YOU CAN’T TAKE ANY WITH YOU
And the government won’t let you give it all to your children
By Chris Morris, The Canadian Press Fredericton

Harry Smith figured the lakefront properties he bought near Fredericton years ago would someday be a nice nest egg for his family.

Smith had no idea his nest egg would hatch into a nasty bird of prey ready to gobble up the fat inheritance he planned to leave his children.

The Fredericton businessman purchased 20 lots for an average price of $5,000 in the 1960’s. Today each is worth roughly $50,000.

Smith is sitting on a million-dollar hot potato. Should he die and leave the land to his baby-boomer kids, they would have to come up with $300,000 to $400,000 to pay the taxes.

“He had absolutely no idea this could happen,” says Brent Hanson, a retirement planning specialist with London Life in Saint John, N.B., who is helping Smith sort out his finances. “It’s not the kind of thing people think about.”

Welcome to Canada’s capital gains tax.

There’s a widespread perception that the levy is only a problem for the rich; that death duties are pretty much a thing of the past in Canada.

But in recent years, many businesses and parcels of lands have been lost because the family estate didn’t have enough money on hand to pay the capital gains. Before the heirs could get their inheritance, they had to sell so Revenue Canada could get its cut.

A lot of people say “This tax is never going to affect me,” says Walter Robinson of the Canadian Taxpayers Federation in Ottawa.

Affect many boomers  

“Well, yes it is. It’s going to affect many boomers as their parents are starting to pass on and they’re inheriting a great deal of wealth.”

“Trillions of dollars in assets are supposed to pass over the next 20 years or so from the boomers’ parents to the boomers. These are Depression-era parents, and that’s where it will really hit home. The debate will coincide with a lot of boomers realizing this capital gain issue for the first time upon the death of a parent or parents.”

Canada’s high capital gains tax rate is becoming a political target as pressure grows on the federal government to reduce taxes in a number of areas.

“We’re going to push up the temperature on this whole issue of capital gains,” says Jason Kenney, Reform revenue critic in the House of Commons.

“We’re launching an information campaign on it. It’s a huge tax on savings and investments. People who started small businesses and invested in them their whole lives find they lose about 30 to 40 per cent of the value of the business when they go to sell it. They can’t pass it on to their kids. It’s a very destructive tax.”

There has been a capital gains tax in Canada since the early 1970’s, but the federal government has steadily increased the rate and gradually removed exemptions for most transactions.

The tax rate on capital gains is 75 per cent. That means if someone makes $100,000 on a piece of land, the sale of the stock or a business, $75,000is considered taxable income.

The situation is even worse if your last surviving parent dies and leaves behind, say, $250,000 in registered investments, either an RRSP or RRIF.

“Upon death, all $250,000 is taken as income in the year of the death,” says Bill Jory, an investment representative with the Edward Jones firm in Ottawa.

“It’s all taxable. In that respect, this is a nastier situation than the capital gains and many people are not familiar with it at all.”

Source: The Windsor Star