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schooltax 22 | summer 2018 cmba-achc.ca CMB MAGAZINE taxes to those whose property values fall? is question is very relevant today given how so the residential market is (especially above $3 million). n Property taxes are the main source of revenue for municipalities. When the provincial government comes in and taxes property in this way, it is reducing the ability of each municipality to provide needed local services from their main source of revenue. In a discussion I had with B.C. Attorney General David Eby, I asked him if the main purpose of this tax was to raise revenue from those who had accumulated wealth above a certain level. As you might appreciate, I never received a direct response to the question, but there was no doubt that the government is making an assumption that those who will pay this tax can afford to. What I then asked Eby to respond to were the following with respect to wealth overall and how to measure it: If one is going to tax wealth, then why choose a tax on only one type of wealth? Why would retirement savings not be included or other types of real estate, shares of private and public businesses, savings accounts, insurance policies, etc.? If an individual for example has $2 million in investments, a $3-million home clear title and an indexed pension that is worth $3.5 million and is currently earning $200,000, then that person has a net worth of $8.5 million. at would put them easily in the top half of 1% of Canadian wealth and top 1% in terms of income. Yet none of this is being used as the basis for raising $200 million in new provincial revenue. I pointed out to Mr. Eby that his boss, Premier John Horgan, will be entitled to a fully indexed pension plan equal to 70% of his best three years income with only 20 years of service (teachers by comparison have to work 35 years to get the same pension levels and then it is based on best five, not best three). Mr. Horgan has had his income almost double because he is now premier of the province and not just an MLA. Our estimate (based on http://members.leg.bc.ca/mla- remuneration/employment-benefits.htm) is that at or before age 65 he will be entitled to an indexed pension of about $140,000 per year with survivor benefits. In today's marketplace it would cost at least $3.5 million to acquire such a pension. Here are some other observations about the MLA/premier pension benefits. n If you were trying to build a $3.5-million RRSP account over 20 years, assuming a 4% aer-inflation rate of return, you would need to be able to put away more than 70% of your pre-tax income to achieve this goal. In the case of an MLA or the premier, they contribute 11% of their pay to the pension, and the government funds the other 61% (by our estimate). e additional contributions do not show up as a cash benefit. ey do not show up on their personal tax return and it is unlikely that the cash value of the pension shows up on an MLA's net worth statement, even though their RRSPs would. It seems to me that these pension benefits are real wealth and very tax efficient and low-cost to the owner of the asset. If we are taxing wealth and the ability to pay on the basis of that wealth, then why would assets such as these be excluded? We started this newsletter with a dictionary definition of the "thin edge of the wedge," with respect to taxing personal homes. Paul Kershaw, tenured professor at the UBC School of Population and Public Health, believes that not just the top 2% of homes should have additional taxes, but the top 20% (homes over $1 million). e tax would be 1% and raise $3 billion per year (people would be able to defer the tax and pay it when the home is sold). is means that each homeowner would have a partner in ownership of their home who can impose the following conditions: n No need to put up any capital. n Able to increase share of the equity of the home over time. n You are not guaranteed to get your capital back first. Your partner's equity comes off the top before any capital comes back to you. And some people think the mafia has tough "partnership" terms! Let's assume in this period of lower expected returns on most asset classes that future returns on homes just match inflation (as has been the case in most of the world for the last 50 years). Let's further assume you acquire a home for $1 million today under Prof. Kershaw's model. Your tax is 1% annually and you can defer it. If inflation is 2% per year, then your home is $1,650,000 in 25 years. Even if the government agrees to allow you to defer the taxes with a 1% rate of interest, your deferred tax bill will be about $360,000, payable when you sell the home. at is about 22% of the entire value of your home, and more importantly, about 54% of your profit on the home. So here you are assuming any appreciation on your home is tax-free and in this case it would cost you a tax rate that is more than double what you would have paid on an investment property. How does this type of taxation encourage saving for a home? is is the thin edge of the wedge. We encourage you to write and call your MLA and express your concerns. We will be collecting articles and data on this question as we did for the tax reform, so look on our website (nicolawealth.com) and use anything that might be of assistance. Even if your home is worth less than $3 million and not currently impacted by the new school tax, there are many ideologues that support any number of taxation models to increase government revenue. As Churchill once wrote, "trying to tax a country into prosperity is the same as a person trying to li themselves out of a bucket by the handles." John Nicola CFP, CLU, CHFC is the chairman and CEO of Nicola Wealth Management. is market commentary is reprinted with the permission of Nicola Wealth Management. Trying to tax a country into prosperity is the same as a person trying to lift thermselves out of a bucket by the handles. – Winston Churchill

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