The federal budget fiscal response to COVID-19.
On April 19, 2021, Deputy Prime Minister and Finance Minister Chrystia Freeland delivered the first federal budget in over two years. Despite unprecedented fiscal stimulus to support the economy during the ongoing pandemic and a reported federal deficit of $354 billion, the budget did not include any significant revenue-generating tax measures aimed at paying for this spending.
The revenue-raising options of most concern and speculation prior to the budget were:
- An increase in the capital gains inclusion rate from 50 per cent to something higher;
- The elimination or capping of the principal residence exemption;
- Income tax increases at higher income levels;
- A rate increase for the sales tax (GST/HST);
- Some form of “wealth tax”.
The only budget measures resembling a tax on the wealthy was a new tax on the purchase of luxury vehicles, aircraft and boats and a proposed tax on vacant residential real estate owned by non-residents. Click here to read the budget summary prepared by the Manulife Tax, Retirement & Estate Planning team. This is a far cry from the much more broad-based measures that were of concern before the budget. But, it’s not over until it’s over. What the options are for revenue raising, and which are the most likely to be implemented, is anyone’s guess.
On July 18, 2020, the Organization for Economic Co-operation and Development (OECD) released a report for G20 finance ministers and central bank governors that outlined possible avenues available to restore public finances and considerations that a country may need to balance in using these avenues. Five main approaches were considered:
- Income tax increases;
- Taxation of capital, including capital gains, property taxation and inheritance tax (which could also take the form of estate or wealth taxes);
- Increasing sales tax;
- Raising or introducing “sin” tax (alcohol, tobacco, carbon emission, etc.);
- Minimum tax for multi-national corporations in a digital economy.
The following are some thoughts on the first three of these avenues in the Canadian context:
Income tax increases?
The OECD encouraged finance ministers and central bank governors to consider existing income inequality, which has been amplified and exacerbated by the pandemic. In Canada, if income tax increases are under consideration, they would most likely only be at higher income levels. In 2015, a majority Liberal government was willing to do this by introducing a new upper income tax bracket with a top personal tax rate of 33 per cent on taxable income in excess of $200,000 (now $216,512 as indexed for inflation as at December 31, 2020). Combined federal and provincial income top tax rates on ordinary income now exceed 50 per cent and are closer to 54 per cent in many provinces. Is there any room for more increases at the top bracket or the creation of a sixth federal bracket?
The concept of a wealth tax was proposed by the New Democratic Party (NDP) during the 2019 federal election campaign. The proposal called for a one per cent annual tax on family net worth above $20 million that would include all assets (except lottery winnings) minus liabilities. On July 8, 2020, the Parliamentary Budget Officer estimated that this proposal would impact 13,800 families in Canada and could raise net revenues of $5.6 billion in 2020-21. The concept of new forms of tax to address wealth inequality was mentioned in the Liberal government’s throne speech on September 23, 2020, but the Fall Economic Statement on November 30, 2020 did not provide any insights. An NDP motion to introduce an annual one per cent wealth tax was defeated in the House of Commons in November. Further discussion of a wealth tax of this type was absent from the 2021 federal budget.
Wealth taxes are tricky to implement since - as the OECD noted in its report - there would have to be international co-operation to prevent capital flight. The form and approach to wealth taxes would also need careful consideration. The design would have to contemplate such things as:
- At what threshold of wealth should such a tax be applied?
- What assets should count – all or some subset – which ones should be included and excluded? Domestic and foreign?
- How should assets be valued?
- Should the rate be flat or progressively higher as different thresholds are met? Should there be ceiling provisions?
- Should wealth be viewed individually or on a family basis?
- Should such a tax be annual or one time on a temporary basis?
- Depending on the design of such a tax, what kind of administration is required to collect the tax and at what cost?
Right now, there are many more questions than answers when it comes to a potential wealth tax in Canada. What the federal budget did was make some small efforts in this arena, as mentioned – a luxury goods tax and a proposed tax on vacant residential real estate owned by non-residents.
Due to the difficulties in implementing a new form of tax on wealth, what may be more likely in Canada is limitation or elimination of existing tax preferences. Just because the 2021 federal budget did not change the capital gains inclusion rate and principal residence exemption, does not mean that these measures are off the table.
A higher GST?
The area of sales tax is an interesting one. The Goods and Services Tax (GST) rate is currently five per cent, which was lowered from the initial seven per cent rate by the Conservative government over the course of 2006-2008. We may see some impetus to reverse that decision and increase the GST. The OECD report pointed to many countries using the equivalent of GST taxes in the aftermath of the 2008 global financial crisis to support their economies, so there may be no runway for this type of action in many countries. Canada may be an exception.
There is some emphasis in the budget on enforcement and collection of existing taxes with more resources going to the Canada Revenue Agency for audit functions. As well, additional efforts are being placed on strengthening the anti-avoidance provisions in the Income Tax Act and lowering the thresholds for self-disclosure by tax promoters of aggressive tax plans. These are all palatable ways for Canada to increase revenue collection without increasing taxes.
The only safe prediction one can make is that there will have to be a revenue-generating answer to this deficit problem. What that answer may be, only time will tell.