Why Asking the Rich to ‘Do a Little Bit More’ Might Backfire

You’ve likely seen the video by now -- Prime Minister Justin Trudeau defending the recently-announced increase to capital gains tax rates in Canada as a way to increase generational fairness.^[1] In his words, “So yes, we are asking the most successful in this country to do a little bit more to make sure that everyone can see themselves in the success of this country.”

He’s referring to the announcement in the latest Federal Budget that the inclusion rate on capital gains is being increased from 50% to 66.67% as of June 25^th.

You can read lots of commentary on this change in the media, and we also have an article detailing the impact of this change in The Northwood Perspective this quarter. Instead of rehashing what you’ve likely already read elsewhere, I want to focus on the potential perils of continually asking the rich to ‘do a little bit more’ in a world where capital and labour are increasingly mobile.

To start, these changes have led some people to start looking at moving to jurisdictions where they can pay less tax. One that’s nearby and familiar to many Canadians is Florida. Here are some data points they are probably perusing as they evaluate their options:

• The top tax bracket for someone living in Toronto starts at $246,752 CAD. Any income above this number is taxed at 53.53%. The top tax bracket for someone living in Miami starts at $609,350 USD. Any income above this number is taxed at 37.00%
• An individual earning $500,000 in Toronto would pay an average tax rate of 44.86% and have after-tax income of $275,696. An individual earning $364,964 USD ($500,000 CAD) in Miami would pay an average tax rate of 30.55% and end up with after-tax income of $253,471 USD ($347,255 CAD). This works out to an additional $71,559 CAD of after-tax cash in your pocket every single year.
• The average house in Toronto currently costs $1.16M CAD ($847K USD Equivalent^)[2] The average house in Miami currently costs $748K CAD Equivalent ($546K USD)^[3]

• This is what Miami looks like in January:

• This is what Toronto looks like in January:

The above example is admittedly cherry-picked to illustrate the point I’m trying to make. Florida is a great comparison because there is no state income tax there, and many Canadians dream about living somewhere warmer as soon as the snow drops each year. The above example doesn’t work as well with a picture of Cleveland, but it’s worth pointing out that your tax bill is still roughly $55K lower every year in Cleveland vs. Toronto, and the average price of a home in Cleveland is $157K USD ($215K CAD Equivalent).^[4] To put this in perspective, Cleveland is less than a five hour drive from Toronto, and you could buy 5 homes there for the price of one home here! Crazy!

I don’t mean to suggest there is going to be a rush to the exits in Canada due to the latest announced tax changes. But I think we’d also be wrong to assume that there aren’t smart and ambitious individuals doing the above math every single day in our biggest cities and deciding that the American Dream feels a lot more attainable than the Canadian Dream does these days.

In fact, several of my friends or former classmates in their 30s have actually  pulled the trigger in the last two years and moved South. I’ve also spoken to several other people who have seriously considered it or continue to do so. None of these people are dumb or lazy. In some cases, they’re married with kids, and the logistics behind making a move like this are quite complicated for them. That they’re still choosing to do it, and our country is losing them to the US as a result, is not a good outcome for Canada.

However, working at Northwood for the last seven years has also allowed me to form relationships with many wealthy Canadians at all different stages of life. Over that time, I’ve noticed that there has always been a small subset of wealthy Canadians who bring up the idea of changing their tax residence to the U.S. (or elsewhere) whenever their favoured party loses an election, or new tax policies they don’t like are announced. We then work with them and explore the different tax residency options out there, and the logistics involved in actually changing your tax residence (i.e., cutting social ties with Canada, spending at least 182 days in your new country every year, moving your family and kids, etc.) and most people generally back off the idea.

In the same way that lots of Americans threatened to move to Canada if Donald Trump won the 2016 election (and very few actually did), the number of wealthy Canadians interested in exploring the idea of leaving Canada, has always been far bigger than the number who actually want to go through with it.

But you wonder if the recently-announced tax increases might start to tip that balance. We’re now hearing a lot of people say they’re fed up with constantly being asked to ‘pay a bit more’, and they’re ready to do what it takes to stop having to pay higher and higher Canadian taxes. Just as a single straw ended up breaking the camel’s back, these tax changes may end up being the tipping point that causes some of these families to leave Canada and take the significant amount of future tax dollars they would have paid to the CRA with them.

I’m a married 30-something homeowner with two kids in Toronto. I’m not leaving, and neither is anyone else at Northwood. I love this country, and I think we continue to have the potential to be the greatest country in the world. I just hope that some of the policies our government is currently pursuing don’t lead to us losing some of our smartest and most ambitious people to our neighbour to the South.

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^[1] https://www.facebook.com/LiberalCA/videos/were-ensuring-the-ultra-wealthy-pay-a-bit-more-so-we-can-deliver-for-every-gener/406715538824669/

^[2] https://trreb.ca/wp-content/files/market-stats/market-watch/mw2404.pdf

^[3] https://www.rockethomes.com/real-estate-trends/fl/miami

^[4] https://www.rockethomes.com/real-estate-trends/oh/cleveland

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