The federal government did not release a 2020 budget, but even though a date is not yet set, we know one is coming for 2021 as they are currently conducting their cross-country budget consultation tour. It is my view that the bulk of the 2021 federal budget will concentrate on the spending side of the equation and not so much on the revenue side. But, we know that the budget deficit is very, very large thanks to the Covid-19 pandemic relief programs, so will we see a tax increase this year? The federal government is on record as saying that raising taxes is not a current priority – the economy needs to recover first, and I hope that is the case. So, if not 2021, presumably tax revenues must increase at some point to try to get the budget deficit under control. How might the government consider doing this?
- Increase corporate/business tax rates – I don’t think this will happen. The small business rate has recently been reduced (to 9%) and the big business rate has remained stable for a while (15%). After adding in the provincial/territorial tax rate, the CDN rates are comparable to, if not higher, than current US rates. And the corporate income base is not one that generates a lot of tax revenue, especially during an economic downturn.
- Increase personal tax rates – I hope not. Certainly the current government has made much of protecting the middle class, so any personal tax rate hike would be directed to those who can afford to “pay a little more”. The highest combined federal/provincial tax rate now nears or exceeds 50%. Statistics have shown that once that 50% line is crossed, tax revenue generation does not meet expectations – the incentive to avoid paying that rate of tax becomes an issue. Also, higher taxes on higher income taxpayers provides another incentive – move from Canada to a lower tax regime – one thing 2020 has reinforced is the ability to work from anywhere. Let’s hope the government keeps this in mind when preparing the budget.
- Increase the tax rate on capital gains – this has been mentioned a lot lately. I believe this will happen eventually, but probably not in 2021. There would be an impact on capital markets – something that is not good during an economic recovery. But, one reason I believe it will happen at some point comes from being a tax geek. The current capital gain tax rate is considerably lower than the tax rate on a dividend, so us tax geeks spend a lot of time planning (properly within the tax law) so our clients realize a capital gain instead of a dividend with respect to remuneration from their business. The government doesn’t like that this can be done – the simple fix is to raise the capital gain tax rate to be closer to the dividend tax rate.
- What about the Principle Residence exemption? – speaking about capital gains, the best one of all is the tax free gain when you sell your house. And, in the last number of years, a lot of people have realized very large gains when selling their house – especially if you live in one of the big cities. My thinking here is not the complete elimination of the tax free gain, but perhaps putting a cap on the tax free portion, say the first $500k is tax free. And, would this be for each time you sell your house, or could it be a lifetime limit? What about only on increase in value once the new rule is put into place – now we’re getting complicated…..but I do see something happening here – too much tax free wealth is being realized for the government to ignore.
- Increase the GST – if there is to be a tax increase, this is the one that I think should happen. In fact, the initial 7% GST rate should never have been reduced to 5% (by the Harper government). The GST is a highly efficient and very stable way to collect government revenue. Why an increase now? The Covid-19 pandemic has created a very strong pent up demand for people to spend – it has been almost a year of an inability to spend (unless you’re fixing up your home) and as we settle back to whatever the new normal might be, people are going to spend their money. A 1% or 2% increase in the GST will not dampen that pent up demand and will raise significant tax revenue.
So, those are my thoughts on potential for tax increases – probably not in 2021 – but some day they will come.