Facing deficit, Grits may target wealthy

“I don’t see [big tax hikes] happening before next year at the earliest,” says Wudrick, who adds that the Liberals “haven’t made any indication that they are going to dial back spending anywhere.”

Major policy initiatives targeting the wealthy and high-income earners are more likely to be introduced once an economic recovery is underway — probably within 18 months to two years, according to Glen Hodgson, an economist and fellow-in-residence at the C.D. Howe Institute in Toronto.

“We’ll see what the debt-to-GDP ratio is [at that time] and whether economic growth is adequate to start eating into [the deficit],” Hodgson says. That growth will probably be inadequate, he adds, and the government may look at finding new sources of revenue.

In late September, a report from the Parliamentary Budget Officer projected that Canada’s deficit would be $328.5 billion for 2020-21 and $73.8 billion for 2021-22.

In the speech from the throne last month, the government outlined an agenda focused on continued financial support for Canadians who lost their jobs due to Covid-19, including new benefit programs and an expanded employment insurance regime. The government also signalled interest in big-ticket spending, such as a universal pharmacare plan, a national childcare system and a variety of infrastructure investments. Clean energy initiatives feature prominently in the $10 billion the Liberals earmarked through the Canada Infrastructure Bank on Oct. 1.

While the Liberals’ agenda would come at a high cost, Michael White, portfolio manager and head of multi-asset strategy with Picton Mahoney Asset Management in Toronto, says the government’s support for Canadians during an economic crisis makes sense.

“We’ve had monetary policy do what it’s supposed to do — take interest rates to long-term low levels,” White says. “Now it’s time for fiscal policy to come in.”

White notes that Canada’s debt and deficit remain competitive relative to those of other developed economies.

However, Brandon Schaufele, an associate professor in business, economics and public policy at the Ivey Business School at Western University in London, Ont., says the government has yet to identify a fiscal anchor — such as a target debt-to-GDP ratio or some other guide — to manage the federal budget and measure Canada’s economic resiliency.

“If [the Liberals] provide guidance [in the fiscal update] on what they’re targeting for a fiscal anchor, we can start to imagine tax and spending scenarios that will achieve that sort of target,” Schaufele says.

The fiscal update also will be the first opportunity for new Finance Minister Chrystia Freeland to articulate her policy priorities, notes Wilmot George, vice president of tax, retirement and estate planning with Toronto-based CI Investments Inc.: “[Freeland] is going to put her mark on this particular fiscal update or mini-budget.”

As was widely expected, the government provided few details in the throne speech in terms of actual tax policy plans. However, the speech stated the Liberals would “identify additional ways to tax extreme wealth inequality, including by concluding work to limit the stock-option deduction for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants.”

In a minority government situation, the Liberals will need support from at least one other party to pass legislation on new tax policy. They could find an ally in the NDP — although the NDP probably would demand some concessions from the government in exchange for its support.

One of those concessions could come in the form of a wealth tax. During last year’s election campaign, the NDP proposed taxing “super-rich” residents 1% on the portion of their assets exceeding $20 million.

Hodgson says he’s concerned the Liberals would consider an annual wealth tax, which he contends would not only be difficult to administer, but be unsuccessful in raising adequate revenue.

“Wealth is very mobile,” Hodgson says, “and if you start to tax it in a way that the wealthy see as unfair, they’ll just move their wealth.”

One tax that might be easier to administer — and was part of the Liberals’ 2019 election campaign platform — is a “luxury tax” of 10% on cars, boats and personal aircraft costing more than $100,000.

But Hodgson says he favours another option for addressing government debt and the deficit: increasing the GST rate.

“The people who benefited from the [Canada Emergency Response Benefit] and other programs should also pay their fair share,” Hodgson says, adding that an increase to the GST would offer the government “a stable, ongoing source of revenue.”

However, Wudrick says, the Liberals “do not want to risk taxing anyone who could conceivably fall into the category of ‘middle class.’”

Concern about alienating the middle class also might keep the government from moving ahead with any tax based on home equity values, which have soared in recent years.

“That’s a complete no-go zone,” Hodgson says. “[A home] is the biggest asset for almost everybody. Even to make some noise about tapping into the capital gains there [could result in] the government no longer being the government.”

However, some tax experts believe the Liberals will consider raising the capital gains inclusion rate, perhaps to 75%, where it was in the 1990s, from the current level of 50%.

“We know that capital gains [taxation] affects mostly the wealthy,” says Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto. “The average Canadian doesn’t have any money outside of registered plans.”

Michelle Connolly, senior vice president of advanced wealth planning at Wellington-Altus Private Wealth Inc. in Toronto, says she “firmly believes” the government won’t introduce a broad increase to the capital gains inclusion rate, suggesting such a move would hurt ordinary Canadians. “Do you punish [the middle class] by increasing the tax on their retirement savings?” she asks.

There are few options for high net-worth (HNW) clients to engage in preemptive tax and investment planning. Carol Bezaire, senior vice president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto, says HNW clients shouldn’t make rash moves to minimize the impact of potential new taxes because predicting the timing and direction of government tax policy is tough to do.

“Advisors and clients should stay the course but pay attention to developments,” Bezaire says.

Golombek suggests that HNW clients concerned about an increase in the capital gains rate could consider selling an investment before there’s a tax hike, but only if that sale “makes sense from an investment perspective, or to rebalance a portfolio or to sell a stock [that’s had a big gain].”

Certain wealthy clients also might consider accelerating existing charitable-giving plans, such as setting up a donor-advised fund or a private foundation, Golombek says.