Evidence of meeting #153 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was changes.
A video is available from Parliament.
Govindadeva Bernier Director, Budgetary Analysis, Office of the Parliamentary Budget Officer
Thank you for the question.
We will be looking at how many corporations are affected either every year or once across a number of years. However, obviously, for publicly traded corporations, we won't be able to link it to the shareholders. We're going to have that link specifically for private corporations.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
That's okay.
What about, for example, the Canada pension plan? It is invested in corporations. Does it not also realize capital gains?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Yes. Any corporations that the CPP or any other pension plan has invested in would be subject to the capital gains inclusion rate.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Is it possible that the Canada pension plan will be adversely affected by this change?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I would say it's more than possible. It's very likely, given that the CPPIB invests in publicly traded corporations that are Canadian.
Conservative
Liberal
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you, Mr. Chair.
I'm going to direct my questions to Mr. Lewis.
Welcome to committee. Thank you for following this committee for the last number of meetings.
I want to just comment on a couple of the points you made in your opening comments, starting with the impact of capital gains on income inequality and tax inequality and income disparity in the country. Something we've fallen into, I think, in this committee and in some of the conversations around the capital gains adjustment is really overstating the impact that this very modest tax change is having.
With that in mind, some professionals—and you have probably heard this in other testimony or other meetings here—incorporate to obtain generous tax and liability benefits. Those could be doctors, plumbers or certainly, as you have indicated, independent consultants. We've heard from some MPs that these changes will kill economic growth and job creation. What is your response to this?
I know you referenced some of this very clearly in your opening comments, but I'd like you to restate it, if you wouldn't mind, for the record.
Adjunct Professor of Health Policy, Simon Fraser University, As an Individual
I see no mechanism whereby that tax change will have any impact on job creation. I will lose money. I will pay some more money because of this. None of my incentives have changed. They're still there. If I want to make more money, I will work harder to make more money. This capital gains inclusion increase will essentially add about a third—from 25% to say 33%—of what I will pay on money that is gained through capital gains by the retained earnings in my company. It will not affect any decision about whether I hire somebody or a research assistant or something, because I would be spiting myself to let it affect those decisions.
As far as investments in new kinds of industries go, what happens to our money? In other words, what happens to the wealth that people like me accumulate in our companies? Maybe one or two people put their money in local entrepreneurs and take a flyer on a daring investment, but that's not what most of us do. We buy stocks, bond securities and standard kinds of investments.
If we make money on those, the money we make on those is still taxed less than the money we make by the sweat of our brow working, and it's the same for salaried people. In the case of self-employed professionals with private corporations, frankly, I don't think anything we do has anything to do with creating new jobs. I just don't think that's how it works.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you.
I realize that you referenced some of this in your opening comments, but I'd like to give you an opportunity to go a little deeper. We know that in Canada 100% of Canadian employment income is subject to tax, whereas 50% of capital gains, up to $250,000, was included in that income. Now, with the changes we're proposing, we're bumping this up to two-thirds of any capital gains exceeding $250,000.
Could you comment on who has benefited from this preferential treatment of capital gains in Canada and then give us any other information to try to dispel some of the comments that have been made?
Adjunct Professor of Health Policy, Simon Fraser University, As an Individual
In general, the people who benefit from this favourable treatment are people who have enough money to invest in securities, land and other kinds of investments, or, frankly, in cottages and lakefront property that has a chance of growing. A lot of that, again, is not very risky.
I actually also have family land in southeastern Saskatchewan. I know Mr. Moody will address this later. It is not a risky proposition to have farmland in Canada. It's been going up at an enormous rate—10%, 12%, 15% or 20% a year—for many years in my province, and this creates enormous capital gains. If you're only taxed on half of that, those people who have land will get richer quicker.
The long and the short of it is, on a personal level—never mind if you have a corporation—if you have enough invested that you make $250,000 a year more in capital gains, you're getting an incredible bargain with the exemption. The whole bargain you had before.... If you made a million dollars in capital gains by investing in crypto, then you would be taxed at a maximum of 25%. Now that break is reduced, but you still have $250,000 of capital gain on which you will pay a maximum of 25%, which is a tremendous tax advantage.
While none of us celebrates having to pay more money, this is not a particularly enormous blow to your income prospects. It will be some, but to say that this is somehow reducing people to a precarious state, if you're a doctor, a lawyer or a consultant like me, strikes me as a major overstatement.
Liberal
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
First of all, I see that Ms. Miller has joined us. Secondly, I wonder if Mr. Moody's technical problems were resolved. Obviously, it's very important that we be able to hear the presentations of all the organizations we invited today.
Liberal
The Chair Liberal Peter Fonseca
MP Ste-Marie, it's a good point. I don't know about Mr. Moody, but I do know that we have Ms. Katrina Miller with us now.
If you would like, before we conclude the first round, we can allow Ms. Miller to do her opening remarks, if you'd like to hear those. Then we can also see if Mr. Moody's equipment is fixed.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Yes, that would be perfect. We can hear from our witnesses and then I will ask my questions.
Liberal
The Chair Liberal Peter Fonseca
Very well, thank you.
Ms. Miller, please, let's see how everything works. You have five minutes if everything does work well.
Katrina Miller Executive Director, Canadians for Tax Fairness
Thank you so much for your patience. You have my apologies for my tardiness to this meeting.
Thank you for the privilege of speaking with you today about the changes to the capital gains taxation and how these changes might help our country move—
Liberal
The Chair Liberal Peter Fonseca
I am going to interrupt, Ms. Miller.
Raise your boom to just between your nose and your lips.
Okay. Continue.
Executive Director, Canadians for Tax Fairness
I'm here to talk about how the changes to capital gains taxation can help move us toward a more equitable and affordable society.
I'll be focusing my comments on recent research that we've done regarding how large corporations, particularly those in the finance and real estate sectors, are increasingly cashing in on capital gains because of this tax break and why allowing them to do so is actually harming our path toward an affordable Canada.
We've appeared in front of this committee before to present our research on how the profit margins amongst corporations across many sectors have been growing over the years—quite astoundingly during the pandemic and after the pandemic. During that time, their productive investment has basically stalled out. At the same time, their overall tax rate has fallen. That's because of tax breaks like capital gains and the fact that they're taking greater advantage of those tax breaks, as well as avoidance measures that they're putting into place.
In fact, we've shown that in 2022, Canada missed out on $30 billion of public revenue that could have gone directly to investments in health care, education and housing, which are the kinds of investments that make life more affordable for your average Canadian family.
Today, I'm here to present information from a report we just released yesterday, in fact, about how capital gains and the tax breaks associated with them are hurting our attempts to make housing more affordable in Canada.
In 2023, average rents rose by 8%, while our wages rose an average of 5%. During that time, Canada's real estate sector walked away with $50 billion in profits. That's 40% higher than their prepandemic record.
Financialized landlords—those are real estate investment trusts or private equity funds—are playing an ever-greater role in our housing market. The sector now owns about one-quarter of all purpose-built rental stock. They are the majority purchaser for these properties on the market right now. These financial companies seek out assets that offer the greatest returns. Our capital gains tax break has sweetened the pot considerably for them.
Since the Chrétien government lowered the inclusion rate for capital from 75% to 50% in 2000, we've seen an 860% increase in profit made through capital gains in the real estate sector. These companies are quite clear in their publicly available financial documents that their motivation is to increase rents as much as the market will bear in order to increase ongoing returns and also the value of the property at point of sale. As I mentioned, asset sales are becoming an increasing source of profit.
In 2022 alone, Canada's largest seven residential REITs distributed $100 million of tax-free capital gains directly to investors. In this context, the government's move to increase the inclusion rate to two-thirds is obviously welcomed.
However, the tax incentive for capital gains still remains under these rules. There's still a third that remains tax free. Combine that with the continued corporate tax breaks that we have for REITs in our system and our tax system is still adding fuel to the growing financialization of housing and, with it, to our rental affordability crisis.
Therefore, the Canadians for Tax Fairness recommends a full inclusion of inflation-adjusted capital gains in taxable income, especially for the finance, insurance and real estate sectors. These large corporations should not get tax breaks for owning land that appreciates in value without productive investment into that property.
In addition, the government should rescind the corporate tax breaks for REITs, acknowledging that their role in our housing market is driving, to some extent, our rental affordability crisis. Removing the tax breaks that make it so attractive for financial firms to buy up rental housing, use it as an asset instead of treating it as a home and raise rent simply to increase the asset's value is an important step to making housing affordable in Canada.
The public revenue that we can gain from removing these harmful tax breaks, which will be well over $1 billion annually, could be directly funnelled into building the non-market housing that Canada needs right now in order to make our overall housing stock more affordable.
That's it for my comments at this moment. I look forward to your questions.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Ms. Miller.
Just before going back to Mr. Ste-Marie, we're going to try with Mr. Moody, please.
He is not ready to go.
MP Ste-Marie, now is your time for questions, please.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Greetings to all my colleagues.
I would like to thank all the witnesses for joining us today, and for their very useful presentations.
Obviously, we don't yet have the text of the bill. There was a second notice of ways and means motion yesterday, which we are currently considering. I look forward to seeing the bill so that we can analyze the soundness of this proposed tax policy.
Currently, millionaires and billionaires have a lower tax rate than the middle class in general. That must be corrected; it's a matter of tax fairness. We fully agree on that principle. However, we have many concerns about small-scale savers in the middle class who could be affected by the measure when they are not the ones being targeted. Let's take the example of a middle-class person who decides, for retirement income, to buy a multiplex and resell it when they retire. That person could be affected by this measure, whereas people in the middle class are not the ones being targeted.
My questions are for Mr. Giroux and Mr. Bernier.
I look forward to seeing your next study, which you presented briefly. I want you to know that I am particularly concerned about people who will declare a gain only on an ad hoc basis, as you said. The Corporation des propriétaires immobiliers du Québec, or CORPIQ, tells us that 82% of triplex, quadruplex or quintuplex owners are in Quebec. So we would like special attention to be paid to that. We would also like you to provide, in the breakdown of your data, the cases that involve the sale of a secondary residence or an estate.
First of all, Mr. Giroux and Mr. Bernier, have you had time to look at the new notice of ways and means motion? If so, were there any elements that drew your attention, in terms of the ways and means motion that was passed last June?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We haven't had a chance yet to look carefully at the new notice of ways and means motion to see if it fully complies with the previous notice and with what was announced in the budget. We will therefore take the time we need to make sure that it is consistent or to point out any discrepancy there may be.
We also took careful note of your suggestions regarding subsequent analysis, particularly as to whether capital gains are realized on a one-time or recurring basis. Based on our experience, we can easily guess that, in the case of low or medium value capital gains, it is recurring. As Mr. Lewis mentioned, there are people who report capital gains as a result of mutual fund or equity transactions. Of greater interest to us are capital gains of $250,000 or more, which will be subject to the higher inclusion rate for individuals.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
As I understand it, a middle-class person who owns a multiplex, such as a fourplex, and sells it, cannot spread the capital gain over several years for tax purposes. It has to be reported for the year the building was sold. In that case, under the current act, it is not possible to spread the capital gain over a number of years.
To your knowledge, am I interpreting the current tax laws correctly?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In most cases, that's correct. However, it is possible to share the property with a spouse or with children, for example, and then multiply by the number of people in question the exemption or the lower inclusion rate that applies to the first $250,000 of capital gains.
You can always set up a business structure that spreads the gains from the sale over time, but that would be more complex. There would obviously be a transaction fee associated with those arrangements, so it would be less likely in the case of an apartment building or a few apartment buildings.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, that's very clear.
In the study you published, you presented the estimated amounts. You don't mention, though, the number of individuals or corporations that are covered by the measures.
Have you calculated that number? If so, is it comparable to the figures presented by the government?