One implication of the capital gains changes

Maximum price changes occur when there is demand or supply added to the market in a very short period of time.

The upcoming finalization of the June 25 “Delivering Tax Fairness for Canadians” capital gains tax inclusion rules has created an interesting ripple in the market.

Well-pocketed individuals or anybody managing a portfolio within a corporation that anticipated an upcoming liquidation of unrealized gains over the next three to five years are compelled to realize such gains in the next 5 trading days. The math is pretty straight-forward for somebody in the top Ontario marginal tax bracket – you sell your shares today and $10,000 of capital gains results in a $2,676 tax bill, or you sell your same shares at the end of this month and it will result in a $3,569 tax bill. The value of the tax deferral of the capital gain only reaches a break-even point in about 5 to 6 years assuming a 9% rate of return – quite a liquidity penalty if you decide to hold! (See: RBC report, page 8 and 9 for some reasonable analysis on the matter).

The people that have the capital to be concerned with these rules (over $250,000 in individual capital gains, or any capital gains in a trust or corporation) are more likely to have the economic substance to push the market in a short period of time with a significant amount of assets.

Hence I deeply suspect that there has been over the past week or so and will be, until June 21 (note – the change occurs on or after June 25 and now that stock trades settle T+1day, the last trade you can do is Friday June 21 to qualify for the 50% inclusion rate), a very unique form of “tax gain selling” on stocks that have reasonable potential for gains to be realized.

All things being equal, next week may prove to be a better than not opportunity to put capital to work.