Finance Committee on June 18th, 2024

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

Thank you, Mr. Chair.

Mr. Godbout, I want to thank you again for being here. What stood out for me from your presentation are the four concerns you raised and the fact that, in the past, taxpayers were given at least six months to fully understand the proposed capital gains changes, which was not the case this time. We certainly lament that fact.

I want to go back to your first suggestion, which was to allow taxpayers some flexibility by offering them the option to realize capital gains “on paper”. That suggestion was taken up by the Joint Taxation Committee of the Canadian Bar Association and Chartered Professional Accountants of Canada, if I understand correctly. Can you provide further details on what that involves?

[Prof. Luc Godbout]

It would simply mean telling people right away that whether they file their 2024 tax return in March or April of 2025, they can opt to declare before June 25, 2024 that they have decided to dispose of certain assets of their own accord. That would be particularly helpful for property owners who have a duplex or triplex. They could decide to dispose of some of their assets on paper, of their own accord, and claim that the capital gain had been realized before the actual sale of those assets. There is nothing mysterious about this proposal since the capital gains would be taxable in the tax return filed in March or April 2025, but at the rate of just 50%. That would give people a lot more flexibility. Not everyone could take advantage of it, but it would ease some of the stress and uncertainty among people who may not have been able to promptly consult professionals about these changes.

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

Thank you. If I correctly understand the explanations on the finance department website about the proposed legislative changes, the department has specifically excluded that possibility from the bill. Do you know why? Do you have any idea?

[Prof. Luc Godbout]

I don't know why that possibility was excluded. I still believe in it though and can cite by way of argument that, for the 1994 tax year, the Canadian government did offer that choice at that time. Since it was eliminating another measure, it allowed people to dispose of certain assets on paper, up until February 22, 1994, with a view to their spring 1995 tax return.

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

That's very clear. I would have liked to ask you about some other things, but my time is up. Thank you again for being here.

[Prof. Luc Godbout]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

MP Davies, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Dr. Stanford, I'd like to talk about an issue that I don't think has been raised in this meeting, and that's the Canadian entrepreneurs' incentive, which will reduce the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains.

Combined with the enhanced lifetime capital gains exemption when this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.2 million when selling all or part of a business. According to the government figures, entrepreneurs with eligible capital gains of up to $6.25 million will be better off under these changes.

Do you have any comment on that particular aspect of the change?

[Dr. Jim Stanford]

It is important to keep in mind that the existing exemptions under the capital gains tax that we already have, including the principal residence exemption and the lifetime exemption for farms and small businesses, are maintained and, in the farms and small business cases, expanded.

Now, this new entrepreneurship credit will provide a lower capital gains inclusion rate than we have at present for that lifetime $2 million. There's a significant share—probably a strong majority—of small businesses that will actually be better off under this reform than they are at present.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

I have a final question for Canadians for Tax Fairness.

I just want to be clear on this. Mr. Poilievre argues that the reform will “drive billions of dollars of machines, technology, business, and paycheques out of our country.” What's your comment on that?

[Silas Xuereb]

Yes, sure. I mean, if we're worried about capital flight, where I think we're normally worried about that is to the U.S.

I just note that President Biden's recent budget proposed an even larger increase in the top marginal tax rate on capital gains than this proposal here. I also think that Canada has a very skilled workforce and generous tax credits, so there are a lot of reasons that companies will want to be here. I don't think this is going to cause a significant exodus.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Next I have MP Morantz. Then—I know we'll go a little bit over, members—MP Thompson will finish off this round.

MP Morantz.

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

Thank you, Mr. Chair.

Mr. Cochrane, you said a few minutes ago that the increase in the capital gains inclusion rate is a blunt instrument. I'm paraphrasing, but it's unfortunate that people like Mr. Stefanec and Mr. Jochum get caught up in it, because the real point of it is to get at the very wealthy high earners who are really in the 0.13%.

Would you agree, then, that it's worth trying, in this process we're studying—the proposed legislation—to come up with a mechanism to exempt folks like Mr. Stefanec and Mr. Jochum, who are legitimately not part of the 0.13%, from having to pay an inclusion rate over and above the 50%?

[Dr. D.T. Cochrane]

I don't think it's the appropriate means of making sure they're not paying it.

I think we need to take, as best as we can, the Carter commission's recommendation that you tax all forms of income and then provide other mechanisms to ensure that taxes are being levelled where you want them to be levelled. Provide credits as a means for people to reduce their tax burdens rather than leaving this area of certain forms of income that aren't going to get taxed, which then just entices all kinds of deformations of how people are going to operate to avoid having income that gets taxed at all.

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

Fair enough, but at the end of the day, I think we're getting to the same place in two different ways. You would agree that folks like Mr. Stefanec and Mr. Jochum, who are not legitimately part of the 0.13%, should be made whole and not penalized the way the high earners would be.

[Dr. D.T. Cochrane]

I don't know their exact financial situations. I'm assuming that they are looking at reasonable gains. It's worth mentioning with regard to the different changes that are going to be made that it's at $6.2 million in capital gains: that once all of the changes are implemented, at $6.2 million you're going to be paying higher capital gains than under the current rules. If those gentlemen are looking at more than $6.2 million in capital gains, good for them, but also, they have an obligation to pay into our tax system, as all people do.

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

There are people like them who are not part of the 0.13% who are caught up in this and who are not part of that group. All I'm asking you to confirm is that you would agree that they shouldn't be taxed at the higher inclusion rate.

[Dr. D.T. Cochrane]

I will agree that you have work ahead of you to make sure that our tax system is fairly applied to all Canadians.

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

All right.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now we'll go to MP Thompson, please, our final questioner.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

Dr. Stanford, I'm sorry, I referenced you before as Mr. Stanford. My apologies.

Some professionals incorporate to obtain generous tax and liability benefits. There has been criticism that essentially we're killing working-class jobs and even hindering entire sectors as a result of the tax change. Would you give your response to those criticisms, please?

[Dr. Jim Stanford]

I don't believe that this change in the inclusion rate will have any impact on actual real investment spending by Canadian businesses. Businesses don't buy machinery in order to try to sell it later at a profit. That's where the capital gains issue would be most relevant. For running and maintaining a profitable business, this change will have no impact.

In terms of professionals, there are huge advantages, and not just tax advantages but also issues about protecting liability for the professionals involved. If they decide those advantages are no longer relevant, then they can organize their businesses differently, but I doubt that very many will do that. They'll still continue to access those benefits of incorporation.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

I'm the final speaker, and I'm going to give you the final word. Are there any closing comments on what you heard today?

[Dr. Jim Stanford]

Thank you.

Well, again, this is obviously a very passionate debate, but I think it's an important one. It's a long-standing controversy in tax policy that Canada's partial inclusion system was so generous—not just unfair—in terms of delivering so much tax advantage to generally very high-income people, but also inefficient in terms of distorting decisions that companies make about corporate structure and stripping cash from businesses in order to take advantage of this loophole.

I think this measure is modest and timely and I support it.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you.

We thank our witnesses.

I need to hold the members' attention for a second, because I need your approval for something.

Would the clerk and the chair, I'm asking, be empowered to publish—we do this every year—a news release to launch the pre-budget consultations process and request submissions, with a provisional deadline for the submission of briefs of Friday, August 2, 2024?

Okay. Thank you, members.

MP Davies.