Tax Law Legal Report: Killing the golden goose

Liberal party calls for taxing wealthy may seem non-controversial, but tax lawyers warn of unintended consequences

Tax Law Legal Report: Killing the golden goose
Vitaly Timokhov is partner at Tax Chambers LLP in Toronto

The Sunshine State is a short plane ride away, and, says Vitaly Timokhov, say what you will about American politics and Donald Trump but they have some common sense — they’ve made it extremely easy for Canadians to get immigration status. 

“People go to Florida sitting on millions in their investment accounts,” Timokhov, a partner at Tax Chambers LLP in Toronto, says. “It’s unbelievably easy to structure — it takes half a year. A lot of people do it.” 

If you grew up in Canada, you’re unlikely to pick up and move to save on tax, and young people tend to live where the economic opportunities are, he says. But if a person is ultra-high-net worth or a retiree and has most of their wealth in investible assets, it’s easy to move somewhere like Florida with no loss of quality of life and easy access to the safety net in Canada that they’ve already paid into — for example, health care if they need it. 

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“You buy a ticket to Florida and cut your taxes by 25 per cent right away,” says Timokhov. “What would you do? If you’re an upper-middle-class or high-net-worth Canadian, you don’t think twice about it.” 

A move to the south might be more tempting as Prime Minister Justin Trudeau’s federal Liberals continue to push “tax the wealthy” proposals. With the NDP advocating for similar policies, legislative changes could make it to the finish line. 

The Liberals’ so-called luxury tax, tentative mention of increasing capital gains exemption amounts and an NDP proposal to increase the top personal tax bracket by another two per cent fit in with the recent climate of the attack on the “rich.” 

“It’s an easy sell,” says Kim Moody, CEO and director of Canadian tax advisory at Moodys Gartner Tax Law LLP in Calgary, of the luxury tax, which would add an extra 10 per cent on any vehicles, boats or aircraft that cost $100,000 or more. 

He says the average person would look at that and think that, yes, they should pay the government more if they want a plane or a big boat — but what’s fair about that? 

“We already pay taxes on property like that. There’s no need to punish the so-called ‘rich’ for wanting to acquire stuff like this. In my view, this just contributes to class warfare.” 

Timokhov says the government is looking for ways to increase revenue that would be non-controversial to its base, and from a tax policy perspective, the luxury tax would make the GST tax progressive in the same way the income tax system is progressive — and generally considered fair. 

“The more you make, the more you’re able to consume. And if you consume luxury goods, then, theoretically, you should pay more for consumption,” he says. 

But he argues that the money from the tax isn’t enough to make it more than political bait. He also points out that the extra funds would go to general revenue, not to any sort of anti-poverty programs, for example, which might offer more of a justification. Since his high-net-worth clients mind paying an extra $1,000 on their luxury item, it may not mean more wealthy people buying luxury goods outside of Canada. 

Moody says he could see games being played — prepare to see a lot of luxury vehicles priced at $999,999 with a special bottle of vodka thrown in for an extra $20,000 — and predicts disputes over what constitutes a luxury vehicle, for example, or when a vehicle crosses into commercial use, which would make it exempt. 

“Do I see disputes like that happening with creative ways to avoid that tax? Yup, I can see that,” Moody says. 

It’s an interesting debate — who should contribute more — but we’re living in a society where 40 per cent of people don’t pay any tax at all, Timokhov says. 

“Upper-middle-class and ultra-high-net-worth individuals bear the main burden of Canadian taxation,” he says, and by targeting them with extra taxes, “you’re sending the message to basically get out.” 

The Liberals also said they would review tax expenditures for unfair tax breaks, and the 50 per cent inclusion rate for capital gains is one of the biggest tax expenditures, Moody says. 

“I would submit that the capital gains inclusion rate is likely going to go up because they do have the support of the NDP who want to increase capital gains inclusion rates to 75 per cent from 50,” he says. 

This move has been talked about frequently over the last few years, Moody says, and while he doesn’t think it’s the right thing to do, “if they’re going to do it, this is probably the right time because they could force it through quite easily.” 

Timokhov says there are “plenty of grandmas and grandpas out there in North York, Ont., sitting on run-down pieces of property that they bought for $20,000 or $30,000 that are now in the $5-million and $6- million range.”  

Right now, we are experiencing one of the largest transfers of wealth in Canadian history — or even world history, he says. If you start taxing those gains, the impact will be across the board, on all levels of income. 

“Personally, I would be shocked if the capital gains rates went up, even if the NDP supported it,” Timokhov says. “I don’t see the Liberals being able to sell that to their base.” 

But for Moody, the possibility is real enough that he “can see tax lawyers, probably frantically, between now and the next budget, having clients trigger gains so as to get preferential treatment under capital gains 50-per-cent inclusion rate as opposed to 75.”  

“I can see a lot of that happening between now and budget day,” he predicts. 

Moody says another thing that has the community “a little bit concerned” is the NDP’s proposal to increase the top personal tax bracket by two per cent.  

He says he could see the change going through because there’s a need to increase revenue as a result of the spending policies of the Liberals, although they didn’t mention it in their platform going into the election.  

“I can see this being very much something they would support vis-a-vis the attack on the rich,” Moody says. “But what this does is it really discourages small countries like Canada with a giant south of the border. It basically says, ‘Hey, best and the brightest, we don’t want you.’ That’s the real danger.”  

Moody says Alberta has seen a lot of people leave over the last four years, and if the taxes went up on top of the flight of capital outside of the province, it would be “further devastation.” 

Even if none of the floated tax changes come to fruition, there is a troubling climate of “anti-rich” rhetoric, he says. 

“The wealthy are not enemies,” Timokhov says, noting that his clients are rubbed the wrong way by the suggested taxes and it “prompts them to start thinking about the exit, and that’s the truth. 

“In the end, will they vote? The answer is absolutely yes — they’ll vote with their feet.” 

And even though tax lawyers would benefit from clients leaving because they would be the ones structuring their exits, it’s not the message society should want to send, he says. How long can you take eggs from the golden goose before it walks away? 

“The overall push of let’s tax the wealthy, frankly, is not a healthy debate in any circumstances. We have to maintain the social peace. You contribute enough and please stay — that should be the message.” 

Capital gains inclusion rate

  • Introduced in 1972 at 50 per cent 
  • Increased to 75 per cent in 1990 
  • Dropped to 66.7 per cent in February 2000 
  • Reduced again, down to 50 per cent, in October 2000, where it has remained to this day 

Canada’s income tax brackets, 2019

  • 15 per cent on the first $47,630 of taxable income, plus 
  • 20.5 per cent on the next $47,629 of taxable income (on the portion of taxable income over $47,630 up to $95,259), plus 
  • 26 per cent on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), plus 
  • 29 per cent on the next $62,704 of taxable income (on the portion of taxable income over $147,667 up to $210,371), plus 
  • 33 per cent of taxable income over $210,371 

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