I suppose that only some have heard of Morton’s Fork. Be aware, a version of it may appear soon.
Archbishop of Canterbury and later Cardinal, John Morton was Chancellor of the Exchequer under King Henry VII. He developed a unique way to determine who should pay taxes. If you had an ostentatious life style, you should pay taxes. If you did not have the lifestyle, you were obviously saving money and so could afford taxes. It seems there were few that did not fit the criteria, and while it may have been unfair, the plan did get the country out of the debt that arose under Richard III.
Modern governments might like that. Do we know, today, of any governments that need to get out of debt? Maybe several.
What they need is a perfect tax. Since income taxes already gather in large amounts from those with the ostentatious lifestyle, we can leave that side alone. But what of the frugal and tax wise. How are we to capture their necessary contributions for the treasury? By a tax on their estates of course.
Why is an estate tax a perfect tax? It meets all of the political requirements of a perfect tax:
- It applies to only a few people. Make the threshold $2,000,000 or so and only a tiny minority will need to pay. Even at $1,000,000 it would eliminate a lot of estates.
- Rich people can afford it, or so the government will say.
- It is imposed while money is moving around. It is like a payroll deduction. You don’t really notice it as much as writing the checks.
- It meets the “social justice” sophistry that all the money people make and keep is dependent on society and this is just a way to pay for that infrastructure.
- The people who owe the tax are dead and therefore without political influence.
- It would raise a lot of money.
How much would it raise?
The income from the Liquor Control Board of Ontario, and the Lottery Corporation together is around $3 billion per year. What would you need to believe to get that much from an estate tax? This is a guess, but if we assume that in Ontario, the Estate Administration Tax (EAT) is around $150,000,000 now then a tax rate averaging 30% would raise $3,000,000. If we believe, as Barry Corbin does that a lot of EAT revenue has been avoided by careful planning, then the rate might be considerably less. See OBA Re EAT. If the base is really 3 times bigger as he suspects, then 10% might do. The estate tax base will be much more difficult to avoid than is the EAT base.
No matter how you look at it, and whether the income is $3 billion or even half of that, it is unlikely the government will leave it alone for long.
The current wisdom is that there is $1 trillion to transfer in the next 20 years or so. It is not hard to imagine that governments, both provincial and federal, will want some, maybe a lot of it. I am reliably informed that the federal government has it on their agenda and my imagination is not good enough to expect that the province does not.
No estate tax ever appears without a complementary gift tax.
As well, estate taxes tend to materially reduce estate liquidity and that can cause forced sales of non-liquid assets. Accordingly, forward defensive thinking will be important.
Bear in mind that it is never good to panic, but if circumstances force you to panic, then panic first.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org