What property taxes can tell us about a wealth tax

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Dylan Reid is the executive editor of Spacing magazine.

The idea of a tax on wealth has been much discussed in recent years in response to statistics showing increasing inequality in Canada and other nations. A wealth tax is a key part of the NDP’s platform in the current federal election campaign, and a recent poll by Abacus Data suggests the idea has considerable support among Canadians of all political stripes.

In general, proposed wealth taxes would only apply to the value of a taxpayer’s assets above a high threshold ($10-million in the NDP proposal), affecting just a tiny percentage of the total population.

Wealth taxes are controversial, in part because they are levied not on income or gains realized after selling assets, but on the value of the assets a person holds – value that exists only on paper.

Yet in Canada, municipalities already impose what is effectively a wealth tax: the property tax. Like a wealth tax, it is levied on the assessed value of an asset, in this case real estate, even though the asset hasn’t been sold.

When the comparison is mentioned, it’s usually in passing. Yet, while they are not exactly the same, property taxes can tell us a lot about why a wealth tax could be a reasonable measure to implement.

Around two-thirds of Canadians own their homes and pay annual property tax on them. Renters don’t pay property tax directly, but part of their rent pays the property taxes of their landlord. And the tax is paid on the gross value of a property (it doesn’t take mortgage debt into account), rather than net wealth (assets minus debts), which is what wealth tax proposals usually target.

A wealth tax will only end up disappointing Ottawa

So, for all the arguments about whether it’s reasonable to tax unrealized wealth, in fact, most middle-class Canadians already pay an annual tax on their unrealized wealth. And that tax, set by municipalities through an annual “mill rate,” is generally within the range mooted for wealth taxes: between 0.5 per cent and 1.5 per cent of the value of a property.

For most homeowners, the value of their primary residence constitutes the vast majority of their potentially taxable assets (excluding tax-sheltered retirement and savings funds such as pensions, RRSPs and TFSAs).

Statistics Canada numbers show that even most of the wealthiest 10 per cent of Canadian households hold most of their non-tax-sheltered wealth in real estate that is subject to property taxes.

By contrast, a 2018 study by the Canadian Centre for Policy Alternatives calculated that, for the 87 wealthiest families in Canada, just 19 per cent of their wealth is held in taxed real estate, leaving the rest of their asset holdings untaxed.

A tax on the assets of the wealthiest Canadians would thus help even out the differences in taxation of the assets of Canadian households between the middle class and the wealthy.

It’s true that non-real-estate assets may have been purchased with income or profits that had already been taxed, but that’s also true of people’s homes. And any real estate that is not a primary residence will, like other investments, also be subject to capital gains tax on any profits when it is sold.

Owners of real estate may pay their property taxes grudgingly, and argue about how those taxes should be implemented, but most accept them as necessary. Although the reasoning isn’t always clearly articulated, at heart, the services paid for by property taxes are essential to maintain the value of a property. If a city had disintegrating roads, overgrown parks, collapsing infrastructure, no law enforcement and social services, and so on, the value of properties in that city would collapse.

The same logic can apply to a wealth tax. The wealthy, in fact, usually already pay fees, calculated as a portion of their assets, to experts such as investment advisers and fund managers, in order to preserve and enhance the value of their wealth.

Federal and provincial governments, too, are essential for preserving individual wealth. The legal system, social supports, infrastructure, an educated and healthy work force, and so on are all needed to maintain a society in which wealth is preserved and increased.

Taxes on real estate, which cannot be moved or hidden, are obviously easier to implement than a tax on other, more mobile kinds of wealth. But property taxes show us the principle of taxing the unrealized value of assets is already implemented and accepted, the majority of Canadians already pay a tax on the value of most of their wealth, and it may be not only reasonable, but also more fair, to tax other kinds of wealth in the same way.

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