Evidence of meeting #150 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was income.
A video is available from Parliament.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I hear you. I'm hoping my colleagues on the Liberal, NDP and Bloc side of this committee are hearing you as well.
One thing that's interesting is that the finance minister made it sound like it wasn't that big a deal. Only 0.13% of Canadians are going to be hurt by the increase in this inclusion rate for the capital gains.
Do you consider yourself to be among the wealthiest 0.13% of Canadians?
Plumber/Business Owner, As an Individual
No, definitely not. I'm sitting here working.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Yes.
When it comes time for you to sell your business and your building, on the investments you've saved up for your retirement, you will wind up paying tax at the two-thirds inclusion rate and your plan was based on the 50% inclusion rate.
Do you kind of feel like the rug has been pulled out from under you?
Plumber/Business Owner, As an Individual
Well, I feel like everybody in my age category who did an alternate pathway, who didn't work hard to buy a business and gainfully employ people to get ahead, is going to retire before me and I'm going to have to work longer.
You talk about fairness. It's just not fair. To me, it doesn't make sense. I think people have lost touch there. I don't think they really understand how many people like me there are.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Do you feel unfairly targeted by this change?
Plumber/Business Owner, As an Individual
I'm not sure I'm targeted; however, I do believe it's unfair. I just think that if they actually knew.... If they wanted to call and talk to me about it, I can explain to them my thoughts and my journey. It just doesn't make sense.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Yes. You're doing a very good job of that right now, by the way, and it really matters.
Now, just out of curiosity, one thing about business people is they're risk takers. You may want to grow your business or have plans to grow your business.
Do you think increasing the price you're going to have to pay to the federal government on your gains is going to make you more or less inclined to make further investments in your business?
Plumber/Business Owner, As an Individual
No, it's stifling. It doesn't make sense for me. Why should I put more effort in and take more risk only to pay more taxes? It makes no sense. I don't have an economic background. I don't read reports on a regular basis. I just understand being the person here working hard. I started out sweeping the floors and went all the way up, and it just seems like now.... What did I do that for? I have no words, really.
Thanks very much for listening, everybody. I am open to talking to anybody off-line who is actually making this change if they want to just realize the effect they're having on people and families.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Mr. Stefanec. We appreciate it, and I'm sure there'll be more questions.
That's the time, MP Morantz.
We have MP Sorbara next, please.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you, Chair, and thank you to all the witnesses for being here this morning on a very important discussion that we're having.
I'd like to start off with Mr. Stanford.
Jim, welcome to you. In your comments, you spoke of a “fairer” Canada and a “healthier” Canada.
From my understanding, a fairer Canada would mean a tax system that is more neutral and efficient, and a healthier Canada would speak to the choices we've made as a government to invest in dental care, pharmacare, early learning, national $10-a-day child care, the Canada child benefit and other programs. That, to me, means a healthier Canada.
I want you to comment on those two themes that you brought up in your remarks.
Economist and Director, Centre for Future Work
I'm glad you picked up on those two words. I chose them carefully for that exact reason.
We aren't just discussing a tax measure in isolation. The purpose of our tax system is to fund the government's ability to sustainably support the programs that the government delivers. The additional revenues that will come from this reform and how we treat capital gains are clearly intended to support the additional program initiatives that were also announced in the budget. I think several of those are very important, both for a stronger economy and a healthier one, as you note.
School lunches is an example. Canada is one of the only industrial countries in the world that provides no assistance for school lunches, particularly for families with low incomes. That would clearly improve both physical and mental health.
The dental care program, which is rolling out, obviously with the leadership of your NDP colleagues, is clearly going to improve health among older Canadians and lower-income Canadians. The reports that we're receiving from millions of people signing up for that program indicate clearly that it's meeting an unmet need. We could say the same thing about the disability benefit and some of the affordable housing measures, etc.
Those programs are associated with revenue flows and expenses that are, I think, modest in the grand scheme of the federal budget and the overall economy, but they are important. In order to meet the government's fiscal targets at the same time, they have to be funded. In that regard, the connection between the two is important.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I want to put on the record, as an economist and as someone who spent over 20 years working both on Wall Street and on Bay Street, that I look at the change in the capital gains inclusion rate as the right thing to do. The IMF has stated, just to put this on the record, “The...inclusion rate improves the tax system’s neutrality with respect to different forms of capital income and is likely to have no significant impact on investment or productivity growth.” Following that, you can read the remarks from the University of Toronto's Michael Smart, a professor of taxation economics.
I've often argued that we needed to change or do away with a thing called “surplus stripping”. It's basically a tax avoidance strategy where folks take advantage of the differential tax rates in our system. A tax system needs to be neutral, efficient, fair and progressive. This change in the capital gains inclusion rate, not the effective tax rate, moves us in that step. For a government showing responsible leadership, this is the right thing to do from a tax system...to make it more neutral, efficient, fair and progressive and to help middle-class Canadians and seniors. Two million seniors have signed up and been approved for our dental care program, and more than 200,000 have gone to see the dentist. It provides for pharmacare, diabetes medication, contraceptives for women, child care, the national food benefit, things that Canadians need and use every day.
I would like to go to Mr. Stefanec next.
Thank you for opening your business. Thank you for being in the trades. My understanding is that you're in the plumbing business. In Canada, we have a small business tax with a very favourable rate of 9% that small businesses enjoy. That is something we reduced from 11% to 9% in the early part of our mandate.
In addition, with regard to a corporation, you'll have different forms of income in your corporation. You'll have interest if you invest in that, as well as dividends. You'll also have the opportunity to use the registered retirement savings plans and TFSAs for your retirement.
I just wanted to confirm whether you have used an RRSP program or a TFSA program to also fund your retirement.
Plumber/Business Owner, As an Individual
As a small business owner, I basically look at how things work out at the end of the year. If there is money left over, then it's usually reinvested. However, a small portion would be put towards retirement.
On the personal side, because it's a corporation and I'm an employee of my business, like everybody else, I pay my taxes under my bracket. Basically, I'm able to use that for RRSPs, provided that my family is taken care of and that all the bills are paid. It's probably no different than yourself or what have you. The only thing is that I'm not a public servant. It's all private. That's all.
Does that answer your question?
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Yes. You've done a great job of answering the question.
I wish to thank you for being here. I appreciated your testimony, but we really need to understand that small business corporations in Canada have a tax rate of 9%. When you're running a corporation and you want to pull money out of the corporation at the end of the year, then you make your decisions about investing in your RRSP, investing in your TFSA or reinvesting in your business and growing it. Of course, I love to hear about that as well.
Liberal
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
I would like to welcome all the witnesses and thank them for being here.
The topic of today's meeting is a topic we want to study carefully. So we denounce the fact that the measure will come into force next week while the bill will not be studied until next fall. We don't even know when we'll be able to study it in committee. This is not the right way to do things, even though Mr. Godbout reminded us that it has been done in the past.
I also find it quite paradoxical that, in the past, the Conservative Party raised the inclusion rate to 75% and the Liberal Party lowered it to 50%. The roles seem to be reversed this time.
Mr. Godbout, thank you for being here.
It is often said that, for capital gains, an inclusion rate of less than 100% is chosen for more fairness, in order to fight inflation. What do you have to say to that kind of an argument? What rate would make that fairness possible, from that point of view?
Professor, Chaire en fiscalité et en finances publiques, Université de Sherbrooke, As an Individual
It is said that preferential treatment should occasionally be given to capital gains, since a portion of inflation is part of the sale price. That's true. It is less true, however, if the sale is only made after one or two years. However, it will definitely occur if the holding time is significant.
The advantage is that the capital gain is taxed only on disposition. Wage earners are taxed on their pay every two weeks, whereas the person making a capital gain can wait, or even plan, for example, by spreading it out over two years. So the inflation portion can be offset by the fact that the gain is carried forward over time.
That said, measures such as those that apply to principal residences could have been included, meaning that, if they are sold within the first 12 months, the proceeds of the sale do not benefit from the capital gains exemption on the sale of a principal residence. That way, it could have been established that the inclusion rate remains full on dispositions made in the first 12 months. It's not in the bill, and I don't want to add confusion, but it could have been done. This is the kind of measure that may exist in other jurisdictions.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you very much.
A point was discussed around the table a few minutes ago. The government says that this measure will target the wealthiest people, 0.13% of Canadians, which represents 40,000 people. We are concerned that middle-class families selling their property would be among those 40,000 wealthiest people, but only for the year of sale, not the year before or the year after.
I understand that you've already done longitudinal studies on this issue. Do you know what percentage of the people affected in other years would not be part of the 0.13% or 1% of the richest people? Do you have any information on that?
Professor, Chaire en fiscalité et en finances publiques, Université de Sherbrooke, As an Individual
I don't have any exact figures in front of me, but I can give a more general answer. A long-term analysis does indeed show that people are in that group just once, and it is because they sold their property.
In reference to the statistics earlier, Mr. Stanford said it was mostly concentrated among wealthier people. In the year that a farmer sells his farm, statistically speaking, he is actually considered to be one of those wealthier Canadians. That's why the study conducted a few years ago for the Canadian Tax Journal provided some nuance. I cannot tell you what percentage of people, statistically, are in the category of wealthier people just once. I can say however that it is often in the year of their death.
I don't know if this is less important, but this is nonetheless a way of redistributing wealth when properties are passed on to the next generation. Even if there are not many deceased people among taxpayers, they account for a significant share of the gains realized in a given year. Those were also the findings of the study we conducted a few years ago.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you very much. The committee will have to look at the information you provided.
Now I would like to talk about the exemptions for SMEs or businesses. The first $1.25 million is excluded from capital gains, and that is indexed. If I understand correctly, there is an additional amount of $2 million for which the inclusion rate is just 33%. From my understanding, that is an incentive for entrepreneurs. That incentive would be for the founding shareholder only, the person who helped found the business. So the other owners of a business that is sold would not qualify for that additional $2 million measure.
We do not have the bill before us, of course, and the government says we will not have the draft bill until the end of July. We can look at it then.
From my understanding, the $1.25 million in addition to the $2 million benefits businesses realizing gains of less than roughly $5 million. I don't know if you have had a chance to examine that and go through the ways and means motion, but I would like to hear your thoughts on that.
Professor, Chaire en fiscalité et en finances publiques, Université de Sherbrooke, As an Individual
Thank you for the question.
This relates to the entrepreneur who is here, Mr. Stefanec. When he goes to sell his business, $1.25 million will already be tax exempt when he sells his shares. If he owns the business jointly with his spouse, $2.5 million would be tax exempt. Tax specialists often multiply the $1.25 million exemption by adding children to the business structure. The amount of that exemption has also just been increased with the announced change to the capital gains exemption rate. It was supposed to be $1 million this year, in 2024, but it will increase to $1.25 million on June 25, as you indicated.
The other incentive measure in Canada is in fact more restrictive because it will apply to business founders only. If people join the company later on, they will not qualify. According to the original wording—I don't know what the final wording of the bill will be—this also prevents adding people who are not really involved in the business, such as children. The rate offered will be half of the capital gains inclusion rate. So if the inclusion rate is 67%, the tax rate will be 33%. So that will be more advantageous than at present.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Professor Godbout.
We're well over time.
Thank you, MP Ste-Marie.
Now we go to MP Davies.
Go ahead, please.
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you.
This is for Ms. Bruske and maybe Mr. Cochrane, the senior economist for the CLC.
Ms. Bruske touched on this. In April 2024, Mr. Cochrane, you co-authored a report entitled “Canada's shift to a more regressive tax system, 2004 to 2022”, which found that in 2022 the total tax rate for the lowest household income decile—that's the bottom 10%—was 35%, whereas the total tax rate for the top 1% was 24%. Moreover, the report found that the top 5% of Canadians paid a lower rate in 2022 than the bottom 95% of Canadians did, with the top 1% paying an even lower rate.
Can you explain why Canada's tax system imposes a higher total tax rate on the bottom 95% of households than on the top 5%?
Dr. D.T. Cochrane Senior Economist, Canadian Labour Congress
No, because there's no justification. There is zero justification for that. It's completely contrary to how our tax system is supposed to work. So as to the why, no, I can't answer that.