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Canada Launches Election With Higher Taxes on Wealthy in Sight

Aug. 18, 2021, 8:46 AM

Canadian businesses and wealthy individuals are bracing for higher taxes as the country kicks off a general election Sept. 20 with tax fairness and income inequality among top voter concerns.

Every major party running nationally has embraced the need to redistribute the tax burden and close tax breaks used by the rich. Proposals include new wealth taxes on individuals, capital gains taxes, higher taxes on corporations—especially those that made a windfall during the pandemic—and new digital services taxes.

Their promises will very likely find a receptive audience ahead of the Sept. 20 vote—57% of Canadians believe the new coronavirus pandemic created a rise in income inequality and 62% think the tax system is unfair, polling firm Abacus Data found in a July poll commissioned by progressive and union groups.

Strains on government finances from pandemic costs could also lead to higher tax rates, though whoever wins the election has to be careful not to extinguish Canada’s fledgling economic recovery, according to David Hogan, partner with Richter LLP.

“If you’re going to raise the general corporate level of taxation, that I don’t think is prudent,” Hogan said.

A better approach would be to tailor tax increases toward companies that have done well in the pandemic, either through windfall taxes or better enforcement of existing tax laws, Hogan said.

Businesses are likewise pushing back against new taxes, calling instead for a major tax review and tax credits to increase competitiveness.

“New corporate taxes will not only jeopardize our ability to recover, but could also see thousands of new business closures,” Patrick Gill, senior director of tax and financial policy at the Canadian Chamber of Commerce, said.

Taxing the Wealthy

Prime Minister Justin Trudeau, whose Liberal Party leads in most polls, has pointed to his track record of raising taxes on the richest Canadians. Trudeau, who on Aug. 15 asked Governor-General Mary Simon to dissolve Parliament, hasn’t released a re-election platform.

“The very first thing we did was to raise taxes on the wealthiest 1%, so we could lower them for the middle class,” Trudeau said outside of Simon’s residence, Rideau Hall.

Trudeau’s most recent budget in April introduced significant new tax measures on large multinationals—such as the expansion of the national sales tax on major foreign digital firms like Amazon.com Inc., Netflix Inc. and AirBnb Inc.—raising the possibility he’ll expand the tax further, according to Tara Benham, partner and national tax leader at Grant Thornton LLP.

Given the broad concerns about wealth inequality, Benham said she expected Canada’s next government to expand the capital gains tax rate to 75% from 50% and to reform a tax exemption on gains from sales on principal residences, both of which would be effective ways of targeting wealth without affecting too many people.

Trudeau is also hitting the campaign trail having left several proposals targeting the wealthy—a luxury tax on expensive goods and a charge on vacant housing owned by foreigners—still incomplete from his latest term in office. The government has only recently opened consultations on those proposals.

The New Democrats, currently in third place in most polls, have proposed sweeping changes to the tax code, including a 1% tax on those with over C$10 million ($8 million) in wealth. The party has also promised to raise the capital gains rate to 75% in their platform, as well as increase the corporate tax rate to 18%, increase the top marginal tax rate to 35% and launch a temporary 15% excess profits tax on large corporate windfall profits made during the pandemic.

While the popularity of the left-leaning party’s proposals remain to be seen, they will determine in part whether Trudeau gets his coveted majority of seats in Parliament or remains with a less powerful plurality—forcing him to negotiate with other parties to pass bills, Elliott Hughes, senior advisor at government relations firm Summa Strategies, said.

“The difference between a Liberal majority and Liberal minority is how strong the NDP do in this election,” Hughes, a past adviser to former Finance Minister Bill Morneau, said.

Stronger Enforcement

The second-place Conservative Party is promising major tax breaks to individuals and companies in a platform released Monday, though the document also includes populist language more akin to proposals from the left.

Leader Erin O’Toole would raise the Canada Revenue Agency’s budget by C$750 million annually to “fund stronger enforcement of taxation for multinational firms, taxation of large corporations, international taxation, and other tax evasion,” his election platform says.

The Conservatives would also target “wealthy tax cheats” by reforming a revenue agency program that targets high-net-worth individuals and create a new 3% digital services tax on gross revenue in Canada for foreign companies that don’t pay corporate income tax.

O’Toole is the only party leader who has so far promised the tax code review sought by businesses, arguing in his platform that tax rules’ lack of simplicity benefits big corporations and insiders connected with the government.

“Canadians cannot keep up with the complexity and cannot afford teams of accountants and lawyers to help them navigate the system,” his platform says.

To contact the reporter on this story: James Munson in Ottawa at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Vandana Mathur at vmathur@bloombergtax.com

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