Finance Committee on Oct. 31st, 2024

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Are taxes and permitting costs' being lower in the U.S. on the construction of new homes also contributing to that gap?

[Timothy Sargent]

Certainly, if you're going to invest in housing in Canada, you're going to have a very long wait before you actually see anything get built. That time is very significantly less in the United States.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Would it be fair to say that the higher taxes, as you mentioned, and the longer permitting times are causing the decline in GDP per capita in Canada as well?

[Timothy Sargent]

I think those are key contributors to the predicament we find ourselves in.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

The Prime Minister recently claimed that increasing the capital gains tax has no impact on whether people invest more or invest less. Does he have any idea what he's talking about?

[Timothy Sargent]

I'm not going to speak for the Prime Minister, but as an economist, I can tell you that when you increase taxation on investment and saving, you're going to get less investment and less saving.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Mr. Robson, I'll ask you the same thing.

The Prime Minister claimed that increasing the capital gains tax has no impact on whether people invest more or invest less. Can you comment on that?

[William Robson]

I've already said this, so I'll repeat it: The direction of the impact is very clear. I'm echoing Tim Sargent. You'll get less saving and less investment.

The higher capital gains tax on corporations is less visible than the one on individuals, but it's pervasive. Therefore, that is going to reduce the return on investment and make the marginal project more attractive to undertake in the United States than in Canada.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you.

Mr. Sargent, I want to get your thoughts on.... The government keeps saying that it's only 0.13% of the population who's going to be affected by this capital gains tax hike. Can you elaborate a little bit more on that and on how it's actually not? It does affect the middle class as well.

[Timothy Sargent]

Those figures are often based on a point in time—in a given year, how many individuals are affected—but that's very different from how many individuals will be affected over the course of the period that they hold...over the course of their lifetimes, let's say. You're not necessarily buying or selling these assets every year. You're buying a cottage or something, and you're holding on to that for a longer period of time.

In fact, it'll actually be more people who are directly affected, and then everybody suffers if we have less saving and less investment because we're less productive as a country.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Chair, with my remaining time, I want to put something on notice, if that's okay. I just want to put it on notice. It is:

Given that the Governor of the Bank of Canada refused to answer questions regarding the job killing capital gains tax hike and its impact on the economy, that given it is the mandate of the Bank of Canada “to promote the economic and financial welfare of Canada,” and given that the committee heard that this tax hike will further harm the economy, the committee call the Governor of the Bank of Canada to return to answer questions on the economic impact of the capital gains tax hike and that his testimony be included in the Pre-Budget Consultation Report.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Hallan.

Now we're going to MP Sorbara, please.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Chair.

It's great to hear all this testimony today. I see Mr. Robson on screen, and obviously I don't see Mr. Sargent. I know he's there.

Mr. Robson and Mr. Sargent, you're both economists.

Mr. Robson, I tend to read quite thoroughly the material that's put on the C.D. Howe Institute website, and I see that Sandra Pupatello, a good friend of mine, has now joined, so some great folks work there.

There's one thing I'm very disappointed about with your commentaries. Neither of you mentioned, as esteemed economists or supposedly, that Canada's fiscal deficit is roughly 1%. What is the United States' fiscal deficit? If we want to make the comparison, it's over 7%. Canada would be running a deficit of over $300 billion or even $400 billion a year if we were doing exactly the same thing the United States does.

Second, Mr. Sargent, I have to correct the record. On foreign direct investment, Linde was $2 billion, Dow was $10 billion, Honda was $15 billion, and the list goes on and on. On an FDI basis on a per capita basis, you know the numbers as well as I do. Canada is doing very well on a per capita basis.

Also, concerning the IMF, you two can get up tomorrow morning and write the IMF to tell them they're wrong. We all know what surplus stripping is, and I'm surprised that you guys don't mention surplus stripping and how that tax avoidance strategy works. The IMF said, “The increase in the capital gains inclusion rate improves the tax system’s neutrality with respect to different forms of capital income and is likely to have no significant impact on investment or productivity growth.”

Now, maybe the folks at the IMF are all wrong. Maybe you folks are both right, but you didn't mention both sides. You didn't talk about fiscal deficits. You didn't talk about the neutrality and integration aspects of taxation. Somehow these aspects got left out of your testimony, and I'm curious why. I'm very curious.

With that, I would like to ask this question. On electric vehicles, has Canada attracted billions of dollars of investment here in the Canadian economy, including the $155-million investment that was announced right here in the city of Vaughan two days ago by a South Korean company creating 300 jobs? Also, no one mentioned that, in the last month, there were over 100,000 full-time jobs created here in Canada.

The other aspect you guys didn't mention, and I have ask is whether we've achieved a soft landing.

Mr. Robson, has Canada achieved a soft landing, yes or no?

[William Robson]

Canada is in a long period of stagnation, so I don't—

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I have to correct. Stagnation is defined as when there's inflation and there's zero growth. Inflation is falling. Interest rates are falling. The economy is growing moderately.

Did you not see the forecast in the Financial Times, either of you, that the Canadian economy will lead the G7 in economic growth in 2025 and be number two here without a 7% fiscal deficit? Am I the only one reading that stuff?

[William Robson]

Chair, how would you like us to respond to this? There are a number of points on the table.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I'll give you 30 seconds each.

[William Robson]

The U.S. fiscal situation is terrible, and it's one of the reasons that I think it would be good for us to make our fiscal situation better. I think interest rates are likely to go up because of all that borrowing pressure.

If you're worried about integration, consistency and surplus stripping, why would you make the inclusion rate different in different places? The problem that it creates is much worse than the problem it was notionally supposed to address, and you think that the IMF is wrong.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Only 12% of corporations, actually, are impacted by the capital gains inclusion rate, and the marginal effective tax rate for manufacturing investment here in Canada—I'll even send you the chart myself—is actually the lowest in the G7. There are many things in this country that we're blessed with. There are many things we need to work on, absolutely. This is Canada's decade—and I'll repeat that over and over again.

Everything we've done, from AI to hydrogen, to green, to electric vehicles and so forth, is going the right way. I'm so happy that one million Canadians have now gone to the dentist and received the care that they need. It may not be a social program that Conservatives want, and I'll say this: We know the Conservatives have said they're going to cut the housing accelerator fund, which accelerates housing here in the city of Vaughan, Richmond and Markham, and that's real dollars being put to work here in those cities. Confident governments and countries invest in their people, and that's exactly what we're doing.

I'm disappointed that neither one of you talked about fiscal deficits in the United States versus Canada, our fiscal position or our AAA credit rating. All you did, especially Mr. Sargent from the Macdonald-Laurier Institute, was just talk down the economy. I thought you were sitting on the opposition benches for a couple of minutes, and I'm trying to be neutral as an economist.

Chair, I turn it back to you. I think my five minutes are up. I wish to thank everybody. Happy Halloween.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Sorbara.

Now we move to round three. We have enough time to go through a full round three today.

I have MP Kelly for the next five minutes.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thanks, Mr. Chair.

Given that Mr. Sorbara challenged two of our witnesses and then wouldn't allow much—a very small reply—before interrupting Mr. Robson and didn't let Mr. Sargent get in at all, I think that some of these points need to be addressed by the actual witnesses today because this is what we do at the committee. We call witnesses who provide evidence that forms part of the report. MPs don't provide the evidence for reports.

Mr. Sargent, do you want to start and maybe tackle some of the points that were raised?

[Timothy Sargent]

Just to quickly go down the list, firstly, the United States government gets to borrow in U.S. dollars, which is the world's currency, so they have a lot more way to go before they run out of fiscal road than Canada, which is a much smaller economy and is only borrowing in Canadian dollars.

I didn't finish my thought on foreign direct investment, so I didn't actually say anything about it. Had I been able to continue, what I would have said is that, yes, foreign direct investment in Canada has increased if you look relative to the U.S., but it has been dwarfed by the amount of money that's actually leaving the country. We actually now have a net deficit in our investment relationship with the United States. These numbers are in a recent Royal Bank of Canada report.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

I'm sorry, but on that point, do you have a number for that deficit? Yes, there's money coming in, but there's much more money leaving. What is the total of that investment deficit?

[Timothy Sargent]

We have $600 billion coming in and a trillion going out, so that deficit is $400 billion in 2022.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Despite what we heard from Mr. Sorbara, we're actually down $400 billion in net direct investment. Okay. Thank you.

I'll let you continue if you have other points to make.