Advisors' phones started ringing after fed budget dropped

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It’s fair to say that family office advisors’ phones started ringing when the federal budget was announced on April 16. And many got an earful.

“The response has been overwhelmingly negative,” says Carolyn Cole, founder and CEO of Cole & Associates: Family Office Strategy and Design in Vancouver. “Several people have reached out and talked about leaving Canada,” she says. “Canada is no longer an attractive option for wealth creation and intergenerational transfer.”

Families are busy calculating the compounding impacts of these changes and making decisions from a 25-plus-year lens, she says.

Marvin Schmidt, founder and principal of the Schmidt Investment Group in Edmonton, says the complexity of the country’s tax system is also proving to be a big headache for its wealthiest families. “Simplifying the Canadian tax system would be welcome news for all,” he says.

Canadian Family Offices reached out to seven family office advisors across the country to hear what their clients are saying about the budget.

First, the good news

Changes to the Alternative Minimum Tax (AMT) for charitable donations: The government announced that individuals can now claim 80 per cent (instead of the previously proposed 50 per cent) of the charitable donation tax credit when calculating the AMT. “This is a definite positive and some welcome relief for charities,” says Schmidt.

Elke Rubach, president of Rubach Wealth in Toronto, agrees that this change alleviates the worry of high-income individuals facing additional tax if they couldn’t fully utilize their donation tax credits under the AMT.

But both agree the change of the capital gains inclusion rate undermines modifications to the AMT.

“Under the prior AMT proposal, only 50 per cent of donations were considered for AMT calculations, resulting in a lower credit rate than the tax rate, potentially leading clients to pay AMT despite charitable giving,” says Rubach. “The government maintained the plan to include 30 per cent of capital gains from publicly listed securities in AMT calculations.” She says the impact of the 30-per-cent inclusion rate on AMT liability is still shortsighted and is a “punch to the same donors who want to make a difference.”

The so-so news

Super exemption for share transfers to Employee Ownership Trusts (EOTs): The government announced the first $10 million in capital gains realized on the sale of a business to an EOT will be exempt from taxation, subject to certain conditions. It states that the benefits of the exemption will be “clawed back” if the EOT fails to continue to qualify as an EOT.

“I’m not sure this offers significant benefit, as I’m doubtful many people will pursue this option,” says Schmidt. “This type of incentive may very well cause business owners to sell their business to employees who may not have the skill set, business acumen or personality to be a business person.”

Rubach sees it as a positive step to encourage employee ownership and support business succession planning. But she, too, has reservations: “I question how many business owners will sell to their employees.”

Schmidt says that rather than trying to incentivize to whom a business should be sold, the government should create economic environments “to help businesses grow the economy.”

The Canadian Entrepreneurs’ Incentive (CEI): This is intended to reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual, according to the Conference for Advanced Life Underwriting, or CALU, Canada’s professional association for life insurance and financial advisory leaders.

“Where it applies, the capital gains inclusion rate will be one half of the general inclusion rate on up to $2 million of capital gains over the individual’s lifetime,” reads the letter it sent out to members. This $2 million cap will be introduced over the next 10 years (2025 to 2034) in $200,000 increments.

Arthur Salzer, founder and CEO of Northland Wealth Management in Oakville, Ont., weighs in.

“CEI does not include a direct or indirect interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one or more employees, or a corporation that carries on certain types of business, including operating in the financial, insurance, real estate, food and accommodation, arts, recreation or entertainment sector, or providing consulting or personal care services,” Salzer says. “This means that for most entrepreneurs this program is of little to no benefit.”

Schmidt also has mixed feelings about the incentive. “The 10-year ramp-up and seemingly arbitrary decisions on which sectors qualify for this make it cumbersome and may appear that the government is picking industry winners and losers,” he says.

Lifetime Capital Gains Exemption: The government proposes to increase the LCGE from $1,016,836 to $1,250,000 for dispositions that occur after June 24, 2024. “This is a nice little bump but really not that meaningful,” says Rubach, adding it may be beneficial for small businesses.

The bad news: Changes to capital gains inclusion rate

What blew up advisors’ phones was the increase to the capital gains inclusion rate from one half to two thirds of the capital gain realized on a disposition by a corporation or trust. (The increased capital gains inclusion rate for a particular tax year will apply only to capital gains in excess of $250,000 and on capital gains realized on or after June 25, 2024.)

Here’s how it affects clients:

1. They’ll have to change their estate planning: “I have trouble understanding how the government estimates that the increase in the capital gains inclusion rate is only going to impact 0.13 per cent of Canadians,” says Sloan Levett, partner and practice lead, Family Office Services, at Fuller Landau in Toronto. Levett says the government failed to factor in the number of Canadians who have owned a real estate property (a rental property or cottage property) for decades and were planning on liquidating that asset to either fund a retirement or leave to their estate. “Now they will have to update their projections or estate planning,” he says.
2. They’ll need tax-mitigation strategies: The panic that the capital gains change elicited among her clients, particularly those who planned to sell vacation properties, led Rubach to send out a letter advising her clients to stay calm. “We told them: ‘Please don’t let this tax – or any other tax – dictate your financial plan,’” she says. Rubach advises families to not react hastily and to review their financial plan to see how it might be affected by the tax rules, and to undertake tax mitigation strategies with the help of their advisor.
3. They might have to delay retirement: Declan Ramsaran, managing director of PANGEA Private Family Offices in Toronto, says that his clients are disappointed that they need to pay more tax, “especially at a time when the government should be doing more at home to help Canadians with the existing tax dollar,” he says. “A Fraser Institute report found that the top 20% of income-earning families pay nearly two-thirds of all the country’s personal income taxes while accounting for just under 50% of its total income,” he says. The capital gains change led some of his clients to hold emergency meetings, says Ramsaran. “One of our clients is a significant shareholder of a CCPC in the Canadian mining sector,” he says, adding that an urgent meeting of shareholders was called to discuss the tax impact. He says that some of the company’s shareholders were counting on their capital gains to fund their retirement, and will now have to delay their retirement.
4. They are smarting from their “bad image”: “The government has created this persona of the ‘one per cent’ as somehow bad and that Canadians should just keep going after them,” says Schmidt. “This is very disappointing.” The government’s policies are targeting Canada’s “job creators, innovators and productivity enhancers for the country,” he says.

Some of Schmidt’s clients say they are planning to leave Canada. “We are hearing that breaking point has now come for many.”

As it stands, families and family office advisors will spend the next few months in talks, particularly about the changes to the capital gains inclusion rate, says Ian Calvert, vice-president and principal, wealth planning, at HighView Financial Group in Oakville, ON.

“There is a lot of decision-making taking place before the deadline in June.”

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