Tax Options for Pandemic Spending

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.

A lot of people have been asking what is in the future in terms of tax policy and budget in 2021 and a lot of speculation on a variety of things. So, let me discuss four areas, which I think could be the subject of potential discussion, not that they’re necessarily going to be in an upcoming budget, but in terms of tax changes. The first, of course, is the capital gains inclusion rate, and then we touch on the principal residence exemption, I’ll talk a little bit about a wealth tax, and then finally, whether or not we could actually see a tax rates rise at all.

The capital gains inclusion rate is a subject of enormous debate. We’ve had a 50% inclusion rate on capital gains for some time now. Could that increase? A number of factors that we’re looking at. We’re looking at what’s happening in the U.K., where a study was just done about potentially doubling their tax rate on capital gains. In the U.S., Joe Biden has a proposal to also increase the tax on wealthy people for capital gains. Of course, whether or not he is able to get that passed will depend on the results of the runoff election in January. But that being said, capital gains, we know, are paid primarily by the wealthy. The government has targeted the wealthy in terms of tax increases, so it is certainly something that could be on the table.

In terms of the principal residence exemption, there was some news over the summer, a bit of buzz, on whether the government was thinking about taxing capital gains on a principal residence. Of course, in Canada, we have no tax on a principal residence, an unlimited amount of gain is tax-free. The U.S., for example, only taxes the first US$250,000 of capital gains or half a million for couples who are married, filing jointly. So could they do this? I don’t think so, politically. I think it’d be very difficult for them to pull off something like this. That being said, if they did do something, then I think that ultimately that would be on a prospective basis. In other words, they would say, “Well, if we’re going to tax the gain on your residence, it wouldn’t be the entire gain because everyone’s been relying on the wealth built up and their principal residence to fund a retirement.” So I think that would be fundamentally unfair.

But what they could do is they could pro-rate the number of years, let’s say pre- and post-2021. So if you had a home for 20 years, they would say any years prior to 2021 would be tax-free, any years after that would be taxable, and if you owned it for 21 years, for example, you’d pro-rate one over 21 of the gain would potentially be taxable. So again, I don’t think they’ll go there, but it certainly is something that has been discussed.

The third topic, which has been discussed enormously, is a wealth tax. In other words, would there be a wealth tax potentially in Canada? Well, again, I think it’s unlikely. That being said, I can tell you there was a study that was done recently by the parliamentary budget officer that estimated that if there was a 1% wealth tax in Canada that applied to families with over $20 million of wealth, about 14,000 families would pay, it would raise revenue of about $5.6 billion for the upcoming year. It was introduced briefly, or at least it was discussed briefly, in Parliament from the NDP. It was quickly defeated. So I’m not sure that we’re going to go there. There’s a lot of debate on the pros and cons of wealth tax.

There’s issues with wealth tax in terms of a form of double taxation. In other words, you’re taxing the income while it’s being earned, and then you’re taxing it again on a wealth-tax basis. It’s really double-tax. If you really look at the fundamental trend, while maybe 30 years ago or so you had about 12 countries having a wealth tax, if you’re going back down to today, there’s only four countries left that we’re aware of that have a wealth tax. That’s France, Norway, Switzerland, and Spain. Would Canada be the fifth? I’m not really sure that it would be.

Something that could happen, of course, is an estate tax. We don’t have an estate tax. We do tax capital gains tax on death in Canada. The U.S. has an estate tax, for example, of 40%, but a significant exemption in the U.S. currently around US$11 million. Of course that could drop with the Biden proposal. But in the end of the day, again, there’s a lot of debate, again, whether that would be a form of double taxation.

The final question that we get asked is, could they actually increase the tax rate any further? And again, my answer to that is how high can you go, really? Because if you look at our tax rates in Canada, we have a marginal rate, federally and provincially, over 50% in eight provinces already, Nova Scotia being at 54% and then Ontario, B.C., and Quebec, as well as New Brunswick covering around 53%. So, in terms of how high can you go, I’m not really sure we can go much higher. If you look at our top rate in Canada versus all the rates in the world, we’re actually number seven at 54% for our top statutory personal tax rates for the current year. Sweden’s is higher at number one at 57%, Japan at 56%, Denmark at 56%, and then you’ve got France, Austria and Greece just above us.

But 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. If you look at the top 9% of all taxpayers in Canada, they earn about a third of all the income, but yet pay about 55% of all the personal income tax. In fact — the 1%, these are the people making over $250,000 a year on a personal annual basis — actually account for 23% of all the personal income taxes paid in Canada.

So in a nutshell, I would say capital gains inclusion rates is probably the most likely of all these particular changes, but in terms of some of the other stuff, there’s certainly some debate about it, but we’ll see what happens in a spring 2021 federal budget.