Part 4: Debt and Taxes

The current economic recovery from COVID-19 may be just right for making money on your investments, but sooner or later there will be a reckoning for all the public money spent to keep households and businesses whole, virtual attendees heard in the final portion of the 2021 Strategic Outlook on April 28. “We’re waiting for the other shoe to drop,” Nicola Wealth chairman and CEO John Nicola said, referring to the federal government’s next “real budget,” coming either in 2022 or in an update next fall, that will at last strive to balance revenues and expenditures. Given the inclinations of the current administrations in both Ottawa and Washington, expect the biggest steps toward that fiscal reconciliation to come on the revenue side – which is to say, get ready for higher taxes.

In the United States, the Biden administration aims to return corporate tax rates from the 21 per cent of the Trump era to 28 per cent and to double the inclusion rate for capital gains taxes to 40 per cent from the current 20 per cent for people earning US$1 million or more per year.

Here in Canada, we can expect a higher capital-gains inclusion rate too, from the existing 50 per cent to 75 or even 100 per cent, Nicola suggested. We could also see higher marginal tax rates for the highest earners and some form of wealth tax long espoused by left-leaning economists as a way to address growing inequality.

There are ways to minimize this looming tax hit, Nicola assured viewers. Nicola Wealth offers its clients a variety of tax-planning strategies including income splitting, family trusts, prescribed loans, charitable giving using a donor-advised fund and tax-exempt life insurance. Built into its investment offerings are strategies such as low portfolio turnover which limits the taxable gains in any one year. If taxes are a concern, he reiterated, “you need a customized approach.”

A bigger question for many people, especially those intending to leave an inheritance to their children and grandchildren, is the rapid increase of the federal debt to some $2 trillion since 2008.

“Will doubling the national debt in both Canada and the U.S. create an insurmountable burden for future generations?” Nicola asked rhetorically. The logical assumption, he noted, is that somebody has to pay off the debt. “Except, what if that’s not actually true?”

Nicola then pointed to past examples of extraordinary government borrowing to deal with a crisis, some going back a very long time. Analysis of government debt in the United Kingdom over 350 years shows that the debt incurred in the early nineteenth century to finance the Napoleonic wars was never paid off. “It’s been rolled over but it’s never been repaid.”

The same goes for America’s massive outlay to fund the Second World War and the postwar reconstruction. “That principal has never been paid off,” Nicola observed. In large part, it has been shrunken by subsequent economic growth and inflation. Nor should debt be seen as an unmitigated evil. “Sometimes we forget that someone’s debt is also someone else’s asset.”

Last year Canadian governments, corporations and individuals posted the highest borrowing and the biggest percentage increase in borrowing of all the major world economies. However the country’s debt-to-GDP ratio, in the middle of the pack as it was, did not significantly increase. And if you look back at Ottawa’s fiscal history, the debt has only rarely been reduced. The current cost of servicing the debt, at around 7 per cent of overall spending, is actually on the low side historically.

“This is not quite the burden that everybody’s talking about for our children and grandchildren,” Nicola concluded.

So yes, mounting debt, taxes, inflation – they are all almost certainly coming our way, the speakers at the Strategic Outlook conceded. But with a well-diversified portfolio and shrewd tax planning, these risks facing investors in 2021 are all manageable. Stop and smell the rosy returns of the past year, in other words; whatever happens, we’ve survived worse.


Watch the full 2021 Strategic Outlook event on April 28 here.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.