Another Tax Proposed

An estate tax in Canada

The Canadian Centre for Policy Alternatives (CCPA) is a left leaning think tank in Ottawa. They recently released a report around the tiresome topic of wealth inequality. Their conclusion was that an inheritance tax would smooth things out.

In their view a tax of 45% on estates over $5 million would be very helpful in achieving the equality goal. They have carefully calculated the tax revenue but have provided little evidence supporting the view around the equality issue. It is a popular mistake.

An old concern

In 1993 I became convinced that Canada would adopt some form of taxation on estates. My thinking was that from a government perspective, it was a perfect tax.

It applied to only a few people so numbers worked in favour. The money would be taken from the estate not the people involved and the owner of the estate was dead, therefore without political influence. It addressed the phony “social justice” angle that rich people could afford it and would therefore appeal to many who had neither thought about it nor expected to pay.

Best of all it would raise some money in a new way. “Revenue tools” are becoming harder to find and more needed. It could help pay interest on the foolishly created government debt.

As it turns out, very little paying would happen. The CCPA analysis indicated the revenue could be $2 billion. Given that Ontario’s interest bill is in the $12 billion range and the federal bill higher still, it is a trivial amount.

It’s hard for me to see $2 billion as trivial, but everything is contextual.

Who would win?

An estate tax would match late finance minister, Edgar Benson’s idea regarding the 1971 tax reform bill. “It should be called, the accountant’s, lawyer’s and life insurance company’s relief act.” A bonanza for the professions.

Historically, estate taxes are easy enough to manage. The structures are somewhat more complex than people like, but the methods exist and they work. Thus the relief for accountants and lawyers. Another easy structure is to use life insurance to pay the bill. Welcome relief for me and I suppose for others.

The government would raise some money and the economy of professional advisors would expand. The rest of the economy might not do so well.

Some businesses require a certain scale.

Some businesses must be large to be efficient enough to survive. It is not an accident that Walmart sells things for less than local stores. They can because they have the purchasing power, inventory sourcing and management skills, and distribution skills to wring costs out of the system. No local business could afford the infrastructure so they disappear. Taking away some of their money would do more harm than people think.

Do you think two small “Apples” would be as valuable as one big one? An interesting graphic about Apple’s relative size from the New York Times.

It is not only the Walmarts of the world that would suffer. Most small businesses would disappear or be sold to a large company in order to meet the tax liability. That would have adverse effects on local employment. Consolidation works and the acquiring company likely has another business like it in another place.

Many family businesses are already badly harmed by the capital gains tax due at death. Borrowing to pay the tax due on a business is often a cause of failure or sale. Careful succession is an important management task for a successful business. Many overlook it and fewer still do the simple thing. Insure the future tax cost.

Life Insurance is a process

If you have a future tax obligation, life insurance converts the unaffordable large amount into affordable annual premiums. As always, if you can turn an event into a process, you can manage it better. Don’t overlook the obvious.

PS:

In 1993, I also assumed that the United Sates would have a national sales tax. They have not done that either. Prophesy is difficult.


I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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