I recently had a quick chat with a young friend of mine who works in the public sector and leans heavily left, so we often get into friendly but lively debates about tax and economic policy. The topic d’jour, of course, was the proposed capital gains inclusion rate increase.

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Overly simplified, his comment was that the result of the proposal would be that instead of the rich “eating caviar,” they might have to eat something less expensive. Another person, who also works in the same public-sector industry, chimed in and said the rich would still be able to sit on their “piles of cash,” but they’d have a little bit less.

Comments such as these drive me crazy. I started my rebuttal by asking them if they knew how much the “rich” paid in overall personal tax revenues. Neither of them knew, so I quickly provided the following 2021 statistics:

• The top 0.01 per cent of income earners, 2,930 individuals, had an average income of $7.73 million and paid three per cent of all federal and provincial taxes collected by the applicable governments.
• The top 0.1 per cent, 29,260 individuals, had an average income of about $2.1 million and paid 8.9 per cent.
• The top one per cent, 292,560 individuals, had an average income of $579,100 and paid 22.5 per cent.
• The top five per cent, about 1.46 million individuals, had an average income of $259,600 and paid 41.7 per cent.
• The top 10 per cent, about 2.93 million individuals, had an average income of $190,000 and paid 54.4 per cent.
• The top 50 per cent, about 14.6 million individuals, had an average income of $90,700 and paid 93.8 per cent.

The reaction is usually consistent when I list the above statistics: most are surprised that the average incomes are that low for certain groups. In addition, there is often a recognition that a very small group of rich people pay a large and disproportionate amount of tax. Yes, that is what happens when you have a progressive taxation system such as Canada’s.

I’m in favour of a progressive taxation system, but if the asks become too much, there will obviously be negative behavioural reactions. Those reactions include a large number of rich — and even not so rich — Canadians leaving the country. It was recently announced that the emigration of Canadians to the United States has reached a 10-year high. That’s not surprising since I’ve been ringing this alarm bell for years.

With the above statistics in mind, you should easily be able to appreciate that it doesn’t take many losses in the top 0.01 per cent to five per cent to have an extremely negative impact on the remaining population to replace the lost tax revenue. It also certainly doesn’t help improve Canada’s productivity challenges.

Under this federal government, the recent asks of the rich have included a four per cent increase in personal tax rates, an attack on small businesses and their ability to income split with family members, major amendments to the Alternative Minimum Tax and a host of other “adjustments.”

In addition, it is clear from the above statistics who pays for Robin Hood programs such as Pharmaccare, the Dental Care Plan and a whole host of other wasteful spending. Yep, those darn rich people. Again, if the rich feel that their hard-earned money is not being put to good use, there will be negative reactions.

That’s where the capital gains inclusion rate increase proposal comes in. The proposal to increase the inclusion rate from 50 per cent to two-thirds (with individuals able to maintain the 50 per cent rate for annual capital gains of $250,000 or less) is not about the vacuous speaking points pumped out by the Prime Minister’s Office and repeated by Justin Trudeau and others who try to suggest that the increase is good policy (necessary for “fairness,” “equity,” “intergenerational fairness” and the “capital gains advantage”).

Nope, this is a simple tax revenue-generating measure since this government has no desire to materially reduce spending and try to appease the value-for-money-spent crowd. Instead, it needs the revenue in order to continue to recklessly spend.

Unfortunately, though, the capital gains inclusion rate increase impacts much more than the rich. Average Canadians are waking up to the simple fact that they don’t need to be rich to be directly or indirectly impacted in a negative way.

Those who have second properties (such as rental or vacation properties), taxation on death (which impacts inheritances), small-business owners who realize capital gains individually or through their corporations, pension holders whose investments include shares of publicly traded corporations that pay dividends, those who become non-residents of Canada and others will all be impacted.

“Your personal experiences with money make up maybe 0.00000001 per cent of what’s happened in the world, but maybe 80 per cent of how you think the world works,” venture capitalist Morgan Housel said in his book The Psychology of Money. I very much agree.

Accordingly, while my socialist friends’ experiences with money might make them think that the so-called rich are all “eating caviar” and sitting on piles of cash, they are definitely not. They get up in the morning and put their pants on one leg at a time, just like we all do.

While the rich might make more money than most, many of them are creating jobs, supporting families, making large charitable donations, supporting their communities in a disproportionate way and trying to make Canada better for all.

The capital gains inclusion rate is simply poor policy introduced at a time when our country needs more successful people. We need to encourage and support success rather than attack it. Our country’s future economic success depends on this.

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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