The Rideau Canal in Ottawa, Canada
© Jean Vaillancourt / 123RF Stock Photo

As Covid-19 case counts continue to rise, ensuring more government spending to help workers and businesses through the winter months, there may eventually be a need for new taxes to pay for pandemic stimulus.

Listen to the full podcast on AdvisorToGo, powered by CIBC.

The NDP has championed a wealth tax on Canadians with more than $20 million in assets as well as higher taxes on companies’ excess pandemic profits. In a report last month, the C.D. Howe Institute suggested a GST hike was most likely. Deutsche Bank called for a tax on remote workers who haven’t been negatively impacted by Covid-19. Meanwhile, former Bank of Canada governor Stephen Poloz said the Canadian economy can grow its way out of deficits.

Of all the potential approaches for the Liberal government, which faces a nearly $400-billion deficit in fiscal 2020-21, CIBC tax expert Jamie Golombek said a change to capital gains is most likely.

“The capital gains inclusion rate is a subject of enormous debate,” said Golombek, managing director of tax and estate planning with CIBC Financial Planning & Advice.

The Canadian rate was reduced from 75% to 50% in 2000. Golombek pointed to activity in other jurisdictions.

A U.K. study commissioned by Chancellor Rishi Sunak recommended doubling the capital gains rate, while U.S. President-elect Joe Biden campaigned on taxing capital gains and qualified dividends at ordinary rates for those whose income exceeds US$1 million.

“Of course, whether or not [Biden] is able to get that passed will depend on the results of the [Georgia Senate] runoff election in January,” Golombek said in an interview earlier this month.

Changing the capital gains inclusion rate would affect wealthy Canadians most, which fits the Liberal government’s policy agenda, he said. In 2017, the government introduced changes to limit business owners’ passive income, while last week’s fall economic statement signalled a cap on employee stock option deductions from large companies.

“Capital gains, we know, are paid primarily by the wealthy,” Golombek said. “The government has targeted the wealthy in terms of tax increases, so it is certainly something that could be on the table.”

Another revenue-raising option that received some “buzz” over the summer, Golombek said, is eliminating the principal residence exemption. But he said this is less politically viable. If the Liberals were to change the rules, they would have to do so on a go-forward basis because so many Canadians rely on the wealth built up in their homes.

Golombek also said the wealth tax, the subject of an NDP motion that was defeated in Parliament last month, is unlikely. While four countries have a version of a wealth tax — France, Spain, Norway and Switzerland — the trend is moving away from such an approach.

One concern about a wealth tax is what Golombek called “double taxation”: wealthy individuals are taxed on their income and again on their assets.

That being said, he pointed to the potential windfall for the federal government. A report in July from the Parliamentary Budget Office found that a 1% tax on the roughly 14,000 families with wealth above $20 million would net $5.6 billion in annual revenue.

A recent public opinion survey also found most Canadians were receptive to a wealth tax.

Another possibility is an estate tax, which Canada doesn’t have. But because Canadians are taxed on capital gains at death, there would again be a question of double taxation, Golombek said.

Finally, he said the government could simply raise income taxes. But with eight provinces already at marginal rates of 50% or higher when federal and provincial taxes are combined, there isn’t a lot of room.

“I’m really not sure we can go much higher in terms of competitive advantage, and we are already paying a significant amount of tax,” Golombek said.

The top 9% of all taxpayers in Canada earn about one-third of all the income but pay about 55% of all the personal income tax, he said. The top 1% — people making over $250,000 a year — account for almost one-quarter of all the personal income taxes paid in Canada.

“In a nutshell, I would say capital gains inclusion rates is probably the most likely of all these particular changes,” Golombek said.

“But we’ll see what happens in a spring 2021 federal budget.”

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.