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198. 2024 Canadian Tax Changes, CPP And Economic Updates · Wealth On Main Street

• 0:00
  Speaker A: You are listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe, as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on. Get our simple seven step guide to becoming your own banker. It's easy. Head over to Sevensteps, CA and learn exactly the learning process required for you to implement this amazing strategy into your financial life. That's seven steps, CA 2024 the Tax man's coming. You better watch out. I know we're recording this around Christmas time, so everyone's watching out for Santa Claus, but by the time you hear this, we're going to be in a new tax year and I'm telling you the tax man's coming. Now, you probably already knew because you've probably already been impacted by said tax man, but in 2024, there's some important changes you need to know about and we're going to cover them today. I'm joined with my good friend Henry Wong here today, our resident tax specialist. And boy, we got some doozies for you in the recent update for the budget and how Canadians are going to be, I would say, whipped into further submission through the use of penalizing taxation and to some degree, some, I guess I would almost call them hidden or unknown layers of tax that are going to suck dry more of your hard earned capital as you go about earning money to survive and keep your food on your table and pay for your very expensive canadian housing. So I think we're going to have a little bit of fun today. And I was sharing with Henry as we were hitting the go button. Know, you go to a comedy sometimes. You know, the things that are the funniest are know the comedian is telling a story, of course, and it's relating to some painful experience that they had in their life and they're bringing you along for that journey and you feel for them like, oh yeah, I've kind of had an experience like that. Well, hopefully you could take some laughs away from our conversation today because we're going to hit some pain points, I guarantee you, about just how much you're going to get. I guess the whip smashed on your back as you go through the 2024 tax year in Canada at least. So we're going to cover some premium tax changes that are coming up, hit some of the main categories. We're going to spend a little bit of time on some of the easy ones and then we're going to dive much deeper into what Henry feels is by far the biggest, most impactful change for the average Canadian, and it's the one that's probably the most misunderstood. So we're going to spend a little bit more time there understanding just how this thing called alternative minimum tax came to be in Canada and why we need to be very mindful of it as we go into 2024. Henry, I'm excited to get this show started.
• 2:51
  Speaker B: Yeah, it's a lot of fun. I mean, it's in December and most of the time people will see December as fun and festivities. This one, I hope it doesn't come as there is a grinch that could potentially steal your Christmas. So the main thing that I wanted.
• 3:10
  Speaker A: To steal this Christmas, but he's definitely working towards stealing next Christmas, Christmas, 2024, he's going to be taking a big chunk out of definitely.
• 3:17
  Speaker B: And so tax for many people is a lot of money. And I would just put into context that it is a legal requirement that you are paying taxes. And as you are entering 2024, just as you set your goals to what you want to do in the next coming year, how you want to go about doing it. And the part that what people usually spend their time focusing on is how much more money that they'll bring, you know, by virtue of work that we do, Richard, we are helping people build their own family banking system, becoming their own banker, implementing the, the infinite banking concept that is related to using their capital. Now, from another standpoint is actually once, let's say the client is working on bringing in their capital, we're helping them build that storage warehouse to protect their capital. The other component is, well, what about the capital that would potentially leave them? And there is still that arrangement as it relates to taxes. So taxes for people is actually a lot of money. And what I want to dive into actually, at the beginning is first we'll go over some really quick, simple, but very major tax changes that happen, because by virtue of what we do, we're focused on trying to help clients keep more of their money, and taxes is definitely part of them. So we'll start with some of the simple ones, and then what we'll go into is some more in depth ones that are actually very important to recognize. And I will put together more from a strategic standpoint because I think it's actually important to be very mindful of these tax changes because the tax code is so large, so thick, written in such a difficult way. And we're all inundated with information, so we'll never really know. And not all of the new changes in terms of the scope of their impact would affect you. But these are the ones that I've kind of pared down that have, in my opinion, at least in the clientele that we work with, have a major impact for people. So that's what we'll dive into afterwards, too.
• 5:23
  Speaker A: Yeah. And to add some more context to that, some people, there's a lot of marketing out there that happens, especially in this political sphere, about how we're going to pay for everything. And, of course, the only way the government can pay for anything is through taxes. They literally have nothing else to use. Or they basically mortgage the backs of future Canadians by selling bonds so that they can raise capital. That doesn't seem to be literally. It doesn't seem to be working very well either. However, we have to understand that the canadian population, roughly 40 million people, we're a little under. That is a population base that has people in very different income brackets like any other country. There's people on the low end and on the high end and a lot of people in the middle. It's a bell curve, essentially. So one thing that we will be looking at as we talk about this is once we announce some of initial ones, is trying to understand, okay, we hear certain statements, certain things out there in the marketplace, like, oh, we're going to tax the rich because they have all the money and that sort of thing. And so we should really actually have an idea. How much are we taxing the rich now? Who is actually paying for the bulk of the taxes that are coming into the federal coffers? Where is that money actually showing up from? Who is paying the bulk of it now? Is it the wealthy? Or is it the poor and the middle class? Like, who's actually paying and footing the bill? And I think when we have more context on that, we can think about our own unique circumstances wherever we fit on the curve doesn't matter, and just have a relevance point understanding, hey, if you're in the middle of the curve and you're trying to get higher on the curve, what is some of the impact if you do that? And so it's about considering the way we think through how the taxes are showing up at our life, at different stages of life relative to our incomes, and then we'll tie some inflation ideas into that as well. So do we want to go over the summary of the top changes first, Henry? Or do we want to maybe just jump into understanding who's paying the bulk of taxes first? Where do we want to start, yeah.
• 7:25
  Speaker B: Let'S go through the context of our taxation system and tie into that point that you've gone in there. So one thing I will share with you, and maybe listeners can actually relate to this, is when it comes to messages that are being shared from politicians or the government and things of that nature, I personally take a half listen to the messages that get shared. Now, I do listen to very particular points where my ears will get perked up on certain things like, oh, we're going to enhance your HST or whatever they're going to do. But very few people have the intimate relationship of knowing from that type of announcement what that trickle effect or what those actions are actually going to link and tie to. And they're like, oh, we're going to invest in new housing, we're putting $60 billion together, or we're going to help issue a new health plan or anything like that. And again, it's still tying to those trickle effects and what the context of the situation related to where the government of Canada stands as it relates to their debt and their needs. But there's one statement I definitely want to make sure that you probably hear this quite often, or campaigned about, is tax the rich because they are not paying enough taxes. Now, if I take it from the vantage point of hearing that for the general population of Canada who's in a situation of struggling and everything like that, they're like, oh, this is the richest problem, why there's not enough money for the government because they're not taxing enough. I will just kind of share with you, in my opinion, some objective data. So I'm going to borrow some of the research and I'm going to give credit to the Fraser Institute for this. I'm just interpreting the information. I think it's actually important for context, people to recognize related to it.
• 9:26
  Speaker A: And anytime the word enhance or invest comes up in a government speech or a politician speech, they're going to enhance something. I would immediately be concerned what that means for the tax bills. Anytime they're enhancing something, the money is going to come from somewhere, and the only place the money comes from is out of your back pocket.
• 9:46
  Speaker B: Most definitely there's announcements that kind of stir an excitement or some form or division, whatever it is. I think it's actually really important to find ways to measure the actions that come from that. If they're going to say, oh, we're going to launch new housing, we're building more, or we're issuing a new GST rebate or HST rebate or whatever it is, people can't really make that connection. What the actual actions are going to come to that. So if they're taxing the rich. One thing I just want to share with you, and this is not to discriminate anyone, is just talking about very important information that I'm going to share here, and you can draw your own conclusions to it. What I wanted to share here, again, I'm borrowing from the Fraser Institute, and I'm going to walk through several pieces of information. Here is what the Fraser Institute has actually done. A tax simulator gathering the population of Canada, and they've segregated into five groups. And that five groups is broken down into the bottom 20%, which is zero to 59,270. And the part that I want to highlight here is the actual average of family income for Canadians. For one spouse is 50,000 and the family. So if there's two working spouses, is 100,000. So the bottom 20% is up to 59,270. Then there's the second quintile, the middle quintile, 59 271 to one, four, eight. Then you have the third, fourth and fifth quintile, which is the top 20%, which is 243 799. Now, I just want to give a little bit of context of numbers when we talk about it. The statistic, canada, the population, they're very proud of announcing that Canada has finally reached 40 million in terms of a population. And if we take the 20%, that's 8 million. So if we break it down in these quintiles, 8 million of Canadians are earning income above 243 799. Now, that's just kind of the segmentation of how the Fraser Institute has grouped these people. But now, what I want to share with you is a very eye opening chart, which is the first one here, if I go back to this picture here, is that in 2023, what they've come towards for people to see is, on average, the average canadian. So that 50,000 plus 50,000, $100,000 of family income, 45.3%, is paid in taxes. Now, when you hear taxes, you just think of income taxes. We're talking about carbon taxes, sin taxes, gas taxes, all those taxes, property taxes, property taxes, all those sources of revenue combined. Formulate this. 45.3%. Which, if we look at that pie as relative to people who. What they need, which is including inflation, in some ways, 35.6%, is to survive the necessities, clothing, what you need to eat, how you live. That is less than the amount of money that you're paying towards governmental services. So, again, breaking into context. If the family income is 100,000, we break it in half, which is one spouse is working just to pay for the government's taxes. 45,300. That's pretty eye opening. This pretax, by the way, 50,000 pre tax. So post tax is actually less. So actually, some of the second spouse's income is used to just pay for the taxes.
• 13:24
  Speaker A: Yeah. It's important to understand that these numbers aren't coming from thin air. The Fraser Institute does a lot of research on this, and again, they have reports available on their website. We'd encourage anyone to go take a look at that. But where I think this gets really interesting, Henry, is when we look at those five groupings of people, the bottom 20%, which were just below 60,000 a year in household income. The top 20%, which were over 243,000 in income. And each of that, the bottom and the top is 20%. So there's 8 million Canadians at the bottom and 8 million Canadians at the top of that chart. So I think that's important for people to kind of see. And then in the middle, of course, we have people earning between 60,000 and up to 244,000. So several groupings here of canadian households. And where this got really interesting is when you showed me the chart that walks through what amount of the total personal income taxes received by the canadian government of tax revenues is paid by these different groups of Canadians relative to their income.
• 14:35
  Speaker B: Yeah. Now, what I'm going to share with you, again, is just from their research, they've shared the load of from personal income tax that the canadian government receives. It's very eye opening for people to actually see this, where all of the money that they receive, the canadian government, how they then whip source and the size of that source is coming from. You would think it's a very particular bell curved way. However, this was very eye opening, and I wanted to share this. So this figure that you see here is the bottom 20%, the bottom 8 million. You'll see this Orange color, which is share of the total income. And then what I want to highlight specifically is share of the taxes paid in total that they earn x amount of money, that 50,000, let's just say. And then of that, the amount of taxes they're paying as a group of every of the 40 million, let's just say they're contributing 0.7% to it. And then we move to Quintile two, which they're taking the share of income, 10.1%. And then 4.6% is being taken from them in the form of taxes. Now we move to the top 20%, where they are contributing 45.7% of the income. And the total taxes that they're contributing to the government is 61.9%. So when you hear expressions related to tax the rich, the perspective that I would take is the government's revenue source is clearly in the right customer group.
• 16:15
  Speaker A: Yeah. To hit this one more time, just to read it, because it's a very interesting chart and I think it's important for people to understand. So in other words, looking at all of the taxes paid and all of the income earned for every canadian who fits into these five categories, well, the income earned, the bulk of the income earned, about 45% of it was in that top 20% category. But the taxes paid the revenues into the government coffers from all personal income taxes, 62% of all the revenues came from the top 20% of people. So I think it's important people to really recognize that that means that 62% of all the government revenue on income taxes for personal income, t four or whatever related income, is coming from the top 20% of people already. And what's really fascinating about this, Henry, I looked at this chart a little bit differently, where if we look at the other groupings of people, we have, again, quintile two, three, four, and then the top 20%. If we look at the top three sections and we add up all of the percentages of income taxes paid, 94.7%. 94.7% of every tax revenue dollar for personal income taxes is in the top three brackets. Well, the third bracket begins at $104,000. So if you're making household family income, household family income of $104,000, you represent everyone. That's that category. And above represents 95% of every dollar for personal income taxes funding government revenues. That's an astonishing way of looking at it. And so it's just important to understand now, as you move forward and as we talk about these changes in 2024, I want you to have this. The reason we're going over this now is because talk about 2024 changes, you want to think about how your year is going to shape up in 2024, and what is your income maybe going to be, what is it projected at, or is there going to be a pay raise, is there an increase, whatever, all these things that are happening? Well, in the high inflationary world that we live in today, which everyone's moaning about inflation for the right reasons, and it's not a Canada problem, it's more of a global problem and imagine that probably has to do with a little bit of money printing. We won't go down that road. So food inflation and all these other things are up. If your income isn't keeping up with inflation, well, then it's hard to maintain with the level of inflation cost. Okay, so that's a pretty simple thing to understand. But most likely there is going to be some inflationary gain, let's say on income for a lot of people over the next twelve months, pay raise, whatever it is. It's common that as inflation drives things, often wage inflation does experience some things as well. It tends to go up. It just isn't going up in balance with the true cost of everything is the issue. But as your wage continues to rise, it's pushing you into future tax targets. The inflation itself is taxing you. It's a hidden tax on everything that you do. In order to keep up with the hidden tax on everything that you do, you're hoping that you can get an increase in the wage to match with the inflation. So you need to get a wage increase to match with the hidden tax, but it pushes you into a higher tax bracket. So the marginal tax taken on every future inflated dollar is worse. So it's like a whole nasty puzzle that just says less money shows up for you. You got to work harder for less money, work harder for less money, work harder for less money. It seems like a hamster wheel scenario that you're put on. So if you feel like you're running on a hamster wheel right now, that's probably part of it.
• 20:20
  Speaker B: Yeah, that was the exact visual that came to my mind as we were talking about it. Richard, is that in the system that is designed with the money printing that's happened, weakening the value of the dollar, meaning you need more money to get the same things that you were getting before. Added with the fact that the only way that most people get more money is to get more income, which is based on the progressive tax system, or I call it the punishment system. You are getting disincentivized to make more money because of the marginal tax rates and the other incremental tax rates that that starts attracting. And so you ultimately end up working harder and keeping less for yourself, which is the never ending battle that we work with our clients every single day on to help them actually keep more of their money, rather than they're going to be talented to make more of themselves. But we've got to help them add value to help them keep more of that money. So these strategic discussions are absolutely important to have with the right people in your circle or team. And this is what I like to work with my clients on. And we have these kind of discussions because how could I say I'm interested in your financial wealth or helping you in your financial journey without my own understanding of how the tax system works, which is like a 45.3% expense. That is a big elephant in the room. You just can't ignore that. I can talk to you about investments like there's no tomorrow, but the big elephant in the room is 45.3% of your money is leaving you. And it's even worse for higher incomes that we just already shared. This is a big problem. How do you strategize a plan? And so ignoring the fact that you will hear campaigns that really, in my opinion, are divisive and puts pressure on people who actually work hard and earn the income that they're supposed to earn. Let's just talk it like properly, right? They are able to access more resources, but they have to bear the burden of paying for professionals filing their taxes. If they have multiple companies, then they're paying professional fees up the wazoo just to give the government the information that they want just so that they can tax them more. You can kind of see this is like a never ending cycle of challenge for Canadians who actually work hard.
• 22:45
  Speaker A: You're right. It's a very big deal. And it's important to understand that as we talk about these new changes in 2024, our hope, our goal for you at the end of this conversation, is to really take stock of understanding and thinking about, spend some time, book some time in your calendar this year to think and plan proactively around your taxes. Don't wait until December or wait until February of 2025 to do it. Start the process and be very intentional about coming up with some tax planning around whatever it is that you might do, whether it's even just listening to some of our other podcasts and just exposing yourself to more of the concept of how you're being taxed so that if you understand the. How, you can begin to figure out what you might do about it specifically. If you don't know what's going on, you won't know what to do. So hopefully that's what the takeaway is from people listening into this. And so with that in mind, Henry, I think now that we've really helped people clarify who's actually paying the bulk of taxes in Canada and how probability is. If you're not in that category yet, even just with inflation, you're moving towards that category anyway. So if you're not there now, you will be eventually. And let's talk about what these changes are. Let's kind of hit the quick and dirty ones, and then we'll move into the big kahuna that you shared with me earlier today that I'm excited to chat about. I think it's going to be very eye opening for a lot of our listeners today.
• 24:14
  Speaker B: Yeah, I'll start with some of the small things. So if anybody's owing tax money to the government, beginning in 2024, the interest rate that they're going to charge now, instead of the 9%, is now up to 10%. And what's really important, in case you don't understand financial instruments and the calculation of their interest rates, it's not compounded annually or compounded monthly. It's compounded daily. This is very penalizing. So it's 10% compounded daily. That's very crazy. So you have $10. You owed them $10. The next day they would take 10%. So $11. The next day they would take and divide by 365 and so on. So the incremental of each compound is by the day. So that's their calculation to it. Yeah.
• 25:01
  Speaker A: So just to reiterate, so it's a 10% annualized rate, but the compound period, a lot of people don't realize the difference is, like most auto loans or whatever are compounded monthly in Canada, mortgages are compounded semiannually. So the compound period basically puts another amplifier, potentially, on the amount of actual interest accumulated. So the effective rate becomes potentially more than what the number that they show you.
• 25:30
  Speaker B: Now, the next thing that I will talk about is Canadians may not know this enough in detail, but in the tax code, there's something called the general anti avoidance rule, short for Gar. And tax practitioners kind of have a little bit of idea, and the reason why it's introduced, and it's introduced in a very liberal way, in the sense that if the CRA detects ways that and how you're planning for things is way too aggressive, doesn't know that way too. And reasonable is very subjective to interpretation. They have every right to challenge you for it and penalize you for it. So they've installed that type of rule into the tax code, and that was installed for a long time ago. And because of all the changes that happened in tax rules, I'll just issue one as an example. In the past, back in 2017, 2018, a way to tax plan for children that you have in your family. If you have a lot of money in your corporation. You can include them in corporations in a very particular way and then split the income. So let's say if you have four people and you have $100,000, instead of doing one person $100,000 and get taxed on a concentrated basis for that time, you can divide it 25 25 25. So that, as an example, can lower your tax bracket issue. And then by doing that, but the taxes changed through their scope of what they do first. Now, created a new channel that prevented. One of the strategies that I talk about in our book Richard, co authored together, which is keep taxes away from your wealth, was dividing your income. So if you divided your income, that was a way to bring down your tax bracket, but still get retain more of your capital to it. Now, they introduced that rule in 2017, 2018 that prevented children under the age of 18 to be included in those type of tax planning arrangements. Now, in 2024, what they've done is expanded the scope of GAR. So, meaning it increases their ability to be able to challenge you further. And this includes significant adjustments. There's no clarity on what that means. So if it's probably non normal transactions that they're used to and their patterns that they see in your tax files, and they're of large dollar values, they'll probably investigate or audit you for it. And if it's found to be out of the code, then it'll be backed by large penalties and a lot of that. Also, in terms of the GAR, they've still loosely put in language that are basically, and this is my opinion, there's a very planned, mobilized action to go after tax planning directions. So this is really actually having the right skilled, experienced tax practitioner is actually getting into very high demand, and these are going to start altering tax planning dynamics, how you structure transactions, and also other considerations and disclosures. So that Gar scope and what they're trying to tackle now, instead of being specific with issuing new subsections or sections on what is allowable or not allowable, they just put a blanket in there and they just said, if there's some questionable tax planning, we're going to investigate, and then it's going to fall into bigger penalties than what it was before.
• 29:03
  Speaker A: Become your own banker and take back control over your financial life. Hey, is this even possible? You may be asking, can I even do this? Well, you better believe it. In fact, it's easy to get going. So easy that we've put together a free report, seven simple steps to becoming your own banker. Download it right now go to Sevensteps. Ca. That's seven steps. Ca. Now let's get back to the episode. I think it's important to hit that. And I think most people are probably familiar who'd listen our show, what they've seen Gar or Gar before in some way. And what's important to recognize is you said something about scope. So a change happens sometimes in a previous budget, three, four, five years ago, something happens, and it seems very small and insignificant at that time. And so we kind of, oh, okay, that's not a big deal. And we just move past it and we go on with our life. But what actually is happening is they're opening a doorway and they're cracking the doorway open so that in future years, once you've forgotten about what they've done, they can go and kick the door wide open and make it a much more impactful thing that they put in years ago. And so those are the things that we want you to be thinking about as we talk about the other remaining updates for the 2024 budget. And just be mindful as these budgets come about. Although something doesn't seem like it immediately impacts you, really take a look at it and say, okay, how might this impact me in the future? What could this thing that they have added lead to in a couple of years from now? And you can start to see the trajectory of how that overreach begins to happen and the amount of money leaving your wallet seems to increase.
• 30:56
  Speaker B: Absolutely. So Gar, speaking to your point, Richard, is a good example. It was introduced as, let's call it a nice honor system. And the rationale that got pushed through is it's a nice honor system so that we're making sure people don't skirt the tax system because it's bringing less revenues for the government. But what's really concerning as it comes to now, 2024, this was very concerning, personally, for me to realize if you actually pull it up and start reading the language behind it, it's now becoming, in my opinion, much more aggressive towards any, let's call it common sense situations. And it's also now presumed you're guilty or anything that is outside of predictable pattern. It's giving them an ability to rationalize, looking into what you're doing before when it was actually much more, I'll call it friendly. Now it's like, oh, this is unusual. I now have the right to issue you a challenge and start investigating you. And that's very troublesome, in my opinion. And instead of doing it section by section by saying I can't figure out all these tax planning structures and strategies. I'm just going to shove it into the gar, which is an overarching one, that if I can't challenge you on the subsection, I'm going to challenge you on the basis of Gar. And that's very troubling to hear.
• 32:23
  Speaker A: Basically, it's a catch all for them to be able to say, we really want to challenge this guy on something. Yeah, what are we going to use? Gar will work and we've already set up, so let's just use that.
• 32:33
  Speaker B: So even though they don't have any specificity, they can put together some possibility that you're breaking Gar and then just throw you into some lot of challenges. And when you go through an audit, it's actually a lot of resources that you also have to endure. Paying the professional, assuming your books are organized, you still have to assemble them, your time and everything along those lines. It's a lot of work. And this is also additional administrative tax burden that people don't see. Now, this one is very troubling, again, in my opinion, because it's very one sided. So we understand how businesses work. We have this assumption that if you're earning income to bring in, but you have to incur expenses as long as the expenses are incurred as it relates to generating that income, you should be able to decrease the amount of taxes you pay. So you should be able to apply those expenses to pay less taxes on the income, the money that you brought in. Now, what was just changed very quickly in Q four in October was an announcement that short term rentals, so if you're using, I'll call it listing sites I don't want to name, maybe like Airbnb or those type of, or basically short term arrangements, this is less than 30 days. Those type of short term rentals, which not only have the burden of needing to pay and file for HST, not only have the burden to file for. A lot of cities have what's called accommodation tax and what now unilaterally, just to stop the, I'll call it entrepreneurs of wanting to generate extra income because maybe they're feeling pains from inflation or whatever that reason is, they just full out sledgehammered that you're no longer able to deduct expenses against that income. And it's enforced at the federal level, not at a municipal level, but at a federal level. So if you earn $100,000 on your short term income and you incurred 70,000 of expenses to generate that 100,000. So you should be paying taxes on 30,000. That 70,000 is no longer allowable for expense deductions. The full 100 is now added into your income. So when people hear about paying more taxes, it's not from the first thing that most people have in their mind is my tax bracket is going up. But it's these type of changes like this one, where they've completely eliminated an ability or category for you to do it. And if you ask me, I can't see any justifiable reason that makes sense here other than a very powerful policy change that very much discourages short term rental and penalizes Canadians for something like this.
• 35:29
  Speaker A: But I want to expand on this one because this is a big deal and these are the quick ones, by the way, that we're going through. So just thinking through the impact of that, and I'd have everyone who's a listener here consider who do you know personally? Think of anyone in your personal circle that owns, let's say, a rental property or has an Airbnb, let's say rental or a VrBO or something like that, and then just consider for yourself if you've ever used one. At this point in time, I think pretty much everyone's used or been to something like an Airbnb before. I know I've certainly used them a number of times. And imagine what's the impact for the person that owns that unit. And there's people that do this as a business structure. And it's really what's. A lot of people do this. It's their full livelihood, it's their full income, and they have expenses like cleaners. Well, you know, I don't want to go to an Airbnb that hasn't been cleaned. That's an expense. In fact, it needs to be done every time. Things like the sheets, things like the towels, things like the floors, like these things need to be cleaned. And if you have someone staying there for two days, you need to hire someone to do so. Like you might have a condo building, there's condo fees, like there's tax, property taxes. These are all things that have to happen in order to operate and manage that business. So it's no different than running a long term rental, except that there's a high volume of transactions. And so it's an operating business versus a long term buy and hold type strategy. So I just really want you to consider who you know personally that's going to be impacted by this. Make sure they get a copy of this video. Make sure that they hear about the impact of what this might do to their own tax bill because probability is either going to cause them to sell some real estate or it's going to cause them to move to a long term rental situation. But now they might not cash flow. And if they don't cash flow, well, then their income now goes down and into the negative because they can't cash flow that, like everything gets impacted and their quality of life is probably going to go down drastically unless they have to start pulling some levers. So I'm curious, Henry, before we move on from this topic, what are some other ripple effects of this one item do you see taking place over the next year?
• 37:34
  Speaker B: Well, I mean, one thing is the quality of. And this is beyond, I think let's just take a step back in terms of economics and look at the impact of government policy and their intervention and their intervention into something like this. Now, Canadians, as a behavior standpoint will start looking at, okay, if we look at the context of the current environment with high interest rates, maybe long term rentals was not a profitable incentive anymore because they don't have the ability to change rental rates as dynamic as they want. But the bank of Canada, which they have no control over, has increased interest rates. So the bank of Canada, the bank has decided to also increase the lever of how much money they're taking out of your pocket through the form of interest. And you're not able to respond to the same lever that they're able to because you're restricted by rules set up by the government for long term rentals. So then what people may do is if they have been able to turn over that tenant, one of their strategies would be, okay, let's go for short term rentals because I can set the pricing, I'll build my strategy on doing that. And that's what worked. And that maybe helped them keep and make their business profitable. And now then you have something wide swoop that came in with this and then you're like, oh, now I have to actually pay more taxes. So now with that change, you can still be working like crazy. I don't know if anybody's worked in doing to one of the businesses that I used to work with, did a lot of Airbnb. It's a lot of work. And that work is multiplied by the volume of turnovers. Every turnover resulted in cleaning up the place, repairing the place, restoring it back to a very particular state. So that is attractive for rent, ready for the next circumstance. And that is actually a lot of. I'll call it background work that people don't really see, but it's actually very onerous and heavy lifting to do that. So if you imagine if you're not able to deduct expenses for the revenue that you bring in, then you're thinking about do I cut the quality of the experience? What about the cleaners? Do I pay them less? Now I'm going to start trying to find the cheapest cleaners, whatever that is just in that business. And the way that is being done now, that has also significant trickle effects. Then we're looking at the economy. So if you can't do short term rental anymore with the saturation of all the buildings and condos especially that are being built, try putting in Toronto. From what I can see, try putting a Toronto condo on the market right now, the supply out there is ridiculously high. So if you have an empty room or tenant and you have ballooning mortgage that is unvariable or fixed, still high interest rate, and you're not able to fill it up with rent, and you want to get rid of this building, but you can't because there's a whole saturation of supply out there.
• 40:34
  Speaker A: There's buyers that want to buy, but they can't buy because they can't qualify because of the interest rates and the qualifying criteria. And so you have to discount your price even further. And if you discount it further, well, then you don't have enough to pay off the mortgage. And if you don't have enough to pay off the mortgage, well, then you might have to declare bankruptcy. And then if you to declare bankruptcy, well, then it doesn't take long to see how far this trickle effect begins to happen. And then you mentioned the cleaners. Well, those cleaners, they're making a livelihood by cleaning Airbnb properties. I'm sure they clean other properties, but they probably have, if they're in that environment or in that business, that could be anywhere from 20 to maybe 100% of all of their income is just on dealing with Airbnb people. If you're a cleaner, you have a cleaning business, you find one person, they've got ten units, they recommend a buddy, he's got ten units, boom, you have an entire month's worth of work that you do just cleaning these Airbnb units. That's your entire livelihood. And all of a sudden now you can't do them because you're not allowed anymore. You have to go find other customers. The ripple effect goes on in multitudes beyond just one thing. And it's all because of a government decision, in my opinion, without any real thought. Or maybe it went through a lot of thought and they're going to create the exact environment they want. In which case I would be curious, what do you think environment they were looking for? So just posing a question that you can ponder anyway. It's absolutely crazy. Henry. So yeah, this is one of the big changes in 2024, and we're still on the easy ones.
• 42:03
  Speaker B: And that was an easy one. That was just a small, easy one. And there's a whole series of changes that have happened, but we can only cover so much in the time that we have. The next one is related to CPP 2024 changes. Now, this is not really what most people would understand as a tax change, but funny enough, you know, who enforces collecting CPP? The CRA. And I would just argue that in the form of. Without that definition of tax, it's still ultimately money that is leaving you. And today their positioning for it is related to building a bigger, better future for you. Where they've taken the money, they put it into an investment fund, a canadian investment fund. Nothing against those professionals, but I definitely have concern when we've already discussed this, Richard, related to the money, only about 16% to 17% of that money is actually inside of Canada. The rest of it is out internationally, not as much in the US too. So that also brings the question, how is that really serving Canadians? I mean, there's a whole bunch of other, call it differences that are happening at a provincial level, especially around Alberta, around this. So nonetheless, the key takeaway related to CPP 2024 is that has now introduced another tier to CPP. And for Canadians who don't understand how you've, you know, as soon as you earn income on your paycheck, they're taking three items, income tax, CPP, and then EI, and CPP is one of those items. And for this particular year, the rate that they would use is 5.95. If you're self employed, you pay double. If you're employed by your own corporation, you pay yourself a salary, you still pay double. So that basically ends up to be 12% of money that is leaving on whatever that base of money that you're using.
• 44:01
  Speaker A: Although it's not a tax, but it's mandatory, so you don't get to choose to opt out. Therefore they call it a contribution. But the reality is maybe our video editors can put this on the screen somewhere. It's not a contribution, it's more of a confiscation, because you don't get to choose to contribute it, you are required to contribute it. Therefore, to me, confiscation seems like a more appropriate utilization of language, if we're looking at defining the language. But now we're moving into a second tier territory. It used to be that you would only pay cpu up to a maximum income, and once you hit that ceiling of income, boom, you'd paid the maximum amount. They've taken their pound of flesh. You don't have to put any more in. Now, the second tier being introduced, how is that going to impact Canadians particularly?
• 44:47
  Speaker B: Yeah, so this is again one of those silent changes that came in, and we've already done a video related to CPP and the problems from a vantage point of capital. So, still going with the point of view that when we talk about becoming your own banker, one of the main things is when you come into money, a lot of people trying to take your money, when money leaves you, you've lost that earning potential. You've given that earning potential to someone else. So, Richard, if I gave you a. Can do something with that, can't do anything with that $1,000 anymore. I can't bring in any more interest or income or money. But now you have the money in your hands, you can do whatever you you want with it. We know what the government does with our money, but with related to CPP two, now they've introduced a new tier. Not many people have heard about it. They've campaigned and made it exciting. It's like, oh, great, you get to save more for your future. Sure. For the viewers who love that, that might make sense. I'm just trying to come with the position of that's less money for you today. Whether you like to leave the custodian of the money that you're giving to them, to someone else and the government, that's again your choice, who spends majority of it outside of Canada. Again, that's something. So what I wanted to share was just the mechanics of how it works. And I just will show on screen a very quick and simple excel calculation. So let's just assume someone earns $75,000. So of that $75,000, CPP one is at 5.95%, which is capped to that 68,500.
• 46:23
  Speaker A: And that's an increased number from the year before as well. So the CPP one cap, the original cap, will also increase from what the 2023 number was as well. Is that correct, Henry?
• 46:35
  Speaker B: Yeah, correct. So I actually on here have a table. CPP one stays at 5.95. So for people who have watched our video related to CPP in the past, we can see that the rate of that CPP of what they're taking off of your income has increased significantly, and the base that they're taking it off of has also increased significantly. But they capped it at three, eight, six, 7.5. So together that's about $8,000 almost. So I'm just kind of keeping the numbers really simple. But you just double the numbers. If you're self employed, you're basically paying that double high number. So if we kind of apply the mechanics of that calculation, again, I'm not doing the cap or anything. The key thing that I just want to highlight is just a little bit of how the mechanics of it works. So, related to CPP two, if we take a look at that cap at 68,000, 506,500 is related to the difference, and that's going to be essentially an extra 110 that is being added on top. And it doesn't sound so penalizing. It doesn't sound like a lot, but your initial amount was the 3800 or so. Now you add an extra 110 that's coming out of you, so it doesn't sound, again, a lot. But this is an extra 110. Let's just say the working class is approximately 20 million, half of it. That's an extra 2 billion for the government.
• 47:59
  Speaker A: Yeah, that's a pretty large number. And even if it's only an extra $110, well, relative to what you were already paying, that's like 3% on top of what you are already. It's a 3% increase on top of what you are already paying to CPP. And so again, why are they doing that? Well, they're doing it because they need to prop up the CPP plan because of the Ponzi scheme created around it. And so that's the theory. But they're selling it to you as a good thing. Okay, so some people might have the perception it is a good thing, maybe for you that it is, but you're losing control over the ability to work with that dollar. And then I want to go back to something we said earlier, Henry. Once they initiate or begin something, they open the door. They've cracked the door open now to a second tier calculation method of taking money off of you for CPP confiscations. What's to say 20 25, 20, 26, 20 27. That door isn't kicked wide open and it goes up to, what's the tier cap at, the income tier cap at. I'm trying to remember.
• 49:07
  Speaker B: I don't recall in the announcement oh, 68,500.
• 49:11
  Speaker A: Yeah.
• 49:12
  Speaker B: But the second in tier, 273 thousand.
• 49:16
  Speaker A: Okay, so it goes up to just under 75,000. So what's going to happen now? If they raise that tier all the way up to 150,000, then how much is the increase going to be? And again, you will not have the ability to say no, you're not going to have the capacity unless you figure out other ways to try to segment yourself from those layers of that system. So it's in the aggressiveness of the continued expansion and overreach of a change that is made. And then when they are going to implement and adjust that change in the future, because you're now getting accustomed to it being there. It's kind of like the boiled frog theory. You put the frog in the water and then you just kind of slowly inch it up and inch it up and an inch and up. And eventually the boiled frog, although they say you can't actually do that, the reality is that's effectively what's happening around the tax system. We're all just a bunch of boiled frogs walking around aimlessly wondering how much money is going to disappear out of our pocket by the end of the year.
• 50:16
  Speaker B: Yeah, exactly. So just what I shared on the screen is just that table. This one's a CPP one table. So CPP one, back in 2010, their max that they would take off of you was 47,200, which was essentially 2000 and 163. And over that 14 year period, it's gone to that 68,500. They've increased the rate. So the base has gone up. The rate has gone up, and then the amount of contribution that you're sending has gone up too, from 21 63 to 38 67. For a lot of people, they may not even see this money ever again. And now they've introduced tier two or CPP two. And so there's a possibility that the rate, so right now is four point there. And then let's say they increase that 73,000 number to 85,000. So then instead of the 110 in the future, that's also going to go up. So there's a risk that that 4% can go up, and there's a risk that that base on what CPP two is going to get covered into is also going to go up. So they just kicked the door, slid the foot in already. They got the foot in the door. How far until they start bringing in.
• 51:27
  Speaker A: The bulldozer, driving a bamboni through the door.
• 51:30
  Speaker B: This one is relatively a quick point because we do quite a bit of, like, I like to work with my clients to help them with their tax planning. And it relates to, at times in a good way, transitioning their business to the next generation. And that might involve the activation of what's called the lifetime capital gains exemption. Now, there's not really of a change here, but this follows inflation rates and CPI more specifically, not the real inflation, but the lifetime capital gains exemption now in 2024 has exceeded to 1 million. The actual official number is 1,016,000. 836. So that means if you're doing tax planning and things like that, you're able to shield more money in. However, whether you did it before or after, it's just something interesting to be mindful of and know that it's reached a million. It's a big number. It's just something people get excited about. Now, here's what I wanted to go through related to a much bigger topic, and this.
• 52:36
  Speaker A: We've done all the easy ones, Henry, are we on to the one that actually matters now?
• 52:39
  Speaker B: I'm pretty exhausted after that, actually. This one, I promised everyone that I'll have the energy to do it. I have the energy to do it. So the key thing is this one's a big topic and it's actually called, so most people will know, tax brackets, marginal taxes, average taxes. This is kind of what I'll call is the middle class or the lower, sorry, middle class and the lower class. And then there's also upper class. So there's different classes that is generally tiered in terms of the system. And then inside of that, they have different tax brackets inside of those tiers. And related to that, I'll just call what everyone hears about. I'm just using this term and it's called the mainstream system. So you earn 100,000, you have federal taxes, provincial taxes, and then you have your CPP hitting up what actually people don't know because of the complexity of our system. If you actually filled your own tax return of the forms that the government requires, not using the interface of a tax software or anything like that, you actually filled out the forms. There's a series of boxes and sequences that you would go through, and it actually does all these calculations behind the scenes. And for those of you who do not know, in Canada, there is something called an alternative minimum tax. And what this alternative minimum tax is, is it was brought in in 1986, and this was, as they call it, to bring fairness to the canadian tax system and what the reason that it was brought in. So this is now almost 40 years later, this is very key. So it was introduced back then, almost 40 years later. I'll call it enhanced it. I mean, they've always enhanced it, but I haven't tracked that history related to it. But this was very important because it was a sizable enhancement. And when I say enhancement, I say enhancement for the government. It prevents high income earners and trusts from paying little to no tax. So that means because in Canada there's tax in the tax code, you have the ability to reduce your income to zero or even negative so that the government would pay you money. If that was the case. If that was the case. However, what the alternative minimum tax brought in is, they tapped the floor to say that you can't go to as much as zero or negative when taking all of the government programs and credits and entitlements that you have. They've floored them with the ability so that they've protected themselves, in my opinion, related to it. Or for the canadian, they actually have to pay a certain amount of taxes no matter what.
• 55:31
  Speaker A: So you could do all the best planning, legitimize everything. It could all be on board, following every rule, paid a professional to do everything for you. And then they're going to say, well, actually, we've got this thing here that says we need to charge you something.
• 55:46
  Speaker B: Yeah. So you'll still have what's called a minimum amount of taxes you will pay. So that's what's called the alternative tax system. So there's the mainstream tax system and then the alternative tax system. Sounds great. Our media, too.
• 56:05
  Speaker A: We wonder why people's eyes glaze over when the word taxes comes up and we want to run out of the room and not kind of like, do the whole ostrich thing where we stick our head in the sand and it's things like this where it's like, how can you impossibly keep up with some of this? Again, it's so difficult and convoluted and complex. You need to have good professionals and shout out to all the amazing professionals out there who do such good work to help people manage and plan their taxes. But man, oh, man, what a crazy, crazy system that we live in.
• 56:36
  Speaker B: Yeah, it's a tough system. I mean, you've just got so many changes happening that people have very individualized circumstances, and there's often comments that I'll hear where they wish their tax professional was as good as I am. But I'm not in the trenches. I'm not the technician that I used to be related to looking at these things so I can see the landscape a lot clearer and I'm not inundated dealing with trying to stay on the phone with the CRA for 5 hours just to talk for one client. I don't have my time occupied with those type of things anymore, so I can see things in a much more clear detail and with the fortunate gratitude of working with a lot of certain complexities in client situations that also bolstered my experience and things like that too. And challenging them in court and winning also doesn't hurt, too. So the part that I want to talk about related to our tax system is just let's kind of look at, you have two systems actually in that calculation. So you will go through the mainstream system and you'll actually go through the alternative tax system when you go through that calculation. And in that alternative tax system calculation, I kind of first want to share with you what that formula looks like. So I'm just going to share my screen. And in that tax system, when you fill in your information, they're going to take the greater of, not the lesser of the greater of the two. So if your alternative tax system is higher than your mainstream system, then they will make you pay taxes on the mainstream system. Sorry, alternative system. So the calculation on the alternative system is relatively simple. It's actually defined by a formula which is a times b minus c, subtract D, where a is a fixed percentage of 15%, and then b is the individual's adjusted taxable income, which I'll explain in a bit. And then they have c, which is an exemption level amount, and then they have allowable non taxable credits. And I will dive into these things in a little bit more detail. Again, this is very big, but I just want to dive into a couple of things just for listeners to have that understanding. So when I expand that this adjusted taxable income is based on net taxable income adjusted for certain tax preference items, so they'll subtract those tax preference items. So this is key. I put it here in the excel sheet again, I'm sure everyone on the screen in a second, but there's tax shelter deductions, interest expenses. So let's say people love to use a certain maneuver that somehow got famous by someone's name on it, but it's really just an application of a tax code, not trying to put it down, but you're taking interest expense using it for, sorry, you're borrowing money for a productive reason to generate income that you're gaining an interest expense for. So that is part of this scope here that falls in there and then carry charges, tax loans, stock options and lifetime capital gains exemptions. So there's certain things that they're going to exclude out of the equation. But let's just kind of.
• 59:39
  Speaker A: Although, Henry, I'm going to say the name. So you're referencing, again borrowing money, let's say, for the purpose of investment, so that you can write interest off and in the purposes of utilizing it in real estate endeavors, often referred to as the Smith maneuver.
• 59:54
  Speaker B: Correct. So the reason why I shared the formula is there's a whole bunch of things here, and the one on the left is what was current. So that basic exemption, 40,000, that tax rate is 15%. This is key capital gains inclusion rate for someone in the alternative tax system. In the mainstream tax system is 50%. In the alternative system is 80%. So I just want to pause on that for a second. Employee stock options is normally 50%. Both systems the same thing, deductions is 100%. So I'll talk about deductions in a second. Non refundable tax credits is 100% and then capital gains on donation of security is 0%. So that was the old, the new, they've taken an exemption now to 173. So this number doesn't mean anything until you apply it into the formula, which we'll walk through in a bit. The rate has increased from 15 to 20.5%. The inclusion rate, mainstream system, 50%. Current alternative systems, 80%. News update is 100%.
• 1:01:06
  Speaker A: So this is for capital gains. I know you'll get to this, but I want to check in. So if you've encountered a capital gain in the tax year, if you're measuring it through this alternative minimum tax change method, rather than having only 50% of that gain applied as taxable income, in this scenario, with the new proposed change, it's going to be 100%. Am I tracking with you, Henry, on that?
• 1:01:31
  Speaker B: That's correct. So if you have $100,000 of income under the mainstream system, 50,000 would be included in your income for taxable purposes. If you are in the alternative system, then the full 100 is getting taxed.
• 1:01:47
  Speaker A: Of the capital gain. So all the gain is fully taxable in the alternative system. Got it.
• 1:01:55
  Speaker B: And then the employee stock options, again, for certain private companies, they do stock options as a benefit. You could do tax deductions for 50% when you exercise those options. There's no exception on that now, which is 100%, right? Oh, yeah, sorry.
• 1:02:13
  Speaker A: You're earning now. You're the employee, you work for a company, they have a great stock option benefit. It's one of the reasons you work there if you're not in that mainstream system, and again, most people are, but if you end up having to roll into this alternative system because of you're really in both of them, it's just a matter which one's going to ding you for the tax bill. So we're both in the two systems. It's just which of the two systems is going to get you, one of them is going to get you, which one's it going to be? Okay, so that's really what we're trying to figure out here. And this one in the employee stock option benefit scenario, 50% of it in the alternative system has moved to 100%. So that seems pretty aggressive. So tell me about deductions here. This one seems like it's got a bit of a mystery on it.
• 1:02:55
  Speaker B: Yeah. So let's just remember that deductions is 50%. And I want to highlight very particular deductions that people are familiar with. So that moved from 100%. So if you had an expense just like Airbnb expense for generating the income because you're in the alternative tax system level, only 50% of very particular expenses are now deductible. It's not 100%. Maybe in the future it could be zero, just like Airbnb. But just using that for some context, I haven't gone into the specific list of line items yet, but just kind of going through that.
• 1:03:25
  Speaker A: So the proposed changes are in the alternative system, which we are participating in unknowingly, because I'd never heard of this until you told me about it today. Everything that they could tax you on has gone up and everything you could deduct against the potential of taxation has gone down. Am I on track?
• 1:03:45
  Speaker B: That is a very excellent way of saying it in a simple form.
• 1:03:49
  Speaker A: Okay, sounds good. I'm so excited.
• 1:03:54
  Speaker B: We were talking about those deductions and lists of those deductions. Just the notable ones. There's a lot of other ones. I am very concerned on certain languages that they used, and the one that I'm very concerned about is employment expenses. Some that used to be 50%, sorry, 100% now are 50% other than if you were earning commission income. So they very clearly called that out for a very big concern. So real estate agents, life insurance agents, just pointing that out there.
• 1:04:33
  Speaker A: So those individuals can deduct employment expenses, but everyone else can't, or they can deduct 50% of it, I think you said.
• 1:04:44
  Speaker B: So if they had allowable employment expenses, home office as an example, that was deductible. You could do 100%. Now it's switched to 50%. The concern is they've listed other than commission income soon. I'm just afraid they'll strike that.
• 1:05:03
  Speaker A: This door was already kicked wide open. Now what they're doing in this scenario is they're actually installing a second door when they want to make the next change. Is that kind of a right way of looking at it?
• 1:05:13
  Speaker B: Okay, that's my concern. There's deductions for CPP, so it was 100%. Now it's 50%.
• 1:05:26
  Speaker A: So the confiscation that the same system is taking from you that you can, every other instance you can deduct 100%. That's fascinating.
• 1:05:37
  Speaker B: Moving expenses, childcare expenses. This one, interest and carrying charges incurred to earn income.
• 1:05:45
  Speaker A: But that's where we circle back to the Smith maneuver scenario. If someone is doing that, if you've been doing that for a couple of years, if you end up looking at your tax bill, either in the mainstream system, hey, everything's the same as it is. However, if they're analyzing system two here, the alternate system, if that one is the one that increases, is a higher tax payable amount. The end result of this, Henry, my understanding is whichever one of these is going to get the most amount of taxes to the federal coffer is the one you're going to end up being in. Is that correct?
• 1:06:21
  Speaker B: That's correct. The greater of.
• 1:06:22
  Speaker A: So I want everyone to be really clear about that.
• 1:06:25
  Speaker B: We're going to work.
• 1:06:25
  Speaker A: Every system is going to pay the largest tax bill is the one you're going to be attributed to. And you most likely, if you're anything like me, didn't even know the other system existed until today.
• 1:06:37
  Speaker B: Then there's non capital loss carryover. So if you had a bank of losses when you first started your business, you're allowed to carry that for x amount of years, and you may not access that bank yet until you suddenly start generating income that you want to have us take home. Instead of paying too much taxes, you can use the non capital losses, not capital. So capital losses are different than non capital. Non capital is from, let's say, like business. They are restricting it to 50%.
• 1:07:12
  Speaker A: It takes away a little bit of the incentive to take on the risk of starting a new business.
• 1:07:16
  Speaker B: Yeah. And then for people who tax plan and decide to receive dividend as an income. So that note two, which was the non refundable tax credits. So dividend as a source or a definition of income, is taxed more favorably because it has a very high non refundable tax credit base, and you also don't contribute to CPP and EI. That's kind of the reasons. Now the government, in terms of a tax plan, squashed that in a sense, because they've introduced something called integration, where if you paid either or, you generally will pay roughly the same amount. The benefit of doing it is a very particular way. Again, still, strategic tax planning that comes in place to prioritizing which one you decide to do. But nonetheless, the key thing is when you take dividends, you get access to these non refundable tax credits, and now they're reducing it to 50%. Again, that now has disenfranchised taxable dividend as a form of income, in other.
• 1:08:25
  Speaker A: Words, and you wouldn't know when would a person find out which system they ended up falling into when you finished filing? And let's say they're using like a turbotax, just hypothetically, is it going to pop up and say, oh, we went into system two. Sorry, John, your tax bill that you thought was going to be 40 grand is actually 70. Whoops.
• 1:08:51
  Speaker B: So the problem is that you actually don't know the system you fall into with the mainstream products like turbotax. That's why professionals use the professional ones that they use.
• 1:09:10
  Speaker A: Yeah. So in other words, what I'm getting at is the average consumer won't have any earthly idea, and for the most part, most likely, the average consumer will never even need to know that the system, too, exists. However, for people that are probably in a higher income tax bracket and are doing some other things, you're investing, you're trying to grow, maybe people who are employing something like the Smiths maneuver, et cetera. A lot of real estate investors and professionals out there. These are individuals who are going to be more inclined to be very aware that this alternate tax system exists, and they're going to be a lot more, I guess, exposed to the potential of landing in this category unknowingly. And the takeaway is you won't even know that it's happened until the tax year is over and you're filing your taxes and you're already into the next tax year, and you might be creating the exact same problem again that you didn't even know about. So I think that's the important thing I want people to understand here, is a, an alternate tax system exists, b, you're involved in it and you didn't know you should. I didn't. And C, you won't even know you're in that scenario or you're paying a different tax structure of methodology of calculating your tax until it's too late and the bill is due.
• 1:10:33
  Speaker B: Correct. Now, the issue that a lot of people run into that they don't actually know is exactly what you mentioned. They don't actually realize. And they will usually pay their taxes based on certain schedules that the government sets in advance at times and that payment in advance. When they file their taxes, they think that they actually were fine. But when they actually file their taxes, they may not even know there's actually that increased exposure to be like, oh, by the way, under the alternative tax system, you are actually going to pay more in taxes. So too bad, so sad. It is what it is.
• 1:11:16
  Speaker A: They just get basically like a reassessment notice. Does it indicate alternative tax system on there anywhere? Is that what it says? No, it just tells them, here's your reassessment and not really an explanation as to why.
• 1:11:28
  Speaker B: Correct.
• 1:11:31
  Speaker A: So they wouldn't even know the calculation scenario that's transpired to create an environment for increased tax. They're just going to get sent the bill.
• 1:11:41
  Speaker B: Correct.
• 1:11:43
  Speaker A: Well, that sounds just dandy with interest and mean. That's just icing on the cake, Henry.
• 1:11:54
  Speaker B: Yeah. So I first wanted to walk through an example. Now, the example that I can share with you is obviously not a real one because it doesn't exist. But I can show you what the current rules looks like. I can't really give you an example, but we can explain and talk through the new one and the application of it. Of course, I trust the actual tax software, professional tax software version of it. It's not rolled out yet, so I can't really tell you. But that's why it's going to replace what I would do on excel. But the key is the discussion around it. So the example on the screen that I'm going to share with you that you see here is the individual's income is $300,000. That exemption is 40,000. So a is 15%, b is the 300,000, c is the 40,000. So subtract C and then subtract D just to keep everything simple. Did nothing related to that. So the mainstream as general calculation for the federal. Okay, I'm just showing federal is 26,958. So that's the mainstream system. If we were to apply under the old rules on the alternative tax system, that would be 39,000. So the person has adjustable items, 150. They actually don't have to pay as much taxes because 300, subtract 150 is 150. So they're actually getting taxed in the mainstream system at 150. That creates the 27,000 tax bill federally. But under the current alternative tax system, they would get taxed at roughly $39,000, actually $39,000. So they would pay the greater of. So the tax bill that they would pay is $39,000.
• 1:13:38
  Speaker A: They think they're going to be in the mainstream system. They think they should be paying or they're told by their account or their professional or their tax software, hey, we should be around $27,000. But because of the way it goes into this two tiered model, they end up actually paying $39,000.
• 1:13:55
  Speaker B: Yeah, if you look at any tax planners, calculators on the Internet and stuff like that, all of that is generally on the mainstream system. So you will plan for, oh, I think I'm going to pay 27,000 in taxes. But hello, there's another one actually called the alternative tax system that very few people, that's not mainstream, it's alternative, they.
• 1:14:17
  Speaker A: Don'T know about, which is. So 39 -27 is twelve grand, which is like a 44% increase. It's 44% more money that you're paying than what you expected to pay.
• 1:14:32
  Speaker B: Correct. The new tax. So all of the chart and what I've shared earlier, the new rate is 20.5% and then that adjustable income is over here. And then that exemption is 173. Again, I just kept it really simple on these allowable non taxable credits and these adjustment items. I didn't include it. So the representation of what I'm going to share with you is going to be off visually. But the key point on the qualitative discussion that I want to highlight is important. So what I mean by that is under the new rule that already in the new tax system is 26,035. And you add to the fact that you have, let's just say, interest expenses that you wanted to deduct only 50%. So that's going to get added into that taxable impact, the moving expenses, CPP, whatever other stuff that you were eligible to deduct, that's going to lift that number even higher. So this is the part that's really key to capture related to it. So the mechanics and the model related to the old system. On the outright, it looks like, oh, it looks so favorable, but the fact that they've limited what you could deduct to bring down your taxes now will play a bigger factor onto this alternative minimum tax system.
• 1:16:04
  Speaker A: But I think my interpretation of this is you've got the mainstream system box there, which is 27,000. Then under the new rules, it's 26. But it's 26, not including any of the, any of the. You haven't factored anything in yet. It's just the baseline. You're already basically right at the level of where the mainstream system says you would be, which means it is so simple to cross into the alternate tax calculation because of the new rule changes. Am I on track with what you're kind of the point you're trying to make, Henry?
• 1:16:41
  Speaker B: Yes. As complicated as our tax bracket in the main system is, the new system is so simple, but so simple in such a way that it actually aligned to where the mainstream tax bracket system is as the floor. And so anything on top of that floor brings it up to an even higher level.
• 1:17:01
  Speaker A: Right. And anything on top of the floor is my rate of adjustments that need to be made on things like you said, like deductions, things that you would normally be able to do that you're now no longer able to do once you cross over in a new alternate system.
• 1:17:19
  Speaker B: Correct.
• 1:17:20
  Speaker A: Great. Well, I didn't see too much talk about that on the news when I saw the budget go out.
• 1:17:25
  Speaker B: So these are part of things that as you are stepping into your new year, is to really understand that landscape as it relates to taxes. And I would encourage actually to build a relationship with your professional to, first, number one, find the right professional that actually encourages these type of discussions with you because some of them are too inundated with a workload and they aren't able to offer the value that you probably need. And then the second component related to that is, of course, then being able to have those discussions to strategize the plan for yourself, how you can manage the situation that is coming up today. We've only listed a few of the, I'll call it the big hitters, but there's a lot more individualized circumstances that can affect you. And it's not about going down item by item list and everything like what's relevant to you. But again, finding the right professional can be a challenge because each professional, in honest sense, will specialize in very particular codes, whether they operate on that mechanic. I like to work from the source.
• 1:18:42
  Speaker A: Right.
• 1:18:42
  Speaker B: So if there's a specific subsection and stuff like that, I generally know which subsections I've been a master at. And my volume of inventory of that knowledge is quite grasp large. But not every tax practitioner looks at it from that standpoint. That's number one. And then number two is their ability to integrate and problem solve your specific situation is where you want to have that type of discussion, especially as it comes to 2024. And when you hear changes that are happening, please don't brush it off. There is these trickle effects. Nobody heard about these alternative minimum tax changes. Maybe what has probably got a little bit of a wind was the Airbnb short term income expense deductions. But that's mainstream. Which of course hits mainstream. But as we could see, a lot of Canadians, 8 million of Canadians, are carrying the load of taxes and paying most of those taxes. And that's a lot of money for people in that category. And without diving into that section, how can you have a discussion on your wealth without having a discussion about the big elephant in the room of money, 45% and up, that is leaving you without your control?
• 1:19:58
  Speaker A: Yeah, the tax game is critical. It's important. And we're always looking to improve in every area of our life, whatever it is. Our health, our wealth, you name it. Improving your knowledge and understanding and awareness, even just awareness about what's happening in your tax scenario, it can only have a positive effect on your ability to see things happening. It's pretty difficult to deal with a car accident after the accidents happened. But if you're scanning your peripherals and you know what you're looking for, you might increase your ability to avoid a car accident. So that's the same mindset that we're looking at, is creating some not avoiding the tax bill or tax that you legally are supposed to pay, but avoiding the necessity of having to pay it because of a lack of poor planning or poor judgment. That's really the focus that we're trying to create. Henry, this was amazing. This was an unbelievable update. I hope people get a ton of value out of this. I know I certainly did. Hopefully they can steal away a laugh along the way at the situation, as abysmal as it might sound, because it's not like there's a lot of positive news that we dropped here, but you have to take everything with a grain of salt, and you got to find the humor in life wherever you can get it. So for everyone tuning in, thanks again for being a part of wealth without Bay street, go ahead. You'll see right down below, another video just popped up. Probably a great tax video with Henry and I. Go ahead, check that out. Continue your journey of learning and as always, we appreciate our listeners for sticking with us and having a great time. Make sure you subscribe and stay with us for more great content. Thanks for listening to the wealth without Bay street podcast where your wealth matters. Check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies, and the mindset that maximize your wealth.