Personal tax increases—what’s on the table?
Jamie looks at four areas that may see changes—the capital gains inclusion rate, the principal residence exemption, the future of personal income taxes and a wealth or inheritance tax.
Personal tax increases – What’s on the table?
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[Personal tax increases – What’s on the table?]
[Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Private Wealth Management]
COVID-19 had obviously a huge impact on the economy, but also on government spending with billions in dollars being spent on both personal and corporate support for Canadians and for Canadian businesses. Many have been asking the question, how is the government going to pay for all this? What potential tax changes do we see in the months and even year ahead?
[1. Capital gains inclusion rate]
In terms of the capital gains inclusion rate, what you see here is a hundred years of capital gain inclusion rates in Canada. Before 1972 of course, we didn't have a capital gains tax at all. That started with the 50% inclusion rate. We've seen it as high as 75% in 1990, and then of course, it's been back down to 50% for the past 20 years. People have asked, could that rate go back up? The answer, I think, is potentially. After all, at the end of the day, who pays capital gains tax? It's mostly the upper-income Canadians, the top 10%. So, I think it's certainly a possibility. It would also get rid of this planning they don't like with corporations surplus stripping by moving the capital gains tax rate higher, more equivalent to a dividend rate.
[2. The principal residence exclusion]
The second thing people are asking about is could there potentially be a tax on the principal residence? Of course, in Canada, we don't pay any tax on the principal residence. The entire gain is tax free. You take a country like the U.S., where in fact there is a principal residence tax on gains above $250,000 U.S. or $500,000 per couple. So again, if this happened, I think it would be prospectively. It would be unfair, I think, to tax everyone's wealth accumulated inside their principal residence retroactively. But perhaps they’ll do some kind of proration like they do right now with the years of principal residence exemption where effectively what happens is, if they introduce this at some point in the future, the number of years, let's say before 2020 would be sheltered, but the years after that, there would be a pro-rated gain.
[3. Future of personal income tax rates]
In terms of tax rates, people ask me, well, how high can you go? We can see by this chart that we have basically 8 out of 10 provinces in Canada having a personal top rate of over 50%. That rate is pretty high. If you look at who pays the taxes in fact, what we’ve got here is a distribution for you - if you look and really focusing on the top people, maybe the top 9% of all taxpayers, these are people with incomes of over $100,000. They earn 35% of all the income in Canada and yet paid 55% of all the tax. If you take a look at just the top 1%, those are individuals making over $250,000 a year. Their tax rate basically accounts for 23% of all personal income taxes paid in Canada. Canada ranks basically seventh in the world right now in terms of the top statutory personal income tax rate. So, I'm not really sure there's much more to go in terms of competitiveness and therefore I don't really see a lot of increases there on personal tax. 2
[4. Wealth, inheritance and estate taxes]
And finally, the subject of wealth taxes. The Parliamentary Budget Office did an estimate that if they tax people over 20 million dollars on a wealth tax, even at a 1% wealth tax, about fourteen thousand families would pay and that would net about five billion dollars of revenue. That being said, a lot of debate in the public domain about the pros and cons of a wealth tax and whether it's fair, whether it results to double taxation, whether it ultimately could lead to people using all kinds of tricks to avoid the wealth tax. And in fact, if you go through the years, go back even 20 years ago where you had about 12 countries having some type of wealth tax, you fast forward ahead to 1991 and between 1991 and 2000, that dropped down to only nine countries. And then finally right now, today in 2020, we only have four countries that have any kind of wealth tax. You know, could Canada be the fifth country? Again, I don't really think that's in the cards. And then finally, what about an inheritance or an estate tax? Well, again, here are a list of select countries around the world. You see U.S. there with a 40% top estate tax. Canada doesn't have any type of estate tax. However, what we do have that's different than the U.S. is a capital gains tax on death at a fair market value realization. So, again, it's certainly possible, but I'm not really sure that our government would go there.
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