Ahead of federal budget, Morneau says world should follow Canada’s tax-the-rich plan

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Finance Minister Bill Morneau is telling his G20 colleagues that taxing the rich is good economics, just days before he releases a second budget that must keep Canada competitive as the United States promises massive tax cuts.

Speaking in Frankfurt, Germany, on Thursday, where finance ministers and central bankers are gathered for an international summit, Mr. Morneau highlighted the Canadian government's efforts to prioritize the middle class.

In a speech, Mr. Morneau claimed that other countries have been very interested to hear about Canada's economic plan since it was first discussed with them at the 2015 G20 summit in Antalya, Turkey.

Opinion: Another broken promise: Tax cuts for the middle class

"At the time, people looked at our plan for more generous and means-tested child benefits, tax increases for the rich and tax cuts for the middle class as a bit of a curiosity," he said, according to a copy of his remarks. "I think we can all agree that curiosity has been satisfied over the last year or so."

Mr. Morneau's short speech made several references to ensuring the gains of economic growth are not concentrated in the pockets of the wealthy.

The minister's March 22 budget is expected to reveal the initial results of a year-long review of federal tax credits, which had a goal of eliminating targeted tax breaks that were ineffective or that delivered benefits that were skewed in favour of the highest-income earners.

However, business groups have been urging the Liberal government not to raise taxes further, warning that such a move could place Canada at a competitive disadvantage in light of U.S. President Donald Trump's pledge to support a "massive" tax cut for the middle class.

The government appears to have budged in response to those concerns. As the Globe reported last week, sources say that the review of tax credits will continue beyond the budget. That suggests that while some credits are likely to be eliminated in the budget, more complicated tax changes could be recommended for further study and consultation. That would buy the Canadian government time to see what emerges from the United States before adopting major tax reform.

The Liberal Party platform estimated that this review of tax credits could raise $3-billion a year in new revenue.

Some observers expect that credits introduced under former Conservative prime minister Stephen Harper are most likely to be eliminated in the short term.

Still, the lack of public clarity from Mr. Morneau on his tax-credit plans has fuelled speculation on Bay Street that tax hikes on investment income could still be on the table.

Mr. Morneau's comments were made at the Institute of International Finance G20 conference. The formal meeting of ministers and central bankers from 20 of the world's leading economies is scheduled for Friday.

In his speech, Mr. Morneau said the budget will focus on helping Canadian workers upgrade their skills throughout their careers in an economy where the skills that are in demand are changing rapidly.

"I will be confirming that Canada plans to continue doing what confident, optimistic countries do – invest in our people, our communities and our economy," he said. "I will also be taking steps to create a culture of lifelong learning, helping people develop the skills they need at every stage of their life to succeed in the new economy."

The government has made clear in recent days that the budget's theme will be heavily focused on skills training, innovation and promoting long-term growth.

Ian Russell, president and CEO of the Investment Industry Association of Canada, said Mr. Morneau's repeated statements about stimulating economic growth leaves him optimistic that the government won't introduce major hikes on investment income in the budget.

Mr. Russell said higher taxes on dividends or capital gains would run counter to the government's pledge of boosting innovation by attracting foreign capital and talent. He also challenged the argument that new taxes on investment income would target the rich.

"There's a lot of retired people that have blue-chip, dividend-paying stock and they're certainly not rich. They're the middle class that he's talking about and you would hit them pretty hard if you took the dividend tax credit away or you reduced it," he said. "I don't think he's going to do it."

The government has already imposed a new 33-per-cent federal tax bracket on income over $202,800, which produces a combined top tax bracket of more than 50 per cent in six provinces.

Bank of Montreal chief economist Doug Porter said in a note Thursday that being in the top tax bracket does not mean Canadians can live large in hot housing markets like Toronto.

"Even people who nearly qualify for the top 1 per cent of all incomes and will be paying over 53 per cent in personal marginal tax rates – and would presumably be considered 'rich' – are at best able to afford a semi-detached home on the fringes of Toronto, or maybe a low-end detached home verging on tear-down status," he said. "Now just imagine the predicament a more typical couple of more modest means faces in the current market environment."

The federal review of tax expenditures was announced in last year's budget alongside a pledge to give the Canada Revenue Agency more money to fight offshore tax evasion. The G20 has been co-ordinating efforts to improve the sharing of information between countries in an effort to catch and discourage tax evasion. Mr. Morneau's speech Thursday encouraged the G20 to continue these efforts.

"This principle of equality and fairness also applies to another area that is of critical importance to the G20, and that is the issue of tax fairness, closing loopholes and fighting international tax evasion," he said. "This is an issue Canada takes very seriously and is working hard to address in collaboration with the G20 and other countries around the world, so that we can bring tax fairness to our middle class."