Finance Committee on Oct. 21st, 2010

[The Vice-Chair, Liberal, Massimo Pacetti]

You'll have five minutes, Ms. Block.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

And again, thank you all for being here and for your presentations.

My first question is for the Investment Industry Association of Canada, specifically to your second recommendation, to increase the contributions and deposit maximum limits for RRSPs and TFSAs.

In this past year, as we've studied retirement income security, I have come to understand that these vehicles are not being utilized by Canadians to the extent that we'd like them to be. I surmise from this recommendation that you believe that increasing the maximum limits would further incent Canadians to take advantage of them.

Is that correct, and why do you believe it?

[Ian Russell]

You're right, and it's for two reasons.

One is that the statistics look at the average usage across different income groups. Lower-income Canadians tend not to use them. In fact, Malcolm Hamilton, who has a high reputation with Mercer as an actuary, has indicated that in retirement, lower-income Canadians do better with the two pillars they have. Many middle-income Canadians don't take full advantage of the RRSP for lifestyle reasons, whereby you're in the process of family building and you make large outlays along the way for education and for a house. That would explain in part why some Canadians actually use their RRSPs to make those purchases, which at that time of their life is a priority. The people at the high end of the income scale always will use them up.

But the point I guess we're making is that the statistics belie a need to increase the ceiling. We've done some comparative analysis comparing the ceilings in the U.S. and in the U.K., which has a lifetime limit. We're just saying, given the economic climate, and the difficulties in saving with very low levels of interest rate to accumulate, and the financial crisis, that to the extent possible given that there are budget constraints, to raise those ceilings would be a good thing to do.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much.

My second question is for GrowthWorks. You stated in your brief that fundraising has stayed flat during the past two years, at approximately $1 billion per year, and is substantially lower than in early parts of the decade. I thought you also made a distinct correlation between RRSP contribution levels rising and the annual maximum investments of $5,000 and the impact these have had on venture capital investment.

My assumption is that your recommendations would have a positive impact on fundraising efforts. If that is a fair assumption, what impact in terms of potential dollars could your recommendation have?

[Thomas Hayes]

Thank you.

Given the current environment in VC across Canada, and in fact across the globe, it's a difficult time, for all parties, to raise funds. However, if both measures that we're recommending—a return to the 20% tax credit and an increase in the annual contribution amount to $20,000—are introduced, we think we can raise at least another $300 million a year from retail investors in Canada.

I should have said in an earlier response to one of the questions that I think some folks feel a concern that if they were to introduce those measures and the thing became wildly popular, the cost to the treasury would be out of control. That won't happen, because most of the provinces who participate in this program have caps on the amount of provincial tax credit they are prepared to extend to investors during each fundraising season. Once those tax credits are maxed out, investors stop buying the asset class. So there really are some control mechanisms in terms of what can be raised in a given year.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I just want to clarify. You said $300 million?

[Thomas Hayes]

Yes. I also said that, from a deal-flow perspective, we see no issues in taking those dollars and investing them. In our case we focus on early-stage investments, and from our perspective that's really where the gap is in Canada.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I have just one further question. What were the levels in the early parts of the decade?

[Thomas Hayes]

Well, Quebec has always led the pack in terms of retail fundraising. I think in the province of Quebec they're still raising in the order of $800 million to $900 million a year. It's in the rest of Canada, particularly Ontario, where the fundraising has declined significantly.

Back in the mid-1990s, when they were raising more money than they could properly invest, I suspect that between Quebec and the rest of the country it was close to $2 billion a year.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Ms. Block.

I have just a couple of questions, and if we can keep the answers short, we can move on.

Mr. Russell, in your brief you're asking for capital gains to be reduced from a 50% taxable rate to a 37.5% rate. Capital gains are already getting favourable tax treatment. My philosophy would be to make the Income Tax Act a lot easier; just tax everything as regular income and lower the rate immensely so that everything is treated equally, almost like a flat tax type of mentality. What would you say to that?

[Ian Russell]

I guess my comment on that would be the slogan that was used at the Carter commission, which goes back 40 years now: “A buck is a buck is a buck”.

What we're trying to indicate here is that there are certain investments and certain income flows, certain capital gains, and particularly capital gains that carry risk, and to the extent they carry risk, there's a disincentive for someone to invest in those instruments, whether it be a corporate bond versus a government bond or a—

[The Vice-Chair, Liberal, Massimo Pacetti]

Does the risk carry a benefit of 37.5% or 62.5%?

[Ian Russell]

I don't know. What I'm saying now is that the effect of capital gains tax is 25%, whether it's 20% capital gains tax or 22%. I'm just saying that to make it lower would provide an additional incentive to—

[The Vice-Chair, Liberal, Massimo Pacetti]

But if you made it higher and taxed it at a lower rate, would that not do it?

[Ian Russell]

I guess it depends on whether you—

[The Vice-Chair, Liberal, Massimo Pacetti]

If the ultimate result were the same—

[Ian Russell]

If the ultimate result were the same, you could change the inclusion rate and lower the tax rate. You're right, you could get to the same result.

[The Vice-Chair, Liberal, Massimo Pacetti]

I'm addressing you, Ms. Jean. I'll be brief.

The last group of experts informed us about support for artists internationally, and I understand that you're in favour of an investment of $25 million.

[Anne-Marie Jean]

Yes.

[The Vice-Chair, Liberal, Massimo Pacetti]

What organization would manage this program? The Department of Foreign Affairs?

[Anne-Marie Jean]

It could easily be the Canada Council, because it is often in contact with companies that need support abroad. These companies obtain financial support from the council for their creative endeavours. So the council has what I would call intimate knowledge of these arts companies.

[The Vice-Chair, Liberal, Massimo Pacetti]

The danger is that these $25 million may already have been granted to the Canada Council. That's why this group of experts is not convinced that these funds should be provided to the organization.

[Anne-Marie Jean]

When we talk about an increase, we're certainly not talking about increasing the money that is already there. What we mean is to inject additional funds into the system.

In fact, the Canada Council's budget should also be increased in accordance with changes in the arts community. The Canada Council must have its budget increased to $300 million over the next five years. That's quite clear.

[The Vice-Chair, Liberal, Massimo Pacetti]

I understand, but this is just to put it on the record as we say.

As a member of Parliament from Montreal, I see that a lot of money has been invested in culture in Montreal. You cited among others le Quartier des spectacles and other projects.

Does any money come from the federal government?