Taxing Issues in Quebec
How low can you go? may be the chant often heard by limboists, but if you’re a Quebecker, chances are you’ve been wondering, How high can they go? in reference to the Quebec government’s recent plans to increase personal taxes.
In an effort to replace the $200 per taxpayer health contribution, the Quebec government recently announced changes that would see substantially higher marginal tax rates for top income earners as well as higher taxes for investors who earn dividend income or realize capital gains.
If the tax increases are enacted as proposed, Quebec will have the highest marginal tax rate in Canada for income-earners over $130,000, who will face a combined federal-provincial marginal rate of 52.2%, up from the current top rate of 48.2%. This rate would top both Nova Scotia’s highest combined marginal rate of 50% for income over $150,000 as well as Ontario’s recently announced high income rate of 49.5% for Ontarians who earn more than $500,000 annually. For the highest Quebec earners — those who make more than $250,000 — the marginal tax rate will hit 55.2%.
But the Quebec government isn’t only after ordinary income. It’s also attacking investors who try to earn higher returns through investing in equities by raising the taxes on both Canadian dividends and capital gains.
Currently, the top combined marginal rate in Quebec on dividend income is 32.8%. Under the new plan, that rate is scheduled to hit 50.7%. Given that the corporate income has already been taxed prior to distribution to its shareholders, imposing such a high rate on already-taxed income essentially dismisses the theory of integration for Quebec residents earning dividend income by effectively taxing the same income twice.
As for capital gains, the plan has the inclusion rate, now 50% of the capital gain, increasing to 75% for Quebec tax purposes. This would bring the highest marginal tax rate on capital gains in Quebec up to 35.4% from 24.1%.
According to a new C.D. Howe Institute study released earlier this week entitled, Killing the goose that lays the golden eggs: Impact of proposed tax increases in Quebec (available only in French), by Alexandre Laurin, associate director of research at the institute, the new plan could result in a Quebec government revenue shortfall of approximately $800-million annually, owing largely to the change in taxpayers’ behaviour that could be triggered by the proposed personal tax changes.
While the Quebec government maintains its proposed tax plan will be revenue neutral, Mr. Laurin states that “several empirical studies have shown that taxpayers react to higher tax rates in a way that minimizes their taxable income. The proposed increases would create much lower new tax receipts than the government expects.”
According to Mr. Laurin, what Quebec actually needs is to have a tax system conducive to wealth creation. “Over the long term, declining economic activity and investment would lead to the relative impoverishment of Quebec society,” he concludes.