On April 15 we received snow throughout Calgary while six to twelve inches hit the foothills. Long time Calgarians are not surprised by this, we simply call it spring! When I was new to Calgary over 30 years ago and experienced 20°C above zero one day and six inches of snow the next I was shocked, while locals just took it in stride. April snowfalls don’t faze Calgarians, we don’t believe we are in for five more months of winter, we know summer is coming because we are focused on the long-term seasonality of the weather, not the day-to-day phenomena.

Likewise, there is a long-term pattern in economics called productivity, and although it has been declining in Canada due to a host of factors such as never-ending regulation, which may be compounded by recently announced tax increases, productivity around the globe is improving, and as investors, we can invest in this prosperity. However, we aren’t proposing that investors give up on Canada entirely, there are a number of world-class market leading Canadian companies that earn their revenue in and outside of Canada that also benefit because of Canada’s regulatory framework.

With regard to the recent tax changes to realized capital gains in Canada, the inclusion rate has just been raised from 50% to 66.7% for corporations and trusts, and also on personal realized capital gains that exceed $250,000 in a calendar year. Although this has been positioned as affecting only a small portion of the population, inquisitive types understand the law of unintended consequences: Much like the proverbial pebble thrown into a pond, there are ripple effects to every action, and some are not immediately or easily understood. Interestingly, the realized capital gains inclusion rate in Canada was also raised in 1988 from 50% to 66.7% and raised yet again in 1990 to 75%. It was then cut back to a 50% inclusion rate in 2000. How long ago was 1988 - 36 years, so if you are 65 today you were 29 then and probably weren’t thinking about capital gains taxes, I certainly wasn’t as a starving university student.

The conclusion is that although no taxpayer likes tax increases, people overlook them if they are raised on someone else, and we also know that tax payer behavior will not remain unchanged because of these changes. Tax professionals will come up with perfectly legal tax avoidance (not tax evasion!) strategies, while business people will adjust their behavior and veer toward profitable solutions. This is human nature and also the reality of capital - it goes where it is treated best and most profitably. Things will not remain as is,  and this is the power of the human spirit, innovation, and productivity. As an example: A byproduct of continuous improvement and as shown in the graph below, US oil consumption per unit of economic output has fallen by two thirds since 1970 as all industries are more efficient in their productivity, but this is rarely talked about in the media so it may come as a surprise to most people.

This may also come as a surprise – as shown by the chart below, productivity as measured by revenue generated per employee (adjusted for inflation) is at all-time highs and has broken out of a 17 year trading range.

These are merely two examples of how things improve economically and compound incrementally over time and why we need to invest looking through a long-term lens. This is especially important as we all navigate current headlines such as the upcoming elections, the war in Ukraine and the Middle East, and whatever else is sure to come next like the recently announced increase to taxes. Unsurprisingly, and despite the tax hikes in 1988 and 1990, many of the world’s economies and equity markets have continued to ratchet higher since then, including Canada's. Always remember that as an investor you own a portion of stable, profitable, growing and improving businesses, not just stock certificates trading on an exchange, and those businesses that are highly successful are run by people that wake up and go to work searching for ways to improve their company’s prospects, and this will not stop.

As a closing thought, it is worth noting that wealth is a great combination of physical, emotional and spiritual health, family, community, contribution, money, and many other elements that give life true meaning.

Not a bad thing to remember at tax time.

Randy for R&R Investment Partners

 

Source for US Oil Consumption Per Unit of Output: scottgrannis.blogspot.com

Source for S&P 500 LTM Revenue per Employee: @SamRo, X