It was 1917 when Canadians were first introduced to the income tax. Now, I wasn't around at the time but I do know that the income tax was intended to be a temporary measure to raise revenue for the war effort. If there's one thing we've all learned since that time it's that there is no such thing as a temporary income tax.
Fast forward to April, 2012, and hear Dalton McGuinty, Premier of Ontario, utter similar words of consolation as he introduced a new tax on wealthy Ontarians on Monday. In an effort to avert an election and gain the support of the provincial NDP, Mr. McGuinty agreed to levying an additional 2 per cent tax on income over $503,700 starting July 1, 2012. The measure is intended to raise an additional $470-million annually to be added to the general revenues of the province. The measure is supposed to be temporary and, according to Mr. McGuinty, will be done away with once Ontario's budget is balanced.
One has to wonder how in the world this is going to help the province eliminate a deficit that, in the current year, is expected to be $15.3-billion.
If I can speak based on experience for a moment, let me say that the wealthiest individuals and families in Ontario – and in this country – do recognize that they are privileged and, from my experience, are more than willing to pay a higher percentage of their income in taxes than others with lesser means. But make no mistake, wealthy individuals also care very much about paying more tax than they think is fair and reasonable.
The change that the Liberals have proposed in Ontario will increase the highest marginal tax rate for the 23,000 Ontarians that will be affected to a whopping 49.5 per cent. These Ontarians haven't seen tax rates that high since 1998, and you might recall that the 1990s were a decade characterized by aggressive tax shelters and offshore tax planning brought on by very high marginal tax rates nationwide at that time.
What are wealthy Ontarians likely to do? Some will leave the province. How can I be sure? Simple. It has been happening for many years – particularly when wealthy individuals expect to receive large taxable amounts from different sources – perhaps the sale of a business, or when expecting significant investment income. Where do they go? Alberta. Or they leave the country (which is not difficult to do when you can carry on business from any corner of the globe fairly easily today).
Others who decide not to leave the province will undoubtedly look to their tax advisers to develop strategies to keep taxable income below the new highest marginal tax bracket. These strategies will include the increased use of family trusts where it's quite possible to shift income to the hands of lower-income family members. It should be expected that wealthy Ontarians will be reviewing how they use their family trusts, and many will consider the use of testamentary trusts in their wills, which will allow their heirs to minimize the amount of income they eventually have to report on their own personal tax returns. We might even see the introduction of new tax shelters designed to keep taxable income below the new highest marginal tax bracket.
The new, higher marginal tax rate proposed comes dangerously close to the psychological threshold of 50 per cent where individuals become extremely frustrated with the prospect of paying more to the government than they keep for themselves. Mr. McGuinty is only fooling himself if he thinks that wealthy Ontarians will do nothing about it. Perhaps the Liberals should focus on making friends with these people, who create a significant number of jobs for Ontarians, and focus less on making friends with other politicians who, like themselves, seem to care more about gaining or keeping power.
Tim Cestnick is president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.