Inheritance tax unlikely to benefit income inequality


Marlin Horst head shot

A report that suggests the federal government could collect $2 billion annually if it implements a tax on inheritances of $5 million or more doesn’t take some unintended consequences into account, Toronto corporate lawyer Marlin Horst tells

“One of the problems with an inheritance tax is that the very wealthy will structure their finances in such a way that they don't have to pay it,” says Horst, a partner with Shibley Righton LLP. “People will transfer everything to their heirs before they die or they will set up family trusts — money that will likely go offshore.”

The Canadian Centre for Policy Alternatives (CCPA) report looked at inequalities in wealth between those on the extreme high end in Canada and everybody else. Economist David Macdonald told CBC News the 87 wealthiest families in the country owned a collective $259 billion at the end of last year.

“He contrasted that with the numbers for the median Canadian family, which saw its net worth increase by just 15 per cent over the same time period — rising to $295,100 from $257,200,” the article states.

“While the group of super-rich would no doubt contain a large number of high earners, Macdonald says they are even more disproportionately made up of people who inherited much of their wealth,” it continues.

One solution to that growing income disparity, the CCPA says, is to implement an inheritance tax — a one-time fee an heir would pay upon receiving an inheritance paid out of the estate.

CBC News reports the United States, the U.K., France, Japan and South Korea all take up to 40 per cent or more of large inheritances.

Horst says Canada no longer has an inheritance tax, which was abolished for a number of reasons.

While the reintroduction of an inheritance tax would be a boon for estate lawyers, he says it won’t benefit society as a whole because it’s unlikely it would result in the $2 billion a year the CCPA estimates.

“The report made the assumption that no one would change their way of doing things. Of course, that is not the case when there's tax involved,” he says. “And wealthy people are in the best position to be able to arrange their affairs to avoid taxes.”

He says the U.S. has a 40 per cent rate but very few Americans pay that tax because most people have set up their affairs in such a way that they don't fall within the numbers to have the taxation come into play.

“If you have a family business, for example, the heirs already own the company by the time the person dies so the wealth has already been transferred to the next generation,” Horst says. “Really, the only ones you catch are people who are too lazy to do any tax planning.”

CBC News notes Harvard economics professor Greg Mankiw, who has written extensively on inheritance taxes, says “that keeping the tax on inheritances low or non-existent is the best way of encouraging investment, which boosts the economy and grows wages and government revenues over the long haul.”

Horst says the efforts that go towards mitigating taxation are not actually helping the economy in the same way as allowing wealth to grow and be invested.

“The money then goes into investments in the stock market, helping companies raise money and become more innovative,” he says. “Implementing an inheritance tax is an interesting idea that pops up every now and then, but doesn’t take into account that people will change their way of doing things.”

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