Taxing the 1%: A Cautionary Tale for Canada Finance Minister

  • Quebec saw high-income earners depart after tax increases
  • Trudeau's Liberals won majority last month on similar pledge

As Bill Morneau takes over the reins of Canada’s finance ministry, among his thorniest tasks will be to implement Prime Minister Justin Trudeau’s pledge to introduce a higher tax rate for the country’s top earners.

Data released by Statistics Canada this week show the costs of moving ahead.

The agency’s report on Canada’s top 1-percent tax filers incorporated for the first time the Quebec government’s decision to pursue a similar strategy in its 2012 budget, and the results aren’t encouraging.

Quebec was alone among the country’s 10 provinces to see a decline in filers who cracked the top 1 percent of earners in 2013, Statistics Canada said Tuesday from Ottawa, with its share of 1-percenters falling to the lowest in at least 30 years. The number of Quebeckers among Canada’s top earners fell 5.8 percent to 40,825, while increasing in the rest of the country, the data show.

Higher taxes for high earners, it turns out, prompts them to move.

“The Liberal government would be off to a very bad start if they go ahead with their tax plan by raising the top rate,” Jack Mintz, a fellow at the School of Public Policy at the University of Calgary, said in a telephone interview.

Quebec Exodus

The exodus from the mainly French-speaking province, Canada’s second-most populous, followed a budget measure introduced in November 2012 to create a new top tax bracket for people earning at least C$100,000 ($77,000), lifting the top tax rate to 25.75 percent, from 24 percent. Adding the new federal taxes will make many of Canada’s provinces some of the highest taxed jurisdictions in the world for people earning C$200,000, well above a 50 percent top marginal rate.

That’s raising some alarm bells in corporate Canada.

“He’s got to be very careful that he watches the competitiveness of our whole tax structure,” Manulife Financial Corp. Chief Executive Officer Donald Guloien said in an interview last month at Bloomberg’s headquarters in New York. “It’s one of the reasons Canada has done so well economically is that we have attracted business and talent while U.S. tax rates are going up.”

Liberal Plan

Morneau and Trudeau argue that tackling inequality is ultimately good for business. The governing Liberals proposed creating a new tax rate of 33 percent for people earning more than C$200,000 a year, up from today’s 29 percent, while lowering the tax rate for people earning between C$44,701 and C$89,401 a year to 20.5 percent from 22 percent. The promise helped them win a majority in an Oct. 19 election and the government doesn’t look like it will back down. House Leader Dominic Leblanc told reporters in Ottawa the government wants the tax measures to be in place by Jan. 1.

“The long-term success of Canada, as well as in business, includes making sure that all Canadians are successful,” Morneau said in an August interview. “So if the rewards of that success only go to a favored few, we will end up with a challenge down the road.”

A bigger challenge may be if the favored few take the lead from Quebec’s high earners and decide to move elsewhere.

(A previous version of the story was corrected to fix spelling of Manulife Financial Corp.)

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