Vikki Wiercinski

Should Canada Have An Inheritance Tax?

David Moscrop, the contributing columnist for the Washington Post and author of Too Dumb For Democracy?, says yes. 

Intergenerational wealth transfer is central to perpetuating wealth inequality. Passing assets along—not the cash your grandmother left you or family heirlooms from parents, but high-value property and financial holdings—maintains family wealth and, through it, power. As Baby Boomers die, many countries are preparing for a massive intergenerational wealth transfer. In the US, in the next few decades, analysts are expecting $68-trillion to be passed along. In Canada, over the next decade, that number could hit CAD $1-trillion.

Canada has neither an inheritance tax nor an estate tax. Rather than levy a tax on the beneficiary, the Income Tax Act applies a “deemed disposition” at the time of death as if the assets had been sold at fair market value. There are limits, including spousal transfer and a principal residence exemption. The estate transferring the assets is taxed on the deemed disposition on any de facto capital gains when filing income tax.

In 2018 the Canadian Centre for Policy Alternatives made the case for tax reforms aimed at reducing wealth inequality. In “Born to Win: Wealth Concentration in Canada Since 1999,” David Macdonald points out that Canadian estate tax policy “contrasts with the US, which maintains a 40 per cent tax on estates above $11.2-million, or Japan, which maintains a 55 per cent maximum rate.” Accordingly, he suggests a 45 per cent inheritance tax be adopted and applied to large estates—those with over $5-million in assets. This would be applied to the beneficiaries of an estate, tackling what is received both as an asset and a transfer of power, because wealth is more than an asset. It’s also a tool. As Macdonald notes, this policy would be consistent with the estate inheritance policies of other G7 countries and would raise some $2-billion in revenue annually.

Capitalism tends not only towards monopoly but to the general pooling of wealth and power into the hands of the few. Rather than a success, this is a market failure of the sort that worried not just Karl Marx but Adam Smith, who was concerned about inequality as a threat to the market. The same logic can be applied to the health of our democratic institutions, which rely on (but rarely realize) the principles of both formal equality and broadly equal opportunity to influence social, political and economic outcomes in the public interest.

Massive wealth transfers through inheritance drive inequality, undermining the market and our democratic institutions, concentrating not just assets but power into the hands of the few. Not only is there a fundamental moral reason to tax and redistribute to help those in need, there is also a functional one: we need to protect our institutions. Taxing inheritance on the beneficiary side offsets the concentration of power and could even be designed to eliminate it if we so wished. At the very least we need a rebalancing—and we need it now.

Franco Terrazzano, the federal director of the Canadian Taxpayers Federation, says no. 

There are two key challenges for Canada as we move beyond the pandemic: growing the economy and addressing government debt. A death tax won’t achieve either.

A death tax won’t come close to balancing the budget, never mind paying down a $1-trillion federal debt. A death tax on estates valued over $5-million would generate $2-billion per year for the feds, according to the Canadian Centre for Policy Alternatives (CCPA). For context, the federal government adds $424-million to its debt every day. So even if Justin Trudeau received all the death tax money Monday morning, he would blow through it by the end of happy hour on Friday.

In 2018 Canada’s inflation-adjusted per-person spending reached an all-time high. Even before COVID-19, the federal government was spending more than it did during any year of the Second World War.

Politicians would try to sell a death tax as a tax on high earners, similar to the CCPA proposal. But history shows that once politicians are done soaking the rich they quickly set their sights on the wallets of average citizens. Ottawa, for example, imposed its first income tax in 1917 to help pay war expenses. Very few Canadians had to pay the tax, because of its high exemptions. More than a century after the war ended, most Canadians with paycheques now make more than the income-tax-free threshold because of the lower personal exemption.

Similarly, when France introduced its wealth tax in 1988, it was indexed to inflation. But in 1997 the threshold stopped moving with inflation, and as property values rose, more families were hit by the tax.

During Canada’s 2019 federal election, the NDP proposed a tax on wealth over $20-million. In 2021 they promised a lower threshold of $10-million. How long before a Canadian party follows New Zealand’s Green Party and demands a wealth tax starting at $1-million, including the value of primary homes?

A death tax won’t fix the nation’s finances. It would, however, discourage the savings and investment sorely needed for job creation. The Tax Foundation’s 2021 International Tax Competitiveness Index ranked Canada 20th out of 37 OECD countries. After falling two spots this year, Canada is in the bottom half of the pack of developed countries on tax competitiveness. The index noted that a rare bright spot is that “Canada does not levy wealth, estate or inheritance taxes.”

Even Prime Minister Trudeau has dismissed the idea of more taxes on the wealthy. “People know we need to have economic growth in order to create jobs, opportunities,” he said during the 2021 election. “The idea that you can go with unlimited zeal against the successful and wealthy in this country to pay for everything else is an idea that reaches its limit at [some] point.”

Any politician looking to grow investment and recover the economy should prioritize tax relief instead of looking for new schemes to punish hard-working Canadians.

David Moscrop responds to Franco Terrazzano

An inheritance tax—often called a “death tax” by those who oppose the measure, and who wish it to sound like one’s end itself is being taxed—offers at least two sorts of public goods. First, it raises revenue. Second, it redistributes wealth and thus balances power. Either good on its own is sufficient reason to adopt an inheritance tax, but combined they make the policy particularly appealing—as long as you don’t expect it to do everything on its own.

Franco Terrazzano argues that while an inheritance tax would raise revenue, it would not raise sufficient revenue to pay down the national debt or even balance the federal budget. But, I’d add, nor should it. Few tax measures on their own can address such aims or, for that matter, are designed to. An inheritance tax would add to the federal treasury and would in fact contribute to debt reduction and a balanced budget if we should decide that such things are necessary in the short, medium or long term. Indeed, if combined with cuts to federal spending—which I’m not advocating—the measure would be all the more effective at such aims, though it would come at some expense: the opportunity costs that accompany spending cuts. There are, however, better ways to spend such funds.

Inheritance taxes are designed to redistribute wealth from people who have been fortunate enough to take advantage of public infrastructure— and who no doubt have benefited from a dollop of their own fortune and hard work—back to the public that provided that infrastructure, once those people are, well, done with their wealth. Our government can then use that money to support citizens who need it or to build out more and better infrastructure. This redistribution is fundamental to contemporary conceptions of fairness that rest on the idea that the people who are served most by our society owe the most back to it. Moreover, since workers generate wealth that flows to owners, this redistribution is essential to pay to them what the system extracts from them. No single tax can do that on its own, but an inheritance tax can play its part when properly constructed and applied.

As Terrazzano notes, the federal New Democratic Party proposed a $10-million threshold for applying a wealth tax. Indeed, he worried that it could be reduced to $1-million. Well, reduce it further still and you’ll have the £325,000 ($535,000) threshold used in the United Kingdom to tax estates at death. In 2019 the UK’s inheritance tax raised over £5-billion ($8.5-billion), which the Office for Budget Responsibility notes is “0.6 per cent of all receipts and was equivalent to 0.2 per cent of national income.” Not a paltry sum. And the UK threshold is plenty reasonable, ensuring that smaller estates are left untouched in a country where the average income is roughly £31,000 ($53,000) per year.

And while an inheritance tax would redistribute wealth and, through it, power, this doesn’t have to come at the expense of economic competitiveness or economic investment. For instance, Terrazzano notes that Canada ranked 20th of 37 OECD countries in the Tax Foundation’s 2021 International Tax Competitiveness rankings. A handful of countries ahead of Canada on that list have inheritance taxes, including Ireland (19th), Turkey (17th), Germany (16th), Finland (15th), the Netherlands (12th) and Switzerland (4th). Those countries apply a tax ranging from a low of 7 per cent in Switzerland to a high of 33 per cent in Ireland. Of note, the annual growth rate of GDP per capita was 7.2 per cent in Ireland in 2018 and over 4 per cent in 2019, pre-pandemic. Those figures are not representative of all states with inheritance taxes, but they certainly suggest that having such a tax is no barrier to robust growth.

The goal should be to rebalance wealth and power from year to year, and also from one generation to the next.

An inheritance tax ought to be established with the goal of rebalancing wealth and power from year to year, and also from one generation to the next. We must ensure that wealth flows through a society and doesn’t become stagnant and used to create economic blocs that prevent not just economic growth and innovation but also social mobility. Regrettably, Canada already has a problem with both. And each is keeping people down. In Canada, social mobility is in decline. As Statistics Canada reports, “Canada and all its provinces have been ‘going up the Great Gatsby Curve’”—that is, it’s getting harder for people to be upwardly mobile across generations.

Fixing our social, economic and political problems requires us to rebalance wealth and power, and that requires that we break up dynasties and the economic monopolies they tend to create while freeing up resources for everyone and growing the economy. And while an inheritance tax would be no panacea, it could play an important part in creating a fairer, more inclusive society for everyone.

Franco Terrazzano responds to David Moscrop

A death tax that takes $2-billion a year from Canadian families is the wrong way to address inequality and will make it harder to grow our way out of the pandemic downturn. Death taxes are effectively a form of double taxation and create strong perverse incentives against the savings needed for long-term investment and a post-pandemic recovery. That’s because death taxes impose a penalty on future consumption by taxing it at a much higher rate than current consumption, meaning thrifty people who save and invest end up paying far more tax than people who fritter their money away.

Death taxes create incentives for aggressive estate planning, ensuring that wealth is allocated in less-efficient but more-protected ways. This also reduces economic growth while simultaneously minimizing the government’s eventual take. The proportion of total government revenues raised by such taxes has been falling in OECD countries since the 1960s.

What empirical evidence suggests that a Canadian death tax would minimize inequality? Post-death-tax Sweden remains a relatively egalitarian country, while the US and the UK, which both have death taxes, remain more unequal than death-tax-free Australia, Norway and Canada.

A 2018 study from the Canadian Centre for Policy Alternatives shows that nearly half of Canada’s 87 richest families weren’t heirs to a fortune, and that by the third generation, only 18 per cent of the ultra-rich owed their status to having wealthy forebears. That means the advantage of inherited wealth tends to dissipate over time, and income inequality doesn’t automatically perpetuate itself across generations.

Record spending didn’t solve inequality. But increasing Ottawa’s budget by less than half a per cent will…?

Giving politicians another $2-billion to spend won’t end inequality. The federal government was already spending at all-time highs before the pandemic. If record levels of government spending couldn’t solve inequality, what makes anyone think that increasing Ottawa’s budget by less than half a per cent will?

Even if the government directly transferred the $2-billion it took through a death tax to all impoverished Canadians, the result would be less than $8 every week for each Canadian living in poverty.

And that overstates the benefits. First, the new bureaucrats needed to administer the redistribution would eat away at the revenue. The number of federal bureaucrats grew by 43 per cent from 2006 to 2012.

Second, a new welfare program would encourage more Canadians to collect the new money, further reducing the per-person subsidy. This happened during the pandemic. Ontario’s auditor general report shows that 14,500 ineligible businesses collected the pandemic subsidies, while many businesses received more tax dollars than they lost in revenue. In March 2021 the office of the federal Auditor General said it counted 30,000 suspected cases of fraudulent Canada Emergency Response Benefit (CERB) claims.

Third, it’s a good bet that by reducing savings, the death tax would reduce charitable contributions that total five times more than estimated death tax revenues. In the US, 9 per cent of all charitable donations are bequests ($42-billion annually). If you knew the government was going to take more of your income after you die, would you allocate as much to charity?

It’s important to distinguish how incomes are created before advocating government action. If consumers are willing to exchange their money for goods and services that an entrepreneur provides, why should that entrepreneur be punished with a death tax on top of the great many taxes they’ve already paid, such as income taxes, corporate taxes and capital gains and property taxes? The top 1 per cent already pay 22 per cent of all income taxes.

Accumulating wealth through government coercion is a different story. Ford Motor Company, for example, a Fortune 500 corporation whose CEO’s salary in 2019 was over 300 times the average Canadian household’s, recently received $590-million from the governments of Canada and Ontario. Just before the last federal election, the feds announced $440-million for aerospace companies and $420-million for Algoma Steel. Businesses receive $29-billion annually worth of special taxpayer treatment from the feds and four largest provinces, according to a 2018 University of Calgary report. That’s over 10 times more than the revenue that would be generated by a death tax.

Ending corporate welfare would be a much better way to reallocate spending to higher priorities. Meanwhile, Canada can grow its economy and combat negative forms of income inequality not by instituting a death tax but by removing government barriers to competition and opening opportunity for everyone in our economy.

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