What Obama's Tax Proposals Mean for Canada

What President Obama’s tax proposals mean for Canada

Expect to see more talk of how tax policy should adjust to the new “Piketty era” of economic inequality

Jason Reed/Reuters

Jason Reed/Reuters

President Obama will deliver his annual State of the Union address to the U.S. Congress on Tuesday, and reports tell us that tax policy for wealthy Americans will be front and centre. There are already some analyses of the whole tax package, but to me the change to capital-gains taxation is the most interesting. The President’s proposal moves capital gains taxation in the United States directly toward how we’ve done it in Canada for the last 40 years. Here’s a short explanation of what is going on, and how it will influence tax policy discussions in Canada.

Capital gains arise when you sell an asset. A capital gain is calculated as the difference between the selling price and the original purchase price of an asset like a stock, bond, or investment property. If you bought a share for $10 10 years ago and sell it for $100, you have a capital gain of $90 on which you will have to pay some tax.

Capital gains in most countries are not taxed the same as other income. In Canada, we only include half the gain for taxation, but the half that is included is put in the same income pot alongside earnings, pension income, and other income sources and taxed using our regular tax brackets and rates. In the United States, 100 per cent of realized gains are taxable, but there is a special reduced rate schedule just for capital gains.

The big action in President Obama’s proposal is found in what happens at death.

The United States has always given very generous treatment to accrued capital gains at death. If the asset is passed onto an heir, the entire accrued capital gain is exempt from taxation. Moreover, the recipient of the assets gets to use the current asset price as his or her “cost” for any future capital gains calculations — the cost basis is said to be “stepped up” at death.

In contrast, Canada uses a “deemed disposition” assumption for capital gains at death. The Canada Revenue Agency simply pretends that any assets owned by someone who died are sold at the current market price. A common situation occurs when parents leave a family cottage to their children when the parents die. A large capital-gain tax liability can be triggered from the cottage through the deemed disposition assumption even if no actual cash changes hand.

The United States already has an estate tax that taxes the value of assets (over a $5.43 million exempt threshold) at rates up to 40 per cent. According to the Washington Post, however, the new capital gains liability at death would be credited against any estate tax liability. This lessens any concerns that there would be double taxation of these assets at death.

Presidential policy proposals in the State of the Union address don’t always end up in legislation — and this is especially true in 2015, given Republican control of both Houses of Congress. However, putting tax hikes for the wealthy front and centre in the high-profile State of the Union speech will bring new attention to how wealth is taxed in the United States, and we should expect subsequent responses and new proposals from the 2016 presidential hopefuls.

Here in Canada, I see two consequences of the President’s new tax proposals for our policy debates.

First, there may be some renewed attention to how capital gains and wealth are taxed in Canada. Since deemed disposition at death is similar in many ways to an estate tax, calls for an estate tax in Canada haven’t gone far. The last time a major party included a wealth tax in their platform was the NDP in 1997, and no party seems to be going down that path for 2015. Still, the Broadbent Institute has called for wealth taxation and the President’s proposal may generate new enthusiasm for this idea.

Second, we may begin to see more general discussion of how tax policy should adjust to the new “Piketty era” of economic inequality. My view, expressed in my C.D. Howe Benefactors’ Lecture in November, is that our tax system should confront the growth of inequality to ensure continued support for the pro-growth economic policies we need to create the jobs and opportunities of the future. The President’s attention to inequality will bring renewed prominence to the idea that prosperity that is widely felt across the income distribution should be central to policy debates in both the United States and Canada.

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What President Obama’s tax proposals mean for Canada

  1. The old adage, “If you Rob Peter to pay Paul…you can always count on Paul’s vote” springs to mind every time the idea of taxing the rich comes up.

    Here’s a novel idea………instead of complaining that the RICH are the majority owners of wealth in the country…..why not show how much wealth this small group has CREATED. They made it…they deserve it.

    Here’s another novel idea….that the NDP will hate.

    In Canada, or the United States, the life you lead, is largely the result of the decisions you have made. If you make the wrong decsions…..chances are the life you lead will be more difficult. If you DECIDE to have 4, 5, or 6 kids before you are 30…chances are your life will suck financially.

    If you want to spend your money on drugs, smokes, or booze instead of investing it….chances are your life will suck.

    If you want to have a good life…EARN IT. It’s not my responsibility to keep you in smokes, pot, booze…….. or provide a roof over your head. Your decisions…..your life.

    Look after those who cannot look after themselves. Don’t worry about those who WON”T look after themselves.

    • Everybody gets the same shot at it do they?

      • “…..why not show how much wealth this small group has CREATED. They made it…they deserve it.”

        This may be true for a minority of entrepreneurs who have bootstrapped their way to success, but most wealthy people (I’m talking the 1% here; not the professional class) have earned their wealth on the backs of others. They make their money off their money – not off anything they have actually DONE.

        Arguably, they are bigger leeches on society than the welfare class – certainly individually, if not collectively.

        And for a guy who seems to be anti-immigration, I’m surprised to see you dumping on people who have large numbers of children – they are your best hedge against the need for immigrants.

        • Sorry Em – meant that last to be a reply to James, not you.

          • No prob. It’s hard to tell who you’re answering on here anymore….and frequently posts end up in the wrong places.

        • Spoken like a true communist moron. You may have a point if you were talking about the crony capitalists – those who suck at the government teat, but generally speaking entrepreneurs take risks from which we all benefit.

          Learn a bit of humility, drop the class envy, and you’ll be much happier.

          • Go back and read again – that’s what I said. Who, exactly, is the moron?

            There are lots of rich who earn their money off their investments and who get plenty of tax breaks – yet it is the people who work for them who actually generate the wealth. Yet they are the first to decry any effort to help those on the low end of the scale.

            Take the Waltons, founders of Walmart. Yes you can argue Sam certainly earned his money, as the founder of the company. His heirs? Certainly not to the same degree. They subsidize their company by paying wages so low their many of their employees qualify for government assistance. Yet they have loopholes galore to protect their wealth: http://www.bloomberg.com/news/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes.html

            The rich keep getting richer on the backs of the rest of us. I’m far from a communist, but more equitable wealth distribution is good for everybody. Including the rich, if you stop and think about it.

          • There’s no sense in being upset at the people who were born lucky. After all, if I made it big, I would love to be able to ensure the prosperity of my descendants (while hopefully not turning them into spoiled brats).

            There’s nothing wrong with people who make money off of their money. I wish I could do that. Entrepreneurs need investors to fund their ventures. When investors dry up and put all their money in bonds and gold, that’s when job losses start happening.

            Walmart employs the otherwise unemployable and saves poor people alot of money by providing goods at low prices. Check out Penn&Teller’s BS episode on Walmart for more info on that.

            I agree with your point about loopholes, tax breaks, corporate welfare and all that other nonsense. The problem there is not the rich though – they are just acting to the incentives that naturally occur. Anyone of us would do the same if we were rich (or we wouldnt stay rich very long). This is a flaw in the system.

          • “…they are just acting to the incentives that naturally occur.”

            The “incentives” are created for them by politicians who kowtow to the rich – esp. in the US, where they can give huge amounts of money to favoured politicians. Canada is thankfully mostly sheltered from this direct buying of laws and votes – but it is a very serious rot in the US democratic process.

            As for “Anyone of us would do the same if we were rich”… apparently there are a lot of rich folks in the US who disagree with you: http://www.huffingtonpost.com/2014/05/06/millionaires-taxes-survey_n_5272647.html

            Warren Buffett said: “If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further. But I think that people at the high end — people like myself — should be paying a lot more in taxes. We have it better than we’ve ever had it.”

            The system, globally, is messed up. In some countries more than others. In the US, it looks like Obama is finally making steps to put things on a more even keel. And kudos to him for doing so.

          • Sorry to burst your bubble but Canada is not “mostly sheltered” from crony capitalism and corrupt politician. Havent you been following what’s been happening in Quebec recently? The only remarkable thing about Quebec was that the corruption came to light. I would bet alot that the other provinces have similar problems.

            And, Im sorry are you being sarcastic? You’re saying Warren Buffet is one of those good “rich guys” who want to pay more taxes? Oh my god buddy please.

            Who else do you admire? George Soros? LOL!!!

            These are amongst the richest people in the world and they make a little pronouncement about wanting higher taxes and the cheap seats clap like trained seals. HILARIOUS.

        • Keith,

          In the report discussed, MOST CANADIANS are in the 1% referred to.

          You talk about people making money off the “backs” of others’, which is pretty much confirmation that you are one of those folks who thinks that the wealthy are undeserving of their wealth. Sure, some make a LOT OF MONEY by treating people like crap….but you can find those in Saudi Arabia, Russia, China, or some other backwater. In the West, most wealthy folks have EARNED it fairly, legally, and for the most part, ethically. (Most, not all)

          The fact you think the wealthy are leeches….is pretty clear evidence that you know DIDDLY-SQUAT about economics or finance. When people invest money in the stock market and get a return…they are NOT leeching. They are taking the risk with their own money, and can loose it. That is why some people are more successful than others. They take risks, and accept the consequences of their decisions. They don’t rely on handouts from others to live.

          As for immigration, I’m all for it…..but I think we need to be more selective of what countries they come from. If the country of origin is a Muslim backwater….sorry, we don’t need the hassle or the added terrorism. You can’t deny this part, no matter how progressive you claim to be. Consider….if you had to take in 100,000 new Canadians to keep your numbers up, and only had TWO countries to choose from, what would they be.

          Pakistan – hotbed of fanaticism, and terror
          England – hotbed of bad food, bad teeth, but a civilized society

      • Of course not. Some have to work harder at it…..

        But it is easier for people who plan ahead, have some ambition and skill, and aren’t looking for handouts.

        Emily…..your jealousy is showing again.

  2. Piketty’s analysis has been shown to be wrong. He used incorrect information/data.

    We should be celebrating and congratulating anyone who has become rich through hard work and new ideas.

    The poor won’t become rich by taxing the wealthy (only the government-related people benefit) but by trying to emulate the rich they can become wealthy.

    The goal should be for everyone to become wealthy, not having the rich brought down so everyone is the same.