Find out whether it could come to Canada, and what pros and cons it would have for your clients
Introducing a wealth tax has become a hot topic in the pandemic. Canada’s federal Liberal government has considered introducing it to reduce inequality and pay for several initiatives – such as the pandemic deficit as well as new programs. The New Democratic Party (NDP) has also supported a 1% tax on the wealthy to bring more fairness to Canada’s tax system, so another Liberal minority with NDP support could move Canada closer to having such a tax.
If a newly-elected government implemented such a tax, it would present significant planning challenges for financial advisors and many of their clients as the tax is defined. So, this primer defines what a wealth tax is, what Canada has considered, and some of its pros and cons.
What is a wealth tax?
A wealth tax – which can also be called a “capital” or “equity” tax – is a tax based on the market value of a taxpayer’s assets. That includes a client’s cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
Will there be a wealth tax in Canada?
The idea of having a Canadian wealth tax has been gaining traction, especially as some people’s wealth has risen over the past few decades
In its September 24, 2020 Speech from the Throne, the federal government announced that it wanted to find ways to place a tax on extreme wealth inequality.
As the wealthy have shed their tax burden over the years, Canadians have begun to favour a wealth tax to equalize the fairness in their tax system. A November 2020 Abacus poll, for instance, showed that 79% of Canadians favoured a 1% wealth tax on Canadians with more than $20 million in assets.
In July 2021, the Parliamentary Budget Office (PBO) released a report that said a 1% tax on family net wealth over $20 million in Canada would generate about $10 billion in revenue during its first year. The report said it would only apply to about 25,000 wealthy families, representing Canada’s riches 0.2%, but it would be a $200,000 tax hit on top of their regular income tax. The PBO report also estimated that a one-time wealth tax of 3% and 5% on Canadians with net wealth exceeding $10 million and $20 million, respectively, could raise between $44 billion and $61 billion.
But the PBO’s report didn’t define family or distinguish between liquid investment assets, such as securities, and more illiquid, like homes, so much would still have to be defined if this tax was introduced. That increases the grey areas that financial advisors would have to work through with their clients if Canada introduced such a wealth tax.
A few countries have wealth taxes, but others have abandoned them. France, Portugal, and Spain have wealth taxes. Austria, Denmark, Finland, Germany, Iceland, Luxembourg, and Sweden, recently abolished it. Some observers say that’s because those countries’ wealth taxes were badly designed since they had low thresholds and taxed many people who were well-off, but not extremely rich.
The U.S.A.’s federal and state governments do not impose wealth taxes. Like Canada, they favour other taxes – such as annual income and property taxes. But, as in Canada, there have also been recent discussions about imposing as a wealth tax as a way to distribute the tax burden more fairly in a society that has such immense, and growing, economic disparity.
Is a wealth tax legal?
No constitutional barriers have been identified for it. Many pro wealth tax advocates also argue that Canada already has a wealth tax in its property tax, which is imposed on everyone’s homes. They feel a new wealth tax would just be extended to all of the wealthy’s other assets.
What are the pros and cons of a wealth tax?
- A wealth tax would ensure more taxation equity. One of the issues that’s been highlighted in the pandemic is fairness – of those who had to continue to work in their workplaces versus those who could stay home, or those who have economically benefited from a colonial system and those who have been disadvantaged by institutionalized racism. The global pandemic also highlighted the growing financial disparity between those who have resources and those who don’t. So, many argue that introducing a wealth tax would ensure more social and economic fairness.
- Revenues from a wealth tax could help the government not only pay for some of the deficit generated by its pandemic support, but generate more revenue to introduce new social programs, such as affordable care for children and seniors. It could also provide more funds to introduce measures to address other current issues, such as climate change or Indigenous reconciliation.
- The rich will always find a way to avoid a wealth tax. Many are concerned that the wealthy will use whatever loopholes they can find to declare less income and avoid paying the tax. Some pro wealth tax advocates also argue that with digital banking it’s now easier to trace how money moves. So, if Revenue Canada’s enforcement budget was increased and tougher penalties were enforced for cheaters, that would allow Ottawa to prevent the wealthy from gaming the system, though many studies have been done to try to determine how widespread that could be.
- A wealth tax will discourage savings and entrepreneurship. Some pro wealth tax advocates argue that’s unlikely since creative Canadians will continue to be entrepreneurial and the tax will only be collected after they’ve made a fortune. Some are concerned that the wealthy may lose their family businesses to pay for it, so that would be another area that advisors with clients who own business would have to work on to identify how the wealth tax can affect clients.
- A new wealth tax system could be confusing since it taxes personal wealth – such as property and land – not personal income, which is already taxed. A client’s net wealth would then become a key area for advisors and their clients to consider, especially if their housing is taxed. That would be important because Canada currently does not tax the gains on the sale of a principal residence, regardless of the sale amount. Introducing a wealth tax could change that. It would also leave families with less money to trade up to larger homes or save for retirement. Those are all issues that advisors would need to examine with their clients as a wealth tax could significantly impact some clients’ resources and their wealth management.