Finance Committee on June 18th, 2024

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now we go to MP Davies, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Dr. Stanford, in an article recently, you wrote, “Most academic economists support a higher inclusion rate, partly because it levels the playing field between different types of capital income.”

Why do most academic economists support a higher inclusion rate?

[Dr. Jim Stanford]

Yes, that's on the basis of, for example, surveys of articles published by the Canadian Tax Foundation and commentary from several academic economists. Mr. Smart's work was already referenced earlier today, but there are many others.

There's a long-standing concern about the level playing field between different forms of capital income. Of course, there's a long discussion about making sure that capital income isn't taxed twice, once at the corporate level and then again at the individual level. That is the theoretical justification for the favourable treatment of all forms of capital income, but across the different types of capital income, there's been an emerging and growing inequality in how dividend income is treated versus capital gains income. Because of two things—an inclusion rate that is too low to reach that equality with dividends, and the decline in the corporate tax rate in Canada over the last couple of decades—it's clear that the treatment of capital gains is now more favourable than the treatment of dividends. That creates an enormous incentive for companies and for tax planners to try to transform any type of income into capital gains rather than interest or other forms of dividend income. There can be significant efficiency losses from that unequal level playing field.

I think that's the main reason that this idea of increasing the inclusion rate to two-thirds or even to 75%, maybe—many academic economists have suggested 75% —makes sense from that perspective.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Maybe you and Ms. Bruske together could comment on this.

We have heard some professionals, including doctors, claim that they will be hurt by this measure. Dr. Stanford, you wrote:

Most professionals incorporate to obtain generous tax and liability benefits. Capital gains exemptions are just the icing on that very sweet cake—and most of that icing is still there. Doctors and other professionals can fund retirement like the rest of us (via CPP, RRSPs, TFSAs, and savings) despite a smaller capital gains loophole.

Do doctors and other professionals who choose to incorporate face more unique challenges or barriers to accessing retirement savings than other Canadians do? I would just note that Stats Canada says that today approximately two-thirds of Canadians have no form of workplace pension coverage. I think Ms. Bruske commented on that. I don't know if doctors are facing any particular challenge compared to most workers. I'd like to hear your comments.

[Bea Bruske]

I don't think that doctors are facing any particular challenges. They have the opportunity to avail themselves of RRSPs, TFSAs, etc. What I'm more concerned about is the average orderly, working in a hospital, being taxed on 100% of his or her salary, while a doctor is not.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now, we'll go to MP Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thanks very much, Mr. Chair.

Dr. Stanford, thanks for appearing back at committee. I know you're no stranger here, so welcome back.

You cited a number of statistics, and frankly, I don't dispute any of them because I think we're looking at the same data. In particular, I think there are obviously very wealthy people who have a significant number of capital gains per year. However, the same data, the LAD, also shows that capital gains are very rare in a person's lifetime, and frankly, if there is a capital gain over $250,000, that it is a once- or twice-in-a-lifetime event for a large number of tax filers. In fact, those who have over $250,000 in capital gains on a perennial basis, i.e., say, 10 out of 10 years, is only about 160 tax filers out of the sample that they showed. Therefore, it is in fact a small number of taxpayers who may get a large break. Would you agree that there are some individuals who once or twice in a lifetime will get caught up in this capital gains hike?

[Dr. Jim Stanford]

Certainly that's true, and I think I said that in my previous intervention. There are a few things to keep in mind there. Number one, there are important opportunities for individuals who have a rare capital gains event to try to reduce and average out their exposure. That includes the $250,000 exemption, obviously, from the higher rate, which is stackable across a joint ownership situation. It also includes the capital gains reserve system, which allows people with an occasional capital gains to average that out over several years.

I'll also point out that the same argument could be applied to other features of our tax system. We have a system of increasing marginal tax rates on personal income, and there are people who end up in the top rate, just once or twice in their lifetime, but they still earn that income in that particular year. We do not have a generalized income averaging system in our tax system, so on some level, if you've made that much money in a year, you should indeed pay taxes on it.

[Adam Chambers, Conservative, Simcoe North, ON]

I understand. Indeed, that's the way the progressive tax system works.

There was also a statistic that suggested, using the same database, that 50% of those who have gains over $250,000 have other taxable income of less than $120,000. Some individuals, 10% of these in this category, have incomes of less than $20,000.

Would you support, or do you think it would be wise to try, narrowing the impact of the capital gains measure to just those individuals who are truly in that top 1% to 2% of income earners and not apply it to 100% of the general public?

[Dr. Jim Stanford]

Again, the number of individuals who receive large capital gains year after year is small, but they account for an overwhelming share of the total capital gains that are claimed, and an even larger share of the tax benefits associated with that.

Clearly, the government was attempting to narrow the impact of this measure with the $250,000 threshold. Again, they were following advice from academic economists who've been publishing on this for years. At some point—

[Adam Chambers, Conservative, Simcoe North, ON]

Mr. Stanford, I'm going to run out of time.

Quickly, would you be in favour of narrowing the application so that it's just for those who have high perennial capital gains incomes or total incomes?

[Dr. Jim Stanford]

I think there are provisions in the existing legislation that do that, with the $250,000 threshold, and other provisions in our tax system, including the capital gains—

[Adam Chambers, Conservative, Simcoe North, ON]

Understood. I'll take that as a yes.

Ms. Bruske, you suggested that many of your members wouldn't be impacted by this. You have about three million members, right? I know of a number of your members who own rental properties—not a number of rental properties but even just one or two—who hold them in a corporation. They will be taxed. This will impact them immediately. Should we exclude them from this legislation?

[Bea Bruske]

The number of members who are in that profitable position is minimal at best, I would argue. The members I hear from and the workers I hear from are certainly not in that kind of a wealthy situation where they have to worry about these situations in terms of the capital gains being increased on their profits.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now it's PS Turnbull, please, for five minutes.

[Ryan Turnbull, Liberal, Whitby, ON]

Well, this is a great conversation. Thanks to all of the witnesses for being here today.

Mr. Stanford, I'll start with you. Welcome back.

You mentioned in your opening remarks double-barrelled fairness. I thought that was an interesting way to put the fact that this new tax measure is increasing tax fairness while also increasing fairness in terms of the investments that are being made.

I wanted to ask you, though, about Kevin Milligan's comments on this. The reason I'm bringing this up is that I found both your article that was recently published, and also his remarks that were published online, really interesting. He said that a lot of the people who criticize these new tax fairness measures are not offering any alternatives to push back on inequality. I found that really interesting. He said, well, basically, you can infer from this that they often don't really care about inequality in our society.

Kevin Milligan put the question to himself online and asked whether this new inclusion rate change was really an effective and efficient measure among the others that could be considered. He said, “yes”.

Would you agree, Mr. Stanford, that this new capital gains change is really effective and efficient as a tax measure for addressing inequality?

[Dr. Jim Stanford]

Yes, I would, for the reason that capital gains income has become so unduly concentrated among the highest income categories of society, more so than other types of income. This actually reflects the proactive use of these loopholes by clever tax planners to arrange income so that it comes through a capital gains channel rather than through other channels.

This is where Professor Milligan and other academic economists want to see a more equal treatment between capital gains and dividends income. Because capital gains are so concentrated at the top end, anything that reduces incrementally the tax advantages of capital gains treatment will have a very powerful impact in reducing inequality through the tax system.

[Ryan Turnbull, Liberal, Whitby, ON]

Thank you for that.

Mr. Xuereb from Canadians for Tax Fairness, I was interested in your report, which I found on your website, about productivity and capital gains inclusion rates, which I read with great interest. I note that you said in your opening remarks that there is no correlation between capital gains rates, or even, by the look of it, tax rates and productivity, as has been claimed numerous times, mostly by Conservatives, I think, who are trying to push back against this.

What I noticed in the report, though, and what I am inferring from this.... I think it's explicit on page 5 where it says, “researchers have begun to establish a causal relationship between inequality and productivity.” It's as if the opposite is the truth, which is that the more inequality we have in our society, the less productive we are. Isn't that the heart of the issue?

I think Conservatives are trying to say, well, we don't want to address inequality because it will hurt investment and productivity, but I'm actually inferring from this report and the data that you've published here that the exact opposite is the truth: if we don't increase tax fairness and if we don't address inequality, then we will continue to struggle with productivity and investment. Is that true from your perspective?

[Silas Xuereb]

Yes, I think that's generally right. I wouldn't want to go so far as to say that inequality is the single biggest driver of falling productivity growth, or something like that, but I certainly think that, yes, if workers are being paid very little, they have less incentive to work harder. We've seen, after decades of trickle-down economics at this point, that it has not increased productivity greatly. I do think that we should make addressing inequality a more explicit goal of our policies.

[Ryan Turnbull, Liberal, Whitby, ON]

Thank you.

I have just a quick question.

I owned a corporation for 13 years, which I ran, and I know that there are significant tax benefits to incorporating. That's why most sole proprietors incorporate, when they get to a certain point of generating enough income, because you actually get some tax benefits to that.

I don't know who to direct this to, but, Mr. Cochrane, I know you're an economist. Do you know of the tax benefits from incorporating? I'm specifically interested in farms and other businesses, plumbers, etc. who own their own businesses and are incorporated. I think they pay significantly less income tax than other members of our society. Is that not true?

[The Chair, Liberal, Peter Fonseca]

I'm sorry, PS Turnbull.

Mr. Cochrane, I'll need a very short answer, like 15 seconds.

[An hon. member]

Are you saying that you evaded taxes when you incorporated?

[Dr. D.T. Cochrane]

I'm not a tax lawyer. I'm not a tax accountant, and we already saw that you get called out if you try to give tax advice, but Dr. Stanford has already mentioned that there are many ways that incorporating delivers certain tax benefits. As was said, the capital gains exclusion is just the icing on the cake, so those benefits all still exist.

[The Chair, Liberal, Peter Fonseca]

Thank you, PS Turnbull.

Members, we rarely have this, but we have enough time for a full third round.

We're starting with MP Hallan for five minutes, please.

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

Thank you, Chair.

I'll try to make this quick, and I'm hoping we can get to a vote quickly. I hope you'll pause my time because I want to move a motion that we have tabled, and I believe it's been distributed to everyone.

Given the large workload the committee has on the docket, the committee instructs the chair to book five meetings between July 8 and September 13, while the House is adjourned, to deal with unfinished business and pressing matters facing Canadians, including the cost of living crisis, housing crisis and the impact capital gains tax changes will have on Canadian small businesses.

Common-sense Conservatives are moving this motion because after nine years of Justin Trudeau and the Liberal-NDP government, they've created a cost of living crisis. Mortgages and rents have doubled. Housing costs are out of control. This is all while there is a housing crisis that the government caused.

Carbon tax one and carbon tax two have made gas, groceries and home heating more expensive. We found out today that one in four Canadians are not only food insecure, but also living in poverty, and there's record food bank usage across the country. OSFI is warning of a price shock for mortgage holders. Loan loss provisions at Canada's banks are at all-time highs. Organized crime and foreign actors are involved in money laundering in Canada. TD Bank is accused of money laundering the proceeds of fentanyl sales by Chinese drug lords. The job-killing capital gains tax hike punishes workers, small business owners, farmers, fishers, tradespeople and the family members who inherit property from loved ones.

Justin Trudeau has doubled the national debt, and now Canada spends more on servicing the debt than it does on health care transfers to the provinces. There are significant issues plaguing this country, yet the Liberal-NDP government is more focused on ramming through half-baked omnibus bills and tax hikes than it is on listening to real Canadians who are suffering from Justin Trudeau's policies and Chrystia Freeland's spending, all being propped up by the NDP to protect Jagmeet Singh's pension.

Common-sense Conservatives are ready to work for Canadians over the summer. I hope that my other colleagues around the table are too.

Thank you.