Advisor says government projections for how much it will earn from passive investment income tax changes are wildly optimistic
The tax changes to passive investment income were an unnecessary complication and missed the big picture, according to an industry insider.
Mark Parlee, senior wealth advisor at IPC Securities Corp, said he understood where the government’s motivation came from as it tried to stop business owners accumulating personal money through their corporations’ lower tax rate, while people with a T4 income have to pay tax on their income before putting it into the likes of an RRSP.
However, he said the favourable pension rules benefiting the civil service, for example, didn’t even come into the discussion.
He said: “The part that was missed in that whole conversation was that nobody talked about pension plans and that people don’t pay any tax on the money that’s going into pension plans, for example the civil service. Their pension plan, the government contributes and that’s not taxable income, it doesn’t even show up anywhere.
“So if you are going to have the conversation, we need to have the full conversation and perhaps we need to take an in-depth look at the whole tax code to begin with.”
The government predicted it will recoup about $925 million from the changes by the end of the 2022-23 fiscal year. Parlee believes this is overly optimistic because the first thing any smart owner will do is move returns from passive income elsewhere.
He said: “[The changes] are certainly going to cause people to sit and review IPPs; certain insurance strategies are certainly going to come into the conversation.
“Let’s face it, if someone has $3 million-plus sitting in passive money, they don’t generally need that money to operate their company. So what you are really looking at is for retirement purposes, inheritance purposes, those kinds of things.”
He added: “Anybody that’s doing any proper planning is not having $3 million of money sitting in an operating company. They’re moving it off somewhere. The projections in the budget of how much they are going to collect in taxes on this money, I don’t see it because the first thing people are going to do, starting right now, is planning. Do we move this into an IPP? Do we put it into an insurance policy? Do we move it off somewhere else? They are not going to just leave it there so it can be taxed.”