If you’re a billionaire looking to pass on your fortune tax-free to your kids, Canada is a great place to do it.
For example, consider Tobias Lutke, the founder of Shopify, which recently surpassed Royal Bank of Canada as the TSX’s largest listed corporation measured by market capitalization. According to Forbes, Lutke is now one of the richest billionaires in Canada, with an estimated net worth of $8.4 billion (U.S.). While he is of course free to give away all his money to charity, under Canada’s supposedly progressive tax system, his estate wouldn’t have to pay a cent in tax.
Lutke wouldn’t be so lucky if he resided in any other Group of Seven country. Even in Donald Trump’s billionaire-friendly U.S.A., his heirs would have to fork over 40 per cent to the Internal Revenue Service. His estate would have to pay the same rate in the United Kingdom. In Japan the estate tax hit would be 55 per cent; in France it would be 45 per cent; and in Lutke’s native Germany, his heirs would pay 50 per cent. But fortunately for Lutke, Canada is the only G7 country that doesn’t have an estate tax.
We’re not talking about fiscally insignificant sums here. At the U.S. tax rate, Lutke’s estate would be sending the Canada Revenue Agency a cheque for $4.5 billion (Canadian).
According to the Fraser Institute, an average Canadian family pays $35,000 a year in taxes. So what Lutke’s estate would pay in taxes in virtually any other G7 country would be the equivalent to what slightly more than 125,000 ordinary Canadian households pay every year in income tax.
If handing wealthy heirs the equivalent of 125,000 tax returns sounds unfair, you may be wondering how that can happen under a Liberal government that claims it wants to close the wealth gap in the Canadian economy. Perhaps because both Prime Minister Justin Trudeau and Bill Morneau, his finance minister until this week, inherited fortunes tax-free and I’m sure they intend for their children to do the same.
Of course, the absence of an inheritance tax is only one of several avenues that the elite have at their disposal to lighten their tax burden. The capital gains tax is another. And its distributional impact is huge.
Two and a half years ago I wrote a paper for the Centre for International Governance Innovation (“Has Globalization Left Canadian Workers Behind?”) analyzing, among other things, the distribution of Canadian household income both on a pre-tax and after-tax basis.
It will probably come as no surprise to anyone that I found that the top quintile of Canadian households recorded far and away the largest income gains, and that within that group the top one per cent cent recorded the greatest increase.
What startled me was the finding that the after-tax incomes of Canada’s richest households had grown even faster than their pre-tax incomes. Everyone knows the rich are getting richer. What is not as well known is that since 1990 the tax burden on Canada’s richest households had been steadily falling.
You might wonder how that could happen in a country with a progressive income tax system, where the proportion of income that you pay in taxes rises steadily as your income increases. In most provinces the combined federal-provincial marginal tax rate is at least 50 per cent for top income taxpayers.
The answer is, the wealthy don’t earn their money from wages. Particularly during the longest-running bull market in history.
Tobias Lutke didn’t make his billions at Shopify from what he earned on his monthly paycheque. Instead, he made it through his ownership of just under 6.9 million Class B shares (each with a voting power equal to 10 times that of Class A shares), as well as 125,000 Class A shares.
From a taxation perspective, that is capital gains, not wage income, and he must pay tax on those gains only when the shares are sold. Even then, those capital gains are taxed very differently from wage income. Only half of capital gains are taxable. In Lutke’s case, that means billions of dollars of capital gains will go untaxed when he sells his shares.
In other words, if you are wealthy enough to make millions or billions on your investments, the government is willing to give you a huge tax break in the name of promoting risk-taking. But if you are a middle-class Canadian struggling to pay the mortgage and put away a little for the kids’ education, every cent of wage income that you earn is taxed. That’s how progressive Canada’s tax system really is.
Maybe it’s time to level the field and consider taxing capital gains in the same way wages are taxed.
That’s how the rich get richer. So what do they do with all that money? The ultimate tax play for Canada’s elite is to stash their billions away in tax havens like Panama.
Globally a staggering $8.7 trillion (U.S.) was stashed away in offshore accounts in 2015, equal to more than 10 per cent of all household wealth in the world. Some of that money was parked offshore by wealthy Canadians.
According to the Canada Revenue Agency, some $3 billion (Canadian) of annual tax revenue is lost from the untaxed investment income that is generated from the $240.5 billion that wealthy Canadians have squirrelled away in offshore tax shelters.
It would be interesting to see who they are. When the confidential files of Panamanian law firm Mossack Fonseca were hacked and subsequently released, the client list contained some eye-popping names. None more so than Deng Jiagui, brother-in-law of Chinese President Xi Jinping, which just goes to show that the elite in communist countries rely on the same tax evasions as the elite in capitalist countries.
When the wealthiest households in our economy avoid paying taxes, guess who makes up for the revenue shortfall. You do. That is why there is a growing backlash across OECD countries against how little tax the wealthy actually pay.
In the U.S., several candidates who ran for the Democratic presidential nomination proposed huge tax hikes on the rich. For example, Bernie Sanders, in addition to calling for a hike in the top marginal tax rate from today’s 37 per cent level to as high as 52 per cent, proposed a near doubling of the inheritance tax rate to 77 per cent on estates worth over $1 billion.
Elizabeth Warren went one step further, arguing that Washington shouldn’t have to wait for billionaires to die before taxing them. Her proposed wealth tax on households owning more than $50 million (U.S.) in assets would cost America’s billionaires an estimated $85 billion a year. Of course, the party elite made damned sure neither of these candidates got on the ticket.
But change is in the air, and we can thank the COVID-19 pandemic and the record deficits that it is leaving in its wake. The federal deficit in Canada is already estimated at a horrendous $343 billion (Canadian), and that sum goes up with every new bailout that Ottawa announces. As a percentage of GDP it will rival the deficits incurred during the Second World War. What direction do you think taxes will be heading in the near future?
The question is, who is going to pay them?
When it comes to designing trade deals like the United States-Mexico-Canada Agreement, the middle class is deemed to be expendable fodder. But when it comes to financing Ottawa’s deficits, the middle class is always uppermost on the government’s mind.
Maybe this time around it shouldn’t be left entirely to middle-class expendables to pick up the tab. Maybe instead it’s time for the rich to start to bear some of that burden.
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