Article content

Let’s pretend your boss promises you a big raise and a bonus, but you won’t actually receive either for 24 months. Now, imagine the government taxes you on that promise today.

Article content

Say the raise and bonus will eventually total $50,000. Even though you won’t see a dollar of it until two years from now, you must report the full amount on your current tax return. At an assumed 30 per cent tax rate, that means paying $15,000 well before you ever receive the money. What happens if your employer reneges on the promise? Shouldn’t you get your tax back?

Article content

Article content

Article content

Sound absurd? It is.

Article content

Article content

Modern income tax systems are built on a basic premise: you are taxed when you realize an economic gain, not when someone predicts you might receive one. Income must be measurable. It must be real. And it must be liquid, or at least presumed to be. The Haig-Simons theory of income would tax annual changes in net worth, but most countries sensibly favour realization to preserve liquidity, certainty and stability.

Article content

There are obvious exceptions to these goalposts, such as various taxation regimes on death and exit tax regimes when people are no longer subject to the taxing regime of a country because of loss of residency (or in the United States, renouncing one’s citizenship).

Article content

Wealth tax regimes — which are rare — are another exception and despite many lefties advocating for wealth taxes to solve society’s many problems, they are very ineffective because of their non-adherence to the basic pillars.

Article content

Many countries also have deemed income inclusions for certain types of income to prevent targeted abuse or avoidance. For example, New Zealand, through its foreign investment fund rules, and Canada, through its foreign investment entity and foreign accrual property income rules, impute annual income for certain types of foreign investments held by residents. Most countries have similar anti-avoidance rules that target otherwise available tax deferral.

Article content

Article content

Beyond the above exceptions, eyebrows are raised when tax proposals are put forward that challenge the basic pillars. Last Thursday, the Dutch House of Representatives voted to pass a proposal that, simplified, will tax Dutch residents at 36 per cent on actual investment returns, including unrealized gains on stocks, bonds and cryptocurrencies.

Article content

Article content

Certain types of assets, such as real estate and qualifying startups, will follow the normally accepted model whereby tax is only imposed when such assets are disposed of. The proposal still needs to pass the Dutch Senate, but if it does, it will be effective Jan. 1, 2028.

Article content

In a simple example, if a Dutch resident owns, say, Apple Inc. stock and it has increased in value by 50,000 euros over the year, but the resident still holds the stock in his portfolio, the Dutch tax authority will treat that amount as taxable income and impose a 36 per cent tax, subject to some minor adjustments.

Article content

What about future losses, analogous to the example above where the employer reneges on paying the promised amounts? Can they be carried back to the years where there were gains to recover taxes paid? It doesn’t appear so. Losses will be carried forward, not back. Ouch.