How estate tax works in Canada and the US – and why raising it doesn’t help reduce inequality.
As the “eat the rich” mantra grows stronger in the US, the likes of Alexandria Ocasio-Cortez, Bernie Sanders, and Elizabeth Warren have proposed an estate tax of an astronomical 77% on the very wealthy.
What does that have to do with us? Similar policies have been proposed in Canada as well by the Canadian Centre for Policy Alternatives (CCPA).
The CCPA document states that there are no taxes on inheritance in Canada – despite the fact that several provinces levy such taxes (CCPA admits as much in its footnotes).
After walking through their claim that the lack of estate taxes has led to an increase in the wealth gap, CCPA recommends an estate tax of 45% on estates larger than $5 million. CCPA states that if applied nationally, this new tax would bring in approximately $2 billion.
Although significantly less onerous than those proposed south of the border, the current estate tax in BC, levied as probate fees, show why such policies will be much less effective generating tax revenue than claimed.
First, lets start with the basics on how the BC estate tax system works.
According to the BC Probate Fees Act, the tax is described with as a Probate Fee but acts as a progressive tax on the net value of a deceased’s estate. The estate is subject to taxes as follows: 0.6% on value exceeding $25,000 but less than $50,000 and 1.4% on value exceeding $50,000.
Importantly, there are no major exemptions provided; your house, vehicle, rental property, etc. all fall within your estate.
To put that in perspective, the probate fee (tax) payable on a $1.5 million-dollar estate are approximately $20,000.
$1.5 million may seem like a large estate – but that’s the approximate value of the average detached home in Metro Vancouver. Add in an RRSP, pension benefits, investments, and a family-owned business, and it is relatively easy to move the value of one’s estate beyond $2 million or higher.
Although CCPA wants to classify anyone with an estate larger than $5 million as “super wealthy,” based on property values and accrued savings, this would likely include many middle-income earners in Vancouver and Victoria.
One frequent and reasonable argument against estate taxes is that government is taxing assets twice; the estate has already paid income and capital gains taxes, as well as any other provincial or municipal taxes prior to the calculation of estate tax.
As this thinking goes, if governments want to increase revenues, they should tax the income directly – instead of double dipping after the taxpayer has passed away.
Second, those who want massive increases in estate taxes are right about one thing: they will be a windfall – but not necessarily to government.
As large estate tax burdens get higher and higher, the marginal cost to reduce taxes through legal and accounting professionals becomes more and more attractive. These professions will charge meaty fees, and their clients will happily pay, especially if there’s a net savings in tax burden.
In other words – the higher the tax burden, the more people will pay to avoid it.
There are a host of options available that aid in deferring or avoiding estate taxes upon death. The use of trusts, charitable donations, various insurance products, title strategies and gifting allows significant amounts of a person’s wealth, if not all, to avoid probate and associated estate taxes.
The headlines garnered by politicians advocating for large estate taxes might earn them redistributionist bona fides. But in practice, the only people to benefit from such policies will be lawyers, accountants and the like.
There is a real need for governments in BC and beyond to manage and limit the growth of wealth inequality. Additional estate taxes are a clumsy and inefficient way to accomplish this goal.
Geoff Costeloe is a lawyer and entrepreneur located in Vancouver. The above article is not be taken as legal advice. You can engage with him (civilly) on Twitter @gcosteloe.