Expert forecasts new taxes for the wealthy

With the hefty price tag on Covid-19 relief efforts, Moody expects increased taxes aimed at wealth.

First up: a potential increase in the capital gains inclusion rate.

That increase would be an easy target and is politically saleable, since a low capital gains inclusion rate tends to benefit the wealthy, Moody said. The question isn’t if the increase will occur, but when, he said.

While the increase would ultimately depend on several political factors, a logical timeframe would see it fall within the next federal budget, which could be early 2021, he said.

Increases to top marginal personal tax rates are also likely, Moody forecasted, as is applying tax to a broader base of items (e.g., taking away discretionary deductions).

Another unpopular but potential tax development: limiting the principal residence exemption.

Changes to the exemption are “long overdue,” Moody said, noting the large gains on homes in real estate hotspots and the more limited residence exemption in other jurisdictions, such as the U.S.

Moody was less sure about a wealth tax being introduced, though such a tax would be politically saleable, he said.

Some European countries have introduced wealth taxes but dropped them after experiencing minimal revenue impact and difficulty with administration. As such, a wealth tax should be on the table only as part of a comprehensive tax review, Moody said.

Planning ideas for advisors

With the pandemic expected to result in an aggressive taxman, financial professionals must consider being proactive to prevent clients’ wealth depletion.

“Take a hard look at your client’s wealth,” Moody said.

With the potential for an increased capital gains inclusion rate, Moody suggested advisors consider whether their clients can accelerate gains — and the consequences of doing so.

With low valuations, Moody suggested looking at such things as estate freezes or refreezes.

“Low valuations mean less tax on death,” Moody said. For a business that’s going to survive Covid-19 and eventually grow, “this is the time to do [a freeze].”

Other ideas related to low valuations included gifting to children and trust 21-year pre-planning.

With the latter, trust property is frozen at low value so the property can remain inside the trust at the 21-year anniversary, when a deemed disposition at fair market value occurs.

Low valuation can also make succession planning, triggering tax losses or doing TOSI planning more advantageous.

Regarding the latter, now may be the cheapest time for family members to get excluded shares status (10% value and votes), Moody said.

Editor’s note: Advisor’s Edge and Investment Executive were media sponsors of the Distinguished Advisor Conference. This story was written independently of the sponsorship.