What's a wealth tax – and how can it affect your clients?

Updated November 21, 2023

In Canada, there have been some discussions recently about imposing a wealth tax on its citizens, particularly on those considered as “ultra-wealthy”. Unlike some other countries which already have a wealth tax in place, Canada has yet to come up with a solid tax proposal.

Assuming that a Canadian wealth tax is imposed, what are the possible implications of this on your clients? What are the advantages and disadvantages of such a tax measure? What will the impact be on the Canadian economy? In this article, Wealth Professional attempts to offer some insight.

What is meant by a wealth tax?

Also known as a capital or equity tax, this is a tax based on the fair market value (FMV) of a taxpayer’s assets. For taxing wealthy clients who have a lot of assets, this means that the Canadian government can tax virtually every valuable possession they have.

The tax can include your client’s cash, bank deposits, shares of stock, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.

When will there be a wealth tax in Canada?

As of this writing, there have been no announcements on whether this will be formally enacted in Canada. The last time the government mentioned anything regarding this tax was during the Speech from the Throne of September 24, 2020.

The federal government announced that it intended to find ways to enact a tax that would address extreme wealth inequality. (Perhaps a step in this direction is the luxury tax enacted in September 2022.)

Important facts about the wealth tax

Over the years, more Canadians have looked more favourably upon a wealth tax to bring equity to the tax system. To illustrate this point, a November 2020 Abacus poll revealed that 79% of Canadians approve of a 1% wealth tax on Canadians whose assets exceeded $20 million.

Then in July 2021, the Parliamentary Budget Office or PBO generated a report saying that a wealth tax of 1% could make about $10 billion in tax revenue in its first year.

The PBO report claimed that it would apply to around 25,000 of Canada’s wealthiest families. They represent only 0.2% of the country’s total wealth, yet own 25% to 29% of Canada’s entire wealth.

What this means is that these wealthy families would have a $200,000 tax hit apart from their regular income tax. The PBO report also mentioned that there would be one-time tax imposed on rich Canadians as follows:

The PBO report also said that these could potentially generate as much as $44 billion and $61 billion if levied on families whose net wealth exceeded $10 million and $20 million respectively.

The proposal: understanding the basics

The Canadian Centre for Policy Alternatives BC Office provided the latest modelling for a Canadian wealth tax. In their proposal, the tax would apply to net wealth as follows:

Note that “net wealth” includes all the wealthy taxpayers’ assets, such as shares of stock, mutual funds, real estate, etc., after deducting their outstanding debts, including mortgages.

Under this proposal, the first $10 million of net wealth for any family is untouched; only the part of their wealth above the threshold is taxed.

Arguments in favor of a Canadian wealth tax

With a new wealth tax, there’s a host of benefits that Canadians and the government can reap. Here’s why many Canadians are in favour:  

1. There would be enough money for useful public programs

According to the Canadian Centre for Policy Alternatives’ senior economist Alex Hemingway, “Such a wealth tax would raise an estimated $32 billion in the first year alone, rising to an estimated $51 billion by the tenth year and a cumulative $409 billion over 10 years.”

This, combined with the additional one-time tax proposed by the federal government on wealthy families’ assets, can translate to a windfall for the Canadian government. It can provide sufficient funds for their many programs such as:

• Universal Public Pharmacare
• Free tuition for post-secondary education
• 100,000 affordable homes annually
• Significant investments in public transportation

Apart from the individual benefits gained from these individual programs, the entire Canadian economy benefits. 

2. There can be enough money to address poverty

One of the main benefits of a wealth tax is how it can reduce wealth inequality. The revenue generated by this tax can lessen and eventually eradicate homelessness. Lower-income families can have access to affordable non-market and co-op housing, funding for childcare, food security, access to the labour market, and access to affordable post-secondary education if they desire it.

3. There would be enough money to mitigate inflation

Revenues would make it possible for the government to moderate house prices and mortgages. Providing high-quality public services to make childcare, dental care and prescription medicines more affordable can reduce inflation as well.

4. There would be money to address inequality

The money from the wealth tax will enable the government to invest in beneficial programs for Canada’s First Nations. Funding for their infrastructure, climate leadership, reconciliation, healing, direct support for truth, food security and sovereignty would not pose a problem. Enacting a federal Anti-Racism Act would also be feasible.

5. Canada can become a fossil-free economy sooner

If the government gets more money from a wealth tax, stricter national standards can be imposed and enforced on industries that are large carbon emitters. Canada could remain a powerhouse economy that’s also free of fossil fuels by the year 2040.  

6. We can tackle the healthcare crisis

Canada can keep the healthcare crisis at bay with adequate funding for the universal public healthcare system and do away with the need for privatization.

Revenues from a wealth tax will also mean money to implement new national programs like mental health care, support for substance abuse, dental care, and nationalized pharmacare.

Counterarguments: concerns and critiques

On the other side of the coin are arguments against having a Canadian wealth tax. Critics argue that:

1. The wealth tax can cause some confusion.

As the tax is imposed on personal wealth (like real estate property and land) and not personal income (which is already taxed), the client’s net wealth would become a key area for advisors to focus on, especially if their housing is taxed.

Since Canada currently doesn’t tax capital gains on the sale of a principal residence at whatever sale price, introducing a wealth tax will change that.

The tax can potentially leave families with less money to upgrade to larger homes, or to a home in a better location, or save for retirement.

These would be novel issues that advisors would need to closely examine with their clients. A wealth tax could significantly impact some clients’ resources and how they would manage their wealth going forward.

2. The wealthy will try to find and exploit tax loopholes.

It’s very likely that the wealthy will try to find and use any loopholes to avoid paying more, just like some billionaires did in France.

3. A wealth tax will discourage savings and entrepreneurship.

Advocates argue that this is unlikely since more creative Canadians will keep their entrepreneurial spirit and the tax only applies after they’ve made bank.

Those who object are concerned that some families may lose their businesses just to pay the tax. This is another area that advisors can work on to see how the wealth tax impacts their clients’ growth.

4. A wealth tax can hinder economic growth.

It can be viewed as a “punishment” for success. Why should entrepreneurs strive to grow their business when there are heftier taxes waiting to pounce on them and their assets when they do better and earn more?

This can put off business owners from expansion plans, keeping them stagnant and at a level just below the taxable threshold.

This can also disincentivise business expansion, killing the prospect of creating more jobs and hiring people from the local labour pool.

Worse, a wealth tax can force some wealthy people to uproot their businesses and move to more favourable countries or states. The ripple effects of this can be devastating to both the local and national economy. If this happens, financial advisors can do little to prevent a wealthy client from taking drastic measures like these to avoid getting taxed.  

In this video, National Tax Leader at Grant Thornton Tara Benham talks about the potential for a new wealth tax and cost of living relief.

Comparing Canada with global peers

There are some European countries that have – or at least tried to – enact a wealth tax. Here are the most notable examples:

• Norway, a population of only five million people, has reported revenues worth 1.6 billion euros as of 2019
• Spain implemented a progressive wealth tax featuring several tax brackets that are based on wealth and region.
• Switzerland, renowned for their $6.5 trillion in foreign deposits, also has a successful wealth tax. Theirs is based on region and level of wealth, giving them an additional 4% in yearly tax income.
• Argentina, thanks to its wealth tax, was able to pay for $2.4 billion worth of emergency COVID relief.

Other countries that tax the ultra-rich are Colombia, the Netherlands, Italy, and Belgium.

While Canada can learn a thing or two from these success stories, not all countries with a wealth tax were successful. France initially had one, but President Macron was forced to cancel it. Too many wealthy people (about 42,000 millionaires) left for countries with lower taxes.

What could a Canadian wealth tax look like?

This should provide ample tax revenues for public good. The rich and super-rich shouldn't feel so punished by it that they’d prefer to emigrate. Third-party auditors can and should help peg the appropriate tax levels. And if, despite having a reasonable wealth tax, the rich still choose to leave, an exit tax should be in place.

Formed and implemented properly, a wealth tax in Canada can be a real boon to its citizens and the economy. The challenge is to create and enforce a system that generates enough revenue to benefit the public, without taxing the wealthy at unsustainable levels.

As for financial advisors and their clients, the wealth tax should not be too high for clients nor too low to be of any use to the government. Balance is essential.

As a hot-button issue for many Canadians, do you think the wealthy should be taxed or not at all? What rate do you think is reasonable? Let us know in the comments!