Finance Committee on Sept. 24th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order. Welcome to meeting number 153 of the Standing Committee on Finance.

Today's meeting is taking place in a hybrid format. All witnesses have completed the required connection tests 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 you're 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 on June 13, 2024, the committee is resuming its study of the changes to capital gains and corresponding measures announced in budget 2024.

I would like to welcome our witnesses. With us today, as an individual, we have an adjunct professor of health policy at Simon Fraser University, Professor Steven Lewis. He is joining us via video conference. From the Canadian Cattle Association, we have the senior director of government relations and public affairs, Ms. Jennifer Babcock, as well as officer at large Jack Chaffe. From Canadians for Tax Fairness, we have Katrina Miller, who's the executive director there. From the Office of the Parliamentary Budget Officer, we have the Parliamentary Budget Officer with us, Yves Giroux. Joining Mr. Giroux is the director of budgetary analysis, Govindadeva Bernier.

You'll have up to five minutes to make your opening remarks. Then we'll proceed to the rounds of questions from the members.

Members, we are having some technical challenges with Kim Moody, who's also here as an individual. We're trying to fix those, so we'll put him at the end right now. Hopefully those challenges will be rectified.

I guess there are some connection issues with Katrina Miller for Canadians for Tax Fairness. She is trying to find a piece that will work with her computer or system, so that she's able to connect with us. Hopefully that happens.

With that, we're going to start with Steven Lewis, please, for up to five minutes.

[Steven Lewis, Adjunct Professor of Health Policy, Simon Fraser University, As an Individual]

Thank you, Mr. Chair. Thank you for this opportunity to present to the committee.

I'm a health policy analyst and health researcher. I have listened to two previous committee sessions and will try to avoid repeating arguments ably made before.

I will focus on how the capital gains inclusion rate changes will and will not affect self-employed incorporated professionals, such as doctors and independent consultants like me. The changes will cost us some money, as they should. I will explain why and address some of the claims about the adverse effects of the changes.

First, tax regimes are grounded in, and should reflect, explicit values. The changes are designed to raise revenues, and, importantly, to make the tax system fairer. They will modestly reduce income and wealth disparities by taking more money from higher-income people. The math is simple. If you oppose the changes, you oppose reducing income disparities, at least by this measure. I would emphasize how important it is for participants in these policy debates to disclose their values transparently.

Second, all of us should avoid overstating the alleged impact of any single and relatively modest tax policy change. If any such measure could on its own either exacerbate or solve any of Canada's inequality, housing, productivity, infrastructure, innovation or other problems, there would be documented evidence by now. The tax code remains largely intact and still privileges people like me.

Capital gains remain more lightly taxed than earned income. For professionals, these gains accrue mainly from conventional investments. Few of us are venture capitalists rolling the dice on game-changing innovations. Our incentives are unchanged, and our actual tax rates will remain considerably lower than nominal rates. The system remains less progressive, in fact, than it is on paper.

Third, the measure, though positive, will not do much to address Canada's serious wealth concentration problem. The tax system still makes it easier for me to grow my wealth than an ordinary working person. I can keep some profits in my company indefinitely and pay only 10% to 12% off the top, depending on the province. I can invest the remainder, and until these assets are sold, their value grows untaxed. I can smooth out income over a number of years to reduce my annual tax bill. Some of my income will still be taxed lower than the income of a wage earner with no such options and predictably fewer capital gains.

Fourth, it has been argued that retained earnings in corporations are the retirement plans for professionals who don't have an employer or state-funded pension. Any prudent doctor or consultant like me has a powerful incentive to take enough money out of the company in income to maximize their annual RRSP contribution, currently about $32,000. The RRSP grows tax free until money is withdrawn and also generates about a $15,000 annual income tax refund. It is likewise simple common sense to maximize annual TFSA contributions. With conservative rates of return, over 30 to 35 years, these funds grow to several million dollars.

Fifth, if it is determined that, say, family physician incomes are too low to attract and retain full-time practitioners, the solution is to give them more money. For example, the B.C. government gave them a 54% increase as part of its November 2022 contract with Doctors of B.C. The tax system is a clumsy instrument for addressing a very particular problem.

Sixth, and perhaps most importantly, a fair tax system that eliminates some advantages for people like me and confers new benefits on lower-income people will do more to improve the health of the population than billions of new dollars poured into health care. Put simply, health status is better in countries with less income and wealth inequality. More equitable tax policy is excellent health policy.

That is why I support the capital gains tax policy changes, but they should just be the beginning of other changes that create more security and opportunities for lower-income people to realize their potential, increase their productivity, accumulate wealth and improve their health.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Professor Lewis.

We'll now move to Mr. Chaffe from the Canadian Cattle Association, please.

[Jack Chaffe, Officer at Large, Canadian Cattle Association]

Thank you for this opportunity to present on behalf of the Canadian Cattle Association, or CCA, in your study on changes to the capital gains measures as announced in budget 2024.

My name is Jack Chaffe. I am the co-chair of domestic agriculture with CCA and past president of the Beef Farmers of Ontario. Along with my family, I own and operate a beef feedlot in southwestern Ontario.

CCA is the national organization representing Canada's 60,000 beef producers. The Canadian beef cattle industry is a significant driver of our economy and a global leader in sustainability, contributing $21.8 billion to Canada's GDP and supporting approximately 350,000 full-time equivalent jobs. A prosperous and thriving beef industry generates considerable economic, environmental and social opportunities and benefits to Canada.

CCA has been extensively engaged in discussions on changes to the capital gains since it was first announced last spring in the federal budget. Before we get into the specific measures announced, I need to emphasize that the current capital gains measure that includes intergenerational transfers of beef operations within families is critical. CCA is concerned that the recent changes to the capital gains tax will increase the requirement to sell off pieces of farms when they change hands. We need to ensure that the federal government does not jeopardize the current tax policy that allows the intergenerational transfer of beef operations within families.

In general, the lack of meaningful consultation time in advance of the announced changes is concerning. Beef producers have not had time to assess the changes and how they will impact their family operations. Each operation is unique. It has been difficult to quantify the changes in our sector on the whole without the proper consultation time.

We need to consider the impacts of the inclusion rate despite the changes announced on August 12. While we were pleased to see the changes to lifetime exemptions, other amendments to the measures are counter to those announced under Bill C-208 and its amendments in budget 2023. By increasing the capital gains inclusion rate, the federal government risks weakening the provisions under Bill C-208 that facilitate smoother intergenerational farm transfers to those younger producers.

The majority of Canadian farms operate under a family operation, but each farm is unique in its operational structure. To address the vast differences between those structures, producers need greater clarity regarding the changes between August 12 and those announced in budget 2024. The changes announced in the budget were done without consultation, which creates confusion for farmers whose operations are built on years of tax advice.

In addition to producers, tax advisers and accountants also require more time to assess the changes and how they will affect the families across Canada. Specifically, there are unanswered questions about whether farms qualify under the Canadian entrepreneurs' incentive, as an example. Although we are able to receive tax advice from our advisers, we need more guidance and clarification from the federal government on who qualifies for those incentives.

Regarding the timing of the proposal, the consultation period lasted only three weeks and during a busy time for the farmers. We therefore need more time to accurately analyze the impacts to our producers across Canada. Our sector is at risk of losing a significant portion of the workforce, as farmers may retire without viable succession plans. This also places Canada's rural economy at risk of declining. We need to ensure that government policies do not unintentionally contribute to the decline of agricultural production in Canada.

Thank you for your time. I would be happy to answer any questions that may come.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Chaffe.

Now we'll hear from Kim Moody, from Moodys LLP tax advisers, speaking as an individual.

Go ahead, please.

[Kim G. C. Moody, Moodys LLP Tax Advisors, As an Individual]

Good afternoon, committee members.

My name is Kim Moody. I'm a fellow of the chartered accountants of Alberta. 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 in the Financial Post.

Today, I'd like to briefly comment on three key matters regarding these proposals. The first is the policy underpinning the capital gains inclusion rate increase. Canada has a long and interesting history on the taxation of capital gains, and one can have respectful debates on whether the inclusion rate for capital gains should be 50%, two-thirds, 75% or even 100%. Given Canada's historical debate and treatment on this, 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, to start a business or to buy a business. Most Canadians are not wired to accept that risk, so why is this important?

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

I have a point of order, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Go ahead, Mr. Ste‑Marie.

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

The interpreters are telling us that the sound quality is not good enough for them to interpret.

[The Chair, Liberal, Peter Fonseca]

We will reconnect with Mr. Moody off-line and try to get that rectified, but we cannot continue if the quality of the sound is not good for the interpreters.

We will now move to the Office of the Parliamentary Budget Officer. We have the PBO with us.

Yves Giroux, go ahead, please.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair.

Members of the committee, thank you for the invitation to appear before you today. We are pleased to discuss our analysis related to your study of the changes to the capital gains inclusion rate and corresponding measures announced in budget 2024.

With me today I have Mr. Govindadeva Bernier, director of budgetary analysis.

Consistent with the Parliamentary Budget Officer's mandate to provide independent, non-partisan analysis to Parliament, my office released our cost estimate on August 1.

As you are aware, budget 2024 introduced an increase in the capital gains inclusion rate from one-half to two-thirds for corporations and trusts, and from—

[The Chair, Liberal, Peter Fonseca]

I'm getting some interpretation coming through my earpiece. Is anybody else? It's French. I don't know what happened there. It's the wrong channel.

Go ahead, Mr. Giroux.

[Yves Giroux]

As you're aware, budget 2024 introduced an increase in the capital gains inclusion rate from one-half to two-thirds for corporations and trusts, and from one-half to two-thirds on the portion of capital gains realized in the year that exceeds $250,000 for individuals.

This policy would apply to capital gains realized on or after June 25 of this year. Based on our analysis, we estimate that these changes will increase income tax revenues by $17.4 billion over the next five years. Using a data linkage between corporate income tax returns and personal income tax returns, my office also plans to conduct additional analysis to estimate how many individuals will be affected by these changes over time, either directly or indirectly, through a corporation they own. We also plan to estimate how many unique individuals would be affected at least once over a certain number of years.

We would be pleased to respond to any questions you may have regarding our analysis or other PBO work.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Giroux.

I think we're still working on Mr. Moody, so that's still a work-in-progress, and the same thing for Ms. Katrina Miller.

We are now going to move to members' questions. If we do rectify those connection issues, then we will bring them back to give their statements or to finish off their statements, and then get back to members' questions.

Right now, we're starting with the first round. Each party will have up to six minutes to ask questions.

We're beginning with MP Morantz for the first six minutes.

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

Thank you, Mr. Chair.

I had been hoping to direct my questions to Mr. Moody, but we have other great witnesses here as well, so I'll get right into it.

[The Chair, Liberal, Peter Fonseca]

MP Morantz, I'm sorry to interrupt, but you can pose your questions and then those answers can come in writing, if you'd like.

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

It's better to have a conversation, Mr. Chair, but perhaps some other time.

In any event, Mr. Moody has made some excellent points and criticisms of the move by the government to increase the inclusion rate, so hopefully we'll be able to get him on before the end of the meeting so that he can tell my Liberal colleagues on the committee why it's such a bad idea.

Now, Mr. Chaffe, I listened to your comments with interest. When somebody enters the agricultural industry, whether it's to farm, to raise cattle or to raise hogs for the pork industry, when they make that investment, they're taking a risk—are they not?

[Jack Chaffe]

Yes, it's a severe risk. Most of the time, people don't get into agriculture unless it's through a family operation.

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

I'm not in that industry, but I remember very clearly—it was probably 20 years ago or so—when the BSE crisis took place in the cattle industry and the whole industry was shut down. People in that industry lost a lot of money. Some of them lost their herds. Some of them lost their businesses. There were bankruptcies declared.

Is that not correct?

[Jack Chaffe]

Yes. The fallout from BSE is still upon us under some of the regulations we're dealing with.

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

One of the arguments I keep hearing my colleagues in the other parties say is, “Well, it's not fair that regular income earned through wages is taxed the same way as earnings through capital gains.” There's a reason for that, and consecutive Canadian governments have always recognized that reason. It's that we want people in our society to take risks and be rewarded for those risks, not punished for taking them.

You must know, for example, younger-generation farmers. Would they, for example, consider not making the types of investments they might have otherwise made had the inclusion rate stayed at 50%? In other words, if they took that risk and were successful, half of their gain would have been without tax.

[Jack Chaffe]

I would say that, in any business, it would be a concern, especially for a younger person, because a lot of the money you make in agriculture you would reinvest back into land, buildings and machinery to create income. To have that tax inclusion raised to the two-thirds level takes away part of the drive to take those risks.

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

Mr. Giroux, I want to ask you a couple of questions.

You said you're going to be doing an analysis of how many people will be affected. I realize you don't have the results of that analysis here, but I thought I'd ask you about the types of areas you're going to explore. The Liberals have said that only 0.13% of Canadians are affected by the increase in the inclusion rate. We've heard testimony from many people at this committee who are not in the 0.13%, including Larry the plumber from my home province of Manitoba, who laughed when I asked him if he was in the 0.13%. He is clearly affected by this change.

Are there not other areas where people could be drawn in? For example, corporations don't get that $250,000 threshold. Would it not have to be hundreds of thousands of people?

[Yves Giroux]

Yes, the number of individuals and corporations affected is in the thousands.

To go back to the first part of your question, the analysis we will undertake, once we can link the data, will look at whether these dozens of thousands of people affected will just be affected by a one-off event in their lifetime, or whether there will be multiple occurrences throughout the taxpayer's life.

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

Thank you.

I think you mentioned that you'll also be looking at indirect effects. For example, there are millions of shareholders in publicly traded corporations across the country. Many of them realize capital gains, if not every year, then often in the course of their business over the years.

Will you be looking at that, as well?