Good afternoon, committee members.
My name is Kim Moody. I'm a fellow of the Chartered Professional Accountants of Alberta and the founder of Moodys Tax and Moodys Private Client, a significant boutique advisory firm in Canada. I have a very long history of serving the Canadian tax profession with a variety of significant leadership positions. I'm also a prolific writer and speaker on taxation matters, including writing a weekly column on taxation for the Financial Post.
Today, I want to talk to you on three key matters regarding these proposals.
The first is the policy underpinning the capital gains inclusion rate proposal. Canada has a long and interesting history on the taxation of capital gains, and one can have a respectful debate on whether the inclusion rate for capital gains should be 50%, two-thirds, 75% or even, as some on this panel have advocated, 100%. However, put me on record as an advocate for a low inclusion rate, like 50%, since that lower inclusion rate provides incentive and acknowledgement of a key issue that most people experience when they originally invest capital to generate such gains.
That key differentiator is risk. It takes guts to buy land, to build a building and to rent it out, to buy a farm or to start or buy a business. Most Canadians are not wired to accept that risk, unlike some who think that investing is risk free. It is not. This is important because the ones who can hang on and make something out of their risky venture usually have spinoff benefits for a large number of Canadians. Canada needs to encourage the creation of more entrepreneurs and investment in our country, and a lower capital gains inclusion rate is one of those policy tools that has historically helped with that.
This proposal is a simple tax grab, no more, no less. At a time when Canada has significant productivity challenges, the last thing we need to do is send signals to Canadians and to others that Canada is not the place to encourage entrepreneurship and/or invest their capital.
The other significant policy concern I have is that individuals are afforded a $250,000 annual threshold at the 50% inclusion rate, whereas most trusts and all corporations are not. That proposal blows a hole in the policy of integration, which has been a core principle of Canadian tax for decades and decades. In other words, taxpayers should be neutral, from a taxation perspective, as to where their investment dollars are placed when comparing various legal alternatives. Now, however, taxpayers will be encouraged to realize capital gains personally so as to be afforded the $250,000 threshold, and this will, of course, cause distortions that are simply not good.
Number two is the disingenuous messaging surrounding this proposal. By now, it is well known that the famous so-called “statistic” that this measure would only apply to 0.13% of Canadians, which appeared in the budget documents, is simply false and disingenuous. It still shocks me that a simple and misleading so-called “statistic” would be put forward by a government to try to justify its proposal.
When faced with criticism on that, the pivot was to say that the increase was necessary to deal with intergenerational fairness. The Prime Minister also advertised a new slogan in a cutesy but misleading video where he called it the “capital gains advantage”. Then, of course, there was the pivoting by the finance minister with her famous “higher fences” comment.
These are examples of horrible politics trying to justify poor policy. Like many Canadians, I find it divisive, misleading and disgusting. As I stated earlier, one can have a respectful debate on whether an inclusion rate is a good policy, but to denigrate that subject into divisive politics is disappointing, to say the least.
Third, and last, is the implementation of the proposal. Setting aside my strong dissent to this capital gains increase, I now will consider whether this proposal is well thought out and implemented. It is clear the capital gains inclusion rate proposal in the 2024 budget was half-baked. No draft legislation was available on budget day, with that proposal to be effective roughly 10 weeks later on June 25. On June 10, the imperfect first batch of draft legislation was released and, as expected, was very technically complex.
Given the complexity, this clearly was not enough time to advise Canadians on their affairs, since the effective date would come into effect almost immediately. The second batch was released on August 12, and it's imperfect. Late yesterday, the third batch was released, and of course most Canadians have not had the chance to review it yet.
Canadians should expect detailed draft legislation to accompany significant tax policy changes and proposals. One important fix the government could do would be to redirect some of the huge amount of money that has been allocated to the Canada Revenue Agency in recent years to the Department of Finance's tax legislation division—even a small amount of it to go there—because there are a small number of hard-working bureaucrats in that division who are expected to carry a very heavy load to properly draft this important legislation. Extra resources allocated to them would be a positive step in the right direction.
The second implementation concern is the fact that the only way for Canadian taxpayers to avoid retrospective taxation on their accrued gains up until June 25 was to trigger actual gains on their assets. The government budgeted for Canadians to do this. Think about that for even two seconds. In order to avoid—
