Finance Committee on Oct. 21st, 2010

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

Thank you very much, each of you, for being with us today and for your interventions.

I'd like to start with questions on the venture capital side. What is the risk to Canadian discovery and commercialization in five or ten years if we don't take significant action on venture capital in Canada today?

Why is there such a gap between how our venture capital industry is doing in Canada compared with some countries like Israel, for instance? What are the public policy measures and the differences between them? It strikes me as pretty important that we get it right now, because if we don't, we're going to face a real challenge in ten years in terms of the jobs of tomorrow.

[Thomas Hayes]

Thank you for the question.

I've seen various statistics on what Canada invests in R and D. The number that the CVCA used recently, I think here at committee, was $18 billion annually. That's a pretty significant investment. I think Canada does a good job at that end of the spectrum.

But if we don't fix the gap, or lack of access or lack of capital for these early-stage companies, we're going to have significant problems. We have significant problems today and they are only going to be exacerbated if we don't deal with the issue today. We see countless companies that are unable to raise adequate capital for where they want to take their business plans.

In terms of other countries, I've just been reading the book, Start-Up Nation, which talks specifically about Israel. But on my way here yesterday from Halifax, I was reading some papers for a policy conference in Quebec City next month, where a number of folks in the industry will be making presentations about what's been done in China, the U.K., France, Mexico, Israel, and other countries where government have recognized that the private sector, to some extent, has withdrawn from the industry in terms of supply, and where government is now making very aggressive interventions or policies that encourage not only the private sector to get back into the game but also doing some direct investing themselves, either through funds of funds or direct investments in companies. In some cases they are using the retail model in Canada. It's surprising to read about France, where they've adopted some of the uniqueness of the retail model that was developed here 20 years ago.

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

Thank you.

In terms of the shipbuilding industry, the Liberal Party's position is that the structured finance facility needs to be reinvested in and there ought to be access to it and the accelerated capital cost allowance at the same time—and of course procurement is critically important.

But the recent government measures to eliminate the tariffs on ships was considered a positive announcement when the government made it recently. What is the impact on Canadian shipbuilding of the elimination of these tariffs? I'm not a protectionist at all; I'm a real free-trader, but we have to recognize the importance of a level playing field, and we know that other countries are taking a different approach when it comes to shipbuilding. But what is the impact of the recent government announcement on eliminating these tariffs on ships coming in from other countries? What will be the impact on your industry?

[VAdm Peter Cairns]

We believe the impact to our industry with regard to those tariffs will not be overly significant, because in fact we were actually part and parcel of these negotiations, as you may well know. We did work with the Canadian Shipowners Association on this tariff issue, knowing that they had a significant problem. You might say we took one for the team here.

We recognize, realistically, that we will probably never build certain classes of ships of certain sizes in this country. To face the reality, we said that if those are the sorts of things that you're going to want to bring in duty free, and we're not going to build them here anyway, why should we hold that up? That is one side of the story.

The other side of the story is that one class of ships, ferries, we were adamantly against. That one was put into the finance committee's reduction in tariff. That, in our view, was a distinct, pure lobbying effort by British Columbia ferries. It was accepted by the finance committee. We don't think that made any sense, to be very honest with you, and I could talk at length about that, but this is not the place. We believe that the ferries mentioned in that tariff remission could have been built in Canada. That's not an issue. The company did not want to build them in Canada, and that's essentially where we come from.

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

You described it as being willing to compromise or to take one for the team on this one. In exchange for that, were you able to negotiate a commitment under the structured financing facility or the accelerated capital cost allowance?

[VAdm Peter Cairns]

That was part and parcel of our negotiations with the shipowners when we did this, and that was when we put our response to the government on their issue. We did put that in, but it was never picked up.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Brison.

Monsieur Paillé--

[Andrew McArthur]

Excuse me. Could I add something?

[The Vice-Chair, Liberal, Massimo Pacetti]

Yes, Mr. McArthur.

[Andrew McArthur]

One thing that really ticks us off quite badly, though, was what a time to do it. Why give up the 25% import duty when we're in negotiations with the EU on a free trade agreement?

We know that shipbuilding is a small industry worldwide. The European shipyards would love to get into Canada to build the government ships. They've put it on the table, and it doesn't seem to make sense to us that when you're in the midst of negotiations, you give something away free, gratis, without getting something in return. It just doesn't make good common sense.

[A voice]

That's an excellent point.

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Paillé, you have six minutes.

[Daniel Paillé, Bloc, Hochelaga, QC]

First I would like to briefly address Mr. Hayes and then Mr. Russel.

You provide information about tax credits and the one granted by almost every province is already 20%. Therefore, you are recommending that the federal government follow the provincial example. You also indicated that the maximum investment should increase from $5,000 to $20,000. We see that in most of the provinces, it's currently about $10,000. However, it's $12,000 in Manitoba and $13,000 in British Columbia.

Do you have any impact analyses that indicate how much venture capital investments would increase in Canada if the maximum amount were multiplied by four? Have there been any studies in this regard? If so, could you send us their conclusions as soon as possible, please?

[Thomas Hayes]

First of all, in terms of the recommendation to go back to 20%, that's where the tax credit was when the program was started back in the 1980s, so we'd like to see it return to the 20%. When you couple that with the provincial tax credit of 20%, that's a pretty significant deal from the investor's perspective. That said, it is a very risky and speculative asset class, so there needs to be an incentive to draw people into it.

In terms of the maximum contribution, all we're saying is that it would be nice if it could be tied somewhere in the range of the RRSP tax credit. What's happened is that we've lost a significant distribution channel, because many of what I call the IDA firms, although I think the proper terminology now is “IIROC”, which are mainly the bank-owned brokerages, disincent their investment advisers from doing ticket sizes in the $5,000 range, so we've practically lost that distribution channel. There are no studies, because this hasn't been implemented, but we've done lots of analysis on what we think the results of these changes will be in terms of fundraising, and we think we'll add another $300 million a year to the annual fundraising capacity of the industry.

We have no issues in terms of deal flow. We think we can easily invest an additional $300 million to $500 million a year without much of a problem.

[Daniel Paillé, Bloc, Hochelaga, QC]

Thank you very much.

Mr. Russell, you said that the TFSA contribution ceiling should be increased. You also said that a person over 55, for example, could make retroactive deposits to a TFSA starting from age 18. Personally, that would mean 42 years of retroactive investment into my TFSA, to the tune of $5,000 a year? Is that your proposal?

[Ian Russell]

The number we've talked about, and again it's simply an estimate, was about an allowability of about $150,000. So that would be roughly 15 years of being able to make retroactive contributions.

Our number is $150,000. It is interesting that in the Senate banking committee recommendations for TFSAs they talk about a lifetime of $100,000, so we're not that far apart in terms of the amounts we're talking about. And the rationale is that we're talking about individuals who are on the verge of retirement, who have suffered through the financial crisis and have had losses. This is an extra incentive to help them supplement retirement, and it also is quite cost-effective from a government standpoint.

I think those are the rationales that probably lay behind the Senate banking committee's recommendations as well.

[Daniel Paillé, Bloc, Hochelaga, QC]

Well precisely, when it comes to costs, have you estimated how much this will represent for the Government of Canada?

[Ian Russell]

Yes, we did estimate the cost. I don't have that figure here right now, but I would be pleased to send it to you. We gave that estimate to members of this committee a year ago, I believe.

[Daniel Paillé, Bloc, Hochelaga, QC]

It is in the order of... It must be quite high.

[Ian Russell]

I think it's about $1 billion, something in that order, yes.

[Daniel Paillé, Bloc, Hochelaga, QC]

I want to point out that you're here today representing the Investment Industry Association of Canada. If I remember my former job correctly, that is an umbrella organization of securities commissions of all provinces, all territories and of the AMF.

[Ian Russell]

Yes, that's right.

[Daniel Paillé, Bloc, Hochelaga, QC]

This is an umbrella organization that uses a single system, the passport system. It is the one through which securities trading in Canada deals with the International Organization of Securities Commissions. You therefore have a harmonized set of regulations and tariffs. For all intents and purposes, you represent an industry that works very well, is that right?

[Ian Russell]

That's true. That's correct, yes.

Our industry I think functions well.

You mentioned the passport. This is a system that works very effectively to monitor the regulation of small companies.

[Daniel Paillé, Bloc, Hochelaga, QC]

Donc, if it's not broken, why fix it?