Finance Committee on Sept. 17th, 2024

[Hubert Rioux]

With Mr. Noël's permission, I'll answer your question.

First, the capital gains inclusion rate hadn't been changed in Canada for over 20 years. When it comes to intergenerational equity, we're wondering the following. Why should capital gains accumulated over a significant portion of our entrepreneurs' working lives, or our companies' operating periods, suddenly be taxed more heavily? In our view, this poses a problem from an intergenerational equity standpoint.

Second, for example, when the capital gains tax was introduced in Canada in 1972, any gains accrued but not achieved prior to the introduction of the new tax were exempted in order to preserve intergenerational equity. This approach wasn't taken this time, which we find unfair.

Another issue concerns the timing of this inclusion rate increase. The current financial situation of Canadian companies, especially SMEs, isn't particularly rosy. Over the past year, the number of insolvency cases filed by Canadian companies has risen by over 50% compared to the previous 12‑month period. According to the latest data from the Bank of Canada, investment intentions over the next 12 months are historically low compared to the average over the past 25 years. We find that the timing of the increase in the capital gains inclusion rate, in both the short and medium term, poses a problem. It comes at a bad time when the Canadian economy is slowing down.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Kelly.

We'll now go to MP Baker, please.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair, and thank you to all our witnesses. It's not often that I have another Yvan on the panel, so from one Yvan to another, that's where I'll focus my questions.

Mr. Duceppe, I would like to ask you a few questions about your earlier remarks.

You talked about the needs of your members and workers, the difficulty of finding housing and investments in the green economy. You also talked about the other priorities of your members.

Could you again outline your members' priorities for this tax revenue? How should this revenue be invested to address your members' priority issues?

[Yvan Duceppe]

In our view, intergenerational balance means meeting the needs of the public. Many needs of the public are partially met. I said this earlier.

Let me tell you what we think. Take the example of housing, which we heard about earlier. In our view, affordable housing should receive as much investment as possible. However, to make housing affordable, historically the best approach has been to invest in non‑market projects, such as co‑operatives or non‑profit organizations, or NPOs, that own housing. This might prevent a situation where only units that cost $2,000 or $2,500 a month are on the market. This represents a significant example of a potential investment to support workers.

By raising the capital gains inclusion rate, the government is acting a bit like a Robin Hood. It's taking money from the richest 0.1% or 1%, as I said earlier, and using that money to provide Canadians with affordable housing. We know that this is a priority. This example shows how the new revenue can be used.

There are other examples, including the creation of programs such as dental care. These things help people in general, but they require revenue. This shows how the revenue can be used for public benefit. It's about meeting the needs of the public in general.

CSN members earn, on average, an annual income of around $50,000. For some, it's difficult or even impossible to pay $2,000 or $2,500 a month for housing.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Regarding what you just said, how many of your members have a second home?

[Yvan Duceppe]

I don't have any data on this topic. Certainly, some of them do, but it's definitely a small proportion. However, I know that a portion of capital gains is exempt. Moreover, even though some people have a second home, we believe in tax fairness and progressivity. We see taxation as a way to distribute wealth. This is significant, whether or not you own a cottage. That's our position.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

You spoke about the need to invest in non‑market housing. Why do you find this significant?

[Yvan Duceppe]

This plays a significant role in freezing the value of the building. The property can't be resold at a profit. As a result, the rents won't increase from $1,000 to $2,000 or $2,500 decade after decade. If a non‑profit organization owns a building, the organization can't resell it. This keeps rent affordable.

Unfortunately, in Canada, this hasn't been done enough for many years. I'm saying this with all humility.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Baker.

We'll go now to MP Ste-Marie, please.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

I would like to extend my greetings to all the witnesses. I want to thank them for being here and, above all, for their patience during the vote.

Before asking my questions, I would like to point out that I hear an echo. I don't know whether the interpreters find the sound quality acceptable.

[The Chair, Liberal, Peter Fonseca]

I hear a bit of an echo. Maybe you can keep speaking.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

I can still hear an echo. I don't know whether this is acceptable for the interpreters.

[The Chair, Liberal, Peter Fonseca]

We'll suspend for a few seconds and see if we can fix that.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

We will see if that is better.

I thank all the witnesses.

Before asking my first questions, I’d like to seize the opportunity presented by this first meeting to greet all my colleagues. I hope everyone had a good summer. I also greet all the staff who help with making this committee function. I thank them again for all the work they do.

I’d also like to seize the opportunity to welcome Pat Kelly back and to welcome Luc Berthold, who is with us today.

My first questions will be for the representatives of the FCCQ, the Fédération des chambres de commerce du Québec. I will then ask the representatives for the CSN, the Confédération des syndicats nationaux, for their thoughts.

We are talking here about changes made to the capital gains inclusion rate, based on the principle that we must make the system fairer and more progressive, regardless of the form of remuneration.

I am very much looking forward to seeing the bill’s official text, because consultations were held until quite recently, particularly with businesses. What will change from what was announced over the summer? For example, I am concerned about small investors from the middle class who saved their entire lives to buy a multiplex. They could be penalized when they sell it. Will the bill’s final wording take that into account?

When it comes to businesses, Mr. Noël clearly expressed FCCQ members’ fears on the matter. What can we do to set up a fairer and more progressive system without penalizing the economy by, for instance, negatively impacting venture capital?

Incidentally, for small businesses, the capital gains exemption is going from $1 million to $1.25 million. After 2025, it will be indexed.

As Mr. Noël pointed out, there is also the Canadian Entrepreneurs’ Incentive. It does not seem to be enough.

Mr. Noël, do you think this incentive will be enough for small and medium businesses, but not bigger ones? What about venture capital? What is your analysis of that?

You also suggested setting a threshold of half a million dollars. Could you elaborate on that?

I will then ask the CSN for its point of view.

[Philippe Noël]

If I may, Mr. Rioux, I will start. Then, I will let you round out my answer.

My colleague, Mr. Rioux, is in charge of our pre-budget brief. We presented it this summer as part of the federal government’s consultations on the expectations we had for the next budget. He also looked into the venture capital issue.

When it comes to businesses and entrepreneurs in particular, you did well to mention from the outset that duplex and triplex owners put a lot of money into their properties. Then, on June 25, less than two months after the federal budget was tabled, they were penalized even more significantly on a tax level at the moment of sale. Some of them made those investments to fund their retirement. They had a short notice of just two months to react to the government’s tax measure.

When it comes to venture capital, compared to OECD countries, Canada is lagging behind right now, even if it’s only in terms of the funds businesses need to invest in research and development and capital expenditures, as well as to increase their productivity. We’ve seen a decline since the early 2000s. In 2022 alone, research and development spending fell from 60% to 55%. Meanwhile, in the United States, south of the border, they’ve progressively increased it, especially since 2010. The average is 78% for American businesses.

We think it is important to avoid sending mixed signals when it comes to business investments in research and development.

I will let Mr. Rioux answer your second question.

[Hubert Rioux]

First, the government currently maintains that as of 2029, an individual could, for example, get up to $6.5 million in capital gains and pay less tax than before June 25, 2024, due to the lifetime capital gains exemption, Canadian Entrepreneurs' Incentive and $250,000 threshold. The problem is that this calculation will only be valid in five years' time and, in the meantime, many businesses will be sold or transferred.

Second, since the entrepreneurs' incentive only applies to certain sectors, the break-even point will be much lower than for others, sitting at around $2.25 million, which is relatively low. A very large number of sales of businesses and SME transfers will generate over $2.25 million in capital gains in the next few years. There's no doubt about that.

Finally, in terms of companies' actual capital gains, tax payable will be 33% higher than it was before June 25, regardless of circumstance. Keep in mind that over 300,000 Canadian businesses declare capital gains every year. Therefore, it's an important aspect that will affect many people. That is why we think, specifically for reasons of fairness, that a $500,000 threshold should apply to businesses, just as it does to individuals.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Could the CSN representatives respond?

[The Chair, Liberal, Peter Fonseca]

There's no more time.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Since my time is up, I will ask them to respond when I have the floor again.

Thank you.

[The Chair, Liberal, Peter Fonseca]

In the next round.... No. It was just when the question and the answer came up.

Thank you, MP Ste-Marie.

Now I go to MP Davies, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair.

Welcome to all the witnesses, and thank you for being here.

Mr. Lee, I direct my questions to you. The Centre for Future Work published an analysis of the capital gains measures this August, and I'll put some of its conclusions to you for your comment, if I might.

I'm quoting from it. It reads:

Very high-income Canadians receive a disproportionate share of total income. But they receive an even more lopsided share of total capital gains. In 2021, those with total income over $250,000 (the top 1.5% of tax-filers) received 61% of all capital gains. That is forty times bigger than their share of the population.

It goes on:

In contrast, low- and middle-income Canadians receive hardly any capital gains. Those with total income under $25,000 (one-third of tax-filers) receive barely 1% of all capital gains. Those with incomes between $25,000 and $50,000 (another 27% of tax-filers) receive 3.8%. Together, all those with total income under $50,000 (60% of tax-filers) receive just 5% of all capital gains.

Further:

Together, all those with total incomes over $100,000 (one-eighth of the population) received almost seven-eighths of capital gains. There is no other form of income more concentrated among the richest people in the country.

I'd like your comment on that.

[Marc Lee]

I believe that's correct. I've read Jim Stanford's report.

We're concerned about the unequal distribution of income in Canada, and within that, the distribution of capital income is even more unequal. As well, within capital income, capital gains are the most unequally distributed.

I think there are some legitimate comments being raised by my colleagues on the panel, particularly to the extent that we don't want changes in tax policy to affect real investment. By that, I mean investment in machinery, equipment and buildings as opposed to speculative investments in real estate or other financial assets. We should have an eye to those things.

However, generally speaking, we're talking about the very crème de la crème. It's not even the top 1%; it's the top 0.1% of earners who are benefiting from these gains. Again, for the privilege of having reduced taxation on those through both the inclusion rate and the lifetime capital gains exemption, and there are a bunch of other rules that allow.... If there are multiple owners to an enterprise, each of them gets to avail themselves of the full exemption. If it's passing on a family farm or a small business to a child, there are provisions for allowing that to be claimed over multiple years.

I think the finance department and the legislation, to date, has done a good job of anticipating some of the unintended consequences. The particular tax change now, by having the threshold at $250,000 for the higher inclusion rate, is very well designed. There's a great study in the Canadian Tax Journal by Rhys Kesselman, who unfortunately passed away earlier this year and didn't get to see, essentially, his proposal get adopted as federal government policy. He was recommending a second-tier inclusion rate of 75%, so that's higher than the current one.

[Don Davies, NDP, Vancouver Kingsway, BC]

If I might, I want to turn to the impact of this on business investment, because there's been some concern, and you anticipated where I was going. Again, quoting from the report, it says:

However, capital gains taxes (and other business taxes, like the corporate income tax rate) have been reduced dramatically since the turn of the century. Yet business capital spending has declined substantially under these lower tax rates. Spending on tangible machinery and equipment by Canadian businesses averaged around 6% of Canadian GDP until 2000—when the capital gains inclusion rate was reduced from 75% to 50%.... Since then, machinery and equipment investment has declined steadily. Business spending on intangible innovation (such as R&D, computer software, etc.) has also stagnated: it nearly doubled as a share of GDP in the 1990s (when the inclusion rate was 75%), but has not grown since.

Have you seen any data, Mr. Lee, that suggests that increasing the capital gains inclusion rate will lead to a reduced business investment, or is the opposite the case?

[Marc Lee]

As I was noting in my remarks, I think that to the extent that you are taxing capital income and spending that on public services, jobs and infrastructure, you're going to have actually a progrowth orientation to that policy.

My sense is that a lot of the arguments that have been made during the neoliberal era of tax reforms, particularly in the 1990s and early 2000s, have largely been chasing microeconomic efficiency gains in the name of boosting productivity or economic growth. By and large, those misunderstand the overall process of investment and what drives that.

We should be mindful of some of the concerns that have been raised. However, I'm not seeing any evidence that this is actually the case, particularly in an area like housing, as has been raised.

There are a lot of different factors that drive investment in housing, and housing investment is down right now, primarily because interest rates are up. However, the cost of construction is up as well. The cost of land is up. There are municipal fees that need to be paid, and then there are developer profits that need to be made on top of all that. All of those things determine the hurdle rates for ownership for a rental property [Technical difficulty] going to be developed.

At the end of all of that, there may be some capital gains made, but those tend to be a residual. They're more like a windfall, so actually taxing them is a fair way of going about that. That's why a lot of economists favour increases in capital gains taxes.