Finance Committee on Nov. 25th, 2013

[The Chair, Conservative, James Rajotte]

You have thirty seconds.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

So there's lots of money. This is a very conservative estimate.

[Scott Brison, Liberal, Kings—Hants, NS]

For example, your $11 billion in proposed asset sales in the autumn of 2008, how many of those were sold, Minister? How much was raised?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I tell you I'm happy with my record, if you're not.

[Scott Brison, Liberal, Kings—Hants, NS]

Obviously, we're not.

[The Chair, Conservative, James Rajotte]

On that love we will move on to Mr. Keddy, please.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chair.

Welcome to our witness. Minister, it's good to have you at committee.

I want to change the subject back to the lifetime capital gains exemption. I want to come at this from a little different angle than I think a lot of people look at it from. I'd like to hear your comments on it.

The great thing about the lifetime capital gains exemption for small business was to allow for intergenerational transfer of those assets. I don't think that was the full reason for bringing it in, but it certainly worked in agriculture. It works in the fishery, it works in forestry, and it will work in other small businesses as well. But have we done any studies on what increasing the basic lifetime capital gains to $800,000 now, I think, and indexing it to inflation will do for intergenerational transfer?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Question.

Who wants to win?

[The Chair, Conservative, James Rajotte]

Mr. Cook, welcome back to committee.

[Ted Cook, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Good evening, Mr. Chair.

With respect to the lifetime capital gains exemption, as you've indicated, it's increasing from $750,000 to $800,000 and then will be indexed for inflation. With respect to the impact, we don't have any specific intergenerational information. What we do know is that approximately 68,000 filers, I believe it is, benefit from the LCGE, and the expectation is that, at least at the front end, between 2,000 and 4,000 people will be able to take advantage of the growth in the LCGE limit.

The other thing I'd like to point out for the committee is that with the change to an indexed system, when an individual accesses the LCGE, as the indexed amount increases, that will generate new LCGE space for the individual.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you.

The other question, Minister, is in relation to closing tax leapholes—loopholes. Well, people leap through them, I think.

International tax evasion and aggressive tax avoidance have a terrific fiscal cost to governments and taxpayers. They undermine the revenue base and undermine public confidence in the tax system and in the fairness and equity of the tax system, quite frankly. In economic action plan 2013, we've strengthened the integrity of Canada's tax system, I think, by going after these loopholes that people are leaping through. Do we have some specific numbers on the amount of dollars that are out there? I know it's very hard to estimate, but we must have some numbers on the amount that we stand to collect by closing these loopholes.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I bet we do.

[Ted Cook]

In terms of closing tax loopholes and improving the fairness of the tax system, the six-year total projected by economic action plan 2013 is $4.4 billion. That's a global figure, and of course we talked with the committee about the various aspects of it: character conversion transactions, synthetic dispositions, and giving the CRA additional tools in terms of being allowed additional years when someone has failed to file an appropriate form T1135 and has failed to report foreign income.

[The Chair, Conservative, James Rajotte]

Thirty seconds.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

No, I can't do it in 30 seconds.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

Mr. Caron, you have the floor.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Good afternoon, Minister.

I'll be asking questions about the phasing out of the tax credit on labour-sponsored venture capital.

It's a very big deal in Quebec. There is 90% of the tax credit right now that goes to the savers; those who are actually contributing to the two major funds in Quebec. It's a model that has worked well. Quebec is actually third among all jurisdictions in the OECD in terms of venture capital under management as a share of GDP—after Israel and the United States. As a share of GDP, Quebec invests almost three times more than the Canadian average, and over four times more than Ontario.

Now, both funds came to you with a deal asking for the government to not phase out the tax credit, but in return to control the tax expenditure, reducing it by about 30% over the next 10 years and injecting about the equivalent of $2 billion in the venture capital action plan. That would be five times the contribution of the federal government. Yet they haven't received any answer.

We had Mr. Gupta from the Canadian Information Technology Association saying it was a good deal. We had Canada's Venture Capital and Private Equity Association saying it's a good deal. You had the

the Quebec Federation of Chambers of Commerce, the Regroupement des jeunes chambres de commerce du Québec, the Board of Trade of Metropolitan Montreal, and the Quebec Manufacturers and Exporters. All these organizations claim that this is a good deal and that the government should accept it.

Why didn't you say so? Why did you refuse?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I thank the member for his question.

This is a major challenge for Quebec. The province of Ontario has created a new regime.

When I look at this, I'd tell you that this is not effective. This was created to encourage investment in small business. It's become a tax haven where people can hide their money, which is okay tax planning. That's fine; lots of people do it. But it doesn't accomplish the goal that was intended. That's why, for example, the Province of Ontario got rid of it.

If we're going to look at someone independent, the OECD said:

The LSVCCs have distorted the market for venture capital, lowering the average quality of deals and limiting the supply of equity to non-traditional industries and newer companies…. The governance structure of LSVCCs leads to less-skilled fund managers and poorer fund performance…. Overall, the damaging effects of the LSVCC tax credits on the financing of innovation along with their fiscal costs present a clear argument for their elimination.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Minister, we have a minute and a half or two minutes for my last question.

Outside of a Paris-based study from the OECD, outside of the testimony of Jack Mintz—

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

It's transparent.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I'm just saying that we had witness after witness, especially from Quebec, who were telling you it's been very effective and has kept Quebec as a leader in Canada.

I asked one of the officials who came here to meet with us whether any impact studies had been undertaken. What impact will this decision have on the levels of venture capital invested in Canada and on the levels of savings in Quebec? People are not using this fund as a tax loophole or a tax shelter. They are using it to save up for their retirement, which is what the government is encouraging them to do. Has there been a comparative impact study done between what these funds have to offer and what the government plans to do? No, no impact study was done.

How can such an important decision be made about such an important model for Quebec without studying the impact it will have on these various aspects?

[The Chair, Conservative, James Rajotte]

Merci.

A brief response, please, Minister.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I understand, Mr. Caron, but I must take into account the entire Canadian system, not just Quebec's or Ontario's. I can see this is a mechanism which does not work, but for investment in small businesses, that is the goal of this program.

[The Chair, Conservative, James Rajotte]

Merci, monsieur Caron.

We'll go to Mr. Mark Adler next, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

Being the selfless person that I am, what I'm going to be doing, because our time is limited, is sharing my time with Mr. Van Kesteren, if that's okay with you, Chair.