Finance Committee on Sept. 19th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 152 of the Standing Committee on Finance.

Today's meeting is taking place in a hybrid format. All witnesses have completed the required connection test in advance of the meeting.

I'd 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 is resuming its study on the changes to capital gains and corresponding measures announced in budget 2024.

I would now like to welcome our witnesses.

With us today, we have from the School of Public Health, Université de Montréal, Olivier Jacques, who is with us via video conference.

Also via video conference, we have an assistant professor in the department of taxation from the Université de Sherbrooke, Antoine Genest-Grégoire.

We have a philanthropist joining us. Claire Trottier is joining us.

We also have the chief executive director and founder of GRIT Engineering, Montana Wilson.

Heidi Yetman, president of the Canadian Teachers' Federation, is also with us as a witness.

Now we're going to hear from our witnesses. They have up to five minutes for opening remarks, and then we'll proceed to the rounds of questions from the members.

We'll welcome Monsieur Jacques to begin with the opening statement. I understand he will be sharing.

[Olivier Jacques, Assistant Professor, School of Public Health, Université de Montréal, As an Individual]

Good morning. Thank you for having us today.

My name is Olivier Jacques and I'm an assistant professor at the School of Public Health at the Université de Montréal. I'm accompanied by my colleague Antoine Genest-Grégoire, who is an assistant professor in the Department of Taxation at the Université de Sherbrooke.

Today we would like to share our thoughts on the government's proposed reforms to the taxation of capital gains in Canada. We have expertise in developing public policies, particularly those relating to public finances. We will focus our comments on the tax policy objectives related to income inequality.

We have both spoken out to recommend that the capital gains inclusion rate be raised, first at an Observatoire québécois des inégalités event, and then in an open letter to La Presse in the spring. The proposals in the 2024 federal budget related to the taxation of this type of income differ from our suggestions, but they share their spirit. We believe that raising the capital gains tax is one of the most promising ways to make Canada's tax system more progressive and thereby combat income and wealth inequality in Canada.

Compared to other wealthy nations, the level of poverty and inequality in Canada is relatively high. Provincial governments are facing structural deficits associated with their health care service obligations. The federal government is also facing recurring deficits related to its new investments in social protection. Canada's participation in the fight against climate change is not living up to its means or its historical responsibility. Given these challenges, it's unrealistic to expect a return to fiscal sustainability in Ottawa and the provinces without raising taxes, unless we can tolerate more cuts to public services. A number of options exist for raising revenue in this way, but increasing the capital gains inclusion rate is likely to contribute the most to the goal of reducing inequality.

It should be noted that capital gains income is highly concentrated among very high-income earners in Canada. Eighty‑two per cent of capital gains are generated by the richest 10%, while 57% are generated by the richest 1%. Excluding 50% of capital gains limits the amount governments can expect to raise by increasing taxes at the top of the tax grid and reduces the overall progressivity of taxation. Increasing the inclusion rate targets higher-income earners better than a new tax bracket or increasing the current top bracket rate would.

I will now turn the floor over to my colleague Mr. Genest‑Grégoire.

[Antoine Genest-Grégoire, Assistant Professor, Department of Taxation, Université de Sherbrooke, As an Individual]

Increasing the taxation of capital gains also helps bridge the wealth gap. Wealth is even more concentrated than income: The richest 20% hold more than two‑thirds of the wealth in Canada. However, we don't feel that a direct wealth tax is the right solution because it would pose significant administrative challenges. Governments have little data on the value of Canadians' assets, and they have even fewer when it comes to illiquid and infrequently sold assets. Capital gains tax does away with those information needs, because it only requires the valuation of assets at the time of purchase and sale. Annual taxation of assets also poses liquidity issues, as some assets cannot be split for sale. Capital gains tax also lessens that problem by generating tax liability when the money is there. Relying on an existing tax really brings down the cost of implementing a new measure.

The same logic applies to estates. Canada doesn't collect taxes at death. However, the deemed disposition of property upon death performs a similar function in triggering the capital gains tax. Estate tax is among the most useful for reducing income and wealth gaps, as they fundamentally tax heirs. Amounts received by heirs are not the result of any choice or action on their part. From their perspective, they're the same as winning the lottery. Taxing these bequeathals therefore has virtually no effect on investment or work decisions, and it also limits intergenerational transfer of wealth, a form of inequality that hinders social mobility.

From a tax justice point of view, it seems unfair to us that capital income be taxed half as much as labour income. While some assets appreciate as a result of their holder's work, many assets appreciate as a result of market forces, without the holder being responsible.

The current inclusion rate has also been recognized by several economists as a tax dodging opportunity. The fact that income from capital gains is taxed at a lower rate than dividends creates an incentive to structure one's business to convert income into capital gains. This results in a loss of resources for society. Efficient taxation should encourage people to organize their business based on actual economic benefits, not tax rates.

Capital gains are highly concentrated among high-income individuals, but one has to acknowledge that a considerable portion of those gains are enjoyed by middle-income individuals. In addition to providing an incentive for Canadian entrepreneurs, the government's proposal to exempt from the new inclusion rate the first $250,000 of capital gains earned by Canadians seems to us to go a long way toward addressing this situation. The proposed reform seems to us to specifically target the very small minority of individuals receiving significant gains on a recurring basis. In its current form, it's hard to imagine that the proposed reform will affect individuals who are not in the upper reaches of income distribution. As a reminder, in 2021, the median reported income in Canada was $41,000, and individuals had to earn $139,000 to be among the richest 5%.

[Olivier Jacques]

Thank you, Mr. Genest‑Grégoire.

In conclusion, governments in Canada need additional revenue. The increased taxation of capital gains is a simple way and—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Jacques and Mr. Genest‑Grégoire.

That was the divided time, and we're over the five minutes.

Now we're going to Madame Trottier, please.

[Dr. Claire Trottier, Philanthropist, As an Individual]

Good afternoon, everyone.

My name is Claire Trottier, and I'm a philanthropist, investor and tax justice advocate. Thank you so much for the invitation to speak to this committee.

I'm here today as a wealthy Canadian who is very accustomed to earning capital gains, and I am very strongly in favour of the change to the inclusion rate that this committee is currently studying. I am part of the 1% because I won the lottery of life by being born into my family. My father, Lorne Trottier, is the co-founder and now sole owner of a technology company called Matrox, based in Montreal, that will soon celebrate its 50th anniversary.

I believe in a strong Canadian economy in which every Canadian can live with dignity. Unfortunately, wealth inequality exists in Canada and continues to grow. More and more people struggle to find adequate housing and have trouble contending with the exploding price of groceries. Increasing the inclusion rate on capital gains is a positive step to start addressing an unequal system and to raise revenue to provide needed services.

I am a scientist by training. I earned my Ph.D. in microbiology and immunology, and I was a professor at McGill for a number of years when I made the decision to leave in order to focus on philanthropy and overseeing family investments.

When I was a professor, I earned $90,000 per year as my income from my salary, and 100% of that salary was taxable because salaries have a 100% inclusion rate. However, when I earn $90,000 in capital gains, only 50% is taxable; $45,000 is tax free. That means that the income that I earned as a salaried employee at McGill was taxed at a higher level than the income that I earned from the same amount of money as capital gains. I find that situation deeply unfair. Do you?

If you are declaring capital gains, it means that you have capital to begin with. Whether it's a second home, a business or investment in the stock market, you are doing better financially than the average Canadian, even if you aren't as rich as I am.

It's a little weird that if you have enough capital to make capital gains, our tax policy essentially rewards your financial success with a prize. “Congrats. You're rich. Now you don't need to pay as much tax as everyone else.” This is deeply unfair. People who earn a salary have a 100% inclusion rate on their salary, but if you have enough money that you are actually declaring capital gains, you get this bonus prize of not having to pay tax on all of that income.

Right now—before the change in the inclusion rate being studied—50% of capital gains are tax free. With this change, for the first $250,000 of capital gains, you still get 50% tax free. For any income that you receive beyond $250,000, one-third of that income continues to be tax free. Therefore, even with this change, I will still be paying less tax on my income from capital gains than folks pay on their salaries. I and other rich folks are continuing to get this special deal whereby some of our income is tax free; we're just going to pay a bit more tax than we did before.

I've heard folks say that this will kill the technology sector and innovation in Canada. As part of my work on tax justice, I've heard from many young Canadian tech CEOs leading brand new businesses, and what I've heard is that this capital gains inclusion rate is just not on the top list of their concerns.

My family's company is a very successful technology company, and we continue to invest in the business, to invest in R and D, to invest in innovation, with tens of millions of dollars being invested every single year in Montreal. When making decisions about whether or not to invest in developing a new product, the capital gains inclusion rate is just not something that is part of the discussion at all. The bigger shared concern for emerging and established tech companies is recruitment and retention of qualified employees. As previous witnesses have shared to this committee, the period when Canada saw the highest R and D spending was when the inclusion rate was between 66.7% and 75%.

The fact is that our current system has created massive inequality in our society, and this change to the inclusion rate for capital gains is one important step to help make things more fair. This is not about punishing business owners or making wealthy people feel guilty. We have to collectively recognize that if we own assets and these assets grow in value, we are very lucky. We pay lower tax on income from capital gains than people pay on their salary income. This change simply addresses that policy to make it a bit more equitable.

I would be proud to pay more than I do today to ensure that we have a fairer tax system and a fairer society. I am also proud to collaborate with the group Patriotic Millionaires, which brings together wealthy individuals from around the world—including many here in Canada—to advocate taxing the rich. Surveys show that a majority of Canadians support the idea of taxing the rich, and I am glad that this change to the inclusion rate for capital gains will help fund much-needed programs that benefit all Canadians.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Trottier.

Now we'll hear from GRIT Engineering.

Ms. Wilson, please go ahead.

[Montana Wilson, Chief Executive Officer and Founder, GRIT Engineering, As an Individual]

Thank you, Mr. Chair, and thank you to the committee members for the invitation to speak with you regarding the impact of changes made to the capital gains tax.

I would like to take a moment to introduce myself and provide you with some context as to who I am and why I'm speaking with you today.

I am first and foremost a small business owner. I am the founder and CEO of Grit Engineering, a small consulting engineering firm in Stratford, Ontario. I also sit on the board of directors of the Association of Consulting Engineering Companies of Ontario, where I am the chair of the small firm network. I am a member of the Association of Consulting Engineering Companies Canada, and I am president of our current local Home Builders Association - Perth Huron.

I am speaking to you today as the owner of a small business, one that will be affected by the changes that have been made to the capital gains tax this year.

For those of you who don't know, consulting engineering firms are responsible for designing and building much of our public and private infrastructure, ranging from residential and community projects to Canada's most significant transportation, environmental and natural resources infrastructure projects. We also provide a wide range of professional services that allow private sector clients to grow, innovate, and address economic, social and environmental challenges.

But small employee-owned businesses like mine don't just do large-scale infrastructure projects. We are the ones who support the community members by taking on the small-scale but critical jobs that build, for example, a wheelchair ramp or a secondary suite for families to live together. We are the ones who take on young employees and help them work their way up to becoming part owners in the firm. We are the ones who donate to local charities and contribute to your community sports teams.

With the changes to the capital gains tax, businesses like mine will face new challenges that will put pressure on us in an economy that already provides little incentive for people to own and operate small businesses.

Many business owners like me take substantial personal risk when starting and growing their firms, and I am concerned that these changes will have a significant impact on the future of small, locally owned businesses. It is already challenging to encourage our next generation to take on the ownership within our firms. The financial benefits of acquiring shares in ownership of a firm must outweigh the risks for the new generation of leaders in our industry. By making employee ownership less financially feasible, more and more small firms will be forced into mergers or acquisitions. In many cases, these are publicly traded and sometimes foreign-owned companies, resulting in further consolidation of our industry and a reduction in competition and in the number of small employee-owned firms. Some firms may even cease to exist upon the retirement of their owners.

We need to make employee ownership more attractive, not less attractive. There should be incentives for employees to take on ownership roles in Canadian businesses, not penalties, so that Canada can preserve a landscape of large and small firms to serve the diverse needs of our Canadian communities. We need to reward Canadians who are prepared to take personal financial risk to innovate and to grow our economy so that we ensure a vibrant marketplace that includes a robust number of small businesses.

I would like to recognize the creation of the employee ownership trust tax exemption and the Canadian entrepreneurs' incentive as things that will mitigate the challenges for some businesses in some cases. However, many businesses like mine will not be eligible for these incentives, due to our business structure and other factors.

In closing, I would like to urge the committee members to recommend that the capital gains tax legislation be withdrawn and that any of the capital gains tax changes introduced in the 2024 federal budget be postponed pending further consultation with small businesses to ensure any future changes will not negatively impact Canada's small businesses.

Thank you for giving me the opportunity to speak with you today. I look forward to answering any questions you may have.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Wilson.

Now we'll hear from the Canadian Teachers' Federation and its president, President Yetman.

[Heidi Yetman, President, Canadian Teachers' Federation]

Good afternoon, Mr. Chair, and thank you to the committee for having me.

My name is Heidi Yetman. I'm a teacher and the president of the Canadian Teachers' Federation. I represent over 365,000 K-to-12 education workers and their families, with members in every province and territory. I'm here today to speak in favour of the increase in the capital gains inclusion rate.

As I mentioned, I represent over 365,000 education workers. These folks all work in a school community composed of teachers, educational assistants, clerical staff and support staff. All the staff in schools across this country are working-class Canadians, and all of them pay on 100% of the money they earn in their roles in supporting the Canadian public education system. Every dollar of their pay is subject to taxation.

On the other hand, if you look at the wealthiest individuals in Canada, those who will be impacted by this change in the exemption rate, you see that they're earning huge sums of money, while only a portion of it is being taxed. To the leaders and members of the Canadian Teachers' Federation across this country, that simply doesn't seem fair or make much sense.

The capital gains inclusion rate is increasing for those making capital gains over $250,000 in a year. Now, $250,000 is a significant sum of money for most Canadians. In fact, that's roughly four times the average salary of a teacher in Canada, and every dollar of a teacher's salary is subject to taxation. Today we are talking about those fortunate enough to be in a position to have cleared over a quarter of a million dollars in a year. I think most Canadians would agree that if you've made $250,000 in profit on the sale of your secondary property or through offloading some stocks, you're in pretty good shape.

However, let me shift to highlight why this change in taxation is so important. Earlier this year the federal government introduced their budget, and they announced some transformative things. Budget 2024 included commitments to housing supports, furthering the pharmacare file and moving forward with dental care, all of which the Canadian Teachers' Federation believes would improve the lives of Canadians.

Additionally, there are three platform announcements I'd like to highlight: first, the government announced loan forgiveness for thousands of teachers working in remote communities; second, budget 2024 announced funding to establish a youth mental health fund; and third—this is the one I'm most excited about—the government also announced the creation of a national school nutrition program.

The teaching profession currently is experiencing a crisis in retention and recruitment, and all three of these investments will have an impact on education in this country. By investing in teachers and their families and in the well-being of students, the government is in turn investing in the future of our country. That's because education is the foundation of a healthy and prosperous society. These budget items will make a significant difference in the lives of working-class Canadians and their families.

At a time when owning a home is a pipe dream for many young families, grocery prices are at all-time highs, and teachers are taking on second jobs to pay the bills, we're here debating whether it's right or just to tax half or two-thirds of capital gains made over $250,000. I'm here to tell you that two-thirds is a start.

This is about the common good and the Canada we want to live in. I applaud the federal government for introducing this policy, and I actually implore them to seek further changes to the taxation system to make life in Canada more equitable. We need to do a better job of sharing the wealth generated in this country with workers. Revamping the taxation system in this country is a great place to start.

While I doubt that many of my members will be impacted by the capital gains increase, almost all of them and their families, along with millions of families across the country, will see the benefits.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Yetman, for your opening remarks, and to all our witnesses.

Now we're going to get into members' questions. In the first round of questions, each party will have up to six minutes to ask questions of our witnesses.

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

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

I welcome everybody back after a summer break

Ms. Wilson, thank you for being here today. Congratulations on your success as a business owner. Obviously, you take a leadership role within the industry.

I'm curious. After the change, if someone in your position or one of your peers in the industry was thinking about growing, merging with or purchasing another consulting firm, or taking on additional risk, would they be more or less likely to do that?

[Montana Wilson]

I can say with 100% confidence that they'd be less likely to do that. We leverage our own house. We don't pay ourselves. There's a substantial amount of risk in starting a new business. There are already enough deterrents. We don't need to give them any more.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

You mentioned risk. When you're comparing someone who has T4 regular employment income—a regular salary paycheque, for example—with someone who makes a gain on capital, it's not automatically guaranteed that the person who's looking for a gain on capital will actually realize a gain. It's possible they'll get zero. Is that correct?

[Montana Wilson]

That's correct.

[Adam Chambers, Conservative, Simcoe North, ON]

In some years, it may be that when you purchase an asset, a building or another firm, and it just doesn't really work out. That asset is now no longer worth what you paid for it. In fact, it's actually worth zero. That's always a risk. Is that correct?

[Montana Wilson]

That's correct, or the risk is that you won't win the next contract and next year is not as busy, but you're still employing people and you still have the same number of expenses, but with lower profit.

[Adam Chambers, Conservative, Simcoe North, ON]

Therefore, in your mind, it makes sense that there's a bit of preference in the tax system to reward risk-taking. That's because, as you say, if you don't get any contracts the next year, that business could be worth nothing.

[Montana Wilson]

That's correct.

[Adam Chambers, Conservative, Simcoe North, ON]

You mentioned trying to encourage new people to come in to the business or trying to encourage young people to start businesses. After this change, do you think we'll have more or fewer people wanting to start small businesses?

[Montana Wilson]

We already struggle with people having enough capital to invest as an owner in the firm they're working for. This only takes away from that opportunity for them.

[Adam Chambers, Conservative, Simcoe North, ON]

Do you think your experiences in your industry are similar to those in other industries you've come into contact with, such as construction firms and other trades? Do you think your experience is likely similar across those industries?

[Montana Wilson]

As the president of our local home builders' association, which has 110 members, I've met with lots of skilled trades, engineering firms, designers and contractors. They are all in the same boat. For the level of risk they have to take, there needs to be a reward at the end of the day for owning your own small business and investing back into your community.

We don't have a pension plan, so at the end of the day, the money I may make from selling the business—“may make” is what I'm going to say; the risk is on me—is my pension plan.

That's the difference.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Ms. Yetman, you mentioned that you represent 365,000 teachers. That's a lot of people. Would you consider those 365,000 people part of the 0.13% or the 0.1%? Are they really rich?

[Heidi Yetman]

Well, 75% of teachers are actually women. Most of them have a partner, so there is a possibility that they might be part of that small group, yes, but there are very few who are.