Feds have little capacity to raise personal tax rates, experts say

Tax experts suggest the federal government is unlikely to introduce higher personal tax rates in the 2023 federal budget and will instead focus on other measures targeting high-income earners.  

“Canadians cannot afford higher personal tax rates — we just can’t,” said Armando Minicucci, a tax partner with Grant Thornton LLP in Toronto. “We understand there’s a need [to fund] government programs and the debt we’ve incurred, but we’ve got to look at alternatives other than just personal tax rates.”

Minicucci said Ottawa is more likely to change the alternative minimum tax (AMT) regime, change the dividend tax credit for individuals to increase overall tax on dividends, or hike the capital gains inclusion rate to 75% from 50%.

In the 2022 federal budget, the government proposed reviewing the existing AMT regime to ensure top earners pay at least 15% per year. The fall economic statement affirmed the government’s intention to proceed with a new regime, and stated that details would appear in the 2023 federal budget.

Andrew Pyle, senior investment advisor and portfolio manager with CIBC Wood Gundy in Peterborough, Ont., also said the government is more likely to raise the capital gains inclusion rate than personal tax rates.

“If we look at taxes on high-net-worth Canadians, the low-hanging fruit probably is [higher taxes on capital gains],” Pyle said. Higher personal income tax rates are “a lot more visible” to taxpayers, he suggested.

The Liberal government has given no indication it will hike personal tax rates in the run-up to next week’s budget. However, the federal NDP, with which the Liberals have a supply and confidence agreement, advocated for the top federal tax rate to be increased to 35% from the current 33% in its 2021 election campaign platform.

That has added to speculation that the government could choose to raise personal income tax rates again, as it did in 2016 when it raised the top rate to 33% from 29%. In eight of ten provinces, the top combined federal-provincial tax rate for 2022 was more than 50%.

In a March 13 Tax Breaks podcast episode, Kim Moody, CEO and director of Moody’s Private Client in Calgary, said he felt it was unlikely that the government would raise tax rates in the Budget 2023, though such a move might play well with party supporters. Instead, Moody believes the government is much more likely to adjust the AMT.

“If they tinker with it, they can say they’ve implemented a wealth tax,” said Moody, who believed that “overhauling [the AMT] completely is pretty ambitious.”

Pyle said the government is contending with a deteriorating fiscal and economic environment where revenue gaps will have to be filled.

“They can be filled in many ways — we can look at restraining growth in spending, and things like that — but based on the current situation in this country, there is definitely a focus on how taxes would be used to fill that gap,” Pyle said.

In a speech on March 20 teeing up the budget, Deputy Prime Minister and Finance Minister Chrystia Freeland slammed those calling “for sweeping, unfunded tax cuts for the wealthy” as well as cuts to unemployment supports and pension benefits for Canadians. “Other countries have tried this reckless approach — and they have been brutally punished by the markets,” she said.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.