They say that the only two things that are inevitable in life are death and taxes. If you have the fortune of being one of those among us who is destined to receive a large inheritance from your parents or other relative, these two inevitabilities may combine in the form of “death taxes.”
Taxing people on their death is a controversial subject. Many people loathe the idea and take advantage of every opportunity to avoid it. The mechanics of avoiding or limiting tax on death for high net worth individuals has spawned an entire “estate planning” industry of lawyers and accountants who work setting up trusts, moving shares and assets between companies, and buying life insurance.
Critics of estate taxation note that people who have accumulated large amounts were already taxed (at least) once on that money when they first received it and that they should be able to pass it on to their children without the government getting involved. “Death taxes” also sometimes force some families to break up all or part of the family business to satisfy the taxman. If much of a family’s wealth is tied up in non-cash assets – like a business or real estate – some portion of that asset will need to be converted into cash to actually pay the tax bill.
Critics will also fairly note that the rich will find various ways to avoid paying or minimizing taxes against them on death. Some research out of the United States has suggested that, dollar for dollar, the cost of enforcing compliance with the federal estate tax is as much as five times more expensive than enforcing compliance with income tax.
That it is just kind of ghoulish.
Proponents of high taxation on estates, on the other hand, will argue that the intergenerational transfer of wealth threatens our society’s status as a meritocracy. “Trust fund babies” who have never had to work for anything in their life shouldn’t necessarily be allowed to inherit unlimited sums of money just because their parents worked hard during their lives. Sure taxing people’s earnings can have a certain unfairness to it when they are alive, but if the person who earned it is dead, who really cares? – or so the argument goes.
Taxes on death prevent or at least mitigate the establishment of a new aristocracy. They could stem the increased consolidation of wealth in the hands of the very few that has occurred over the last several decades by periodically breaking up the holdings of the exceptionally wealthy.
Canada and the U.S. have taken markedly different approaches to taxation on death. Its estate tax imposes a maximum tax rate of 40 per cent on estates worth more than $5.43 million. In 2014, the tax brought in $19.3 billion in revenue – less than one per cent of the U.S. government’s overall revenue but still almost enough to fund the operations of the Department of Agriculture for the year.
The estate tax itself has been close to death for many years. Opponents have successfully branded the tax the “death tax” and have made its repeal politically popular among a significant portion of the electorate – despite that fact that only about 0.2 per cent of all estates actually have to pay the tax. Politicians get rounds of applause at rallies for promising to repeal a tax that most in the audience will never have the good fortune to pay.
U.S. Presidential hopeful Bernie Sanders, who is arguably Hillary Clinton’s nearest competitor for the right to run for president as the Democratic Party nominee in 2016, is talking about estate taxes and has proposed introducing a graduated estate tax ranging from between 45 per cent on estates worth over $3.5 million to 65 per cent on the estates of billionaires. He would also close a number of loopholes that have allowed the wealthy to shelter their incomes from taxation.
Canada does not have an estate tax, but some Canadians will have to pay some capital gains tax on death if assets they own have increased in value and they didn’t already pay some tax on it during their lives. Recreational properties and business assets are a common source of capital gains.
Some provinces have also instituted ways to get at some of that money. In B.C., the province charges a fee that is based on the value of the estate, so the richer you are the more you pay. But that’s still nothing compared to the U.S.‘s estate tax, particularly at the high end. Estates in B.C. worth more than $50,000 pay 1.4 per cent of the value of the estate in “probate” fees – which, to grossly simplify matters, offer the court’s stamp of approval to the transfer of property on death. Ontario has a very similar system.
The Yukon is as good a place as any to live if you want to pass on your vast fortune to your children while minimizing the government’s take. Here in the territory, obtaining probate can cost as little as $140.
So far the idea of increasing taxes on death is not on the radar of any of the major political parties in our current federal election, so for the time being the inheritances of the Canadian soon to be wealthy are safe from the prying hands of the tax man. But there are philosophical and financial merits to the arguments of boosters of an estate tax, so maybe it should be.
Kyle Carruthers is a born-and-raised Yukoner who lives and practises law in Whitehorse.