PrefBlog

17 Responses to “June 17, 2020”

1. LD says:

   June 23, 2020 at 5:24 pm

   “But yeah, these figures suggest to me that I’m on the right track when suggesting that favorable tax treatment for dividend and interest income be capped”

   James – Am I missing something? My understanding is that interest is taxed like income and dividends are taxed so that when combined with the corporate tax rate, they too are taxed like income. The dividend tax credit serves to avoid double taxation of corporate profits. Will you please explain what you mean by the “favorable tax treatment for dividends and interest income”?

   I know this discussion topic has been ongoing, so I apologize if an explanation has been given previously.

2. LD says:

   June 23, 2020 at 5:40 pm

   Sorry, to clarify when I wrote “taxed like income”, I meant “taxed like employment income”

3. jiHymas says:

   June 24, 2020 at 9:13 pm

   I see no reason to avoid double taxation of corporate profits.

   For some small businesses, the concept is reasonably clear: Joe Blow is making money at his restaurant, or whatever, and you want to make him indifferent as to whether he takes his earnings as income or dividends. I see no clear reason why dividends should not be taxed more, but there’s certainly an argument to be made that they should not be taxed less.

   At the upper end of the scale, however, we are not talking about the earned income of an individual; it is return on capital. There is no logical relationship between the two types of income.

4. baffled says:

   June 25, 2020 at 6:10 am

   you will not be able to find a picture of an explosion big enough , to cover the drop in price of pref , or div stocks in general , if the tax treatment of dividends is changed .

5. jiHymas says:

   June 25, 2020 at 11:54 am

   you will not be able to find a picture of an explosion big enough , to cover the drop in price of pref , or div stocks in general , if the tax treatment of dividends is changed .

   I’m not sure about that; the only change I advocate is the imposition of a cap on the amount of dividends / capital gains for which an individual can get favourable tax treatment.

   e.g., a million bucks, just for the sake of a figure (which I am completely willing to change following discussion). An individual can designate any combination of dividends and capital gains to be treated as they are currently, up to a total of a million bucks annually. Anything not designated becomes ordinary income.

   I don’t think the effect on market prices would be particularly high; but doubtless models of varying credibility will come out in the course of discussion.

6. stusclues says:

   June 25, 2020 at 12:11 pm

   “An individual can designate any combination of dividends and capital gains to be treated as they are currently, up to a total of a million bucks annually. Anything not designated becomes ordinary income.”

   I’m not sure that the impact would be dramatic either in this scenario. For those grey hairs that have structured their retirement income to include a good whack of preferred share dividends, the $1M (or whatever) cap wouldn’t affect their preference for preferred shares terribly.

   The desirability of preferred shares by family offices, UHNW-crowd and people-pretending-to-be-corporations will shake out with price adjustments for sure. However, I suggest that the current seniority spread is so extreme that further price decreases in the pref space will kill off any thought of new issuances, and a combination of buy backs and yield seeking will be a mitigating factor for how low prices can go.

7. baffled says:

   June 25, 2020 at 12:55 pm

   hello , james under the sensible change you mention , then the price drop would probably not be that dramatic . i expect our bankrupt gov , to make a more drastic change as they go after “the rich” , and that i believe will result in a large price drop . i would expect the gov to argue the tfsa provides enough of a shelter , and just change the tax rate on div income along with the cap gain inclusion rate

8. mbarbon says:

   June 25, 2020 at 1:03 pm

   Or could they add a “Surtax” on dividend income, just like “overall income” when they compute the amount of tax owed.

9. dodoi says:

   June 25, 2020 at 1:40 pm

   James, would you advocate capital gain tax on the principal residence too?

10. baffled says:

    June 25, 2020 at 2:48 pm

    dodoi , unless there is a drastic change in this gov policies that encourages growth ( canada has had the opposite , for the last 5 years ) ( and every country will be trying to attract companies to move and grow their economies ) i do not think anything will be ignored as a source of tax revenue

11. stusclues says:

    June 25, 2020 at 5:04 pm

    “i do not think anything will be ignored as a source of tax revenue”

    I’m for comprehensive tax reform, including wealth taxes, and have “stepped in it” on this board before 🙂

    However, if we assume that incrementalism will win the day and the minority government will stick with taxation of “flows”, then perhaps a NVCC-style approach could be used? (For the record, I like James’ concept of capping so this is just an alternative).

    Basically, existing preferred shares would be legislated to sunset in 5 years (or something!). This would put a floor under existing share prices (basically eliminate a Halloween Massacre scenario like with income trusts) and give companies time to adjust their capital structure while increasing tax revenue for the government. Investors would realize capital gains (taxable!) in exchange for the dividend tax credit.

    We’d probably see an acceleration of buy backs and a new class of preferreds emerge (at higher coupons/resets!) possibly with new features. Essentially, some other value (beyond dividend tax credits) will need to be used by companies to attract buyers to prefs in exchange for the flexibility to turn dividends on and off (in theory not practice) in perpetuity.

12. LD says:

    June 25, 2020 at 7:41 pm

    “the only change I advocate is the imposition of a cap on the amount of dividends / capital gains for which an individual can get favourable tax treatment.”

    I’m certainly no tax expert, but Canada’s tax system seems in line with other jurisdictions that provide advanced social programs. Canada’s marginal tax rates for employment income and dividend income are similar to those nations. It’s not like Canada is giving some crazy good (favorable) deal on dividend taxation (considering that dividends are paid out of after tax income at the corporate level)

    So James, why do you advocate imposing an investment income cap for tax purposes? Do you feel that wealthy investors are not paying a fair amount of tax, or is it to decrease the wealth gap, or is there some other reason?

13. jiHymas says:

    July 1, 2020 at 12:08 pm

    Canada has a massive infrastructure gap that is not being addressed. We can pretend all we like that our budgets are balanced – or nearly so – but when bridges become unsafe and commuting times increase, we learn just how much we have been borrowing from the past.

    There is also a redistributional aspect to my recommendation. The PBO report discussed in the main post reveals the staggering wealth of the favoured few. I see no fundamental reason to provide these people with a special tax break; unlike Joe Lunchbucket, they need no special encouragement to save for their retirement!

    Modern technology, by increasing the ‘leverage’ available to innovators, has expanded the rewards for innovation – and early adoption of such innovation – beyond all recognition. This rising inequality can ultimately lead to widespread social disorder – and even if it doesn’t, I have no wish to live in a Brazilianized world divided between gated neighborhoods and favelas.

    On a strictly numeric basis I urge you to examine Canada’s recent history of deficits. Over $100-billion in deficits was incurred in the early stages of the recession caused by the credit crunch; there has been absolutely no effort made to pay that back. We simply got back to break-even, patted each other on the back, and then started cutting taxes again so the rich would get richer.

    We’re currently about $250-billion in the hole due to the coronavirus and that’s just federal. What happens when you include the provinces? Doubles, maybe? There’s informed talk of a $40-billion deficit in Ontario.

    How’s that getting paid for?

14. jiHymas says:

    July 1, 2020 at 11:13 pm

    James, would you advocate capital gain tax on the principal residence too?

    No, not really.

    There are a couple of reasons for this:
    i) if you put a capital gains tax on principal residences as the Americans do, you are logically obliged to make interest payments on mortgages tax deductible. I suspect that this would be largely a wash in terms of revenue and a distortion of the market in that rent payments would continue to be made with after-tax funds.
    ii) a principal residence is logically property held for personal use.

    But why do I say ‘not really’? Well, a case can be made to put a cap on the total value. I see nothing wrong at first glance with saying that the first two million (?) dollars worth of personal residence real estate falls under the ‘personal use’ exemption, but anything above that is a taxable investment. However, this is something I haven’t thought much about.

15. baffled says:

    July 4, 2020 at 6:58 am

    james you ask ..”How’s that getting paid for? ” odds are good it is never getting paid . i think a better question is , when is the great world wide debt reset going to happen , and what does our money and world look like after it does ?

16. jiHymas says:

    July 4, 2020 at 11:39 am

    james you ask ..”How’s that getting paid for? ” odds are good it is never getting paid .

    You could well be correct.

    However, I think back to 1994, when I was a junior portfolio manager trading Canada bonds on behalf of clients.

    There were very definite fears amongst the dealers’ proprietary trading desks that a Canada bond auction would fail. That would probably have been a disaster; interest rates would have rocketted and there would have been significant capital flight.

    It never happened. But fortunately, that fear was successfully communicated to the politicians, tight austerity was implemented and government finances were repaired.

    So … I’m hoping for a repeat of that, which I think is the best we can hope for. The alternative will be very, very messy.

17. peet says:

    July 4, 2020 at 3:52 pm

    James, interesting that you should remember this … so I’m posting a link to a 2011 article from the Financial Post that also dealt with this 30-minute moment and, more generally, the debt bomb(s) at the time.

    https://business.financialpost.com/uncategorized/lessons-from-canadas-basket-case-moment

    It too makes for an interesting read, if for no other reason than it shows how leadership at the top willing to make necessary (but politically very risky) decisions can make a difference.