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By Jonathan Chevreau
National Post
FP Money Section
Saturday, June 12, 2004 |
Jack Layton, Federal NDP leader, wants to introduce a 17% tax for inheritances over $1-million. The idea might make sense if we had low U.S.-style taxes while alive, but that's hardly the NDP's plan, Chevreau says.
The New Democratic Party is trying to throw a spanner in the works of the much ballyhooed $1-trillion inheritance of Canada's Baby Boomers.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, "The NDP seeks to become ‘a spending machine’.”
As outlined in the NDP election platform, party leader Jack Layton wants to introduce a 17% inheritance tax for estates over $1-million.
If you think that's more than you're likely to inherit, realize the proposed tax would be applied to the current market value of principal residences -- often the lion's share of bequests.
At today's sky-high home prices, many estates would be caught by this tax were the NDP actually to achieve power.
Uncharacteristically, I can partly sympathize with this idea in some respects. Compared to the NDP proposal to tax capital gains like income [in effect, another 23% tax grab] or raising corporate taxes, the inheritance tax idea seems at first blush to be almost benign.
After all, if we already pay tax on earned income, why should unearned windfalls like inheritances get off scot free? (For that matter, why are unearned lottery winners tax-free?)
One of the thinkers behind the tax is Marjorie Griffin Cohen of Simon Fraser University. She estimates only 2.5% of Canadian families would be affected by such a tax: the average wealth of the 311,000 richest Canadian families is $2.3-million. With the first $1-million free of tax the 17% inheritance tax on the rest would be $230,000.
The NDP also sent me to economist Hugh Mackenzie, who says Canada, Australia and New Zealand are the only three OECD countries which do not have an inheritance tax.
But invoking the U.S. example only puts the NDP on shaky ground. The U.S. does have an estate tax but doesn't tax "deemed dispositions" from capital gains at death, as Canada does.
It would be the "ultimate insanity" to combine Canadian-style high taxes throughout our lifetimes with American-style inheritance taxes at death, says author Sandra Foster, of Headspring Consulting Inc.
The notion might make more sense if we had low U.S.-style taxes while alive but that's the farthest thing from the minds of the "soak the rich" Layton cult.
The proposal also betrays a lack of historical perspective. Canada used to have a federal estate tax before 1971, when we had no capital gains taxes. Our politicians struck a deal to kill the inheritance tax but in return made capital gains taxable.
Furthermore, in 1981, families lost the ability to realize tax-free gains on both a principal residence and a cottage, Foster says. Then in 1994, we lost the $100,000 exemption on capital gains, further increasing tax liability at death.
The NDP would have it both ways: bringing back the inheritance tax and taxing capital gains at full rates, as is earned income or interest income.
By taxing the dead as well as the living, the NDP would move from the current triple taxation of capital (income tax, taxes on investment income, consumption taxes) to quadruple taxation (inheritance tax.)
The citizens and business people who built their nest eggs paid those three levels of tax along the way, or built businesses which paid corporate and payroll taxes over the years the business grew.
"How many times do governments want to tax us?," asks Jamie Golombek, vice-president of tax and estate planning at AIM Trimark Investments. "They already tax us on death on any appreciated gains. They tax you on the value of your RRSP or RRIF on death, and many provinces have probate tax as well."
Les Kotzer, a principal with Toronto-based Fish & Associates, says families already go through contortions to escape the 1.5% probate fees in Ontario which kick in on estates as small as $50,000. These fees were hiked significantly the last time the NDP was in power provincially. British Columbia's probate fees are 1.4% of estate value.
"I don't see how this can win the NDP votes," says Kotzer. He calls many of his Baby Boomer clients "waiters" -- debt-ridden people waiting to become solvent once parents die and inheritances come through.
Inheritance taxes also mean gift taxes, since without them, parents would simply "gift" their children with cash while still alive to dodge the inheritance tax.
A giant cottage industry would emerge to get around the tax. Reverse mortgages would become very popular, predicts Sandy Cardy, tax and estate advisor at Mackenzie Financial Corp. That's because reverse mortgages let seniors extract home equity while still alive, leaving little or none for the kids once they pass on.
The life insurance industry would also benefit, Foster suggests. She concludes the NDP proposal is "a very expensive proposition, not just for the wealthy but for the middle class. Canadian taxpayers are not an unlimited source of revenue."
The NDP tries to soften the blow by stressing how few would be affected. They say 12,500 Canadians die each year with assets of more than $1-million, representing only 0.004% of the population.
However, Cardy questions how the party got that number. The main sources of information for this would be registries of probate assets, but they don't include jointly held assets such as principal residences. The other source is income tax records, but they too don't show houses or RRSPs/RRIFs held jointly by spouses.
Cardy believes the numbers potentially affected would be "far higher."
Clearly, ordinary families which bought homes for $10,000 in the 1950s could easily hit the $1-million threshold just on the price appreciation of their homes. Throw in cottages and RRSPs and the number of inheritances caught by the NDP tax could be legion, especially if the $1-million threshold is not indexed to inflation.
Some NDP tax proposals are more tolerable -- such as not taxing those who earn only $15,000 or making the medical tax credit a deduction. But the billions it would reap from an inheritance tax are only a fraction of the $79-billion in new program spending it proposes for the next five years. Vancouver investment advisor Adrian Mastracci of KCM Wealth Management says the NDP seeks to become "a spending machine."
The irony is if the NDP did win, there would be few "rich" left to tax by the end of their mandate. The truly rich, including many employers, would flee the country.
Meanwhile, the already beleaguered middle class would be that much poorer. If a mainstream party picked up the inheritance tax idea, it would just intensify what one reader calls the "scandal of middle-class impoverishment."
Earth to Jack : There are only 100 cents in a dollar. The tax larder is empty. And the last thing Liberals need is more ideas on how to fleece us further.
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