Finance Committee on Sept. 17th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 151 of the Standing Committee on Finance.

Welcome, everybody, to this session.

It's great to be back. I see that everybody is here in person today. I believe that everybody is a veteran of this committee, although we do have one new member. Pat Kelly has joined our committee.

Welcome, Pat. It's great to have you here.

Our witnesses, though, are all virtual today.

Before I begin, I'd ask that all in-person participants read the guidelines written on the updated cards on the table. The witnesses don't need them. These measures are in place to help prevent audio feedback incidents and to protect the health and safety of all participants, including the interpreters. You'll also notice a QR code on a card that links to a short awareness video.

Today's meeting is taking place in a hybrid format. All witnesses have completed the required connection tests in advance of the meeting, although, members, we are having some technical difficulties with some of the witnesses. We are trying to work those out before we get into opening statements and then into questions.

I would like to remind participants of the following points. Please wait until I recognize you by name before speaking. All comments should be addressed through the chair. Members, please raise your hand if you wish to speak, whether participating in person or via Zoom. The clerk and I will manage the speaking order as best we can.

Pursuant to Standing Order 108(2) and the motion adopted by the committee, the committee today is resuming its study on the changes to capital gains and corresponding measures announced in budget 2024.

Now I'd like to welcome our witnesses. As I said, they are appearing virtually, so you'll find them on the screen.

From the Canadian Centre for Policy Alternatives, we have the senior economist Marc Lee joining us. From the Confédération des syndicats nationaux, we have François Bélanger, adviser and economist, as well as Yvan Duceppe, treasurer. From the Fédération des chambres de commerce du Québec, we have Philippe Noël, vice-president, public and economic affairs. Joining Philippe is Hubert Rioux, economic adviser. Our witness from NOW Housing is Matt Lubberts, president. He is now connected, which is great.

Witnesses, you'll have up to five minutes for opening remarks. Then we will proceed to the rounds of questions.

At this time, I'll welcome our first witness to make those opening remarks. We are starting with the Canadian Centre for Policy Alternatives, and that is Mr. Marc Lee, please.

[Marc Lee, Senior Economist, Canadian Centre for Policy Alternatives]

Hi. Thank you, Mr. Chair.

Thank you to the committee for the invitation to speak before you.

I'd like to speak in support of the budget's move to increase the inclusion rate for capital gains to 66.7% for gains larger than $250,000.

I'd like to make five points.

First, in my view, the inequality of income and wealth in Canada is too high. A fair and decent society should have neither extreme of obscene wealth nor desperate poverty. Progressive income taxation—in particular, taxation of the wealthiest—is a central means by which we can reduce inequality, provide adequate shared public infrastructure and services, and create opportunities for all to live a decent life. This is reflected in the tax principle of vertical equity: that those with greater ability to pay should pay a greater share of their income in taxes. This fairness, by design, is best implemented at the federal level.

Second, the unequal tax treatment of capital and labour income exacerbates inequality and is part of the problem. My recent tax incidence study with D.T. Cochrane, “Canada's shift to a more regressive tax system, 2004 to 2022”, found that “the mix of federal taxes is progressive up to [the middle of the distribution], then it flattens out and becomes regressive at the top.” That is, effective tax rates fall as income rises. Someone in the ninth income decile paid an average of 21.8% in federal taxes in 2022, and this fell to 14.2% for the top 1% of earners.

Our study points to the role of non-taxed and lightly taxed sources of income, capital gains in particular, for regressive tax incidence at the top of the income distribution. A fair tax system should reflect an individual's actual command over resources. The tax principle of horizontal equity is that two people with the same amount of income pay the same rate of tax regardless of the source of that income. In the words of the Carter Royal Commission on Taxation in the late 1960s, a “buck is a buck”.

Third, preferential treatment of capital gains is costly to government. Federal tax expenditures for the partial inclusion of capital gains are estimated at $23 billion in 2024 by the Department of Finance Canada, plus another $2 billion for the lifetime capital gains exemption. A range of other provisions already addressed particular circumstances for farms, fishing properties and small business shares, such as the increased lifetime capital gains exemption of $1.25 million and the reserve provision for spreading gains over multiple years when transferring to a child, broadly defined. While modest, the capital gains change in the budget is expected to raise $18 billion over the next five years.

Fourth, the capital gains change is very narrowly targeted. Capital gains in excess of $250,000 in a tax year are highly concentrated at the very top of the income distribution. The higher marginal rate will be paid by only the 40,000 or so highest-income individuals. Even with the 2024 change, the income from buying and selling assets will be taxed less than income from working.

Fifth, the benefits assumed from privileging capital gains are vastly overstated. Preferential treatment of capital income has been justified as providing a stronger incentive for investment. Economists like to think of investment in terms of increases in the capital stock of machinery, equipment or buildings, whereas much of the capital gains we're talking about are largely on speculative holdings of real estate and financial assets. If you want a better way of incentivizing real investment, you'd be better off going for investment tax credits than trying to do so through capital gains exemptions.

If anything, Canada's stronger periods of economic and productivity growth were during periods when the inclusion rate was higher than the current 50%. To the extent that additional taxation of capital income provides revenues that are spent on public services, investments and jobs, as is the current case, this will be pro-growth.

In conclusion, a fair tax system should be progressive and broad in its consideration of taxable income. Raising the inclusion rate for capital gains above $250,000 is a small step towards a fairer tax system. It increases the progressivity and fairness of the federal income tax system while affecting only a small handful of wealthy individuals. If anything, the Government of Canada could go further.

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Lee.

Now, we'll hear some remarks from the Confédération des syndicats nationaux.

Mr. Duceppe, please.

[Yvan Duceppe, Treasurer, Confédération des syndicats nationaux]

Good afternoon, Mr. Chair. Thank you for inviting us.

I would like to inform you that the CSN represents 330,000 members across Canada, in all sectors of activity.

Let me start by saying that we support the government's proposal to increase the capital gains tax. First, we acknowledge that government must not only raise additional revenue, but also provide public services and social programs. It must meet the needs of all Canadians, while respecting provincial jurisdictions. I believe that the purpose of government is to meet the needs of the public.

However, there are many needs. This has been pointed out before, and it hasn't changed. We hear talk of housing investments; improvements to the employment insurance system in order to fill in the gaps; the establishment of a comprehensive public pharmacare program; investments in green economy projects; improvements to public transit; and better support for print and other media. Of course, all this requires revenue. So revenue is needed. The Confédération des syndicats nationaux welcomes the decision to raise the capital gains inclusion rate from 50% to 66.66%. Perhaps it could have been raised higher. That said, we think that it's a step in the right direction and that it can be taken further to meet the needs of Canadians. All the same, it's a good thing.

Moreover, it affects the wealthiest people as well as corporations. I heard the previous witness say that it affects few taxpayers, but that it does affect corporations. We find that it represents a progressive aspect of taxation. This matters, because it helps to address inequalities. Let's face it. Inequalities have been increasing for years. The wealthiest 1% and 0.1% of the population have continued to get richer and richer. How has this happened? Basically, financial assets are taxed less than earned income. In our opinion, this obviously encourages speculation, in a number of cases, unfortunately. This approach doesn't always produce the desired results when we consider investments based on historical data. My colleague, François Bélanger, can address this issue even better than I can. This approach has failed to deliver on its promises.

Of course, we know that other sources of funding would be useful to the government, such as a minimum tax on multinational corporations. That said, again, we welcome the inclusion rate increase to 66.66%.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Duceppe.

Now, we'll go to the Fédération des chambres de commerce du Québec, and I believe it's M. Noël who will be delivering some opening remarks.

[Philippe Noël, Vice-President, Public and Economic Affairs, Fédération des chambres de commerce du Québec]

Thank you, Mr. Chair.

Good afternoon. Let me introduce myself. My name is Philippe Noël. I'm the vice‑president of public and economic affairs for the Fédération des chambres de commerce du Québec, or FCCQ.

I'm pleased to be joined by my colleague, Hubert Rioux, an economic advisor at the FCCQ and head of our entrepreneurship as well as financial services, capital and savings committees.

Through our extensive network of 120 chambers of commerce and over 1,000 member companies, we represent more than 45,000 businesses operating in all economic sectors throughout Quebec's 17 regions. As the largest network of business people and companies in Quebec, we're both an association of chambers of commerce and the Quebec chamber of commerce.

We're pleased to be here. We want to thank you for the invitation.

On behalf of the Fédération des chambres de commerce du Québec and its members, we're here today to share our concerns about the financial and economic impact of the increased capital gains inclusion rate. I say “concerns”, but I could also talk about the discontent, astonishment and incomprehension felt by entrepreneurs and business people. This government measure sends the message that you shouldn't invest in your business, because you'll face penalties down the road on the tax front.

Like a number of experts, we find that this measure lacks any rationale other than the need to generate additional tax revenue to cover the budget deficit and additional spending planned by the current government.

The financial sector—and the venture capital industry in particular—will be the first to feel the impact. This industry is vital to maintaining a strong entrepreneurial ecosystem. A highly profitable exit can help offset the substantial losses generated by the inherent risks of investing in start‑ups. Higher taxation of these gains not only discourages risk‑taking, but also jeopardizes or delays the reinvestment of capital gains in new projects. In our view, this will hamper what is known as “entrepreneurial recycling”. Entrepreneurs are usually able to reinvest in venture capital or create new businesses through the sale of shares.

The increased taxation of capital gains will also have a negative impact on the transfer of businesses and on entrepreneurial succession. This primarily affects SMEs, as we enter a historic phase of business succession. Approximately 64,000 companies with employees across Canada plan to sell or transfer their business in the next 12 months alone.

For many career entrepreneurs, the sale of shares plays a key role in planning a well‑deserved retirement. Yet the proposed measure will particularly penalize the people who achieved the greatest success in growing their businesses.

The incentive for entrepreneurs introduced at the same time won't offset the increase's impact on investors, entrepreneurs and transferors. This is primarily due to the number of excluded sectors, the ineligibility of businesses and the five‑year phasing‑in period. Moreover, this decision comes at a time when the government wants to boost investment and productivity in Canadian businesses. We share the view of many experts that these plans are at odds with each other.

We were quite surprised to hear the government claim that the proposed increase won't make any difference in this area. Yet in its own 2024 report on tax expenditures, the Department of Finance explicitly states that the partial inclusion of capital gains seeks to encourage investment and support competitiveness.

The capital gains tax may be higher in many countries in the Organisation for Economic Co‑operation and Development, or OECD. However, undermining this competitive advantage is actually likely to exacerbate our significant lag behind many of these countries in terms of business investment; tangible and intangible assets; research and development; and productivity.

Lastly, a number of the businesses that we represent felt that there was no need to rush things and set an effective date as early as June 25. This forced many entrepreneurs to hastily review their succession and retirement plans.

We're asking the federal government to reverse this decision, retroactive to June 25, 2024. Otherwise, we propose that a lower limit of $500,000, indexed to inflation, be applied to the increase in the capital gains inclusion rate for SMEs and that the incentive for Quebec and Canadian entrepreneurs be extended to all sectors.

Thank you again for your interest in our organization and the Quebec business community and for your attention. We look forward to answering your questions.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Noël.

Next, before we move to members' questions, we'll hear from Mr. Matt Lubberts from NOW Housing.

[Matt Lubberts, President, NOW Housing]

Thank you.

Hello, ladies and gentlemen, boys and girls, ministers and people experiencing homelessness in our communities.

I'd like to introduce myself. I'm Matthew Lubberts. I am the President and CEO of NOW Housing, which is a modular home builder in Ontario. We specialize in affordable housing solutions for all. We build transitional cabin communities for our homeless, as well as apartment buildings and homes for our housing rental market, which are very much needed. Our goal is to help alleviate the homelessness epidemic we are facing in this country.

First, let's list some of the facts. Canada is the second country in the world for living and quality of life, and I would like to thank our government for keeping that standard up in our country. Of the G7 countries, Canada is the second wealthiest and is heavily investing in infrastructure as well as tapping into our resources up north to provide us with a fantastic future.

Canada is the second-largest country in the world, and we can fit all of the countries from the European Union twice over in our land mass. Our population is about 10% of all the European countries at about 40 million; they are at about 440 million.

In other words, here in Canada we have the resources and the money to do a good or even better job than a lot of the European countries that have eliminated their housing issues or homelessness problems.

What are some of the problems we are facing? There are two that I'm going to touch on today: housing and taxes.

On housing, we have all heard of someone facing issues either finding a home or being able to keep their home. These are currently huge problems in our country. Down payments for housing in our country are anywhere from $100,000 to $200,000 for the average home. The cost of rent has soared to over $2,000 for any rental unit in most metropolitan areas. This is putting a lot of citizens of our country out of their homes and onto the streets, causing a lot of mental health and addiction issues and overwhelming many of the communities in every corner of our country.

With tax hikes such as the capital gains tax, we are pushing away investors and investment that are desperately needed for housing projects of all sizes, causing delays and cancelling them altogether, creating a much greater housing problem.

The CMHC reports that we are in need of 3.5 million homes by 2031, so what do we do? Here is a possible solution.

Let me ask you a question. What car do you drive, and how much do you pay for it? It's approximately $40,000 to $50,000. What would happen if you built that car in your driveway, with all of the specs and the quality control we see in a factory? It would cost you millions to produce it the same way, but this is exactly what we do with our homes. We take the materials, the tools and the labour, and we bring them—

[Julie Dzerowicz, Liberal, Davenport, ON]

On a point of order, Mr. Chair, the bells are ringing.

[The Chair, Liberal, Peter Fonseca]

I see the lights. Yes, the bells are ringing, members. Would we like to give UC for the witness to finish his statement?

Okay. Thank you.

You may continue, Mr. Lubberts.

[Matt Lubberts]

Building housing and apartments the way we do now—taking our materials, tools and labour out to a construction site—is inefficient and wasteful. One of the ways to possibly solve this is to build our housing like cars. This would greatly increase the speed and reduce the wastefulness and cost of building homes.

I would like to thank Ontario for making a huge investment of over $30 billion in our EV market to bring in the EV companies to build more electric vehicles. It's this same type of investment that we need in our housing markets to provide the workers and labour force needed for these EV plants.

This capital gains tax will drive away investors and investment in our housing market. This will provide far fewer financial incentives to our entrepreneurs, who have the skills to help us with our housing dilemma. To build the 3.5 million homes by 2031 that CMHC announced in its report, we need investment, investors, entrepreneurs and home builders of all sizes to work with all levels of government to help solve these problems. We need everyone, from mom and pop all the way up to big, industrial factories. We need the government to get on board with investment and incentives, not more tax hikes. This is a step in the wrong direction.

I'd like to thank you guys and all the ministers here for the invitation to speak today. I would like to thank the government for its continued investment in our future through the billions of dollars it's put into the EV plants and into our northern communities to help us tap into our many, vast resources.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Lubberts, and thank you to all our witnesses for your opening statements.

As you heard, bells are ringing here in the House of Commons. That means that we have a vote. We don't have a lot of time; they are just 15-minute bells. We're already down about 10 minutes.

Members, what I suggest is that we break, as has been agreed to with all the whips. We need 10 minutes to get there, and then we have to vote and then have the ability to get back. We will get back to our witnesses, but I do want to inform the witnesses about this interruption. We will get back to members' questions once we return.

Thank you, and we are now suspended.

[The Chair, Liberal, Peter Fonseca]

Members, we're back.

Thank you to our witnesses for waiting patiently for the members as we got the vote done.

We are starting on our first round of questions. Each party will have up to six minutes to ask questions.

We're starting with MP Kelly for the first six minutes.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thank you.

I'll start with Mr. Lubberts with NOW Housing.

How will the increase in the inclusion rate affect investment with your business and the products that you wish to produce?

[Matt Lubberts]

One of the things we're trying to do is build a new factory and find investors to come into an agreement with us. With some of the tax hikes that have been presented with the capital gains tax, we are finding it much harder to find investors, even local investors, to invest in some of the things we are trying to do, not just from a factory point of view but also from a project point of view. Some of the large construction projects we've worked with developers on have margins of profits of 3% to 5%. When the capital gains tax is raised, even though it's only on the profit side, it brings their margins down and they end up shelving the projects.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

You described the shortage of housing in Canada and the housing crisis this shortage creates. We actually need investment in housing; we can't be chasing investment out of housing. It's your testimony that this inclusion rate increase will decrease the investment in housing and, therefore, decrease or fail to increase the supply of housing. Is that what I hear from you?

[Matt Lubberts]

That's basically part of it, yes. That's correct.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

How does that affect employment? What will that do to the workers?

[Matt Lubberts]

For instance, in our case, with trying to build a new factory and expand our operations, which would then create more jobs, it has now been limited or is backed off, and we are unable to build. As an entrepreneur in this country and in the province of Ontario, we rely on a lot of the investors or private lenders to get behind us and invest so they can make their profits. Whether it's selling their stocks or the actual investment in the property, with a raise of the capital gains tax this limits their margins when they're looking at their performance.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

In other words, a prospective investor, when having to choose between maybe something they're invested in currently and shifting capital.... The triggers of this tax increase would make it that much harder for you to attract new investment to your enterprise.

[Matt Lubberts]

Yeah, 100%. That's correct.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

All right, thanks.

I'd like to move to Monsieur Noël of the Fédération des chambres de commerce du Québec.

You talked about venture capital. I'll give you a moment if you want to expand on how the increase in the inclusion rate will affect investment in new start-ups and new technology in Canada.

[Philippe Noël]

I'll let my colleague, Hubert Rioux, answer your question.

[Hubert Rioux, Economic Advisor, Fédération des chambres de commerce du Québec]

Thank you for your question.

The impact is quite clear, given that venture capital often constitutes a recycling of capital gains generated by previous entrepreneurial ventures or prior investments in start‑ups, particularly in the technology sectors, as you said. The higher capital gains tax means that capital investment in technology start‑ups isn't encouraged to the same extent as before, in any case. When capital gains arise, this also creates what is known as a “lock‑in” effect. Investors may choose to delay the sale of their assets, meaning their shares in these start‑ups, to avoid the extra tax.

This distorts investment decisions and misallocates resources by discouraging the effective diversification of capital across the technology sectors. It also discourages entrepreneurial recycling.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Okay. I'll ask for maybe a comment on the timing.

Monsieur Noël, you mentioned the curious timing of this tax announcement. It was telegraphed in a budget, but not to take effect until June. It's unusual, in a budget, to give people who are able to a chance to beat an incoming tax. The only reason to do this that I could think of would be to create a temporary bump in the government's revenue. We still don't even have enabling legislation on this. It was announced in the budget; there was a ways and means motion in June, and there's this strange timing of its coming into force.

Can you comment on the timing of this proposal from the government?