Billionaire Blindspot: How official data understates the severity of Canadian wealth inequality
The report contains three recommendations for the federal government and Statistics Canada:
- Ensure that the wealthiest Canadians – including its billionaires – are captured by creating new tiers of estimated ‘net worth’ that target the top 2-0.001% in all future SFS surveys, as done in the U.S.;
- Modernize how wealth inequality data is published and displayed, including ways to track the wealth shares of the top 0.1% and 1%;
- Treat the Statistics Canada Survey of Financial Security (SFS) with more seriousness by deploying it with greater frequency.
Preparing for SCP's next strategic phase
Social Capital Partners has a long history of investing in people and projects that create more economic opportunity in Canada. Recently, our focus has been on establishing more avenues for working Canadians to build wealth through ownership.
We will continue this work by supporting efforts to make the new legislation around Employee Ownership Trusts effective so that it can be used to support business transition and build wealth for workers.
But we will also deepen this work. In SCP’s upcoming strategic phase, we will build on our experience advancing employee ownership by focusing on additional issues which impact the ability of working Canadians to build wealth and economic security. We will look for projects, policies and investments that will lead to more democratic control of the economy and confront the wealth concentration that is plaguing most democratic societies.
We will do this because the evidence is clear that extreme wealth inequality leads to a concentration of economic and political power, which has negative implications for social cohesion, economic resilience, community well-being, human happiness and democratic stability. We don’t think these issues are getting the attention they demand.
Wealth today is being created in very different ways than it was 20 years ago. Capitalism is changing dramatically, with wealth and value creation driven by American-based tech platforms, private equity buy-out funds, oligopolistic markets, geopolitical competition, wealth sheltering strategies, intellectual property, Artificial Intelligence, financialization, and state-led economic activity, amongst others (whew!).
And yet, in Canada, our public narratives about economic policy are trapped in the long, boring debates of the 1990s. Too many of those influencing decisions and leading discussions don’t seem to understand how our economy works anymore.
“The evidence is clear that extreme wealth inequality leads to a concentration of economic and political power, which has negative implications for social cohesion, economic resilience, community well-being, human happiness and democratic stability. We don’t think these issues are getting the attention they demand.”
Thankfully, there are many ideas around the world about how to confront this moment so that capitalism is more inclusive and works for more people, and many people in Canada with ideas about how to break down the barriers to wealth creation that many people experience. At SCP, we hope we can use our knowledge, experience, licence and insight to convene, provoke, and shape an intentional conversation about the way the economy works and who it serves.
And we will focus on practical solutions. We remain humble because, like all those who try new approaches, we have often failed on our path to innovate. But we are comfortable taking risks, trying things that others can’t and telling the truth as we see it. We might not know all the answers, but we work hard to make sure that we ask the right questions:
- How can we get more capital going to the people and places where it does the most good and produce systems-level change?
- How can we reshape public policy frameworks to change incentives and produce better outcomes for working Canadians?
- How can we scale the initiatives that we know are already working?
We genuinely believe that good choices in the coming years can create more opportunities for more people to build wealth, which will lead to a more inclusive capitalism and a more resilient democracy.
The issues we are confronting are enormous. We hope our friends, networks and communities can help us identify where we can have the most transformative, enduring impact in the coming years and join us on our journey.
Getting the facts straight on the changes to capital gains tax in budget 2024
By Jon Shell
In the 24 hours after the federal budget was announced, my social media and news feeds were inundated with misinformation about the capital gains tax changes and some shockingly bold predictions about how they’ll affect the country. I haven’t seen such a strong reaction to a Budget since Bill Moreau’s failed 2017 effort, and there’s a ton of groupthink going on. A lot of the reaction is based on misunderstanding of what’s actually proposed. So, before you sell your home and move to Austin, or fire your employees, or decide to become a welder instead of acting on your terrific tech start-up idea, let’s talk about what’s in the Budget.
First, what’s been proposed is an increase in the capital gains inclusion rate, from 50% to 66.67%. This is not a tax rate. The number of people getting this wrong makes me glad we have lots of accountants in this country (for the first time). To clarify, “inclusion rate” is the percentage of capital gains (profit after deducting what you paid for the asset that you sold) included in your income for tax purposes. On eligible capital gains before this change, 50% of those gains were added to your income, and now 66.67% will be added to your income. Meaning, if you pay tax at a 50% rate (50% rate used for ease), you would have paid 25% before, and 33.33% now.
Second, the above only applies to individuals on a capital gain of more than $250K in a given year. For example, let’s say your stock options pay off, and you make a capital gain of $500K one year. The first $250K are still included in your income at 50%, so you’ll pay about $62K on that gain – same as before. The next $250K is included at the new rate, and you’ll pay just over $83K on that (instead of an additional $62K). This is an increase of about $20K more in tax on a gain of $500K. If we bump that to $1M in capital gains, you’ll pay about $62K more in tax. And also, congrats! You’ve done well.
“A lot of the reaction is based on misunderstanding of what’s actually proposed. So, before you sell your home and move to Austin, or fire your employees, or decide to become a welder instead of acting on your terrific tech start-up idea, let’s talk about what’s in the Budget.”
Third, the Lifetime Capital Gains Exemption (LCGE) has been increased, and this is a really, really big deal for a lot of entrepreneurs. Right now, the LCGE is about $1M and is being increased to $1.25M. That is an increase of $250,000 in tax-free earnings, but is actually worth a lot more for many Canadian entrepreneurs because many of them make use of multiple LCGEs by transferring shares to spouses or other family members, each of whom can use their own LCGE.
So let’s imagine a small business with two equal partners, with one spouse and one child each as shareholders. For that company, this change means that there can be an increase of $1.5M of tax-free capital (i.e. $250K times 6 people). That’s a savings of about $375K of tax savings compared to the old inclusion rate of 50%. If these business owners sell their company for a gain of anything up to $7.5M, the proceeds will be entirely tax free. That is a huge win for the vast majority of Canadian entrepreneurs.
Fourth, one of the main arguments against the change is that it will discourage people from founding new companies. As someone who’s started four companies and had hundreds of conversations with founders over the years, I can tell you that no one thinks about the capital gains tax rate when they’re bitten by the entrepreneurial bug. Duncan Rowland wrote a great post on LinkedIn on the topic. The actual impact on proceeds for founders depends on a lot of things, but as the Canadian Entrepreneurial Incentive kicks in the “break-even” will be between $5-10M. If a founder exits for a gain of $5M or less, they pay less in tax with these changes, while a gain above $10M results in more. This spreadsheet lays it all out, but on the whole it’s hard to see this changing the motivation of entrepreneurs.
Finally, the inclusion rate for capital gains tax was 75% in the 1990s, which also happens to be the decade many of those currently worried about our “productivity crisis” say was best for productivity, growth, investment, etc. The inclusion rate was lowered to 50% in 2000, around when we started to see lower productivity, so it’s certainly not clear that capital gains tax rates had much direct impact on Canadian productivity. What we know for certain, though, is that cutting the inclusion rate was great for the super rich, and was certainly great for me when I sold my companies in 2020.
In fact, as Trevor Tombe points out, increased rates should discourage share buy-backs by Canada’s public companies, which should lead to more business investment. Business investment is generally considered the most important driver of productivity. My point is that anyone who says, with certainty, that the increase in the capital gains inclusion rate will lead to lower productivity in Canada is making a claim they can’t back up with facts.
There are legitimate areas for debate about these measures. But as this discussion unfolds, it’s critical to understand what they actually mean, and for those in the debate to present the changes fairly and honestly. And, as is always the case, beware of anyone who seems certain about the long-term economic impact of these changes, as they’d be the first person in history blessed with that level of insight.
Unlocking the potential of employee ownership in Canada
TORONTO, Apr. 19, 2024 – Social Capital Partners welcomes the federal government’s decision to explore options to unlock the potential of employee ownership trusts (EOTs) as part of Canada’s economic recovery. This is a first step toward making broad-based employee ownership a more significant part of our economy. Social Capital Partners produced Building an Employee Ownership Economy in October 2020, a report calling for the establishment of EOTs in Canada, as a way to grow Canada’s comparatively low levels of employee ownership.
“There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to reduce wealth inequality, support business succession, protect local jobs, and promote economic resilience,” says Jon Shell, managing partner of Social Capital Partners. “It’s great to see the government recognize that employee ownership could be part of rebuilding a more inclusive, more resilient economy.”
In the US and the UK, employee-owned companies grow faster, pay better, are less prone to lay-offs or bankruptcies in economic downturns, and are more likely to keep jobs in local economies. Due to public policy that encourages their use, EOTs are a popular structure for business succession in those countries, where they have generated significant wealth for front-line employees. EOTs are common in the US, where 14 million employees own $1.4 trillion in shares at over 6,000 companies. Since their introduction in the UK in 2014, they have become increasingly popular, with almost 100 companies becoming employee-owned in 2019 alone. Canada does not have a business structure comparable to the employee ownership trust.
“There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to reduce wealth inequality, support business succession, protect local jobs and promote economic resilience.”
A recent survey by the Canadian Federation of Independent Business (CFIB) suggests significant interest among Canadian business owners in employee ownership. Fifty-nine percent of respondents were either strongly or somewhat in favour of introducing policies similar to the US and UK, and 53% said they were more likely to sell to their employees if such a policy were introduced.
“Canadian business owners are very community-oriented. We think employee ownership in Canada can be even more successful than the US and UK with the right policies in place,” said Shell. “That would mean more Canadian companies staying Canadian-owned.”
Canada’s current regulatory environment makes selling to employees very difficult. “As a business owner who believes in the power of employee ownership, I’m really excited to see it in the budget. It’s been very difficult, and taken a very long time, for me to sell some of my company to my employees. It should be a lot easier,” said Peter Deitz, Co-Founder and Board Chair of Grantbook. His comments echo those of Geoff Smith, CEO of EllisDon, one of Canada’s largest employee-owned companies, in a video he posted this past month encouraging the government to implement employee ownership trusts.
“Given the benefits, a made-in Canada approach to broad-based employee ownership should be a priority for policymakers that are looking to strengthen Canada’s economic recovery and increase the well-being of Canadians over the long-term,” says Shell.
Canada is bad at studying wealth inequality and we explain why that matters
By Dan Skilleter | The Toronto Star
Canadians have a long-standing tradition of downplaying the severity of our inequality problem by comparing ourselves to our southern neighbours.
Even when new data gets published by Statistics Canada showing worsening income and wealth inequality — as happened recently — it’s tempting to dismiss the results by thinking about how out-of-control inequality is in the U.S.
When it comes to wealth, we have little reason to be so smug, as we outline in a new report, Billionaire Blindspot, released Thursday by Social Capital Partners.
An analysis we undertook averaging multiple studies found Canada’s top 1 per cent owns 26 per cent of all wealth in Canada, and our top .01 per cent owns 12.4 per cent of all wealth. This is somewhat lower than the U.S. numbers, but it is much higher than official Statistics Canada numbers report.
If that seems hard to believe, it’s likely a symptom of the inequality conversation in Canada being historically dominated by income. Canada does very well compared to the U.S. on measures of income disparities and poverty rates, especially after you consider our progressive taxation and benefits regime.
But looking only at income paints an incomplete picture because it ignores intergenerational wealth that has been inherited. It also ignores that the wealthiest often keep their growing fortunes within private business enterprises where the tax rates are lower, or use other wealth sheltering strategies to avoid taxation.
“An analysis we undertook averaging multiple studies found Canada’s top 1 per cent owns 26 per cent of all wealth in Canada, and our top .01 per cent owns 12.4 per cent of all wealth. This is somewhat lower than the U.S. numbers, but it is much higher than official Statistics Canada numbers report.”
We have seen a recent global effort by experts, like Thomas Piketty, to focus on wealth rather than income disparities, recognizing that wealth — or its absence — can be more important to the lives of individuals, as well as to broader social cohesion.
But in Canada, we have been slow to broaden our discussion to wealth for at least two reasons.
First, wealth data is harder and slower to come by, obtained by occasional surveys. Statistics Canada runs its wealth survey, the Survey of Financial Security (SFS), only occasionally. The last one available is 2019 (with 2023 data due any month).
Second, our SFS hasn’t kept up with trends and isn’t designed to capture the wealth of the richest Canadians, which paints an artificially rosy picture of inequality. For example, in the 2016 SFS survey, the wealthiest family that participated had a net worth of only $27.3 million.
This obviously paints a misleading picture, given that Canada punches well above its weight in billionaires. Statistics Canada doesn’t even publish data on the top 0.1 per cent or 1 per cent — or even the wealthiest 10 per cent.
Luckily, some independent and academic researchers have stepped up to the plate in an effort to tackle these challenges.
The Parliamentary Budget Officer (PBO) — Canada’s non-partisan agency of financial modelling — produced studies in 2020 and 2021. The PBO created a more realistic Canadian wealth distribution by carefully incorporating the publicly listed networth of some our country’s richest families into the existing Statistics Canada data set.
Academics have undertaken similar studies and have consistently produced similar results that point to an inescapable conclusion: our richest own a much greater share of wealth than Statistics Canada reports.
Canada’s official wealth survey appears to be much worse at accurately capturing and publishing the wealth of our richest citizens than the American survey. When academic researchers in the U.S. study wealth inequality, their results are significantly closer to official government estimates.
We should not need to rely on independent researchers to provide us with sporadic glimpses of the state of inequality in Canada. Improving the accuracy of our survey would be relatively straightforward. As we lay out in our report, we can just use many of the approaches that the American statistical agency uses. This will allow Canadians to get a better handle on one of the most important issues of our time: growing wealth inequality.
Around the world, governments are grappling with how to confront wealth inequalities, intergenerational inequities and the economic and social problems they bring. Canada needs more accurate, timely data so we can engage in these issues with the seriousness they deserve.
Social Capital Partners releases new report on wealth inequality in Canada – concludes that official statistics significantly underestimate the problem
TORONTO, Apr. 4, 2024 –Social Capital Partners (SCP) today released a new report documenting how wealth inequality in Canada is far closer to the inequality that exists in the United States than official statistics claim.
The report, entitled “Billionaire Blindspot: How official data understates the severity of Canadian wealth inequality”, critically analyzes Canada’s flagship wealth survey, the Survey of Financial Security (SFS), and outlines how its methodological shortcomings lead to significant underreporting of wealth inequality.
“Wealth concentration is getting worse in Canada, just like in the U.S. The difference is that Americans have the data they need to accurately understand, discuss, and propose solutions,” explains the report’s author and SCP’s policy director, Dan Skilleter. “StatsCan has already acknowledged the need for better data, and we hope that this report will encourage them to act on our recommendations, ensuring a more accurate understanding of wealth inequality in Canada.”
The report concludes that the top 1% in Canada own 26% of all wealth, and the top 0.1% own 12.4% of all Canadian wealth. These numbers are significantly higher than official estimates and are much closer to U.S. levels of wealth inequality than previously understood. The report concludes that the American survey, the Survey of Consumer Finance (SCF), does a much better job of measuring reality and presents a series of recommendations to improve the Canadian survey.
“Deep wealth inequality corrodes democratic societies and threatens economic resilience,” said Matthew Mendelsohn, CEO of Social Capital Partners. “The misleading portrait of wealth inequality in Canada undermines our ability to have an evidenceinformed debate about how to address growing wealth concentration. Canadians are telling ourselves a story about wealth inequality that is fundamentally wrong.”
“Wealth concentration is getting worse in Canada, just like in the U.S. The difference is that Americans have the data they need to accurately understand, discuss and propose solutions.”
Social Capital Partner’s Director of Policy, Dan Skilleter, on The Agenda with Steve Paikin
Social Capital Partner’s Director of Policy, Dan Skilleter, sits down with Steve Paikin on The Agenda to discuss his recent report “Billionaire Blindspot”. This segment digs into how Canada’s official statistics severely underestimate how rich the richest Canadians are and includes steps that can be taken to correct this misrepresentation.
Speakers
Bank of Canada’s unproductive productivity speech
Why did the Senior Deputy Governor of the Bank of Canada give a speech on productivity that could have been given in the 1990s?
I just read the speech from the senior deputy governor of the Bank of Canada that says that Canada’s long-standing poor performance on productivity is an “emergency.” As far as I can tell, there was not one real idea in that speech, and almost nothing that hasn’t been said for 30 years.
And then the Public Policy Forum, which is about to do its annual Growth Summit, re-posted the speech claiming that their summit would focus on “fixing productivity once and for all.”
The narrowness and orthodoxy of the Bank and our public discourse on these issues is a problem.
I hope the PPF panels will have new insights. The presence of Indigenous leaders is great. Labour and climate perspectives add value. Global perspectives are important. But it seems a lot is missing.
Reading the speech, and looking at the topics of the panels, I have a few questions:
Where is childcare? Where is housing? And particularly, will there be a critique of investor activity in residential real estate that absorbs so much Canadian capital and I would assume impacts our productivity numbers? (I would guess that some of the panelists have personally contributed to this problem). Where is public transit and the impact of gridlock and commutes on productivity?
Where is a reflection on how the structure of capitalism has changed dramatically and is dominated by a few American-based platforms that generate huge profits from surveillance, data, IP, scale, GAI, and anti-competitive behaviour? How much of our productivity gap with the US is explained by these tech giants? Where is a reflection on the role of private equity, which is transforming many sectors?
“And what about wealth distribution? I don’t want to live in a country where our productivity goes up marginally but ¾ of our grandchildren are serfs. I really don’t want my grandkids to be serfs.”
And why do so many of our firms innovate on skimming fees from consumers, rather than doing real innovation on products, processes or price?
And what about wealth distribution? I don’t want to live in a country where our productivity goes up marginally but ¾ of our grandchildren are serfs. I really don’t want my grandkids to be serfs.
These issues were absent from the speech and, to my friends at PPF, prove me wrong! I hope you can orchestrate discussions that don’t sound like the ones I listened to in the 1990s (and participated in during the 00’s)!
At least no one seems to be talking about the importance of lowering corporate taxes to increase productivity anymore, because that was clearly BS. So I guess that’s good!
These are not my areas of professional expertise (although I did do a paper for a federal task force on productivity in 1999 I think!), but it strikes me that we need to come at these issues with fresh ideas, fresh voices and fresh questions.
Consultation on the future of competition policy in Canada
The key findings from our survey are:
- Small businesses are increasingly dealing and competing with larger companies
- The increasing size of companies is making it harder for small businesses to compete
- Small business is increasingly affected by concentrated industries
- Small business owners see mergers and acquisitions as a driver of these issues
- Small businesses want more active government engagement to ensure they can compete in a fair marketplace
Social Capital Partners appoints Matthew Mendelsohn as new CEO
TORONTO, Nov. 29, 2023 –Social Capital Partners (SCP) today announced the appointment of Matthew Mendelsohn as its new CEO, effective January 2, 2024. Jon Shell, SCP’s current Managing Director will become SCP’s Chair.
Matthew is a Canadian public policy leader. For over 25 years, he has designed and implemented public policy solutions that work in practice and has advised governments, organizations and elected leaders on ways to improve economic, social and democratic outcomes. Matthew is a former deputy minister with the governments of Canada and Ontario, and was the founding Director of the Mowat Centre, a public policy think tank at the University of Toronto. Most recently he was a Visiting Professor at Toronto Metropolitan University and a Senior Advisor at Boston Consulting Group.
“Matthew is the ideal leader for our new chapter as we pursue our next big ideas,” said Bill Young, Founder of SCP. “As SCP enters its next phase, we will focus on transformational public policy. Our goal is to drive changes that will confront wealth inequality, the thickening barriers to intergenerational mobility, and obstacles to asset ownership for many Canadians.”
In describing SCP’s next phase, Jon Shell, added: “Good public policy can expand opportunities for Canadians to own businesses, homes and assets. Canada can continue to deliver on its promise, but we must do more to combat the financialization of our economy and create more opportunities for Canadians and communities to build wealth.”
“I have long been a big admirer of SCP and its relentless focus on having a positive impact on the lives of Canadians through concrete action, focused investments and coalition building,” said Matthew. “Rising wealth inequality is corrosive to democratic societies and diminishes all of us. The Canadian dream must remain a realistic aspiration for more Canadians, and public policy needs to catch up to the structural realities of our economy. SCP can help drive this work.”
“Good public policy can expand opportunities for Canadians to own businesses, homes and assets. Canada can continue to deliver on its promise, but we must do more to combat the financialization of our economy and create more opportunities for Canadians and communities to build wealth.”