Don Scott on Potential Tax Increases for Canadians
As the country navigates the uncertainty of the COVID-19 pandemic and the resulting economic fallout, the 2021 federal budget will be one of the most important of our time.
With a focus on post-pandemic recovery efforts, the finance minister has said that raising taxes is not a priority. But speculation abounds around potential strategies to raise revenue to address the ballooning deficit.
Don Scott is a Partner and Director of Tax Services with Welch LLP. He’s a nationally recognized expert for his extensive knowledge in the area of personal and corporate tax. Don Scott joins Sharon Bowes at NewsPoint360 to talk about these potential strategies and how it will affect business owners and Canadians alike.
Economic recovery from the pandemic is expected to be a slow, sometimes painful process. It’s been more than two years since the last federal budget. So if increased taxes do become part of the recovery strategy, where are those increases most likely to materialize?
In the above video interview with NewsPoint360, Don and Sharon discuss personal tax rates, corporate and business tax rates, capital gains, the principal residence tax exemption, and the GST rate. Here are Don’s insights on the impending 2021 federal budget.
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Let’s start with the one that has universal impact – personal tax rates. How likely are we to see changes here in the short term?
I think the federal government is struggling with the amount of money that they’re spending, because of the pandemic, and keeping the economy afloat. We’re all well aware of the record-breaking, never seen before annual deficit that was noted in the economic update last fall, so they’re going to have to raise revenue at some point. Question is, are they going to do it now?
When it comes to personal tax, that’s going to be a tough one for them. Certainly, a lot of their platform has always been to support the middle class, and those who are trying to join the middle class. So are you looking at raising rates again?
If you want to call it the top 1%, or the top 10%, we are already seeing that in most provinces, if not all provinces and territories, it’s just under 50% or greater than 50% as the highest tax rate paid by those by the, say, top 10%. So to raise that even more becomes an issue. Statistics have shown that once you exceed that sort of 50% barrier, where people are saying “I’m now paying more than half of what I’m making”, becomes an incentive for people to not do that, quite frankly, legally, of course, we would hope.
And in today’s world, it’s shown, especially through the pandemic, that physical presence is not really required to run your business or to do your work. And you could see people starting to leave Canada, if it became a very high taxed nation, from that perspective.
This coming budget, as I mentioned, they’re spending a lot of money – we know they are, they need to. I think this coming budget is going to concentrate more on the spending side than it will on the revenue side. So while they’ll be looking at some adjustments in the taxes, I don’t see a personal tax rate hike this year. I don’t see where that would make sense at this point. But someday perhaps.
Stimulating the economy is key to recovery. Let’s look at the potential for corporate and business tax rates next. Is that a potential target for tax revenue?
When it comes to private businesses, small to medium sized businesses, as it’s referred to, the federal government actually has been working on lowering the tax rate. Also, for bigger businesses, when you combine the federal corporate tax rate, which has been very stable, with the provincial corporate tax rates, it is a competitive rate. I don’t think the government would want to see them going above where other G-7 nations are taxing corporations.
Additionally, corporate income is not a very stable base to collect taxes because, if you’re going through a period like we’re going through now, businesses are not making money, except for the odd few. Most businesses are struggling right now, as we well know, because of the economic downturn caused by the pandemic. It would make no sense to me that they would raise corporate tax rates of businesses at this point.
Well, we’re hearing a lot though about capital gains tax increases, if not in 2021, in the not-too-distant future. Why is there so much focus on this area in regards to taxation?
Well, there’s a couple of issues there as to why the speculation. The first is, it’s perceived that it is the “rich” who invest and report capital gains income, and it’s the “rich” where maybe the general public and/or the government thinks they should pay a little bit more for the good of everybody. It’s seen as the “rich” or the top 1% that report significant capital gains.
That’s actually not true.
Once you look at the statistics more closely, you can have situations where there are taxpayers who would not be seen as “rich people” that might have a large capital gain in any one particular year. For instance, if they sell their business, or something of that nature, that skews the statistics because in that year it looks like they have a lot of income due to the capital gain. But in other years, they do not.
Another aspect is the increase of capital gains tax would have an impact on capital markets and investments in Canada. And again, I don’t think that’s something the government would want to do right now. It’s interesting to consider that it was in the NDP’s platform in the last election to increase capital gains tax rates. We know that liberals have a minority government. If liberals were to increase capital gains tax, they’d probably get support from the NDP, and the budget would get passed.
The other reason for speculation falls more into a tax geek region, so I’m not going to really go into details. Tax people like me, in knowing how the tax world works, know there’s different types of income. A capital gain is when you sell an asset for more than what you paid for it. If you’re a business owner, and you want to take money out of your business to spend personally, that’s referred to as a dividend.
Ideally, the government would like to see a capital gain taxed at the same rate as a dividend. That’s not the case right now. A dividend is that a higher tax rate than a capital gain. So another reason the government would look at it is to equalize those two sources of income. But will we see it this year? It’s possible. Then again, because I think they’ll be concentrating more on the spending side than the revenue side, I don’t think it will.
There’s no question in my mind, it will come at some point, if not this year, then probably next year.
One industry that has been booming has been the real estate market and people are making big gains on home sales. Is the principal residence exemption possibly on the table?
It’s an interesting thought. Yes, that’s a form of capital gain; when you sell your house, you are likely selling it for more than what you paid for it.
But there is a special rule that says if it’s a capital gain on your principal residence, then it can be tax free.
We do know that in certain areas of the country, particularly in the larger cities, there has been substantial increases in the value of real estate. Over the next number of years, there’s going to be a substantial transition of that value, perhaps through baby boomers selling their homes and moving or downsizing, perhaps condo owners in Toronto or Vancouver leaving the city and moving somewhere else. Now that we have proven that you can work from anywhere, maybe you don’t need to live in the cities where there’s high costs and realize on your capital gain. I think the government would naturally look and see that there is an awful lot of value on home sales that is totally tax free right now.
Yes, that’s been in our system since the get go – you shouldn’t have to pay tax when you sell your house, but I do believe that’s on the table. However, I don’t think they’d eliminate it entirely. I think what they will probably look at doing is limiting the amount of the portion of the gain or the amount of capital gain that would qualify as tax free.
The government is going to have to reasonably look at starting to raise revenue to deal with the deficit, and I see the principal residence exemption as substantial wealth transfer that is not subject to tax today that they can see as a source of tax revenue in the future.
The changes to GST and HST rules for e-commerce have been in the works for some time and are expected to generate some $3 billion dollars over the next five years. What about GST rate? It’s now at 5%, it was lowered a number of years ago. Is that a potential target?
I’m not an economist, I am a tax accountant. But if there was one area that I thought might make sense for a tax increase right now, or in the near future whether this year or next year, in dealing with revenue increases to help deal with the deficit, it would be an increase in the GST rate. As you mentioned, it was 7% when it was first brought in, and it was ultimately lowered to 5% a number of years ago. Some people might think of it as higher than that, but that’s the federal portion. When you have an HST, the rest is a provincial portion.
What the feds can do is look at increasing the 5%. Why I say that might make sense is one: it’s a very efficient way for the government to collect tax (businesses do it for them by selling their products and their services); second: individuals don’t have to file any kind of return to pay the GST – they pay it when they buy something.
Why increase this tax now? I think we know that there is somewhat of a pent-up demand for those people who have been lucky enough to keep their jobs and continue to work and have a source of income during this past year.
These people haven’t had a lot of ways to spend that money and so they’re building up. I think statistics have shown that savings have been built up to a level that’s never been seen before, simply because people aren’t spending their money at a rate that they’re used to spending. Once we get through this pandemic and get back to people being able to travel, comfortably go out for entertainment, for sports games, for movies, etc., they’re going to start spending their money again. I don’t think a 1% or 2% increase in GST will put a damper on that pent-up demand to spend money. People want to get out, they want to do things, they want to travel. They can’t right now, and when they can, they’re going to.
Raising the GST certainly would not be politically popular, but I do see it as a way for the government to raise substantial amount of revenues that would not necessarily impact an economy that has so much pent-up demand for people who want to start spending again. So, again, not politically popular, and whether a minority government would want to do that… You’d have to wait and see.