Tories in Canada aim to cut capital gains

Feb 6, 2006 @ 12:01 am

By David Clarke

OTTAWA - Prime Minister Stephen Harper won a minority government Jan. 23 partly due to a platform, called Stand Up for Canada, which included a promise to cut taxes on capital gains for individuals and companies that reinvest the money within six months.

Current capital gains rules require investors to report 50% of profits as income.

"This will allow those who sell family enterprises to avoid taking a hit, and it will keep longer-term investors focused on longer-term gains," Mr. Harper said during the campaign.

"Canadians who invest, or inherit cottages or family heirlooms, should be able to sell those assets and flow their profits back into the economy without taking a tax hit," said the Conservative election platform. Gains from real estate would be included, as well as stocks, bonds and mutual funds.

The platform promise could make the traditionally favored way of saving for retirement, tax-deferred registered retirement savings plans, obsolete for some well-heeled investors. They are most likely to have used up the 18% of total yearly income that the plans can shelter from taxes and to be subject to capital gains taxes.

And retirement savings are a crucial concern. "For the first time since 1999, more Canadians are recognizing saving for retirement as their No. 1 financial priority," according to a press release from Royal Bank of Canada in Toronto.

When Canadians were asked to identify their biggest financial concern, 38% cited saving for retirement ahead of trying to keep their ahead above water (27%) and general savings for a rainy day (25%), according to the 15th Annual RBC Registered Retirement Savings Plans Survey.

"As the population ages, perhaps it's no surprise that Canadians are placing more focus on saving and planning for their future life phases," said Dave Richardson, vice president of RBC Asset Management Inc. of Toronto.

On the other hand, changes to capital gains taxes will provide the wealthy, who have used up their capped RRSP room, with new incentives.

"I think it will improve liquidity and the attractiveness of owning Canadian financial assets, although I don't see it as a watershed event for Canadian financial markets," said Douglas Porter, deputy chief economist at Toronto-based BMO Nesbitt Burns Inc.

The left doesn't like the proposed change.

"It's actually an amazingly tiny group of well-off Canadians who will capture the lion's share of the benefit," said Jim Stanford, economist at the Canadian Auto Workers union in Windsor, Ontario.

The Conservatives are going to have to work with parties of all stripes. Waltham, Mass.-based economic research house Global Insight Inc. noted that, "As a minority government, they will always be vulnerable to a concerted push by the opposition."

The Conservatives were elected in 124 ridings, the Liberals won 103, the separatist Bloc Quebecois took 51 and the social-democratic New Democratic Party was elected in 29. Quebec sent one Independent to Parliament Hill. To achieve the required majority to pass legislation, the Conservatives will need at least another 31 votes from other parties.

Mr. Harper will need House of Commons approval to change the regulations regarding capital gains taxes. He is likely to get it, according to industry observers.

"He has a huge amount of goodwill going into this. He just doesn't have the legal authority," said David Zussman, an expert on governance and the Jarislowsky chair in public sector management at the University of Ottawa.

Many questions remain about how the new capital gains rules would be put into effect.

The actual dollar amount of taxes avoided though the proposed capital gains tax rules would amount to $650 million over five years, according to the Conservatives. A Department of Finance spokesman said Ottawa gave up $1.9 billion in forgone revenue from individual taxpayers because of the 50% exclusion rate on capital gains.

The government can afford it. New York-based Standard & Poor's Ratings Services on Jan. 30 affirmed its AAA long-term foreign and local currency sovereign credit ratings on Canada.

"The 'AAA' rating on Canada rests on the country's sound public finances, its diversified economy and its political stability," said Standard & Poor's credit analyst Nikola Swann, in a press release.

The capital gains measure would "unlock a lot of money that's tied up today because people don't want to pay a capital gain when they crystallize their gain," said Monte Solberg, a Conservative member of Parliament.

Some expect Mr. Solberg to be finance minister, though others view former Ontario Finance Minister Jim Flaherty as a leading contender.

The Conservatives plan to introduce a new budget next month. If the capital gains measure runs into political hot water, the Conservatives may have other options.

"The new finance minister may choose to table the notice of the measure on a point of order or during debate, etc.," said the Finance Department spokesman, who asked not to be identified.

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