Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
My wife and I have been reading lately about all this talk related to a possible wealth or estate tax on Canadians. We have significant investment accounts in both Canada and the US.
Do you think Canada will actually implement a wealth tax anytime soon?
Many are currently trying to make a case for Canadian estate and inheritance tax.
Why would we need a Canadian estate or inheritance tax when we already have a “death tax”?
I hear this all the time when the subject of inheritance or estate tax is brought up in conversation.
The truth is, our Canadian “death tax” only takes into account accrued gains on most property and fully income inclusion on specific accounts such as RRSPs and RRIFs.
Tax collected on RRSP and RRIF accounts are definitely quite high, however unless Canadians have significant amounts of unrealized capital gains, which means they haven’t sold their investments for a significant period, they may not pay much extra tax upon death.
On the surface this may not be a perceived problem, however in many cases, wealth has accumulated from previous generations and allowed to compound at very favourable tax rates. One can only invest so much money in there RRSP/RRIF. As such, most of the significant pools of wealth in Canada are created outside of registered accounts. The main assets being real estate, private corporate businesses and public security or stock market investments. Gains on these type of assets are taxed at a maximum rate of 25%, half of our highest Canadian personal tax rate.
These “preference” rates on capital gains were originally intended to incentivize Canadians to invest their capital. The government has now realized that this works well for regular Canadians that may have some real estate, small business assets and a small investment portfolio. However for the wealthiest individuals in Canada these low rates serve to simply help them compound their wealth even quicker.
Because these investments are allowed to compound over many generations they can grow disproportionately from the averages. As a result you get young generations of Canadians being born worth millions of dollars.
I think we can all agree that we don’t need more 5 year old millionaires running around contributing to an ever-growing wealth gap.
Believe me, I understand the arguments against implementing an estate tax in Canada:
- Our family worked hard to build what we have…why should I give it to the government to spend irresponsibility?
- My family helps create jobs and makes the economy more robust
I do understand these arguments and I’m definitely an advocate for capital being reinvested in order to further strengthen and grow the economy. That being said, there comes a point where the compounding effect of inter-generational wealth creates a wealth gap between Canadians that simply becomes unfair to most and allows some a tremendous financial “head start” in life.
Why are we seeing so much current interest in a new Canadian estate tax?
This can be partially explained by the recent COVID pandemic and related Canadian economic response. Even before COVID hit, we were already looking at a difficult future of funding healthcare costs for an aging population. Now the additional government debt burden of COVID has further exposed our likely need to increase taxes for future generations.
The Justin Trudeau government projected back in May that it was on pace to spend $152 billion in direct support to Canadians impacted by COVID-19.
The big problem however is the fact that Canadian tax rates can’t go up much more without political parties losing support.
So, if we know our future expenses will be well in excess of our tax revenue, what is the solution?
Well, modern monetary theory sounds like a tempting path. Print as much money as we need until it all comes crashing down. No one knows for sure as such an approach could actually work for many decades without real adverse consequences. We’ve keep rates very low for the last 20 years without much treat of inflation.
Shrinking the size, and as a result the cost of government, is definitely a great way of reducing the expense side of the ledger. However in modern times, very few governments have ever accomplished such a feat. Even with heavy public support for reducing the size of government and related spending most Canadian governments could not pull this off.
Raising taxes on the middle class is almost never a viable solution. What other options do we have?
Increasing taxes on small business owners has been the strategy under the current Liberal government, however small business owners can’t take much more of the tax burden, let alone an additional increase.
Increasing the capital gains rates does seem like a relatively easy change that would have some “push-back”, however most middle-class Canadians would not necessarily oppose aggressively.
For many advocates the only real way of solving this problem is to institute a Canadian estate, wealth or inheritance tax. The individuals advocating for this wealth tax would only affect very wealthy Canadians. For example, certain proposals outline here suggest implementing an additional wealth or estate tax on net worths in excess of $20,000,000.
Considering the pre-Covid government discussions related to a possible increase in the capital gains rate, coupled with the fact that government debt continues to rise and the fact that personal tax rates don’t have much room to move up, one of the most likely options for government to earn more tax revenue would lie in a new wealth or estate tax.
It remains to be seen whether future tax policy will include a new wealth tax, however for most this change would not be surprising and would be welcomed by many Canadians.