Finance Committee on Oct. 21st, 2010

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Block.

I want to thank all of our witnesses for being here this morning to present your briefs and respond to our questions. If you have anything further, please submit it to the clerk. We will ensure that all committee members get it.

Colleagues, we will suspend for two minutes to bring the next panel forward.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Perhaps we can begin. We are on the second panel on the pre-budget consultations 2010, pursuant to Standing Order 83(1).

I think we have six groups. We have the Investment Industry Association of Canada; Institut des fonds d'investissement du Canada; Culture Montréal; GrowthWorks Capital Ltd.; Chantiers maritimes Irving inc.; and the Rick Hansen Institute.

I will just remind everybody that you have five minutes. I'm going to try to be lenient, but not very lenient, because then members around the table are going to want to ask questions.

So in the order I have here, Mr. Russell, perhaps you'd like to begin, for five minutes.

[Ian Russell, President and Chief Executive Officer, Investment Industry Association of Canada]

Thank you, Mr. Pacetti. It's my pleasure to be here this morning. I have formal remarks, but I'll just talk a bit informally on the substance of my presentation.

I'll preface my remarks by saying that while I think Canada faces some huge challenges in a very competitive global economy, we do have the advantage of having managed our finances prudently and having weathered a serious financial crisis very effectively. I think the upshot of this is that the fiscal measures that we need to get more sustained private sector growth and recovery in the Canadian economy will be less harsh than they will be in other jurisdictions. But that said, I think there are areas where fiscal policy can make a positive contribution.

I want to talk just briefly about recommendations that relate to the savings investment process, and in particular I think there is a pressing need for an incentive to encourage capital formation in the country, especially for small and, I should emphasize, mid-sized companies that need capital.

The Governor of the Bank of Canada in the Bank of Canada October report commented on business investment spending, which is only 5%, really, off the trough. We had a collapse in business investment spending through the crisis and into 2009 and a very modest recovery coming out of that. The governor has attributed that to low profits, to low demand or low capacity levels in business, and he also talked about restricted access to capital. I think that is an important issue. I gathered from the earlier discussions that this is something that witnesses have brought forward as a concern.

I think what we're finding in our industry is that small and mid-sized companies, especially those that want to list on exchanges or those that are already listed, are having a very hard time in finding capital. It's very selective, depending on the nature of the business. If it's a resource company in a particular resource sector, it probably has a better chance. The markets have also been very volatile and the windows of financing have been very short, which have increased the difficulty.

I would draw your attention to the fact that many of these small companies have found it difficult since the removal of the income trust. The income trust proved to be a very critical financing vehicle coming out of the technology market crash in 2002. It benefited a lot of small companies and it also benefited a lot of investors. We haven't had a substitute for an instrument like that since. So I think it's important to be looking at what incentive might make some sense.

Our recommendation to the committee is to perhaps lower the inclusion rate from the current 50% to, let's say, 40%. That would move the effective capital gains tax rate for the higher-income individual from 25% to about 20%. It would have an impact I think as a positive incentive. It would be cost effective, it would send a positive signal, and it would be administratively easy to do, because as we've talked about more complicated mechanisms, I think there's been a lot of push-back for administrative reasons.

Finally, I think we have to find a solution to the capital-raising problem for mid-sized companies. Once these companies reach mid size and they move above those thresholds where government has put in an incentive in terms of tax credits or lower tax rates or the capital gains tax exemption, these companies really have nothing more to go on. And as they get to mid size, they find it difficult to access capital, and that's one reason that we see acquisitions taking place, particularly with companies looking south for partners. So that's the key recommendation we make.

The last thing to say is that we're very pleased at the recommendations the Senate banking committee have brought forward in terms of pension savings, and we would support those recommendations.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Russell. That was below your five minutes and I appreciate that.

From the Investment Funds Institute of Canada, Ms. Weinberg.

[Debbie Pearl-Weinberg, General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada]

Thank you. My name is Debbie Pearl-Weinberg, general tax counsel at CIBC and chair of the Taxation Working Group of the Investment Funds Institute of Canada, or IFIC. I'm here representing IFIC, and my comments do not necessarily reflect the views of my employer, CIBC.

I'm joined by Barbara Amsden, director with IFIC.

IFIC is the national association of the investment funds industry. For Canadians, mutual funds lower the cost and risk of investing in securities, provide access to capital markets that was once only available to large institutional investors, and generate an important source of income, especially retirement income, for those without, and even those with, company pensions.

Eighty per cent of mutual funds in Canada are held in registered plans, RRSPs, RRIFS, and now TFSAs, and therefore the ability to save and maximize income from these plans is of primary importance to us and we believe to you.

You have our submission, so I will not repeat it, but I am going to focus on three items in the submission.

The first is addressing the new work reality. We note that while RRSPs have changed since their inception in 1957, demographics and the typical job have changed even more. While the CPP adjusts for people leaving the workforce for certain reasons by excluding the lowest years of income, there is nothing equivalent for those saving through RRSPs. It is common for people to leave the workforce for child or elder care reasons or due to job loss. They're never able to make up RRSP contributions and tax-free growth of earnings for any period without income.

Also, as more Canadians begin to work freelance or on contract, they will have widely varying incomes and they may not be able to benefit fully from RRSPs.

So our first recommendation is that the committee consider allowing RRSP contributions to be based on average income, allowing the carry forward or back of earned income above the annual limit to maximize RRSP contributions.

Second, establish greater equivalency between those in registered pension plans and those in RRSPs.

There has been a proportional decline in defined benefit pensions plans, and defined contribution pension plans have certain features that make them less attractive, especially for small businesses. At the same time, there has been a growing use of group RRSPs, but there are tax provisions that disadvantage RRSP holders. We recommend that the Income Tax Act be amended to bring Canadians with registered pension plans and RRSPs on more equal footing. For example, we suggested extending the minimum income splitting age with a spouse or partner from age 65 down to age 55 for RRIF income, consistent with rules governing registered pension plan income.

As well, we would also recommend that the pension credit be made available to those people age 55 or more who receive income from a RRIF as it is to those receiving income from a registered pension plan.

Third, we would like to address the implications of the GST and HST on mutual fund investors. It is not well understood that these economically good taxes, which generally promote competitiveness and fairness, apply in different ways to financial services and specifically in a way that taxes fund holders more heavily.

For nearly twenty years the GST has applied to mutual and other investment funds at effective rates of four to five times that of other financial products. Indeed, mutual funds were in their infancy as a retail product when the GST was introduced in the late 1980s and the rules were established.

GST at 5% may be manageable, but an HST in the double-digits makes the long-standing unequal treatment of fund holders a lot worse. This inequity is not because of the higher value added in the mutual fund where additional taxation would be expected, but because the labour and salaries that are part of delivering the financial product are fully taxable for funds, but they're tax exempt in the case of direct holdings of GICs, equity, and debt instruments.

The federal and provincial governments are studying ways to improve retirement savings, and we think Canadian fund holders should be taxed to the lower effective rate equivalent to that of other financial products in Canada and similar to the approach taken in other major value-added countries.

We appreciate the opportunity to appear before the members of the finance committee today as this is where ideas that affect the lives of millions of Canadians can receive a fair hearing and discussion.

Thank you. I would be pleased to answer any of your questions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Ms. Weinberg.

Ms. Jean, the director general of Culture Montréal now has the floor.

[Anne-Marie Jean, Executive Director, Culture Montréal]

Mr. Vice-chair, ladies and gentlemen, members of the committee.

Ladies and gentlemen, good morning.

Culture Montréal would like to emphasize the importance of maintaining and strengthening support for culture and the arts as a way of stimulating the economy.

Culture Montréal is an independent organization and place for reflection and action that contributes to building Montreal's future as a cultural metropolis through research, analysis, and communication activities. Culture Montréal contributes to the branding of Montreal as a cultural metropolis at the national and international levels.

Over the years, many studies have shown that culture and the arts are powerful levers for social and economic development. The arts and culture sector is resilient, very flexible and creates jobs. Investing in it stimulates the economy, thereby helping the federal government in its bid to rebalance the budget.

A recent study done by the Board of Trade of Metropolitan Montreal, Culture in Montreal: Economic Impacts and Private Funding, found that the cultural sector generates close to 100,000 direct jobs in the city, with an annual growth rate of 4.6% for the last 10 years, almost three times the total labour market average.

Another study carried out in 2009, L’économie des arts en temps de crise, showed the instability of artistic and cultural organizations in Quebec while also highlighting their exceptional resilience and flexibility during the economic downturn. Cultural organizations proposed various short-term solutions and came up with innovative long-term solutions that would encourage development and protect the sector from future economic disruptions.

Culture Montréal believes that to improve the competitiveness of the Canadian economy, Canada must pursue its strategic plans to encourage investment, creating sustainable jobs that will last beyond Canada's Economic Action Plan. This is why looking ahead to the 2011 budget, Culture Montréal recommends that the federal government increase its investment in the arts and culture sector to ensure that it grows and to maximize the economic and social spinoffs; that it encourage international recognition for Canadian artists and creators; that it contribute more to developing and maintaining cultural infrastructure, and more specifically increasing and improving areas to create, produce and broadcast and that it continue developing the Lachine canal, Old Montreal, the Old Port of Montreal and the Bassins du Nouveau Havre; that it establish new support measures for encouraging attendance at artistic and cultural events and for acquiring works of art; that it enact legislation to preserve and value our cultural heritage and pair it with an action plan with the provinces and territories, in keeping with the international conventions Canada has signed; that it establish a policy to integrate arts and architecture in federal buildings and that it increase access to employment insurance for all self-employed workers to create a better social safety net in Canada.

Without taking away from what we have already accomplished, the legislation should contain provisions allowing self-employed workers to join a public employment insurance system.

In conclusion, we wish to have the Government of Canada recognize the essential contribution of artists to the social and economic development of Canada and of Canadians, and that this recognition be made clear in all its policies, programs and bills. Bill C-32, An Act to amend the Copyright Act, for instance, must guarantee artists adequate compensation and value intellectual property. Creators, like all other Canadians, must be able to make a decent living from the fruits of their labour.

Thank you for your attention.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

From GrowthWorks Capital, Mr. Hayes.

[Thomas Hayes, President and Chief Executive Officer, GrowthWorks Atlantic Ltd., GrowthWorks Capital Ltd.]

Thank you, Mr. Chair, for providing me with this opportunity to present this morning. I am aware that two of my colleagues from the Canadian Venture Capital Association were here several weeks ago, providing some insight on the CVCA's recommended five-point plan to deal with the venture capital crisis in Canada.

I'm going to focus on one solution this morning, but first I have a few remarks about who GrowthWorks is.

We are one of the few national VC players still investing in new deals in Canada. We manage funds across the country totalling about $600 million in AUM. I think outside of Quebec we're probably the largest VC player in the country. Portfolio companies in our portfolio have won the deal of the year in four of the past nine years. We have offices across the country: Vancouver, Winnipeg, Toronto, Fredericton, Halifax, and St. John's. We have a team of 20 seasoned investment professionals. We're a top quartile VC manager. Our focus is on commercializing early-stage technology companies. Recently we did a scan to discover that about 40% of the companies we funded had their origins in R and D in Canadian universities. We've invested in over 250 companies in the country since we began operations in 1992.

I also want to define retail venture capital. Most folks are familiar with traditional institutional VC. They raise their capital from pension funds, institutions, corporations, and endowment funds. In the retail business we raise all of our capital from individual investors, and governments encourage investors to buy into this asset class through the provision of tax credits. The federal government offers a 15% tax credit, it used to be 20%, and the provincial governments, depending on which province, offer anywhere between 15% and 25% tax credit.

Retail venture capital accounts for about 50% of all VC raised and invested in Canada, and it continues to receive good support from both levels of government. In the past two years, many provincial governments enhanced the retail venture programs. British Columbia increased the tax credit; Saskatchewan increased its tax credit; Manitoba, Nova Scotia, New Brunswick, and Newfoundland and Labrador increased both the tax credit and the annual contribution limit; and Quebec recently introduced increases to tax credits for a particular retail fund.

In terms of the Canadian landscape--you probably heard this a couple of weeks ago--the Canadian VC investment is at a 14-year low. Canada's multi-billion dollar annual investment in R and D is at risk because of the dearth of venture capital available to entrepreneurs. Many private institutional VC funds have withdrawn from the marketplace. Canadian entrepreneurs are finding it much more difficult to access equity capital compared to their American counterparts. The reason that is important is the companies we fund here in Canada have to compete against those competitors in the U.S.

Retail venture capital investors have invested more dollars across Canada than private, independent investors nine out of the last 10 years, and as a result, retail venture capital investors are much more consistent suppliers of VC to Canadian entrepreneurs.

So in our view, the most cost-effective and quickest way to get VC funds flowing again to Canadian entrepreneurs is for the federal government to do two things. First would be to return the federal tax credit to the original 20% level for investors from the current 15% for a three-year period, and to increase the annual maximum contribution to $20,000 from the existing limit of $5,000.

The rationale for those changes is this. The tax credit was 20%. It was reduced in the mid-1990s to 15% when there were significant inflows of capital to this asset class. That's no longer the case. When the original retail program was introduced in the mid-1980s, the RRSP maximum was $7,500 and the venture capital maximum was $5,000. The RRSP maximum today I think is $22,000, but the retail venture maximum hasn't changed. It remains at $5,000. This is a problem for us because many of the bank-owned brokerage firms discourage their investment advisers from tickets of that size, so it has serious ramifications in terms of that distribution channel. The members of the IIROC channel virtually are no longer supporting the asset class.

In terms of cost implications, we feel that with these changes, the industry would raise an additional $300 million a year. That would bring the annual raise nationally up to about $1.5 billion. The investment on behalf of the treasury, in addition to its existing commitment, would be an additional $100 million a year.

Independent commissioned studies have shown that these tax credits are recouped by both levels of government within one to five years. A recent study that was just completed by the Sauder School of Business at UBC is going to report some very compelling statistics in terms of tax credits repaid to both levels of government and in terms of job creation.

Thanks, Mr. Chair. I'm happy to answer questions when we get to that part of the program.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Hayes.

From Irving Shipbuilding Inc., will we have Mr. Cairns or Mr. McArthur?

[Andrew McArthur, Consultant, Chairman of the Shipbuilding Association of Canada, and Vice-Chairman (Retired), Irving Shipbuilding Inc.]

Thank you, Mr. Chairman. I will start.

We are delighted to be here today and to have this opportunity.

I am chairman of the Shipbuilding Association of Canada. Peter is the full-time president. The position of the association is also the position my company supports, but I will talk as the chairman of the association.

Shipbuilding in Canada is in a transition state. If you go back to the mid to late eighties and early nineties, we had a program of rationalization whereby the government in fact paid many shipyards, east to west, to get out of the business. There were too many people in it.

Today we are going through another form of rationalization. We have the national shipbuilding procurement strategy, which in effect will create two centres of excellence, one for large combatant ships and one for large non-combatant ships for both the navy and the coast guard. This strategy will be vital for the continuation of shipbuilding in this country.

The question that arises, as there will be only two selected, is what will happen to the remaining shipyards. There are probably about 116 vessels, which will be outside the centre of excellence, available to the rest of the industry. We have one thing we can do to encourage commercial shipbuilding in the country for small ships.

At this time, I would pass to Mr. Cairns, who is going to outline the proposal.

[VAdm Peter Cairns, President of the Shipbuilding Association of Canada, Irving Shipbuilding Inc.]

Good morning, sir.

I am the president of the Shipbuilding Association. The association is a relatively new one. It was formed in 1995. It's national in its scope. It goes from coast to coast, and we are primarily interested in shipbuilding, ship repair, and the industrial marine industry in Canada.

Shipbuilding policy in Canada is being crafted by several government departments in what appears to be a somewhat uncoordinated fashion. The government has recently announced a national shipbuilding procurement strategy for its own fleets. This has the promise of being an excellent program, but it is still in its infancy, and non-government ships and the shipbuilders who construct them still need assistance.

Canada is in fast-track negotiations with the European Union. Whatever the result, it will have an effect one way or another on shipbuilding in Canada.

The finance department has just announced a change in tariff policy for some ship types imported into Canada. The association supported this change, provided that changes were made to the government-structured financing facility and the accelerated capital cost allowance. This was not done. This change in tariffs also has the potential to affect free trade negotiations in Europe's favour. Repeated requests for changes to the structured financing facility and the accelerated capital cost allowance have not been acted upon.

Now, an accelerated capital cost allowance is an excellent incentive for Canadian owners who are generating healthy profits to build their vessels in Canada. ACCA, as it's commonly known, allows an owner to write off the capital costs of a new Canadian-built vessel in four years. The value of ACCA is calculated at 10% of the vessel price. Structured financing facility, or SFF, was introduced in 2001 and 2002 to stimulate demand for Canadian-built vessels. It provides interest rate support as an interest rate buy-down of financing used in the acquisition or modification of a Canadian-built vessel or offshore structure.

This support is in the form of a non-repayable contribution. The value of the SFF is nominally 15% of the contract to the shipyard. After taxes, however, that value reduces to 8%. A Canadian owner has a choice between structured financing facility or the accelerated capital cost allowance.

Funding of the SFF program is sporadic. There is presently about $6 million to $7 million in the fund, with no guarantee that there will be anything beyond the end of this fiscal year. The government needs, in our view, to commit $20 million per year to the SFF program for a minimum of five years, with a review of progress at that time before considering further investment.

The SFF, combined with the ACCA, is a very useful program for those small shipbuilders who will not be designated as a centre of excellence under the national shipbuilding procurement strategy. They desperately need this to stimulate commercial construction in Canada.

In conclusion, shipbuilding policy and finance require a whole of government policy framework that must include procurement policies for both government ships and commercial vessels, trade negotiations, tariff policy, and tax and program policy. Critical to small shipbuilding enterprises at this time is an adequately funded structured financing facility that can be combined with the accelerated capital cost allowance to encourage Canadian shipowners to build in Canadian shipyards.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Cairns.

From the Rick Hansen Institute, we have Mr. Colin Ewart.

[Colin Ewart, Vice-President, Strategic Relations and Development, Rick Hansen Institute]

Good morning, Chair, and members of the committee.

I'd like to thank you for inviting us to speak on behalf of the Rick Hansen Foundation and Institute. My name is Colin Ewart of the foundation, and this is Marie Trudeau from the board of directors of the Rick Hansen Institute. We're here today to talk to you about the 25th anniversary of Rick Hansen's Man in Motion tour, introduce the institute, and highlight the value and impact of the federal government's investments in Rick's visions to date.

You've likely heard of the foundation, which is responsible for implementing Rick's dreams of a world inclusive and accessible for all. You may not have heard of the Rick Hansen Institute, a relatively new organization, which is a key legacy of Rick's vision. The institute focuses on collaborative, interdisciplinary research that improves lives and contributes to finding a cure for spinal cord injury. Thanks to investments by the federal government, from all political stripes, Canada has become a world leader in spinal cord injury research and services similar to that of cancer, genomics, and HIV/AIDS.

This government in particular has been very supportive of Rick's vision through its financial support to date. We want to urge you to continue to support health research such as this. Investments in research and best practices such as those that we develop make a significant difference in the lives of people and result in significant savings to the health care system by governments across Canada.

Twenty-five years ago, we saw how one person could inspire many. After becoming injured, Rick Hansen was inspired to make a difference. He wheeled around the world--34 countries in over two years--and inspired athletes, politicians, doctors, scientists, young people, and people with spinal injuries, like Marie, into becoming difference-makers. As a result of his efforts and those of the people around him, people today with physical disabilities are looked at in a new light. The world is more accessible, and the science has become so advanced that someone with Rick's injuries today would likely walk away after treatment.

We're currently involved in the international phase of the 25th anniversary of the Man in Motion tour, following a very successful launch leading up to and during the 2010 Olympics and Paralympics. We're looking to recognize those difference-makers who have been part of our teams since 1987 and inspire new difference-makers. Between now and May of 2012, you will see Rick travel to several prominent locations around the world that he originally passed through between 1985 and 1987. With the help of the institute and our partners, these places are looking to collaborate with our work across Canada to accelerate the pursuit of the cure for paralysis and make communities more accessible and inclusive.

Following momentum-building announcements of collaboration in four countries--Israel, Australia, China, and the United States--we will return to Canada in August of 2011, and with our Canadian partners we will launch a new national relay tour across the country and recognize difference-makers all across Canada. This will take nine months in 700 communities with 7,000 participants. We'll ultimately conclude the relay tour with a significant homecoming event recognizing the day Rick returned to Vancouver.

Concurrently, a global conference in Vancouver focused on two symposium streams--cure and accessibility--and a trade show will highlight how progress can expand across the world and through the participants from over 100 countries. Canadian leadership and inspiration will be on display. Our ability to engage leaders nationally and internationally can have a profound benefit for Canadians up to and beyond 2012.

We're looking forward to partnering with and recognizing those who have been instrumental to our success over the years. We are already successfully securing partners and funding from corporations and individuals, and we plan to follow up this fall with key federal departments who will be interested in our plans.

Now I'll let Marie speak about the institute's programs about making a difference.

[The Vice-Chair, Liberal, Massimo Pacetti]

You have one minute, une minute.

[Marie Trudeau, Director, Board of Directors, Rick Hansen Institute]

Mr. Chairman, distinguished members of the Standing Committee on Finance, I would like to thank you for having invited us here today to speak to you about the Rick Hansen Institute, in Vancouver, and also to give us an opportunity to tell you about some of our accomplishments.

Thanks to investments from the federal government and other financial partners, Canada has become a leader in treatment and care for the spinal cord and spinal cord injuries. I would like to tell you about some of the return on investments made to date.

One of the tangible outcomes of these investments—

[The Vice-Chair, Liberal, Massimo Pacetti]

Ms. Trudeau, you're not going to have time to go through it. Your time is up: you only had one minute. It's five minutes shared between the two of you.

[Marie Trudeau]

Oh, I see.

[The Vice-Chair, Liberal, Massimo Pacetti]

It's not five minutes per speaker.

I'm going to let the members ask questions, and then you'll be able to incorporate some of what you wanted to talk about in some of your answers—

[Marie Trudeau]

I will include that in the responses

[The Vice-Chair, Liberal, Massimo Pacetti]

—to the questions some members will ask.

We have plenty of time, so I don't think you won't have an opportunity to talk about your situation.

If we can start with Mr. Szabo, for five minutes, or Mr. Brison....

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

Sure. Thanks.

[The Vice-Chair, Liberal, Massimo Pacetti]

You have six minutes.

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

Thank you, I appreciate that.

[The Vice-Chair, Liberal, Massimo Pacetti]

We'll do a first round of six minutes.