, selling shares of your S&P 500 index fund for $30,000 more than you paid for it. $15,000 of that gain (50%) would be taxable and added to your income, giving you a total taxable income of $115,000. 

In Alberta, income above $106,718 is taxed at 36%. That means you’ll pay taxes of $2,981.52 on the income between $106,718 and $115,000 ($8,282 x 36%), plus taxes of $2,048.69 on the income between $100,000 and $106,717 ($6,717 x 30.50%), for a total tax of $5,030.21 on that $30,000 capital gain. Not too bad.

Top Federal Tax Bracket 

Another federal NDP platform policy would see the top federal tax rate increase from 33% to 35%. Currently, that rate kicks-in for income above $235,675.

This would push the combined top provincial and federal marginal tax rates to about 56% in provinces like B.C., Quebec, and Ontario.

A similar proposal was recently announced by U.S. President Joe Biden when he called for the top federal rate to increase by 2.6%.

RRIF Age and Minimum Withdrawals

Industry groups are lobbying the federal government to raise the mandatory RRIF conversion age and delay minimum withdrawal requirements to better reflect a lower interest rate and return environment and reduce the risk that Canadians might outlive their savings.

Note that a proposal is being reviewed by the Department of Finance but they are not expected to report its findings and recommendations until June.

The Investment Industry Association of Canada argued:

“The existing rules date back to 1992 when interest rates were higher and seniors were not living as long. Today, it’s unlikely real returns on safe investments will keep pace with the withdrawals.”

While I agree that we should review and modernize programs from time-to-time, a proposal like this stands to benefit wealthy individuals the most. The concern about minimum mandatory RRIF withdrawals triggering OAS clawbacks sounds very much like a first-world problem, and so I don’t suspect this proposal will gain much traction with a government that’s looking for more tax revenue from the wealthy, not less.

Finance professor Moshe Milevsky suggested an interesting alternative: repealing the mandatory RRIF withdrawal, and instead taxing the entire holdings at a rate of 1% every year, following the system that Australia uses.

This Week’s Recap:

I wrote about the five year anniversary of Vanguard’s groundbreaking asset allocation ETFs. An absolute game changer for DIY investors.

Earlier this week I shared a detailed post about OAS payments and how much you can expect to get from Old Age Security. Interestingly, this article went absolutely viral with 20x more views than a new article would normally receive. It got picked up by Google news, and I suspect a lot of seniors have also been searching for facts about OAS due to a now repealed change that was supposed the take effect April 1, 2023 (raising the minimum age from 65 to 67). This is not happening, so if you’re turning 65 this year you can confidently expect to receive your OAS if you plan to take it.

Promo of the Week:

With Air Miles making news for all of the wrong reasons (again), many readers have reached out looking for rewards credit card alternatives.

The best credit card depends on your shopping habits and what you’re looking for in terms of rewards. For me, the American Express Cobalt Card is my go-to card for groceries, dining out, and take-out. You get 5x points on “eats and drinks” and those points can be transferred to Aeroplan on a 1:1 basis where you can redeem for flight rewards at a rate of ~2 cents per mile. 

That means you’re getting a mouth-watering 10% back on your credit card spending for that particular category.

Sign up for the Amex Cobalt card and you can earn up to 30,000 bonus points (2,500 Membership Rewards points per month that you spend $500 in your first year as a new Cobalt cardmember). That means if you spend $500 per month in the “eats and drinks” category, you’ll earn 2,500 points per month on the spending, plus 2,500 bonus points per month, for a total of 60,000 points for the year.

Transfer those 60,000 points to Aeroplan and redeem them for a flight reward at 2 cents per mile. That’s like getting a $1,200 value.

Weekend Reading:

Rob McLister warns that when your bank suggests you lock in your variable rate mortgage, it has an angle:

“If you’re a mortgage shopper who can qualify for any term, the message is simple. Don’t let anyone talk you into a 5-year fixed at today’s rates,” says McLister.

Dan Hallett explains why his investment firm avoided trendy investment themes like cannabis, bitcoin, and covered call writing, and has no regrets.

The Millionaire Teacher Andrew Hallam unveils the surprising key to longevity in retirement. A must read.

Of Dollars and Data blogger Nick Maggiulli explains why concentration is not your friend when it comes to investing.

Speaking of diversification, PWL Capital’s Ben Felix explains why international diversification is crucial, both theoretically and empirically, to sensible portfolio construction:

Tim Cestnick shares a cautionary tale on choosing your RRSP or RRIF beneficiaries carefully.

Michael James on Money discusses the benefits of giving with a warm hand instead of leaving a larger inheritance in your estate.

With yields at their highest levels in many years, investors may be wondering whether it makes sense to invest in stocks, bonds or CDs (GICs to us north of the border). Here’s a great discussion on how to decide.

Related, here’s Andrew Hallam again explaining why savings accounts can put your retirement money at risk.

An 85-year Harvard study on happiness found the No. 1 retirement challenge that ‘no one talks about’:

“When it comes to retirement, we often stress about things like financial concerns, health problems and caregiving. But people who fare the best in retirement find ways to cultivate connections. And yet, almost no one talks about the importance of developing new sources of meaning and purpose.”

Here’s Jason Heath answering a question about starting to draw down your investments in retirement – should you sell your non-registered or TFSA stocks, or both?

A basic understanding of bond math can help investors stay the course. Here’s what to expect from bond total returns when interest rates rise.

Frugal, or miserly? Why is it that when rich folks are tightfisted, people call them eccentric, but—if you aren’t rich—people tag you as cheap?

Should the minimum age to receive CPP (currently age 60) be increased? Some arguments for and against.

Wondering where to get your rewards points? Barry Choi compares Canada’s grocery store loyalty programs.

Finally, an excellent post-mortem on the Silicon Valley Bank debacle – credit risk happens fast.

Have a great weekend, everyone!

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  1. Clearly A Female Reader on March 19, 2023 at 2:20 pm

    Interesting how all your Weekend Reading name drops are males. Would be nice to see some female presence being presented to your audience every once in awhile.

    • Robb Engen on March 19, 2023 at 3:27 pm

      You are 100% right and I apologize – that is shameful of me. Believe it or not I do try to pay attention to adding diverse voices to the list.

      Here are some excellent female writers to follow:

      Erica Alini – Globe and Mail
      Christine Benz – Morningstar (she is the author of the stocks, bonds, or CDs article linked above)
      Alyssa Davies – Mixed Up Money
      Gen Y Money blog
      Anita Bruinsma – Clarity Personal Finance
      Julia Chung and Sandi Martin – Spring Plans

      I’ll be sure to keep a closer eye on what I’m sharing in the weekend round-up going forward.

      Thanks for calling this out.

  2. Brent on March 20, 2023 at 12:22 pm

    Is the $12.99 monthly fee or $155.88 per year for the Cobalt card worth it?

    • Robb Engen on March 20, 2023 at 7:23 pm

      I think so, Brent! First year points of at least 60,000 is worth up to $1,200 in Aeroplan flight rewards or a minimum of $600 in statement credits.

      Second year you might earn 30,000 points if you max out the $500/month food and drink spending category. That’s worth $300 to $600.

      • Dustin on March 23, 2023 at 10:15 am

        Hey Rob. Isn’t the limit $30,000/yr on food/drink? So averages out to $2500/mth and not $500?

        • Robb Engen on March 23, 2023 at 4:15 pm

          Hi Dustin, sorry – you’re right. I was anchored to maxing out the welcome bonus in year one ($500/month for an extra $2,500 points) but you can absolutely spend up to $30k annually in that category.

  3. Dave Harries on March 23, 2023 at 10:12 am

    You quoted the Investment Industry Association of Canada saying current RRIF withdrawal rules date back to 1992. That’s not right. The minimum required withdrawal percentages were reduced in the 2015 Federal Budget and became effective that same tax year.

    • Robb Engen on March 23, 2023 at 4:14 pm

      Hi Dave, you’re absolutely right and I forgot about that. A pretty significant change that took the minimum required withdrawal at age 71 from 7.38% down to 5.28%.

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