Does the Famous Saying From the 1966 Royal Commission on Taxation of “A Buck is a Buck is a Buck” Mean Capital Gains Should be Fully Taxable?  No. 

 

Last week, I appeared as a witness before the House of Commons Finance Committee regarding the proposed capital gains inclusion rate increase. I’ve appeared many times throughout the years to both the House of Commons and Senate and although one can legitimately question how useful such meetings are (most are consumed by partisan politics), I always enjoy appearing and putting my comments on the record.

 

Given the topic, it was not surprising to hear the Liberals / NDP committee members, and their witnesses, espouse on how great the capital gains inclusion rate proposal is.  Frankly, it’s exhausting to listen to such nonsense.

 

Some of that nonsense?  “Studies have concluded that a high capital gains inclusion rate – or full taxation – of capital gains has no impact on a country’s economic results”.  Yeah, right.  For every such “study”, I’ll show you three that say otherwise.  The most recent research released, by Dr. Jack Mintz last week, concludes that the inclusion rate increase will cause Canada’s capital stock [to] fall by $127 billion; employment would decline by 414,000; GDP will fall by almost $90 billion; and real per capita GDP will decline by 3 percent. Troubling conclusions!

 

Others go on and on about “tax breaks” or “fairness” when it’s obvious they do not have a fulsome understanding of our country’s tax system.

 

But my favourite is “A buck is a buck is a buck”.  That line is a summarized phrase from the recommendation of The Royal Commission on Taxation that was convened in 1962 to study Canada’s taxation system and make recommendations for improvement.  After 4 full years of study, the Commission released its landmark report in 1966.

 

Many of the Commission’s recommendations were controversial. Some were ultimately implemented (with some modifications) and others were outright rejected.  The recommendation to move to a family taxation system is an example of a recommendation being outright rejected (wrongly in my view).  Very generous employment expense deductions was another recommendation that was rejected (rightly in my view). The full taxation of capital gains recommendation was modified (rightly in my view).

 

In 1966, Canada’s population and economy was much smaller than it is today.  Our taxation system was in its infancy.  Capital gains were not taxable.  Given such, there was much mischief involving planning to create capital gains (that might otherwise be taxable income) or taxpayers taking the position that certain economic wins were capital gains.

 

Accordingly, the Commission said the following with respect to capital gains:

 

“A dollar gained through the sale of a share, bond or piece of real property bestows exactly the same economic power as a dollar gained through employment or operating a business.  The equity principles we hold dictate that both should be taxed in exactly the same way.  To tax the gain on the disposal of property more lightly than other kinds of gains or not at all would be grossly unfair.”

 

And thus, the famous “a buck is a buck is a buck” line was born.  This short, shrift summary of a complex topic is something I’ve never agreed with.  I do agree that the result of various economic activities, “a buck”, is the same but the efforts that go into creating that buck are certainly not the same.

 

In 1969, the government of the day – gasp… the Liberals! – agreed that capital gains should indeed be taxable but rejected the Commission’s logic as documented in Finance Minister Benson’s famous “Proposals For Tax Reform” Paper released in 1969:

 

“The government rejects the proposition that every increase in economic power, no matter what its source, should be treated the same for tax purposes.  This proposition, put forward forcefully by the Royal Commission on Taxation, has often been summarized rather inelegantly as “a buck is a buck is a buck”.  But although the government does not accept this theory in all its splendid simplicity, neither does it believe that the distinction between a so-called “capital gain” and an income receipt is either great enough or clear enough to warrant the tremendous difference from being completely exempt and being completely taxable.”

 

I agree that the phrase is rather inelegant.  And, again, too simplistic.  It ignores a very important feature that other countries around the world recognize when treating capital gains preferentially from a tax perspective…risk.

 

As I mentioned in my opening remarks at the recent Committee meeting:

 

“…put me on record as an advocate for a low inclusion rate – like 50% – since that lower inclusion rate provides incentive and acknowledgment 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, build a building and rent it out, buy a farm, start or buy a business.  Most Canadians are not wired to accept that risk…[but] the ones that can hang on and make something out of their risky venture usually have spin-off benefits for a large number of Canadians.  Canada needs to encourage the creation of more entrepreneurs and investment in our country, and a lower capital gains inclusion rate is one of those policy tools that has historically helped with that.”

 

Employment risk is not entrepreneurial / investor risk.  It’s completely different.  For those that say it is, I often challenge them to “put their money where their mouth is” and become an entrepreneur. And by that I don’t mean your small one-man band consulting business.  Invest your life savings into a real business.  Get a bank loan to purchase your investment.  Sweat a bit about making payroll.  Or the mortgage payments on your building. Take some real business risk. If you accept my challenge, I’m guessing you’ll soon stop trumpeting your former rallying cries of “fairness” and “a buck is a buck is a buck”.

 

And then you might also truly understand why it’s important to have governments encourage entrepreneurship with preferential treatment of capital gains being one of those policy tools to provide such encouragement.

 

“Bad Partners vs Good Partners vs Great Partners”

 

It’s inevitable during a leader’s journey that he / she will be faced with a decision whether or not they should partner with someone.  For me, that decision came about 5 years into my journey of being a sole practitioner.  My practice had grown quickly and I was consumed with many duties. Over the years, I brought on more and more partners.  In hindsight, I obviously wish I knew then what I know today.  Selecting partners would have been a much different process with different considerations.

 

Adam Grant, the famous organizational psychologist, recently tweeted the following:

 

Bad partners pursue their interests at your expense. They’ll hurt you if it helps them.

Good partners value your interests as much as theirs. They strive for win-win.

Great partners internalize your interests as theirs. They take pride in your success and joy in your happiness.

 

Read that again.  And absorb it.  There is a lot of brilliance in those 6 sentences.  If you have had partners, how many of them fit into each category?  Obviously, you want to remove bad partner relationships and replace them with hopefully great but at a minimum good partners.

 

Do you have only good or great partners?  If not, what are you going to do about it?  You know the answer.  Do it.

 

Canada’s Economic Growth is Stagnant

 

A report from Statistics Canada last week states that Canada’s real gross domestic product was up only 0.2% for July 2024 driven in large part by a growing public sector with such sector growing for the seventh consecutive month.  Not good.  A country that grows its public sector while other sectors lag – especially the overall private sector – is in for a shocking collapse at some point.

 

The GDP growth is lagging behind the Bank of Canada projection for the 3rd quarter thus causing concern and once again confirming what everyone already knows:  our country has a very significant productivity emergency crisis.

 

Significant action and measures need to be done now to head off further lags.  If this continues, Canadians will eventually feel this directly with a reduced standard of living.  Unfortunately, though, our current government appears more interested in slogans and optics rather than taking real action.

 

Change is needed quickly.

 

Quote From Michael Eisner – Former CEO of Disney – About Business Partners

 

“It is rare to find a business partner who is selfless.  If you are lucky it happens once in a lifetime.”

 

Absolutely agree!  Leaders, do you have great partners around you?

 

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