Bill Morneau slams Freeland's budget as a threat to investment, economic growth

Finance Minister Chrystia Freeland's predecessor Bill Morneau says there was talk of increasing the capi‐ tal gains tax when he was on the job - but he resisted such a change because he feared it would discourage investment by companies and job creators.

He said Canada can ex‐ pect that investment drought now, in response to a federal budget that targets high-end capital gains for a tax hike.

"This was very clearly something that, while I was there, we resisted. We re‐ sisted it for a very specific reason - we were concerned about the growth of the country," he said at a postbudget Q&A session with KP‐ MG, one of the country's large accounting firms.

Morneau, who served as Prime Minister Justin Trudeau's finance minister from 2015 to 2020 before leaving after reports of a rift, said Wednesday that Free‐ land's move to hike the inclu‐ sion rate from one-half to two-thirds on capital gains over $250,000 for individuals, and on all gains for corpora‐ tions and trusts, is "clearly a negative to our long-term goal, which is growth in the economy, productive growth and investments."

Morneau said the wealthy, business owners and corpo‐ rations - the people most likely to face a higher tax bur‐ den as a result of Freeland's change - will think twice about putting money to work in Canada because they stand to make less on their investments.

"We've created a disincen‐ tive and that's very difficult. I think we always have to rec‐ ognize any measure that cre‐ ates a disincentive for invest‐ ment not only impacts us within the country but also impacts foreign investors that are looking at our coun‐ try," he said.

"I don't think there's any way to sugarcoat it. It's a challenge. It's probably very troubling for many in‐ vestors."

KPMG accountants on hand for Morneau's remarks said they've already received calls from some clients wor‐ ried about how the capital gains change will affect their investments.

Praise from progressives While Freeland's move to tax the well-off to pay for new spending is catching heat from wealthy business‐ people like Morneau, and from the Canadian Chamber of Commerce, progressive groups said they were pleased by the change.

"We appreciate moves to increase taxes on the wealth‐ iest Canadians and profitable corporations," said the Cana‐ dian Labour Congress.

"We have been calling on the government to fix the un‐ fair tax break on capital gains for a decade," said Katrina Miller, the executive director of Canadians for Tax Fair‐ ness. "Today we are pleased to see them take action and decrease the tax gap be‐ tween wage earners and wealthy investors."

"This is how housing, pharmacare and a Canada disability benefit are af‐ forded. If this is the govern‐ ment's response to spending concerns, let's bring it on. It's about time we look at Canada's revenue problem," said the Canadian Centre for Policy Alternatives.

The capital gains tax change was pitched by Free‐ land as a way to make the tax system fairer - especially for millennials and Generation Z Canadians who face falling behind the economic status of their parents and grand‐ parents.

"We are making Canada's tax system more fair by en‐ suring that the very wealth‐ iest pay their fair share," Freeland said Tuesday after tabling her budget in Parlia‐ ment.

WATCH: New investment to lead 'housing revolution in Canada,' Freeland says

The capital gains tax, which the government says will raise about $19 billion over five years, is also being pitched as a way to help pay for the government's ambi‐ tious housing plan.

The plan is geared toward young voters who have struggled to buy a home. Av‐ erage housing prices in Cana‐ da are among the highest in the world and interest rates are at 20-year highs.

Tuesday's budget docu‐ ment says some wealthy people who make money off asset sales and dividends instead of income from a job - can face a lower tax burden than working and middleclass people.

Morneau, who comes from a wealthy family and married into another one, is on the board of directors of CIBC and Clairvest, a private equity management firm that manages about $4 billion in assets.

According to government data, only 0.13 per cent of Canadians - people with an average income of about $1.4 million a year - are ex‐ pected to pay more on their capital gains as a result of this change.

But there's also a chance less wealthy people will pay more as a result of the change.

Put simply, capital gains occur when you sell certain

property for more than you paid for it.

While capital gains from the sale of a primary resi‐ dence will remain untaxed, the tax change could affect the sales of cottages and oth‐ er seasonal and investment properties, along with stocks and mutual funds sold at a profit.

A cottage bought years ago and sold for a gain of more than $250,000 would see part of the proceeds tax‐ ed at the new higher rate.

But there's some protec‐ tion for people who sell a small business or a farming or fishing property - the life‐ time capital gains exemption is going up by about 25 per cent to $1.25 million for those taxpayers.

Freeland said Tuesday she anticipates some blowback.

"I know there will be many voices raised in protest. No one likes paying more tax, even - or perhaps particularly - those who can afford it the most," she said.

"Tax policy is not only, or chiefly, the province of ac‐ countants or economists. It belongs to all of us because it is how we decide what kind of country we want to live in and what kind of country we want to build."

Morneau had little praise for what his successor in‐ cluded in her fourth budget.

Morneau said Canada's GDP per capita is declining, growth is limited and produc‐ tivity is lagging other coun‐ tries - making the country as a whole less wealthy than it was.

Canada has a growth problem, Morneau warns

The government is more interested in rolling out new costly social programs than introducing measures that will reverse some of those troubling national wealth trends, he said.

"Canada is not growing at the pace we need it to grow and if you can't grow the size of the pie, it's not easy to fig‐ ure out how to share the pro‐ ceeds," he said.

"You think about that first before you add new pro‐ grams and the government's done exactly the opposite."

The U.S. has a "dynamic investment culture," some‐ thing that has turbo-charged economic growth and kept unemployment at decadeslow levels, Morneau said. Canada doesn't have that luxury, he said.

A recent International Monetary Fund (IMF) report projects Canada is on track to grow more than the U.S. and much of the developed world in 2025.

Morneau said Freeland hasn't done enough to rein in the size of the federal gov‐ ernment, which has grown on Trudeau's watch.

The federal bureaucracy has grown to about 357,247 public servants, easily out‐ pacing population growth.

The deficit is now roughly double what it was when he left office, Morneau noted.

"There wasn't enough done to reduce spending," he said, while offering muted praise for the government's decision to focus so much of its spending on the housing conundrum. "The priority was appropriate."