Canada’s federal government is considering a wealth tax to reduce inequality and to pay for the relief measures that were implemented in response to the COVID-19 pandemic. Those measures have led to a record deficit and a ballooning national debt. If the new tax were to come to pass, it would present significant planning challenges for financial professionals.
The concept of a wealth tax has been gaining traction. The federal government announced in the Sept. 24 Speech from the Throne that it would seek ways to place a tax on extreme wealth inequality. In July, the Parliamentary Budget Office issued a report that examined the impact of a 1-per-cent tax on family net wealth above $20-million. That would be a $200,000 tax hit on top of regular income tax. But the proposal doesn’t define family, nor does it distinguish between liquid investment assets, such as securities, from those that are more illiquid, like homes.
“It would be a tax on [any assets, ranging from housing to investments]. It would affect families of undefined numbers of members. It would have to be paid each year. And it would cut the value of taxed properties,” says Brock Cordes, a sessional instructor at the University of Manitoba’s Asper School of Business. “What’s more, legislative pressure could tend to cascade the tax downward to affect people with less wealth.”
Tax creep, the process of making more assets and transactions taxable along with rising tax rates, is part of Canada’s fiscal history. For example, Canada introduced an income tax in September, 1917, of 4 per cent on annual incomes. The tax has increased substantially since, of course.
Adding a wealth tax would also cause confusion between personal income, which is currently taxed, with personal wealth, which is not. Someone can have a great deal of income, spend it, and not have much wealth while someone else can be wealthy, with property such as farmland or gold coins or even zero dividend stocks that produce no income, Mr. Cordes adds. For example, farmers often have land that has substantial value but produces little income.
“A farm in southern Ontario could be 640 acres, priced and valued at $35,000 an acre. That’s $22.4-million, but the farm might produce a [annual] crop worth 1 per cent, or $224,000, of the land’s value,” says Don Forbes, advisor at Forbes Wealth Management Ltd. in Carberry, Man., who specializes in serving family farms. “So, a 1-per-cent tax on capital would take all that farm’s income. It would force farmers to find ways to avoid the tax or just go out of business.”
The introduction of a wealth tax would make advisors and their clients take a closer look at net wealth – especially if it indiscriminately affects people with wealth of any kind. Such a tax would require specific attention as it pertains to housing, which is most Canadians’ main source of wealth, says Fred O’Riordan, national leader for tax policy at EY Canada in Ottawa. In Canada, gains on the sale of a principal residence is not subject to taxes, regardless of the amount of the sale. The introduction of a wealth tax could see that change.
“If Canada taxed just the value of property without allowing for the costs [such as mortgage interest], it would be unfair. If the costs of generating wealth are included, it becomes very complex‚” Mr. O’Riordan says.
Part of that added complexity would be geographical bias, says Richard Girouard, senior tax manager at accounting firm BDO Canada LLP in Winnipeg.
“A house in Toronto can [rise in value by] hundreds of thousands of dollars in a short time, depending on the neighbourhood and, of course, the house itself. That kind of gain is unlikely to be seen in small towns in northern Ontario or rural Saskatchewan. If a wealth tax included [someone’s] house, there would have to be valuations, record-keeping, and a (baseline) valuation to start the whole process. It would be complicated and costly to collect,” he says.
A tax on the value of homes would shift wealth to government and leave less for owners and sellers. If buyers were seeking to trade up to larger homes, they would have less money to accommodate their families. Those selling to have money for retirement would have less.
“We have clients downsizing their homes to get cash for a retirement plan,” says Owen Winkelmolen, founder and chief executive at advice-only financial planning firm PlanEasy Inc. in London, Ont. “A tax on total wealth could impair their retirements, force even more downsizing, or even take away their financial independence."
Taxes on wealth in other countries have not turned out well. For example, from 1982 to 1986, and then from 1988 to 2017, France imposed an annual tax of as much as 1.8 per cent on fortunes of more than 13-million euros. In 2012, former president of France, François Hollande, added a 75-per-cent supertax on annual incomes above 1-million euros.
“I have a wealthy client who wanted to leave Canada to return to France,” says Caroline Nalbantoglu, president of CNAL Financial Planning Inc., a fee-only financial planning firm in Montreal. “France’s wealth tax persuaded him to move to another country with no wealth taxes.”
Most famously, France’s wealth tax led actor Gerard Depardieu to flee the country and cancel his citizenship. He chose to make Russia his home. He swapped democracy for autocracy as a tax protest. Unproductivity of the tax led France to abandon wealth taxation in 2017.
“A wealth tax is so problematic in construction and operation that it is unlikely to be adopted by Canada. But if it is, advisors with wealthy clients will have a massive task advising compliance,” says Derek Moran, founder of Smarter Financial Planning Ltd. in Kelowna, B.C.