Finance Risk #1: increased taxes Ottawa’s parliamentary budget officer (a senior bureaucrat who provides a non-political analysis of the country’s finances) recently suggested that the emergency financial assistance doled out during the pandemic could be north of $330 billion. Keep in mind that the provinces are also running deficits to support people during this difficult time. Obviously, these deficits will have to be paid for somehow, some time. And the main way for governments to pay for things is − you guessed it − to raise taxes. Governments certainly have a lot of options available to do that; what follows here is a closer look at some of the more obvious possibilities. Of course, when it comes to predicting changes in our tax code, no one has a crystal ball. Some of the following changes may never happen. Or, they may happen at a later date. Or, they may happen incrementally, rather than all at once. No one knows for sure. Keep that inmind as you read through them. Capital gains tax In Canada, only 50% of any profit that we make on the sale of an asset is taxable. That rate applies to any investments which we might hold in a non-registered account, rental property, a cottage or vacation condo, or almost any other asset that we might sell. In tax parlance, it’s called the “capital gains inclusion rate.” Over the years, the inclusion rate has changed by quite a bit. Before 1972, there was no capital gains inclusion rate − gains were 100% tax free. From 1972-1989, the rate was 50%. Then, from 1990 to 2000, it was bumped up to 66.66%. Then it changed back to the current rate of 50%. Because governments have tinkered with the inclusion rate in the past, some say that there’s precedent for them to tinker with it now. And, indeed, there was a fair bit of speculation and commentary back in 2016 that the governing Liberals were going to raise the rate. It didn’t happen then but, every few years, the subject seems to come up again. Principal residence exemption Since 1972, Canadians have enjoyed the ability to sell their principal residence free of tax (prior to 1972, all capital gains on all assets were non-taxable). As real estate prices in many cities have soared since then (residents of Toronto and Vancouver, we’re looking at you!), that tax-free status has led to billions of dollars in paper profits over that time. Could the government eliminate that exclusion and make principal residence gains exactly the same as every other capital gain? Or, might they introduce an “exclusion limit” on the gains − say, the first $250,000, or $500,000, or $1 million of gains would be tax free, but everything above that would be taxable? Such a structure would be quite similar to what already exists in the United States, for example. Doing so would obviously raise a lot of additional tax revenue. It could also dampen real estate speculation, which could make home prices a lot more affordable for first-time buyers. On the other hand, it would raise the ire of nearly every homeowner in Canada, of pretty much every age, in pretty much every corner of the country. Not something any government wants. Income taxes (corporate and personal) Income taxes are a major source of government revenue: some 50% or so of all money coming into the federal government in 2019 was from income taxes on individuals. So it stands to reason that one way for the government tomake up for a fiscal shortfall might be to raise taxes on that major source of revenue. Well, maybe. The fact is, raising income taxes on individuals often creates a considerable political backlash for any government that tries it. Sure, it’s always possible for governments to nudge up income tax rates, particularly on higher-income earners. But, with marginal tax rates already higher than 50% in several provinces, it’s unclear just how much they could go up from here. Corporate tax rates are another story. Corporate taxes comprised only about 7% of federal tax revenues in 2019, and there’s probably less backlash involved in raising them. Indeed, such a move has already been discussed by the Biden administration south of the border, and it’s conceivable that federal and provincial governments here could follow suit. Wealth tax/inheritance tax A general wealth tax − that is, a tax on an individual’s net worth, rather than on their annual income − seems to be another topic that comes up every few years. Same goes for an inheritance tax: a general tax on estates over a certain value. As the baby boomers age and leave the workforce, Canada’s total working population declines, which means less government revenue from income taxes. At the same time, all of those aging retirees increase the need for government spending on health care and other programmes. So yes, there’s an argument to be made that a shift from taxing income to taxing wealthmakes some sense. Several countries in Europe operate with such a regimen (France, Switzerland and Norway, for example). The U.S. already has an inheritance tax on very large estates (above $11 million or so), and states such as California are openly considering a wealth tax on individuals with more than $30 million. Such policies would be a pretty stark departure from current tax policy, however. But, because they would theoretically only be applicable to the very wealthy, they’d probably generate a lot less public backlash (and a lot less economic hardship) than, say, a middle-class income tax hike or a bump up in the GST, for example. 26 | www.snowbirds.org
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