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Election promises: Tax cuts for many—and tax hikes on the rich

WATCH ABOVE: Canada’s political parties are making affordability a central theme of this election, making promises to alleviate the financial strain on voters. Tax pledges are a big part of that. In this edition of Money123, Erica Alini reviews the proposals for tax cuts and increases.

Affordability is the name of the game in this election. Every major party is campaigning on promises to help Canadians make ends meet, revealing a significant realignment on tax policy across the political spectrum.

When it comes to the economy, the debate is mostly about how to make life more affordable, with little mention of deficits and debt.

READ MORE: Liberals, Conservatives offer duelling tax plans in battle over middle-class voters

Locked in a tight race, the Liberals and the Conservatives are both promising large-scale tax cuts that will cost nearly $6 billion a year once fully implemented.

Talk about tax increases, on the other hand, is mostly focused on making the rich pay more, with both the New Democratic Party (NDP) and the Greens promising a new wealth tax and to hike taxes on capital gains. The Liberals have their own proposed tax on luxury. The Tories, for their part, have left tax increases off the table.

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“It is reasonable to look at changes in the tax system,” said Michael Smart, a professor of economics at the University of Toronto. But for both tax increases and decreases, he argues voters should be asking: What’s the bang for the buck?

(Please note: This article does not look at taxes on vacant homes or foreign homebuyers or tax breaks and benefits changes aimed specifically at parents.)

Money123: What the parties are promising parents
Money123: What the parties are promising parents

Liberal and Conservative tax cuts: A bit of money for many

Liberal Party Leader Justin Trudeau said he would gradually raise the threshold of income that’s exempted from tax from the current level of around $12,000 to $15,000 for most Canadians. The benefit would start to phase out for those earning more than $147,000 a year, with those making more than $210,000 completely excluded.

Conservative Leader Andrew Scheer, on the other hand, is proposing to cut the tax rate on income up to around $47,000 from 15 per cent to 13.75 per cent over four years.

Both plans would amount to around $300 in yearly tax savings for the average taxpayer once fully implemented, according to Smart. But the policies affect different types of households differently, he added.

“The Liberal proposal is more equitable. It delivers about the same tax assistance to most taxpayers,” he said. About 20 million families would save the same amount, he estimates.

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READ MORE: Paid leave, tax credits, more benefits — What the parties are promising parents

Under the Conservative plan, only Canadians who earn at least about $50,000 a year would receive the full benefit of the tax cut. That’s around 10 million taxpayers, with another six million who would see some tax savings but not the maximum amount, according to Smart.

But with both the Liberal and the Conservative tax plans, “You’ve got to be in the top half of earners to really get some benefit,” said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives (CCPA).

Macdonald also questioned whether the tax cuts would make a meaningful difference, even for Canadians who would fully benefit from them.

“For most tax filers, even in the middle [of the income distribution], a couple hundred dollars a year, I expect, would likely be difficult to pinpoint,” he said.

READ MORE: Tired of high cellphone and internet bills? This election is full of promise(s)

The cost of the cuts, on the other hand, would not be negligible, Smart said.

With Ottawa on track to run deficits of between $10 billion and $20 billion in the next few years, “Canadians have got to ask [the parties] how they plan to pay for these measures,” he said.

With the economy humming along and the last recession a distant memory, “this is not a time for deficit-financed tax cuts,” he said.

One constituency that worries about being stuck with the eventual bill is small businesses, according to Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business (CFIB).

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“One of my overriding concerns watching the election from the sidelines is that it does seem that Canadians are becoming far more tolerant of deficits,” Kelly said.

“How that’s going to be paid for is an open question.”

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The Tories and the great tax-credit revival

Scheer’s pitch to taxpayers also includes a long list of narrowly focused tax breaks. In addition to eliminating carbon pricing and the GST on home heating bills, the party is promising a series of tax credits on things like green home renovations and public transport passes.

While each of the tax credits represents only a small drain on government coffers, the question is whether they’re worth even that relatively minor expense, Smart said.

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The tax credits generally amount to a discount of 15 per cent — or 13.75 per cent under the Conservatives’ tax proposal — on the cost of whatever activity they’re targeting, Smart said.

“It’s really not a big deal for anybody.”

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Tax credits also aren’t very effective as an incentive to get people to behave differently, Smart added.

READ MORE: Trudeau vows to boost Canada Child Benefit, make parental leave tax-free

Canada, for example, already had a public transportation tax credit, which was axed under the Trudeau government.

While Scheer promises the credit will give Canadians an incentive to drive less, there’s no indication that the measure actually got cars off the road in the past, Smart said.

In general, Canada’s experience with tax credits was that “they weren’t particularly expensive but they were not a good use of money,” he said.

Conservatives propose new tax cuts
Conservatives propose new tax cuts

Remember the controversy about small-business tax changes? It’s back

Tax credits aren’t the only tax issue on which the Conservatives say they want to undo what the Trudeau government did. The Tories are also promising to roll back some of the Liberals’ small-business tax changes that caused an uproar among entrepreneurs and self-employed professionals in 2017.

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The Conservatives are pledging to go back to allowing small businesses to pay the small-business tax rate on passive income of more than $50,000 a year. They’re also proposing to exempt spouses and common-law partners of small-business owners from revised Liberal rules designed to limit so-called income sprinkling, which consists of sharing business income among family members — whether or not they’re involved in the company — through dividend payments.

The Trudeau government and several economists argued the old tax rules allowed high-earning self-employed professionals who structure their business as a small corporation to lower their income tax burden.

Finance Minister Bill Morneau first proposed the small-business tax changes in 2017 but tweaked some of them in 2018 after fierce pushback from the small-business community. But critics say even the more modest rules that were eventually adopted should be scrapped.

READ MORE: What you need to know about Morneau’s changes to ‘income sprinkling’ rules

The CFIB’s Kelly says the Liberals’ new limits around passive income make it harder for entrepreneurs to have the ability to build a rainy-day fund for their business. He also argues that restrictions on income sprinkling are unfair because spouses and family members inevitably share in risks that come with setting up and running a small business — whether or not they work for the company.

The Liberals’ tax changes also unnecessarily complicate the tax code, adding red tape for small businesses to wade through, Kelly said.

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Smart, on the other hand, is highly critical of the Conservatives’ intention to set the clock back on the small-business tax changes.

In a recent paper, he found that when the Trudeau government increased income taxes on those making more than $200,000 a year, many high-income Canadians were able to dodge the immediate effects of the hike thanks to manoeuvres that reduced their taxable income. That was especially true of small-business owners, according to Smart.

“These are not struggling small-business owners,” he said. “We’re talking about the richest one per cent of Canadians who have very substantial assets in their private corporations, and the [Liberal] government was making an attempt to make sure our [tax] system would work fairly for all Canadians.”

The Conservative proposal to reverse those changes “serves no economic purpose” and amounts to “a tax reduction that’s targeted at the richest,” Smart said.

Ipsos Public Affairs CEO talks about election polling
Ipsos Public Affairs CEO talks about election polling

Taxing the rich is complicated

Some of Canada’s top earners may welcome the Conservatives’ promises on small-business taxes, but most of the country’s wealthiest families won’t like much of what the other parties are proposing.

One of the few tax increases mentioned by the Liberals so far, for example, is a new 10 per cent tax on purchases of cars, boats and personal aircraft worth over $100,000.

The New Democrats want to increase the tax rate on top income earners by two percentage points. The NDP and the Greens are proposing a new one per cent levy on families with wealth worth over $20 million. Both parties are also eyeing higher taxes on capital gains, the profits from the sale of assets like a second home or investments.

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Currently, only 50 per cent of the value of capital gains is subject to tax. The NDP wants to raise that to 75 per cent, while the Greens want to bring it to 100 per cent for large corporations and individuals with a net worth over $3 million.

READ MORE: Canada’s richest families own as much wealth as three provinces combined, report says

The Parliamentary Budget Officer (PBO) has reviewed the Liberals’ luxury tax, the NDP’s wealth tax and the Greens’ capital gains tax changes. While Trudeau’s tax on supercars, yachts and private jets would raise a mere $600 million a year, the wealth tax could bring in around $6 billion a year, while the Green version of the capital gains tax hike could boost revenues by $12 billion per year.

However, all three of the PBO estimates come with a “high degree of uncertainty” due in part to the likelihood that Canada’s wealthy will find ways to avoid or reduce the impact of the tax, according to the documents.

READ MORE: Does Canada really need an inheritance tax?

“You definitely have to write strong legislation and you’d have to keep updating it,” said the CCPA’s Macdonald.

But Ottawa could learn from the experience of other countries, especially when it comes to taxing wealth, something that would be new in Canada.

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Macdonald believes targeting family fortunes has become increasingly important to tackle inequality, as wealth — unlike income — accumulates generation after generation.

“It’s incredibly concentrated,” Macdonald said.

The wealth tax as the NDP would structure it, he said, would target only about 6,000 families in Canada who would pay it. Around half of the tax would be paid by just the top 100 richest families in the country, which have over $1 billion in wealth each, he said.

Canada’s richest people 2018
Canada’s richest people 2018

Smart, however, said introducing a new kind of levy such as the wealth tax would likely posea whole new set of problems and create a whole new set of opportunities” for tax avoidance.

For example, he said, it’s already “very hard” to tax wealth that is held offshore.

“The government’s information about the value of those assets is very limited today,” he said.

Instead, Smart said there is an argument for increasing taxes on capital gains.

There are so many big loopholes within our system, particularly in the taxation of corporate income and capital gains income,” he said.

But raising the capital gains inclusion rate would have to be done “carefully” andin concert with other measures” to minimize the creation of new loopholes and avoid discouraging business investment, Smart said.

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But the basic principle of taxation is that a dollar is a dollar,” he said. “Why would we tax one form of income — capital gains — at half the rate of ordinary income?”