In early February, I had the opportunity and pleasure of participating in a panel discussion of lawyers from several jurisdictions, including the U.S., Mexico, and Italy, at an international legal conference on the interesting topic “Inheritance Tax – Should More Countries Implement It?”. We discussed and compared how our different regimes tax on death, as well as some of the policy issues relating to death taxes.
What is intriguing is how differently each country approaches these issues, and how different our tax regimes are.
Canada is unique in that it has no inheritance, estate, succession, gift or wealth taxes. Instead, we have a capital gains regime, and along with Australia, New Zealand and Denmark, we tax capital gains on death.
As some of you may recall, our capital gains regime came into effect in 1972, at which time federal gift and estate tax was discontinued in order to avoid concerns with double taxation on death. The government adopted certain of the recommendations of the Royal Commission on Taxation, chaired by Kenneth Carter. Known as The Carter Commission, in the 1960’s it conducted a review of the Canadian taxation system and recommended a capital gains regime as more progressive, and as well, more comprehensive, as changes in asset values of capital property is a form of wealth that should also be taxed. The catch phrase used was “a buck is a buck is a buck”.
Other countries use different forms of taxation on death. Some tax the value of assets owned on death in the form of an estate tax, such as the U.S. Others tax a beneficiary on the value of the inheritance he or she receives, including many civil law countries, such as France, Italy, Germany, and Spain. Some tax gifts received by a beneficiary during their lifetime as well as those received on death.
What is surprising about these different types of wealth transfer taxes is how little revenue they raise. They have played an increasingly smaller role in the post-war era as governments throughout the world have turned to the broader, more immediate, and recurring bases of income, consumption, payroll and social security taxes (although interestingly, when Canada first introduced federal succession duties in 1941, the primary purpose was to fund World War II).
Capital gains tax, similarly, is not a large revenue generator. The Fraser Institute’s 2014 report “Capital Gains Tax Reform in Canada: Lessons From Abroad” stated that in 2014, capital gains tax both lifetime and on death represented only 2.3% of federal income tax revenue and 1.1% of total government revenue. In absolute dollars, capital gains tax was only $2.8B of total revenue from all personal income taxes of $120.5B.
So if death taxes are not a big revenue generator, why do we have them?
The traditional arguments raised from a policy perspective for the imposition of death taxes is not primarily to raise revenue, but instead to make the tax system more progressive, and to regulate the transfer of wealth from one generation to the next, including by reducing concentrations of dynastic inherited wealth and economic power, thereby ensuring more equality of opportunity and a more democratic society.
How effective, however, are death taxes at achieving their objective and at what cost?
In the Canadian context, taxation on death can be a minefield, in particular for those who own illiquid assets, family businesses, farms, and recreational properties, and can force their sale, or in the case of some enterprises, even destroy them unless the tax bill on death is carefully planned for and managed.
As well, if death taxes are too high, what impact does this have on entrepreneurialism and the human desire to create a legacy for one’s family?
Obviously, there are no easy answers to these issues, which require a careful balancing of many factors to achieve the best, as well as the most fair and equitable result for society as a whole.