Finance Committee on Nov. 25th, 2013

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

On the issue of tax fairness and the issue of making sure everyone plays by the same set of rules, I was a little shocked learning and doing research into this zapper technology that actually businesses often have the technology in place and they don't even realize it's in place. We have to come up with some type of a much more simple test for people to know, for businesses to know, whether they're compliant or non-compliant.

Have you looked at that? Have you tried to talk to your individual membership about that?

[Joyce Reynolds]

I have to tell you, when this fiscal evasion issue first surfaced in Quebec we would have questions put to us about how prevalent zappers are in the industry. We have absolutely no idea.

For us, it's very difficult. We know that a lot of our members were very concerned about the cost of the solution that Quebec put forward, but no one is going to voluntarily tell us that this is something they've purchased from their point of sale supplier, or something like that. It's our belief that it's out there, not only in our sector, but in all retail.

We're prepared to work with the government to get at the source.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

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

Maybe just a comment, Mr. Hayes, and hopefully you'll get a chance to reply to this to someone else.

When we look at the LSVCC tax credit there are a number of players out there who have a differing opinion than yours. The Organisation for Economic Co-operation and Development, as well as venture capital industry stakeholders...there are a number of OECD group countries that are looking to shut this venture capital source down.

[The Chair, Conservative, James Rajotte]

It's not really fair to the witness to make a statement and then not allow him to respond.

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

Fair enough.

[The Chair, Conservative, James Rajotte]

I'll come back to you, Mr. Hayes.

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

I'll catch you later.

[The Chair, Conservative, James Rajotte]

Okay, thanks.

Mr. Brison.

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

Mr. Hayes, earlier today Jack Mintz spoke of a crowding out of private investments in the venture capital industry. People I know in the venture capital industry have not described a crowding out by too much investment in the last while; in fact, they have described a dearth of investments. It's been a real challenge.

You referred to the leverage of private capital. Your message is exactly the opposite of Professor Mintz's message, and you're in the industry. The chamber of commerce, representing venture capital firms and companies within which they have invested—Mr. Arsenault, again, an industry participant....

What do you think of Professor Mintz's assertion that there has been a crowding out of private investment by labour-sponsored funds, particularly given your figures that one third of Canadian VC is actually labour-sponsored venture capital?

[Thomas Hayes]

Mr. Mintz is a very well-known and highly regarded economist, but I guess it proves that we don't get it right 100% of the time. Some of this misinformation that has been out there for years is outdated and factually incorrect.

There is a dearth of venture capital. The issue here is access to capital for entrepreneurs, and that's exactly why the federal government is taking measures to address it through the VCAP program. At the same time, to remove one of the prime sources of risk capital in the Canadian economy makes no sense from my perspective, and from a policy perspective.

The crowding out argument that we have heard over the years is just not factual, and this is exactly why the Canadian Venture Capital Association has strongly opposed this move. On the one hand, the government is taking a positive step in creating the VCAP program, but all of the positives of that could be offset by the negative impact, the unintended consequences, of removing the federal tax credit. The leverage is tremendous. It's 15¢ on the dollar from the federal government which attracts 85¢ of additional investment.

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

When will the VCAP program be fully operable and firing on all cylinders?

[Thomas Hayes]

That's a good question, and that's a concern that many in the industry have. In fact, some would suggest that the industry has gone on hold in terms of the private sector players waiting for these details to be announced.

I honestly don't know. We've been very supportive of the program and we encourage the federal government to move along as quickly as it can. But it could be a couple of years before cheques are ready.

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

Would the organizations that each of you represent support not moving forward with these changes to the labour-sponsored venture capital tax credit until the VCAP is fully operable? That would give us more of an opportunity to study and consider the potential impact.

Should the government at least put on hold these changes until the VCAP program is operable?

[Thomas Hayes]

I can only speak for myself. Obviously an ideal situation would see a reversal of the decision that the government announced in its March budget, but realistically I don't think that's going to happen.

From my perspective, I would like to see the Department of Finance agree to review the implementation plan they have currently outlined, to sit down with the industry and work out a system that would provide us with more runway and a softer landing, that would protect the interests not only of the portfolio companies we have currently invested in but also the middle-class Canadians who are shareholders in these funds.

We ask that you extend the runway, extend the transition period, which would allow a much better outcome for everyone involved.

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

Thank you.

Ms. Reynolds, the EI account will balance in 2015; we have seen this from the most recent economic update. But the government wants to freeze the EI premiums where they are until at least 2017.

Would it be good for your industry if we were to immediately reduce EI premiums after the account goes into balance, as opposed to keeping them high for the next several years?

[The Chair, Conservative, James Rajotte]

Just give us a brief response, please, Ms. Reynolds.

[Joyce Reynolds]

Yes.

[The Chair, Conservative, James Rajotte]

Okay, that's brief enough. Thank you very much.

I'm going to take the next round. I want to follow up with you, Mr. Hayes. We've been dealing together for years and I've always appreciated your input, your advice. I don't think it's fair, though, to ask taxpayers to provide both indirect and direct support for the venture capital sector.

My impression from discussions with you over the past number of years is that, even prior to the fiscal financial crisis in 2008, the venture capital sector was not doing well and some changes needed to be made.

There was the 2011 Expert Review Panel on Research and Development. From this panel the government has taken the approach that it ought to redirect more support into direct support. That's why the venture capital plan is as it is.

Would you prefer that the capital plan be stopped and we simply revert to the indirect support? I don't think it's fair to ask the small business owner or the restaurant owner to provide support for the venture capital industry in both the direct and indirect measures. At least it's not fair to pursue this to the extent that it seems you're asking for today.

[Thomas Hayes]

Well, I'm on the board of the Canadian Venture Capital Association. For the past three years or so, we've been encouraging the federal government to look at additional ways to assist in creating a greater supply of VC. There has been a dearth of VC available to Canadian entrepreneurs over the last number of years.

Mr. Mintz is correct when he says that the returns in the VC industry generally have not been great in Canada over the last number of years. That is not attributed to the labour-sponsored model; that's private funds throughout Canada. That is changing. In our own fund, our rates of return have changed significantly in the last couple of years. I think the labour model is a very effective tool for unleashing private capital. As I said, 15¢ generates $1 in investment. How much more leveraged can you get with that model?

I compliment the federal government for also trying to bolster and introduce new measures through VCAP. But whenever we were involved in talking about other measures the federal government could take, in all of the consultations across the country, we never thought for a moment that the government would remove what we consider to be a very effective program to introduce an untested one. It was announced two years ago, and we still haven't seen a cheque written to an entrepreneur seeking capital.

[The Chair, Conservative, James Rajotte]

But with respect, you say the model works. My understanding, from our conversations over the years, is that the model was not working. The finance department minces no words whatsoever. They call this an inefficient and ineffective tax subsidy.

You heard Jack Mintz, in the earlier panel, say that the rate of return is low, and he also mentioned how it's invested in normal equities. There are some very strong criticisms of that model, so the government is responding by saying that it's not fair. I'll point to Ms. Reynolds and her organization. It's not fair to tell the average taxpayer or small business owner that he's going to continue to provide additional support indirectly and directly to the venture capital industry. We have to make choices here.

There is a plan in place to provide $400 million of direct support. Would you say we should cancel that and go back to indirect support?

[Thomas Hayes]

I'm a believer in the labour-sponsored model and the accomplishments it's achieved over the years. I think there are a lot of myths and there is a lot of misinformation.

If Mr. Mintz were going to use rates of return simply, he'd do away with the BDC venture capital program, if you looked at their rates of return over the last 10 years. Is that what he's suggesting? I don't think so.

The federal government has always been actively involved in—

[The Chair, Conservative, James Rajotte]

But as you and I both know, there has been a lot of criticism of the BDC venture capital plan as well, which is why this new fund is being established, in part.

[Thomas Hayes]

Look, I'm not here to criticize the new fund. I've been very supportive of that initiative. But it's an unproven model, whereas in the labour fund model we have a proven model that works. Over one third of all of the venture capital that's been made available to Canadian entrepreneurs has been generated by that model.

We just led a round of financing for a New Brunswick company. We haven't announced it yet. We approved it last week. We're putting in $1 million of investment and we're bringing three other funds to the table, for a total round of $4 million. That's what we do: we bring other investors to the table from within the region and outside the region to help entrepreneurs grow their businesses.

[The Chair, Conservative, James Rajotte]

Mr. Hayes, I have a challenging time squaring that with this model that has been in place for years and years, with a lot of the comments that we've had—with discussions you and I've had earlier—about the venture capital industry in Canada. I'm struggling with that.