Finance Committee on Sept. 19th, 2024

[Olivier Jacques]

Thank you, Mr. Ste‑Marie.

To conclude my presentation, I would simply say that we need to generate revenue and reduce inequality. We seldom get the opportunity to reduce inequality while also fostering investment and creating jobs. However, it's hard to find a measure that considerably reduces inequality at a very low cost in terms of job and investment losses like taxing the capital gains of the richest people does.

I'd like to take this opportunity to come back to comments made by other witnesses. I think it's important to consider the positive impact the public spending made possible by these additional revenues will have on the economy.

I agree with Ms. Yetman: Better-nourished children are good for human capital and good for the economy in the long term. Investing that money in green infrastructure is also good for the economy over the long term.

As for the provinces, Mr. Genest‑Grégoire and I think it's a good idea for Ottawa to carry out this type of reform, because capital is mobile between the provinces. So we think it's important for Ottawa to tax capital gains. In addition, it will increase revenues for the provinces. As we've seen, Quebec has increased its own tax on capital gains. As a result, it can now invest significant revenues in health care and education in Quebec. The same is true for the other provinces.

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

At the beginning of your presentation, you said that the government had not done what you suggested. Can you tell us what your own proposal to raise capital gains taxes would look like?

[Antoine Genest-Grégoire]

Before I answer your question, I'd like to clarify what I said earlier.

When someone gets an inheritance, they don't realize any capital gains. They can only realize $250,000 in capital gains when they sell their own property. Capital gains are processed after death. The deceased pay tax on their capital gains, but their heirs do not, unless the property they inherit further appreciates before they sell it.

In terms of our own proposal, we feel that an inclusion rate higher than 66% would certainly have been a viable option. Other witnesses have mentioned this as well. Instead, in our minds, the deduction for the sale of small business corporation shares or farm or fishing property should be merged and a full exemption for capital gains should be provided, but subject to an individual lifetime limit. That keeps us from having to wonder whether $250,000 is the right threshold. Having a lifetime limit allows people to realize a certain amount of capital gains that won't be taxable, but all capital gains thereafter would be taxable. At that point, the reform would be firmly focused on redistribution.

It would also allow us to include the principal residence issue. We don't talk about it a lot, since people don't pay tax on the sale of a principal residence, but it's an unlimited tax benefit. In fact, most of the value of that benefit goes to people who have properties that are very valuable, who resell them at a much higher price and who do so several times in their lifetime. Most Canadians don't do that. Normally, they will sell one or two properties in their lifetime. So they would do very well if that $250,000 we're talking about today or even an individual lifetime limit were there. We would then go collect something from those who sell luxury properties several times over, presumably for speculation.

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

If I understand correctly, you would have preferred that individuals be eligible for the same amount as SMEs: $1.25 million over their lifetime rather than $250,000 a year. So you'd like it to apply to everything. I've carefully noted your comments.

Would a $1.25-million individual lifetime threshold help better protect people who have capital gains on an ad hoc basis, for example only once in their lifetime? Would the model you are proposing be better than $250,000 per year?

[Antoine Genest-Grégoire]

It depends on the nature of the gains and the size of the one-time gains in question. If the gain far exceeds the $1.25 million threshold, and the inclusion rate is higher than the 66% we're talking about, then the threshold we're proposing would take more money from high income earners. However, it would be different for people who realize a one-time gain, which can't be split. It must be said that many capital gains can be split. People are already splitting their capital gains from one year to the next. It's to their advantage because of the tax brackets.

Under the proposed reform, we can expect to see more capital gains splitting, and therefore more sales over several years. Yes, a number of people will have only one asset to sell in their lifetime, and they would be affected by the current reform, but they wouldn't be affected if the reform included an individual lifetime exemption.

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

Thank you very much.

[Olivier Jacques]

I'd like to remind you that we suggested an inclusion rate higher than 66%.

The fact remains that, if we set the threshold at $250,000 and the inclusion rate at 50%, not many people will be paying more capital gains tax, and those who will be paying more won't pay much more tax than they do right now, especially if we consider the high value generated by the gains. We're talking about a $250,000 gain. Few people ever make that kind of gain in their lifetime.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

We will now go to MP Davies, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair.

I'd like to thank all the witnesses for their testimony.

Mr. Jacques, could you confirm approximately what proportion of Canadians would declare a capital gain over $250,000 in any year in their life?

[Olivier Jacques]

I think Mr. Genest‑Grégoire will provide a better answer than I can.

[Antoine Genest-Grégoire]

Currently, less than 1% of Canadians realize over $250,000 in capital gains annually. That figure has remained relatively stable over the past few years.

[Don Davies, NDP, Vancouver Kingsway, BC]

Do you mean it's 1% at any point in their life?

[Antoine Genest-Grégoire]

It's extremely difficult for me to answer, because I don't know how many gains people realize over their lifetime or how to measure tax data. If you looked at people's lifetime, there would be a few more, but that would only bring it up a few percentage points.

[Don Davies, NDP, Vancouver Kingsway, BC]

Maybe you're familiar with this research: A paper published last year by Simon Fraser University economics professor Jonathan Rhys Kesselman found that 80% of Canadians did not report any taxable capital gain between 2009 and 2018. For those who reported in just one of those years, their total gains averaged $26,800, compared with average total gains of $328,000 for people who reported it every year. Are you familiar with that research?

[Antoine Genest-Grégoire]

Yes, I'm familiar with that study. Sadly, it was the last research project Professor Kesselman worked on before he passed away. I believe that the reforms proposed today are very close to the spirit of what is essentially the legacy of this researcher, who was quite a notable figure in the field of tax policy in Canada and around the world.

[Don Davies, NDP, Vancouver Kingsway, BC]

To button this down, it seems to me that the numbers and research and experience in your testimony show that the vast majority of Canadians will never report a capital gain over $250,000 in their lifetime and that the very small percentage of Canadians who do this regularly are the ones who will be primarily affected by the inclusion rate changes that have been announced.

Am I right about that?

[Olivier Jacques]

Yes, and this reform is one of the best ways to reduce inequality and take the money where it is in order to invest back into public services.

We are in favour of this reform, and we would go even further.

[Don Davies, NDP, Vancouver Kingsway, BC]

Ms. Trottier, this is some of the most impressive testimony I've ever heard. To have someone come to this committee and speak so clearly and strongly for the common good, against their own particular interests, is refreshing and very principled.

I noticed that in a May 2024 article in Policy Options, you wrote the following.

Since the modest measures announced in the budget, I've heard plenty of absurd arguments from people who have been enjoying the benefits of this unjustifiable tax break, and who are now attempting to rally the masses in support of continuing to pay a lower tax rate than working people.

One claim is that this change will harm working- and middle-class Canadians.

Can you please outline why you do not agree that a higher capital gains inclusion rate will harm working- and middle-class Canadians?

[Dr. Claire Trottier]

There are many reasons, but to the question you posed to the other witnesses, Jim Stanford had a report from the Centre for Future Work that came out recently and showed that in Canada, there are only 40,000 people who declare over $250,000 in capital gains every year. That is 40,000 Canadians. These are the folks who are most directly impacted by this change. We are talking about the wealthiest Canadians who are being impacted, so to claim this is something that's going to directly touch middle-class Canadians—like teachers, for example—is really just not based in reality. We're talking about people who already have access to capital, and that capital is making more than $250,000 in capital gains. We are talking about wealthy folks.

Obviously there are situations in which people make a one-time gain, so not everybody who is going to be impacted is going to be as wealthy as me, and I understand that, but this policy appears to me to be targeted towards folks who are already doing much better than the average Canadian.

Let's not forget the context in which we live, where a lot of people are really struggling with housing and with grocery costs. This is not only a gap between the extremely wealthy and the extremely poor; a lot of people who work for a living and who have good jobs also are being impacted by housing prices, grocery prices and all kinds of increasing costs.

I really am very strongly of the opinion that this is impacting mostly the very rich.

[Don Davies, NDP, Vancouver Kingsway, BC]

I'm going to throw a question out to Mr. Genest-Grégoire, Mr. Jacques and you, Ms. Trottier.

After some silence following the release of the budget, Pierre Poilievre and the Conservatives voted against raising the capital gains inclusion rate, claiming the reforms would “drive billions of dollars of machines, technology, business and paycheques out of our country” while giving billionaires an opportunity to “sell their investments and move their money abroad to pay lower taxes”.

Is there any evidence you're aware of that would back up that contention?

[Antoine Genest-Grégoire]

I'll answer, if I may.

Raising the capital gains inclusion rate will certainly render some business initiatives a little less profitable. We can't pretend that it doesn't come with economic costs. However, virtually no other measure targeting the rich would have less of an impact on that sort of thing.

This is not my area of expertise, but based on what's been published in Canada on the matter, it's taxing business investments that has the greatest impact on investment decisions. For example, being able to claim investment in machinery or technology as a business expense is a determining factor in decisions to invest and expand. Capital gains play a far more secondary role when making that kind of decision. Therefore, it's highly unlikely that there will be economic costs and a massive outflow of capital.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Davies.

That concludes our first round. Members and witnesses, we're into our second round of questions. The timing is a little different here for the amount of time that members have for questions.

We are starting with MP Morantz. I believe he's splitting his time with MP Stewart.

Welcome, MP Stewart, to our finance committee. Congratulations on your election.

Now we go to MP Morantz.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Ms. Wilson, I want to start with you.

Your firm does work for companies that do construction projects, presumably. Is that correct?

[Montana Wilson]

That's correct.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

In your earlier testimony, you said that you felt that if the capital gains inclusion rate were to be increased, that would incentivize less risk. People would be less likely to take a risk on a project to be developed if the capital gains inclusion rate is increased.

Is that correct?