The new Liberal government is unlikely to implement a wealth tax or raise the top tax rate — two NDP campaign promises to address wealth inequality — despite requiring opposition support to pass legislation.
Instead, Justin Trudeau’s minority government may focus on implementing its own agenda of targeted tax hikes, increased funding for the Canada Revenue Agency (CRA) and a surtax on highly profitable banks and insurers.
“In the early going, the Liberals will likely govern with a very strong mandate, knowing that no one would dare bring them down,” said Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc.
In late September, Trudeau stated his top priorities include supporting Canada’s economic recovery and tackling climate change. The Liberals’ election platform promised $78 billion in spending over five years, with $30 billion earmarked for child care.
Hughes, who was the deputy director of tax policy for former finance minister Bill Morneau, predicted the current government will raise the necessary revenue for its priorities by continuing ongoing efforts to impose a minimum tax on global corporations, as well as move ahead with a minimum 15% tax on high-earning individuals and a proposed luxury tax on vehicles.
All told, the Liberal platform proposed $25 billion in various tax hikes, with most targeting wealthy individuals and corporations “who have done well through Covid-19.”
John Nicola, chairman and CEO of Nicola Wealth Management Ltd. in Vancouver, agreed that “the NDP don’t have the leverage” to advocate for broader-based tax increases on the wealthy after their underwhelming performance in last month’s election. The NDP gained one seat compared to 2019, bringing their total to 25, and their share of the popular vote was up by about two percentage points.
Nevertheless, the Liberals will need additional votes to pass legislation after falling 11 seats short of a majority in the House of Commons, and Jagmeet Singh’s New Democrats are the mostly likely source. The NDP may persuade the Liberals to add more bite to their tax-raising initiatives — for example, provide the CRA with greater resources to target aggressive tax planning — in exchange for the NDP’s support.
Nicola said “there’s little wiggle room” for the Liberals to raise income tax rates on high earners, and “close to zero” chance of the government introducing a wealth tax, which would be complex to administer. Both policies were part of the NDP platform.
However, the Liberals may consider introducing broader tax revenue measures later in their mandate, such as raising the capital gains inclusion rate from 50% to 75%, as the NDP proposed. (A capital gains hike was not mentioned in the Liberal platform.)
Jason Heath, managing director with Objective Financial Partners Inc. in Markham, Ont., said an increase to the capital gains inclusion rate is “potentially on the table.” The Liberals might find it “more palatable” from a political perspective “than just continually increasing tax rates for high-income earners,” he said.
Larry Short, portfolio manager and senior investment advisor with iA Private Wealth Inc. in St. John’s, N.L., suggested future Canadian tax policy could be influenced by international tax initiatives, such as the OECD’s framework for international tax reform and recent moves in the U.S. to increase taxes on corporations and wealthy individuals.
Short believes “it’s pretty much a given” that the Liberals will increase the capital gains inclusion rate during this mandate as a way to pay for pandemic-related spending.
The Liberal government recorded a record $354-billion deficit in the past fiscal year while providing pandemic support to businesses and individuals. Using the Parliamentary Budget Office’s August projections, the Liberal platform forecast a $156.9-billion deficit in 2021–22, falling to just more than $32 billion in 2025–26.
“There are a lot of people with deferred capital gains on rental properties, on cottages, on non-registered investments” watching to see if the Liberals will increase the inclusion rate, Heath said, and some clients have asked about triggering capital gains now in anticipation.
Heath said most clients should refrain from preemptively selling a property with unrealized capital gains unless there’s another reason to do so: “I don’t think I would sell stuff just to speculate on possible tax policy changes.”
Two more tax policy proposals were a 3% surtax on banks and insurance companies reporting profit of more than $1 billion and a temporary fee called the Canada Recovery Dividend on these firms. The proposals recognize that the financial services sector has “recovered faster and stronger than many other industries,” according to the Liberal campaign platform.
Both initiatives are proposed to begin in 2022, but Hughes said the Liberals may push them back in order to consult and consider the legislation.
“[The] levy on banks and insurers will be trickier and harder to implement than [the Liberals] might have thought,” Hughes said, and the government will want to ensure its legislation doesn’t leave loopholes.
However, the Liberals may proceed relatively quickly with proposals to boost housing affordability, such as doubling the Home Buyers’ Amount to $10,000 from $5,000 and introducing the First Home Savings Account, a new registered plan that would allow Canadians younger than 40 to save up to $40,000 tax-free toward a down payment on a first home.
“I’d be surprised if the Liberals didn’t move forward with [the new savings account], just because of the attention that it has attracted,” said Wilmot George, vice-president of tax, retirement and estate planning with CI Investments Inc.
Doug Carroll, tax and estate specialist with Aviso Wealth Inc. in Toronto, said a dedicated account that allows young Canadians to save for a home might be helpful, but added that he’s concerned about government housing affordability programs distorting the market. “The economy should decide whether people buy or rent,” he said. “It shouldn’t be the government influencing Canadians in the direction of one or the other.”
Aaron Hector, vice-president and financial consultant with Doherty & Bryant Financial Strategists in Calgary, called another government proposal to introduce a 15% minimum tax on individuals in the highest income bracket “a bit of a puzzler,” in part because an alternative minimum tax regime already exists in the Income Tax Act.
According to the Liberals’ election platform, the new minimum tax would remove a taxpayer’s “ability to artificially pay no tax through excessive use of deductions and credits,” capturing some taxpayers not caught by the existing alternative minimum tax, which limits a taxpayer’s access to certain tax preferences. The Liberals estimated the new minimum tax would raise $1.7 billion over five years.
Heath suggested the government will be challenged to find ways to raise revenue without creating a drag on the economy or sparking a brain drain: “There’s only so much you can raise personal tax rates before people start to look for ways to avoid paying tax or even move elsewhere.”