Allan Lanthier: The Liberals want to impose a minimum tax? We already have a minimum tax

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The Liberals issued their election platform Wednesday and it is a doozy. Its 82 pages contain more than 100 spending promises, as well as new taxes to ensure that everyone “pays their fair share.” The most curious item on the tax revenue side is a proposed minimum tax of 15 per cent for individuals in the top bracket: “curious” because Canada already has a minimum tax: it was introduced in 1986 — 35 years ago.

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The platform says the Liberals will “create a minimum tax rule” so that everyone in the top bracket pays at least 15 per cent — the regular federal rate in that bracket is 33 per cent — “to remove their ability to artificially pay no tax through excessive use of deductions and credits.”

Say what? We already have a 15 per cent minimum tax, introduced in 1986 under a Conservative government for precisely the same reason. The tax ensures that high-income individuals pay additional tax if they use too many of the many tax incentives created by Parliament over the years.

Individuals start with their taxable income as otherwise determined, and add back various tax deductions and preferences, such as the non-taxable half of capital gains, stock option deductions, and losses from tax shelters. A 15 per cent tax then applies to this adjusted amount. But — and this may be critical to understanding the Liberal proposal — tax credits including the donation credit then reduce the amount of the minimum tax.

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So what could a new tax do that the existing tax does not? The word around Ottawa is that charitable donations could be one of the targets. The Liberal proposal might deny donation credits for individuals who are already paying the minimum tax. The denial might also hit high-income philanthropists.

Assume that after a successful career Janice has all the money she needs. She earns $1 million a year and donates $750,000 to charity (the donation credit is capped at 75 per cent of income). Her federal tax on the remaining $250,000 (at 33 per cent) is $82,500 — which gives her a tax rate of about eight per cent on her $1 million of income.

If the Liberal proposal applies to Janice and disallows donation credits, she would now owe a minimum tax of $150,000 for an average tax rate of 15 per cent. As a result, Janice might well decide to slash her donations so her federal tax under regular rules was $150,000, as well.

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What in the world were the Liberals thinking? My guess is that they felt compelled to criticize high-income earners as part of their platform. But with no appetite for substantive measures — such as an annual wealth tax — they settled on virtue signalling: tweaks to a minimum tax we already have.

The inspiration for the proposal might well be Warren Buffett, who has come under fire in the United States for “avoiding” taxes by using charitable donations. It has been reported that, even though he has massive wealth, he pays very little in U.S. federal income tax. And one of the reasons is his charitable giving.

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Buffett has given about US$100 billion to five foundations since 2006 and, in response to a question at his company’s annual general meeting in 2010, he said “If you want to give away all of your money, it’s a terrific tax dodge.” But is it really a “dodge”? Should he really be taxed on money he doesn’t use himself but gives away to worthy causes?

Buffett has said he prefers to hand his money to charitable organizations rather than to the government. That may be part of our ballot box question on September 20, whether it relates to child care, family income, or charitable donations. Do you want the government to introduce massive tax-and-spend programs? Or would you prefer that individuals take on more personal responsibility for spending decisions? The answers to those questions may determine how some of us cast our votes.

Allan Lanthier is a retired partner of an international accounting firm and has been an advisor to both the Department of Finance and the Canada Revenue Agency.