Advertisement
Canada markets open in 30 minutes
  • S&P/TSX

    24,471.17
    +168.87 (+0.69%)
     
  • S&P 500

    5,859.85
    +44.82 (+0.77%)
     
  • DOW

    43,065.22
    +201.36 (+0.47%)
     
  • CAD/USD

    0.7235
    -0.0014 (-0.19%)
     
  • CRUDE OIL

    70.72
    -3.11 (-4.21%)
     
  • Bitcoin CAD

    90,950.63
    +1,210.73 (+1.35%)
     
  • XRP CAD

    0.75
    +0.00 (+0.24%)
     
  • GOLD FUTURES

    2,668.20
    +2.60 (+0.10%)
     
  • RUSSELL 2000

    2,248.64
    +14.23 (+0.64%)
     
  • 10-Yr Bond

    4.0550
    -0.0430 (-1.05%)
     
  • NASDAQ futures

    20,615.25
    -4.00 (-0.02%)
     
  • VOLATILITY

    19.73
    +0.03 (+0.15%)
     
  • FTSE

    8,260.28
    -32.38 (-0.39%)
     
  • NIKKEI 225

    39,910.55
    +304.75 (+0.77%)
     
  • CAD/EUR

    0.6627
    -0.0015 (-0.23%)
     

Could Kamala Harris' proposal to tax unrealized capital gains be adopted in Canada?

Vice President And Democratic Presidential Candidate Kamala Harris Campaigns In New Hampshire
Democratic presidential nominee, U.S. Vice President Kamala Harris, made a campaign stop at the Throwback Brewery on September 4, 2024 in North Hampton, New Hampshire. (Credit: John Tully/Getty Images)

U.S. Democratic presidential hopeful Kamala Harris has stirred controversy with a proposal to tax unrealized capital gains for the wealthiest Americans. The plan has come under fire for both political and practical reasons — and raised questions about whether the policy could make its way to Canada.

The Financial Post’s Barbara Shecter looks at the possibility of capital gains tax contagion.

What are unrealized capital gains?

Unrealized gains are earnings that accrue as a result of an increase in value on such assets as stocks or real estate holdings. Capital gains can be measured over a specific time period but are normally only taxable once the underlying asset is sold or disposed of in some other way, such as a charitable donation.

How would taxing them work?

This plan would see such gains assessed annually, even if the asset in question isn’t sold by the investor or owner. The proposal, first laid out by U.S. President Joe Biden in March, indicated that such taxes would be treated as prepayments against future realized capital gains to avoid taxing the same amount of gain twice. The taxes could be paid in annual installments over a specified number of years. Under a complicated formula, some refunds would be provided in cases where there are subsequent losses or gifting of assets. This would only be the case if the prepayment amount exceeded the long-term capital gains rate times the taxpayer’s unrealized gains. However, refund amounts would first have to be put toward any remaining installment payments on previous unrealized gains before being refundable in cash.

Who and what would be affected?

So far it looks like individuals with a net worth (assets minus any liabilities) of $100 million or more. The proposal would impose a minimum tax of 25 per cent on total income for such individuals, “inclusive of unrealized capital gains.” Some company founders may be eligible to be treated as “illiquid,” and therefore taxed only on unrealized capital gains on “tradeable” assets, but that would depend on an assessment of their holdings, by asset class, submitted to the Internal Revenue Service (IRS). The proposed tax change is meant to capture just a small fraction of taxpayers, but the full impact remains to be seen.

What’s behind the proposed changes?

The Democrats say current rules on capital gains give wealthy Americans a lower effective tax rate than many low and middle-income taxpayers. Providing less incentive to lock up assets and defer capital gains would put more money back into the economy sooner than under the current rules, thereby reducing economic disparity, according to the Biden tax reform document.

Why is the proposal controversial?

The plan has been sharply criticized for targeting the wealthy and disincentivizing venture capital investment much like the Trudeau government’s June increase in the capital gains inclusion rate drew heavy criticism from Canada’s startup community. Marc Andreessen, the billionaire venture capitalist who runs Andreessen Horowitz and co-founded Netscape in the early days of the Internet, said in a July 16 episode of his podcast that the tax change would make startups “completely implausible” because no one would want to create a growth company only to have their equity stripped away by yearly capital gains taxes. This view aligns with the opposition political argument that the U.S. economy would not be helped by the measure.

What’s more, critics say, simply administering the new tax regime would be complex and cumbersome. For starters, taxpayers with wealth greater than the threshold would be required to report to the IRS the estimated value of their assets, by specified asset class, and the total amount of their liabilities. The way assets would be valued has also come under attack: tradeable assets such as stocks would be valued using end-of-year market prices, but non-tradeable assets would be valued using the greater of the original or adjusted cost base. Taxpayers seeking to be treated as “illiquid,” and therefore only pay tax on tradeable assets, would need to be tested to meet certain thresholds, such as holding less than 20 per cent of their wealth in tradeable assets.

Are the arguments working?

The message seems to be getting through to Harris, who is courting wealthy donors in her presidential bid and last week won praise from the business community for easing up on plans Biden laid out on capital gains reform. While she disappointed some by failing to address unrealized capital gains, she reduced the size of a proposed capital gains rate increase for assets that are sold. Max Reed, a cross-border specialist at Polaris Tax Counsel, said if the policy remains a Harris priority, it could ultimately face a court challenge on constitutional grounds. A case before the U.S. Supreme Court this year, Moore v. United States, raised the question of whether there has to be a realization — an actual sale — for an income tax to pass constitutional muster. The court did not have to answer the question, so it didn’t, potentially punting it down the road.

Could such a plan come to Canada?

The NDP has floated the idea of a one per cent tax on total asset values for those with a net worth over $20 million a “wealth tax” that Reed said would be far “less onerous” than taxing all unrealized capital gains. “I have not seen it suggested in Canada that there would be adoption of unrealized capital gains tax here,” he said. “I think we are done with changes to the capital gains tax in Canada in the short term, unless a newly elected Conservative government reverses the changes to the inclusion rate.”

The rate was hiked in June to two-thirds from 50 per cent on capital gains of $250,000 or more for individuals, and all capital gains for corporations and trusts, with just a couple of new exceptions. Like the proposal in the U.S., it was estimated that a very small number of wealthy taxpayers would be affected by the change — 0.13 per cent of individual Canadians earning, on average, $1.4 million — but many more were ensnared, from doctors running their practices through corporations to folks inheriting cottages that have skyrocketed in value. Canadians wary of further tax amendments are also plagued by a persistent rumour that the minority Liberal government, which until last week was supported through an agreement with the NDP, is looking at taxing a portion of gains on primary residences segment of the residential real estate market that has long been exempt from taxation.

• Email: bshecter@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.