CRA: Canadians Will Pay Higher Taxes To Cover COVID Expenses

The CRA and federal government have borrowed relentlessly over the past few months. Investors should expect higher taxes in the future to cover this.

grow dividends

Image source: Getty Images

It’s no secret that Canada’s coronavirus response was fuelled by government debt. The government has now borrowed so much that investors and taxpayers should start preparing for higher taxes to pay it off soon. Here are some of the ways the Canada Revenue Agency (CRA) could mitigate the debt and what it means for your portfolio. 

GST hike

The goods and services tax (GST) was set at 7% when it was originally introduced in the early 90s. Later, the government reduced the rate to 5%, which is where the tax is today. 

Raising this tax back up is popular with some economists. A consumption tax is viewed as more fair since its impact is on non-essential goods. As wealthier households spend a larger portion of their income on non-essentials, this tax impacts them more. 

A hike in GST could impact high margin retailers such as Canada Goose. Even a few percentage points of higher taxes on the company’s expensive coats could impact their sales. Investors should keep an eye on this. 

Raise income or corporate taxes

Simply hiking the taxes on ordinary businesses and individual taxpayers would be a practical way to mitigate the debt burden we now face. In 2018, Canada had a tax-to- GDP ratio of 33.0% compared with the OECD average of 34.3%. This year, raising taxes on wealthy individuals and businesses could be politically popular. 

A higher corporate tax rate could impact the bottom line for several high margin businesses. Canada Goose, for example, paid an effective tax rate of 12.8% in the second quarter of 2020. A higher tax burden would leave less cash for the company to fuel its expansion overseas and could ultimately squeeze the stock price.

Reduce tax shields

Another potential way for the CRA to boost tax collection is to reduce or restrict popular tax shields. The most popular, of course, would be the tax-free savings account (TFSA). As of 2017, Canadians collectively held $276.7 billion in their TFSAs. While taxing this amount would be unpopular, investors should brace for a potential freeze on contribution amounts for the next few years. 

This means investors can deploy less cash to invest in stocks, which will ultimately squeeze stock valuations. 

Other ways of reducing tax shields could include raising the inclusion rate for capital gains, which means investors would book a higher portion of their investment profits as personal income for tax purposes. The CRA could potentially also eliminate the principal residence exemption, which would have an impact on residential real estate investment trusts. 

Bottom line

The CRA and federal government have borrowed relentlessly over the past few months. Their spending programs have kept millions of families and businesses afloat. However, the debt burden will eventually have to be mitigated with higher taxes from those who are still employed after the crisis is over. 

No matter how the government chooses to mitigate the tax burden, investors should prepare their portfolios for any eventuality.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canada Goose Holdings.

More on Investing

Arrowings ascending on a chalkboard

5 Canadian Stocks That Have Gained Value Year to Date

Although many Canadian stocks have sold off this year, and by a significant amount, here are five that have actually…

Read more »

Filling up at the gas pumps.
Energy Stocks

Gas Prices Are Hitting Record Highs: 2 Stocks to Buy Now!

Buy Suncor Energy stock, Canada's integrated oil and gas giant that's benefitting immensely, as gasoline prices continue to soar.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Bank Stocks

A Different Bank for a Comfortable Retirement

Want a comfortable retirement? Investing in this different bank today can help you reach that goal through a solid income…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Top Canadian Dividend Stocks to Buy and Hold for the Long Term

These Canadian companies have been paying dividends for more than four decades and have been consistently growing the same.

Read more »

Bank Stocks

Bank of Montreal (TSX:BMO) Raises Dividend: Is the Stock a Buy?

Bank of Montreal is about to get a lot bigger. Should you buy the stock?

Read more »

man window buildings

Where Do Economists Expect Canadian Housing Prices to Fall Most?

Canadian housing prices may be falling -- in some regions, more than others -- but there are still plenty of…

Read more »

Business success with growing, rising charts and businessman in background
Energy Stocks

3 Hydrogen Stocks Set to Become Major Multi-Baggers

These three hydrogen stocks could certainly achieve multi-bagger status in the years to come after they overcome the present-day hurdles.

Read more »

Stocks for Beginners

Starting an Investment Portfolio? Buy These 3 Stocks!

Interested in getting a start in the stock market? Buy these three stocks today!

Read more »