U.S. President Donald Trump’s promised tax cut to the rich could sway some Canadian professionals to move south of the border, especially to states where there is no personal income tax, suggests Jamie Golombek, managing director, tax and estate planning at CIBC.
Speaking to the Toronto Chapter of Advocis in January, Golombek said there are currently seven tax brackets in the U.S., with those in the top level of US$418,000 paying 39.6% federal tax.
Trump’s stated plan is to reduce that down to three brackets. The top group would kick in at US$112,500 and the federal tax rate would drop to just under 33%. Most U.S. states also have state income taxes, but seven don’t, including Canada-friendly Florida.
Canada on the other hand, has five federal tax brackets, with income from $142,353 to $202,800 taxed at 29% and anything over that at 33%.
Provinces also have their own tax rates and when they are combined with the federal rates can mean a top rate of 53.53% in Ontario with Nova Scotia slightly higher with a top marginal tax rate of 54%.
Golombek gave the example of a Toronto physician, a specialist, making $800,000 a year who receives an offer to move to Miami. Should the doctor decide to make the move, she will know that if Trump’s policies go ahead, the most she will pay is 33% in federal income tax (Florida has no state personal income tax), compared with the 53.53% in Ontario for anything over $220,000. On top of that, the American greenback is worth 30% more than the Canadian dollar.
“Could this somehow put pressure on the federal or provincial governments to lower our top rates?” asked Golombek.
“For mobile workers, professionals and those in the high tech industry, I think there is concern,” he said. “Not that people are running to live in Trump’s America, but if the numbers are this compelling then maybe there will be some pressure on Canadian governments … to lower our rates.”
Golombek noted that Trump has said he will lower taxes for all Americans: the top 1% will see their bill decline by 27% and middle- and lower-income Americans’ rate would go down by about 10%.
But under the proposal, he said middle- income Americans will pay more on a per capita basis.
“In Trump’s plan, the top 1% actually [would] start paying a smaller share of all federal taxes, while the share of the tax burden is now being shifted to the middle class – all the people who voted for him.”
Principal residence exemption
Back on this side of the border, Golombek reminded the financial advisors about the federal government’s recent rule on the principal residence exemption. Starting with the 2016 tax year, the sale of a principal residence must be reported on the Canadian taxpayer’s tax return in order to claim the exemption.
The purpose, he said, was to ensure that those who buy and then renovate and flip homes as a business pay their fair share of taxes. In the past, professional contractors would legitimately move into a house with their spouse and children and the home would be considered their principal residence. Over the course of a year, the owners would make major renovations and then at the end of that year, sell the house at a higher price. This could happen year after year with different homes, and because the house was their principal residence the contractors could claim the exemption and wouldn’t have to pay any taxes, said Golombek.
“Now they’re going to be caught because they have to report every disposition they make,” he said. “Maybe that should be a capital gain or maybe it should be…wholly taxable business income.”
Health care tax exemption
There had been much speculation that the federal government would make some changes to the health care tax exemption, an important issue for advisors who sell group health insurance plans to businesses.
Currently, employees at some large companies, such as banks, insurers and governments may have private health and dental plans, which are considered a non-taxable benefit.
“But why?” asked Golombek. “It’s nice to get this free stuff, but what about another company where it’s not free. [The employees] receive an extra $1,500 in cash to go get their own and that’s fully taxable.
“So from a policy perspective, there’s a very good argument to do away with this. I’m not saying [the federal government] should do it, but I’m saying I wouldn’t be surprised if this is in the [next] budget because this is something that is seen as inequitable and unfair.”
However, a couple of weeks later, the issue arose in the House of Commons during Question Period, where under questioning from Opposition members, Prime Minister Trudeau said the tax was not part of the Liberals’ strategy for the next federal budget.
“We are committed to protecting the middle class from increased taxes and that is why we will not be raising the taxes the member opposite proposes we will do,” said Trudeau.
At the Advocis meeting, tax issues were also front and centre for members of defined benefit pension (DB) plans who are trying to decide whether they should leave their jobs now and take a commuted value of their pension or wait until there are more opportune times to enhance their yield, said Lea Koiv, an accountant with experience in the pensions and insurance industries.
Koiv said when clients come into a financial advisor’s office eager to quit and take a commuted value, it’s the duty of the advisor to help determine whether the timing is right on a financial basis.
Advisors need to remember that solutions cannot be “cookie cut” and that the best answer for any client can only be identified after appropriate analysis, she said.
The first detail that needs to be determined is whether a commuted value is available and if so, the options that are available.
A DB plan may stipulate a maximum amount that can be switched into a defined contribution (DC) plan, and taxes may then have to be paid on the remainder. Koiv said options that may be allowed is to transfer the amount to a “copy cat” annuity, which may have strict conditions, transfer the amount to another DB plan, including an Individual Pension Plan (IPP), or choosing not to commute.
Tax considerations are a big part of this decision-making plan, said Koiv, adding that financial advisors must be cautious in determining the client’s best options.