The new Liberal minority government will be pressured to take a more aggressive approach to raising tax revenue than outlined in the election campaign, tax experts suggest, as the party will need opposition support for spending programs and to manage the deficit.
The government’s tax policy “will be influenced by the NDP, because [the Liberals are] going to need someone to support them on an ongoing basis,” said Doug Carroll, tax and estate specialist with Aviso Wealth in Toronto. The other main opposition parties are unlikely to fill that role, he said.
Tax experts and advisors will be watching how the Liberals address issues such as higher taxation on high-income earners, the capital gains inclusion rate, and wealth inequality.
Larry Short, a portfolio manager and senior investment advisor with iA Private Wealth in St. John’s, said the Liberals’ proposed 15% minimum tax is unlikely to raise much revenue for the government, in part because high earners are already subject to an alternative minimum tax.
“That’s a headline [promise] without any substance behind it,” Short said.
According to the party platform, the tax would raise $1.7 billion over five years.
Short believes “it’s more than likely” the Liberals will raise marginal tax rates on high-income earners — even though such an initiative was not included in their campaign platform. The move would raise tax revenue and secure NDP support, as the New Democrats proposed raising the top federal tax rate to 35% from 33%.
“We have to look at the NDP and Liberal platform together” when considering the direction of the government’s tax policy, Short said.
However, Carroll believes the Liberals will stick with targeted measures, such as their luxury tax on vehicles proposed in the 2021 federal budget and the minimum tax for high-income earners.
“Those might be the two main [initiatives] to show they’re keeping an eye on the high-income population,” Carroll said.
Introducing big tax increases out of the NDP platform would “play into the hands of the critics, particularly the Conservatives,” who would accuse the Liberals of allowing the NDP to drive government tax policy, Carroll said.
Wilmot George, vice-president of tax, retirement and estate planning with Toronto-based CI Investments Inc., agreed that the Liberals appear to favour a more targeted approach to addressing perceived wealth inequality in Canada.
“Perhaps the Liberal government will try to increase revenue, but do it in a more cautious way,” George said. “However, we are in a minority government, and the Liberals will require support.”
Carroll said he’s skeptical that the Liberals will raise the capital gains inclusion rate — another NDP campaign proposal — suggesting such an increase might be complex to administer and implement, and politically unpopular with Canadian investors.
“People will manoeuvre [in terms of their tax planning] in ways that you can’t anticipate,” Carroll suggested.
The Parliamentary Budget Office (PBO) estimated that raising the capital gains inclusion rate to 75%, as the NDP proposed, would raise $44.7 billion over five years.
Aaron Hector, vice-president and financial consultant with Doherty & Bryant Financial Strategists in Calgary, agreed. “If the Liberals had wanted to increase the capital gains inclusion rate, it would have happened by now,” he said. “It’s been speculated on for a number of years.”
However, George said the NDP is likely to put a capital gains tax hike “on the table” in exchange for supporting the government, even if the Liberals themselves don’t favour it: “Canadians will have an eye on the next federal budget to see if [an increase to the inclusion rate] is a move the Liberals will make.”
For his part, Short believes “it’s pretty much a given” that the Liberals will increase the capital gains inclusion rate, both to address pandemic spending and to secure NDP support. However, he said the government may look for ways to lessen the blow to investors, perhaps by settling on a rate below 75%, which the NDP proposed.
A wealth tax, such as the 1% tax on assets above $10 million proposed by the NDP, is unlikely, the experts said, at least in the short term.
“The Liberals seem to be addressing wealth inequality through the minimum tax and also attacking very large, profitable corporations like banks and insurance companies rather than targeting individuals,” Hector said.
George said that the introduction of a wealth tax would be controversial, in part because it would raise the question of double taxation. A wealth tax would also be difficult to administer and might not raise the amounts of tax revenue that proponents of the tax expect, as the wealthy will look for ways to mitigate its effect.
The PBO estimated the NDP’s wealth tax proposal would generate more than $60 billion over five years.
“I’m not suggesting a Liberal government might not move forward with a wealth tax,” George said, “but I’d be surprised if they did it anytime soon and I’d be surprised if they did it without any significant consultation on the topic.”
Short agreed that an annual wealth tax that would be “a nightmare” to administer. He suggested the Liberals are more likely to introduce some form of estate or inheritance tax, even though neither the Liberals nor the NDP campaigned on such a proposal.
An estate tax would be easier to administer, Short argued, as it would only be assessed at the time of death; a wealth tax would have to be assessed annually. An estate tax would also allow the government to tap into a massive intergenerational wealth transfer currently underway.
“I would be surprised if an estate tax were not introduced,” Short said.