Not all wealth taxes are created equal

This post was originally published on this site

As the prospect of a late summer election sharpens, talk of wealth taxes is swirling in the air.

The NDP proposed a wealth tax in the 2019 campaign, and last week, the Parliamentary Budget Officer issued its estimates for how much revenue a one-time wealth tax (floated by Liberal backbencher Nathaniel Erskine-Smith) would generate. The PBO’s answer: quite a bit, or more specifically, $60.7-billion over five years. (Although the tax would be levied only one time, the resulting obligations could be paid over five years.)

So if a one-time wealth tax is lucrative, a continuing wealth tax such as that favoured by the NDP must be even better, right? Not so fast, cautions the commission that the British government set up to examine the relative merits of one-time and continuing wealth taxes.

Story continues below advertisement

In its final report, the appropriately named Wealth Tax Commission concluded that there was much to recommend a one-time tax: It would be relatively efficient, and would allow for minimal opportunities for avoidance or evasion. The British version of a wealth tax would include pension assets and the value of a primary residence, with a threshold of £500,000 to £1-million ($870,000 to $1.74-million).

In Canada, that scope and that low of a threshold would undoubtedly end up taxing the gains of thousands of well-off, but far from extremely wealthy, Canadian homeowners. Mr. Erskine-Smith’s proposal (although not fully fleshed out as legislation) proposes a much higher limit of a 3-per-cent tax on net wealth over $10-million and of 5 per cent on net wealth over $20-million. By contrast, the NDP proposed in 2019 a permanent 1-per-cent tax on net wealth above $20-million.

There’s no mention of whether primary residences are included in the brief motion wording tabled by Mr. Erskine-Smith. However, the PMO did include primary residences in its calculations. The Liberal government has given no indication that it has any intention of enacting a tax on primary residences, and in any case, a $10-million threshold would shield the capital gains from all but the most luxurious homes.

The British wealth tax commission, however, had a much dimmer view of continuing wealth taxes. One of the biggest issues would be administrative costs. A permanent wealth tax would require continual assessments of the value of assets that didn’t have an explicit public price – think private businesses, or art collections. A one-time tax would also require a valuation, but only once. With a higher rate, the relative administrative costs would be lower for a one-time levy.

Another big issue would be the scope of such a tax. With a continuing tax, any exclusions would distort investment decisions, since capital would tend to flow into the exempt classes. There would be a similar issue with thresholds. A higher threshold would reduce administrative costs, but it would also likely lead to tax-avoidance behaviour such as splitting assets between family members.

In the end, the commission concluded, a permanent wealth tax would be a good way to make the rich less rich, but not a very efficient way to raise revenue.

Taxing questions

Story continues below advertisement

Responding to recent coverage about the delay in legislation that reduces the tax burden on the intergenerational transfer of small businesses, one reader asks why such transactions are taxed at all. The reader contends that almost all of the money transferred would have already been taxed, and that the family member taking over the business would be taxed on any gains.

The second part of the question is a non sequitur: The issue that Bill C-208 addresses is the tax bill to be paid by the person transferring the business, not the person to whom the business is being transferred.

The answer to the first part of the question is a bit more complex. First, it’s not correct to say that the value of the business being transferred would necessarily have been previously taxed. Such transfers, if genuine, are not going to simply be cash, but of the business as a continuing concern. The whole should be worth more than the sum of its parts, and certainly more than cash on hand. But the point of the question also fails to understand a basic principle of Canada’s tax system, namely that when an asset changes hands, a tax liability generally results. That’s not double taxation.

Line Item

Finance committee reconvenes: As first reported in The Globe and Mail, the House of Commons finance committee will hold a special one-day session on Tuesday (in an attempt) to clear up confusion over Bill C-208, a private member’s bill that gives more generous tax treatment for intergenerational transfers of small businesses. Although the bill received royal assent on June 29, the Department of Finance asserted in a June 30 press release that the law will not come into effect until Jan. 1 (and that the government intends to pass amendments in the meantime).

In the morning, the Commons law clerk and deputy law clerk are scheduled to appear, followed by Don Boudria, a former Liberal minister with ample legislative experience, and Peter Milliken, a former speaker of the House. In the afternoon, three senior officials from Finance are scheduled to appear before the committee.

Story continues below advertisement

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

Sign up for the Tax and Spend newsletter here

Related Posts