Huge waves of debt threaten all your assets
By Keith Brown
CFP, CLU, CH.F.C, FEA, CExP™, TEP Business Family Advisor
In the event of a real, water-based tsunami, we all know the best bet for survival is to run for the hills. But, if a tax tsunami hits, where will you run too?
Ottawa and the provinces get full marks for protecting the incomes, residences, jobs and health of Canadians during the seemingly endless COVID crisis. But, looking forward to when we begin a new normal, mostly mask-less and cautiously in person, we are all going to have to pay the recovery bill.
One of many post-pandemic dangers will be a tax tsunami. Looking for answers on how to prepare for and survive this unnatural disaster, I turned to the federal governments website dedicated to helping us prepare for – and survive – every imaginable natural disaster.
The “Get Prepared” website lists all the disasters you can think of alphabetically; from avalanches to wildfires and, just before wildfires, tsunamis. But, of course, not a word about tax tsunamis.
By following the structure of Ottawa’s three-part, tsunami survival guide (how to prepare, early warning signs, and what to do when it happens), here is a basic tax tsunami survival guide.
How to prepare for a (tax) tsunami
Ironically, the government’s “how to prepare” list for a real tsunami is almost a perfect fit for a tax tsunami. The words I’ve underlined in each bullet point are the exact words used on the Get Prepared web site.
- Check your assets for any potential dangers related to their vulnerability to new or increased taxation.
- Identify any vulnerability and repair it.
- Learn how to turn off the media hype about the economy and the politicians’ self-serving platitudes.
- Do not store your important documents in the basement. Immediately have them assessed and updated by an expert advisor.
- Ensure that your family has a solid contingency plan and a tax-resistant wealth transfer plan.
- Ensure as many assets as possible are portable, and if things get really bad, in a back-pack or suitcase with wheels (I’m only half-joking here).
- Your local chapter of St. John Ambulance can teach you first aid and CPR. Your local Red Cross can teach you survival techniques in the water through their swimming and boating courses. And, your local wealth protection advisor can help you create a tax-optimized barrier around your assets.
Early warning signs of a (tax) tsunami
It’s not only ironic, it’s eerie; the warning signs described on the government’s Be Prepared website, mirror the early warning signs of a tax tsunami
For example, “One of the signs of a potential tsunami is the occurrence of a very large earthquake that lasts for more than 20 seconds.” And, one of the signs of a potential tax tsunami is an earthquake of government spending without the customary fiscal anchors.
There’s more.
“A more immediate and ominous sign of an approaching tsunami is a rapid and unexpected recession of water levels below the expected low tide.” Similarly, a rapid and unexpected recession, along with dramatic changes in economic indicators like unemployment, bankruptcies, and GDP is an ominous sign something is about to change… and unfortunately, change for the worse.
“A tsunami may also occur with very little warning.” Likewise, we’ve heard little from our leaders about their plans for paying for the historically huge waves of spending we are in the midst of.
Finally, “When you get warning of a tsunami, if there is time, move to higher ground immediately.” Yes! Even if you are not completely convinced there is a rapidly approaching tax tsunami, moving your assets to higher, tax-optimized ground is just common sense.
What to do during a (tax) tsunami
One piece of advice really stands out on the government’s web site: “Do not go near the shore to watch a tsunami hit. If you can see it, you are too close to escape.”
Unfortunately, for wealthy Canadians, business owners and investors, investing your money in Canada could become like standing on the shore waiting to see what happens.
Some tsunami victims are mesmerized by the sheer magnitude of the natural phenomena. The sheer size of the impending tax tsunami is equally as dumbfounding. Forget the actual debt, the interest payments alone are staggering. In a recent report, the Fraser Institute says taxpayers across Canada will pay a total of $49.6 billion — or about $4 billion a month — in interest payments for the federal and provincial debts in 2021.
These interest payments will ultimately be paid by Canadians in the form of taxes. To add a little perspective to illustrate the sheer magnitude of the debt, the federal interest payments will equal $20.2 billion, roughly equal to what Ottawa spends on equalization and collects in Employment Insurance Premiums.
Even with the inevitable tsunami of taxes ahead, the report says, “These interest payments consume resources that would otherwise be used for public priorities that would help families or improve Canada’s economic competitiveness. As a result, less revenue may be available in the future for tax relief or to support health care, education, and social services.”
Will our economic competiveness be swept away?
In a tax tsunami, where will you run to? Unfortunately, for many, the answer may be somewhere other than Canada. In my work with the Canadian Chamber of Commerce, I am in the middle of the conversation between those who are fiscally conservative (the majority of business owners, investors and wealthy Canadians) and the federal government. At this moment in time, we are at a critical inflection point. The path we choose will have a profound impact on the country’s economic future, and the financial, social, and even physical wellbeing of all Canadians.
And, it won’t be the first time. Think back to the damage caused by the National Energy Policy. (NEP). In 1982, it re-engineered how the revenues from Alberta’s oil production were shared and, despite even the best of intentions, caused economic havoc that took us decades to recover from.
With the NEP in mind, think about what would happen in the event the tax tsunami includes reducing the capital gains exemption for 50 to 25 percent? Real tsunamis often include multiple destructive waves. Similarly, reducing the capital gains exemption will pack a double whammy because it means 75% of your capital gains will be added to your income; you could very quickly find yourself in a higher tax bracket.
Desperate times call for…
Assuming we can’t avoid the coming tax tsunami, it is absolutely critically important to take defensive action. And, you may need to take immediate action because it is entirely possible the next federal budget will be the first wave of the tax tsunami.
Strategies to consider and immediately act upon include:
- Reviewing how your assets are structured to make sure they are tax tsunami resistant
- An asset assessment will reveal which ones are in the government’s sites and would attract the most tax because they would be the easiest to tax (e.g.: real estate – actual value and ownership is easy to identify… investment accounts are also easy targets)
- Reviewing how your accounting is being managed.
- Vulnerable assets could be protected or, at least, be tax optimized through estate freezes, ownership shifts, and other strategies.
Having faith is OK… having a new plan is better
We need Canadians to have faith in our economy so they invest in the country and our collective future.
Most business owners, investors, and wealthy Canadians believe they are protected from the tax tsunami because of the excellent accounting and legal advice they’ve acted upon. Unfortunately, because all bets could soon be off; their plans will more than likely become less effective, and perhaps even destructive.
All bets are off? I recognize this is a radical statement coming from someone whose life has been spent making sure wealthy Canadians are able to control how the majority their wealth is put to work for themselves, their families, their businesses, and yes, for their country.
Even though all bets could be off, my faith in life insurance is unwavering. It has always been, and I believe will continue to be, the very best vehicle for the tax efficient preservation and transfer of wealth. Tax tsunami notwithstanding, having a new written plan, that fully leverages the opportunities created by life insurance, a plan that is absolutely clear about your vulnerabilities right now, is your very best chance at remaining intact after the tax tsunami passes.
Your survival and future success depends on having a plan to share with key stakeholders (family members, business associates, employees, advisors) so that they too can be protected and afford you the best protection possible.
I welcome your comments and questions.
Keith Brown