Taxing the rich is not a magic trick that will help younger Canadians

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I’ve always been fascinated by magicians and how incredible some of their tricks are. A few years ago, my youngest son became fascinated as well. He aggressively took up the craft and let me in on some of the sleight-of-hand and distraction skills that are required to pull off an effective trick.

With this in mind, I couldn’t help but think of magicians with respect to the Canadian government’s 2024 budget and its proposal to increase the capital gains inclusion rate from 50 per cent to 66.7 per cent for corporations, trusts and individuals who have more than $250,000 in annual capital gains realized after June 25, 2024.

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The government plans to raise almost $5 billion from corporations (who might purposely trigger, or “crystallize,” their capital gains before June 25) to finance some of its excessive spending. That’s quite a magic trick.

To introduce the proposal, the government pulled another attack on the wealthy and so-called rich out of its old bag of tricks. Apparently, the proposal will only impact 0.13 per cent of Canadian individuals and 12.6 per cent of corporations. This messaging is blatantly disingenuous and manipulative. The real impact will be much greater.

To cover their tracks, the prime minister and his government have vigorously started defending their budget. Last week, Justin Trudeau continuously argued that the capital gains inclusion rate increase is necessary since the current system is unfair to young people who can’t afford to buy a first home and that it’s time for wealthier and older individuals to pay more to work towards “intergenerational fairness.”

He also said: “We just don’t think it’s right that a student, or an electrician or a teacher be paying taxes on 100 per cent of their income while others have the opportunities to use accountants and pay taxes on only 50 per cent of that income.”

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These comments are classic sleight-of-hand responses (so obviously crafted by the prime minister’s office or communications’ crisis team) to distract us from the real issues.

Intergenerational fairness and asking the so-called rich to pay more tax via an increased capital gains inclusion rate is quite a leap of logic. How that pull of the policy lever assists with intergenerational fairness is certainly not visible to me and millions of others.

If Trudeau genuinely wants to take positive steps towards intergenerational fairness, the most important thing would be to reduce spending and get our country’s debt load back in line. Budget 2024 projects our public-debt charges will be $54.1 billion for the coming year (that is more than $1 billion per week) and is almost identical to the amount projected to be collected in GST by the federal government. Think about that: all our GST payments are going to pay public-debt charges.

Paying public-debt charges brings no societal benefits (no hospitals, roads, social benefits, etc.) and instead benefits bondholders. Burdening our children and grandchildren with our country’s growing debt, and its corresponding debt charges, is certainly not in the interests of intergenerational fairness.

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The attack on one of our country’s most important professions — accountants — is also quite remarkable. A sitting prime minister states that if you can afford to hire an accountant, then those evil accountants will be able to cut your tax bill in half. Besides being extraordinarily offensive to the profession, accountants are now apparently magicians: Abracadabra …poof … your tax bill is cut in half.

Such hogwash. So much so that the Chartered Professional Accountants of Canada came out with a strong statement defending the honour of accountants. Accountants are hardly the problem. Frankly, without accountants, the entire Canadian tax system would fail. That’s not an exaggeration; it’s the simple truth.

While some economists have strongly come out in defence of the capital gains inclusion rate (with such arguments usually centred around equity — a “buck is a buck” — or “it’s the best of a bad alternative”), they are ignoring the real world of investing. Investors place their dollars where they feel the garden has fertile growing conditions. If that assessment determines this garden is not fertile enough, they will place their investment dollars elsewhere.

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To be fair, many entrepreneurs, economists and tax-policy wonks would have been more accepting of the tax increase if it was met with measures, such as a significant reduction in corporate and personal tax rates, to counter the negative impacts described above. These measures, combined with reduced spending, would have helped make the economic garden a bit more fertile and been a positive step in dealing with our country’s serious productivity issues.

Instead, the capital gains tax increase was accompanied by offensive rhetoric, misleading and disingenuous statistics, and a sleight of hand trick (“intergenerational fairness”) to deflect attention from what this measure truly is: a simple political attack in the hopes of increasing votes from the younger generation.

For many successful Canadians, this tax increase is the final straw. They have endured endless attacks during the past nine years in the form of increased personal tax rates, harsh amendments to the alternative minimum tax, illogical and ideological windfall taxes on the financial sector (what sector is next?), attacks on short-term rental owners, attacks on small businesses with anti-income splitting rules, grinds on the small-business deduction if you have too much passive income, threats of a wealth tax, etc. It’s too much.

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My phone/email/text messages have been off the charts with requests from people wanting help to leave Canada once and for all. Such exits have unfortunately been all too common over the past number of years, but this final straw has taken it to a new level.

Thankfully, many Canadians are recognizing that the magic show is almost over. They can only be tricked so often into believing that broad-based tax increases and poor policies are good for all Canadians. The magic is simply not real.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimmoody.

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