Strategies include crystalizing unrealized capital gains, giving money to family, moving elsewhere
Any “new normal” following the COVID-19 pandemic is likely to include a greater tax burden for businesses and individuals.
On Mar. 4 the Organisation for Economic Cooperation and Development urged countries to avoid tax hikes to tackle the bills created by the COVID-19 crisis. “Don’t raise your taxes to pay for COVID,” OECD head of tax policy Pascal Saint-Amans was quoted as saying in a videoconference update on his department’s work.
“You need to make sure that the increase in the debt is sustainable by fostering growth, by favouring investment, by having your own policy,” he said; “but tax is not the response.”
In a bulletin issued Mar. 11 by Lavery Lawyers, the Quebec firm warned that individuals and businesses should start to plan their affairs in anticipation of tax hikes. In an interview with Canadian Lawyer, Lavery partner Luc Pariseau noted that the federal deficit levels were already $25 to 30 billion a year before the pandemic, and at the end of its mandate the public debt was forecast to be substantially more than when the Trudeau government came into power.
(One source cites the federal debt rising to $1.6 trillion by the end of 2021, due to pandemic-related programs such as the Canada Emergency Response Benefit, mass vaccinations, and transfers to provinces for “safe restart” agreements.)
“It’s a very substantial amount,” says Pariseau, a tax lawyer and co-author with Éric Gélinas of the Lavery bulletin “COVID-19: Anticipating Capital Gains, Wealth, Gift and Inheritance Taxes.”
Since governments are not used to substantially cutting their expenses, notably programs and services, “we don't necessarily expect that there will be cuts in government expenses that will be substantial enough to address these huge deficits that are being created,” he says.
The only other possibility, he says, is to increase taxes, whether they are income or commodity taxes, or even new taxes that either have not been seen in Canada before, or taxes of a bygone era such as on donations or the value of estates. In any event, Pariseau anticipates the government is preparing to increase its revenues through increased taxation, either direct or indirect.
Pariseau points first to the likelihood of the government raising the capital gains tax rate. Currently, 50 per cent of the value of any capital gains are taxable. This means that when investors sell their investments at a higher price than they paid – realizing a capital gain — 50 per cent of that capital gain is added to, or included in, their taxable income.
“Even before the pandemic, we were anticipating that this 50 per cent might go up because of the deficits that were already being created before the crisis,” says Pariseau. Inclusion rates have historically peaked and fallen; in 1990 the capital gains tax rate jumped to 75 per cent and stayed there until February 2000, when it was reduced 66.6 per cent before dropping back down to 50 per cent that October, where it has remained.
Pariseau says individuals who are anticipating an increased value in some of their assets might consider provoking a capital gain in order to have it included in their income at 50 per cent and not at a higher rate. Methods of doing this other than selling include transferring assets between individuals, to a corporation, or from one corporation to another.
Another form of taxation the government may consider introducing is a tax on the value of an estate, Pariseau adds, and on donations. Although he considers this a less likely tax than an increased capital gains tax rate, he suggests that clients might accelerate donations to members of their family before this comes into force. Older taxpayers, for example, who have more than enough assets to see them through their lifetimes may wish to donate assets before death to their children, so the inheritance to their children will be taxed at a lower rate.
Finally, another option is to cease to be resident in Canada. “I have some clients who have sold their businesses,” he says; “they have substantial net value. If they were to die while being residents in Canada, with an inheritance tax, that could represent very substantial amounts of money, and they have the means to live in a country like, for instance, the Bahamas,” where they can pay for needed services not covered by the public purse.
“f you have enough money, and you save enough in income taxes and taxes generally, it's worth changing your tax residency and living somewhere else. I know that some of my clients are contemplating that.”
The COVID-19 crisis will come to an end, ideally by the end of this year, Pariseau says, but “then we’ll wake up one morning and we’ll have to take care of public finances.” In Quebec, for instance, the deficits are nowhere near what they are federally, as a result of the crisis.
There will be a lot more written on the topic – including recommendations from accounting firms – before whatever measures the government decides on come into force, he adds.