COLUMN

Gentle persuasion for the rich

Diane Francis June 15 1987
COLUMN

Gentle persuasion for the rich

Diane Francis June 15 1987

Gentle persuasion for the rich

COLUMN

Diane Francis

Donald Harvie is just about down to his family’s last few million — and that’s the way he

wants it. His father, Eric Harvie, a lawyer from Orillia, Ont., became one of Canada’s richest men after he purchased mineral rights to land near Edmonton in the 1940s for a reported $12,000. After two of North America’s biggest oilfields were discovered there in 1947 and 1948, partnership deals with tenant oil companies yielded Eric a handsome profit, and by 1973 he had earned $80 million from the sale of his interests. In 1955 he created the Devonian Foundation, named after the geological formation where oil was struck beneath his acreage, and gave away millions of dollars. And since he died in 1975, his son, Donald, has continued that tradition of philanthropy.

So far, the foundation has spent more than $75 million, mostly by supporting such innovative projects as the architecturally unique block-long atrium in Calgary called Devonian Gardens, and the Niagara Institute for international studies in Niagara-on-theLake, Ont. “Dad felt that if he did nothing, much of his fortune would go to the government in estate and succession duties,” said Harvie, a successful Calgary oilman and chairman of BP Canada Inc. “But he also had a strong philosophy that it was all just a windfall and he had an obligation to see it returned to benefit Canadians.”

As Ottawa prepares for another round of tax reform, the lesson to be learned from the philanthropic Harvies has not hit home. Before Jan. 1, 1972, Canada’s wealthy families faced a heavy toll on the transfer of their wealth: about 30 per cent of those estates valued at more than $250,000. Like Eric Harvie, however, they could avoid this by donations through foundations or trusts. But after Jan. 1, 1972, federal wealth, estate and gift taxes were eliminated, and provincial succession duties began to melt away: Canada is now one of the few countries without such taxes—and with no plans to resume them. “We have looked at an estate tax, but frankly it is not an effective form of taxation,” Minister of State for Finance Thomas Hockin told Maclean's recently. “What is actually collected is a very small amount.”

Still, Ottawa should reintroduce taxes on wealth, particularly since it is almost forced to prune income-tax rates

in lockstep with U.S. tax-reform cuts instituted last January. That will mean shortfalls in taxation revenues. Indeed, U.S. tax reform introduced even stiffer estate tax measures, closing up loopholes and making it possible for the government to seize up to 100 per cent of estates. True, estimates are that such taxes account for less than one per cent of Washington’s revenues. But that is not the point. These taxes are rarely paid because governments allow the rich to divert the money into “worthwhile causes.” Billions of dollars flow to charities, churches, universities, research, patronage of the arts or projects in the fields of education, religion or medicine.

That saves governments money by easing the pressure for government sponsorship. Indeed, estate taxes are one of the most useful levers a society can employ: they reduce concentration of economic power, redistribute wealth

Estate taxes are rarely paid because governments allow the rich to divert their money into ‘worthwhile causes'

and force even the stingiest rich person to subsidize some of the most worthwhile causes around. “We tell our clients, ‘Do you want to choose the charity or do you want to let the government choose?’” said John Sanderson, tax partner with Arthur Young & Co. in Buffalo, N.Y. “That is the choice for the wealthy in this country.”

In the United States, an individual can give away as tax-free gifts $10,000 (U.S.) annually to any beneficiary, including relatives, and up to $600,000 upon his death tax-free in assets, which include homes. Above that, post-reform federal tax rates will range from 15 to 28 per cent. There are also state death duties such as New York’s, where anything above $108,338 could be taxed by a combined rate of as much as 60 per cent. Such onerous duties undoubtedly encourage a massive diversion of tax revenues to worthwhile causes. In fact, U.S. museums, art galleries, performing arts companies and college and university athletic departments routinely employ full-time “directors of planned giving”—professionals who compete for

But despite the obvious benefits, the death of estate taxes has not been a political issue in Canada. Their disappearance began in 1967 in Alberta, which began to refund the provincial share of estate tax money. The reason: Alberta’s ranching and oil communities were concerned that estate duties were so onerous that families would sell out during their lifetime and take the profits—even though the exemption of $250,000 excluded all but rich ranchers and oil investors. In 1972, Ottawa scrapped estate taxes completely when it introduced capital gains taxes charged when assets changed hands, for example at death. Other provinces then felt forced to shed their succession duties in view of the capital gains burden—and also because their well-heeled residents were shifting assets to Alberta to take advantage of the tax break. The abandoning of succession duties spread until the last province, Quebec, gave them up in 1985.

Capital gains taxes are supposed to be paid on the difference between the value of assets when they are disposed of and the price paid for the assets or their value as of Jan. 1, 1972—when the tax began. But under the capital gains exemption, to reach $500,000 per person by 1990, principal residences are excluded for tax purposes, and there is concern that the wealthy citizens will never pay capital gains taxes, no matter how large their empires, unless loopholes disappear. For one thing, back in 1972 cunning tax lawyers began transferring huge empires into trust funds for heirs, called “inter vivos trusts.” Rules allowed them to defer capital gains taxes for 21 years from the inception of the trust. “Unfortunately, there are ways around it that any good lawyer knows,” said Donald Harvie.

The point is that the rich are simply not pulling their weight in Canada. That fact is made even more annoying by the twin whammy of government deficits and pressure on Ottawa to institute copycat tax-rate cuts. If we must follow the Americans down the taxation road, then let us do so completely by reintroducing stiff estate and gift taxes, or by closing some of the trust loopholes that may allow indefinite deferral of capital gains taxes. While apparently not under consideration, such taxes are a meaningful way attack concentration of power, level the taxation playing field and take pressure off government spending.