Evidence of meeting #10 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was quebec.
A video is available from Parliament.
3:55 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
You asked the government to go back on its decision concerning the tax credit, but were you prepared to make compromises?
3:55 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
Certainly. We were ready to cooperate with the government and, in fact, that was the spirit of the proposal. We think the federal venture capital action plan is a good thing for the venture capital industry. However, the fact that the program replaces what we have been doing in this area for several years effectively takes away a source of shared investment as well as an important...
leading source of fund of funds capital for independent funds in Canada.
In fact, that is what Canada's venture capital and private equity association said. That is what the government is eliminating. You have to see what that means. It is all well and good to have theoretical academic analyses, but on the ground, you have to see what will happen. If the fund has 615,000 shareholders, it must mean that we are doing something right. Our returns must be respectable.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
I am trying to understand the government's thinking. Initially, it gave only $400 million to the federal venture capital action plan. Over a period of 10 years, $400 million will have been invested.
4 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
That is correct.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
You suggested investing $2 billion in the activities of this plan.
4 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
Yes.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Knowing that the government wanted to eliminate this tax credit, you asked it to in fact reduce it by 30%.
4 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
Yes. We felt that, for the government, the tax credit was not really effective from a venture capital point of view. So we agreed to spend $2 in venture capital for every dollar of the tax credit. The fund is mainly concentrated in Quebec, but we reached an agreement with the Quebec government to make all investments made outside of Quebec in funds outside of Quebec eligible. It would also be possible to invest funds that we support in Quebec in venture capital outside of Quebec, while making these investments comply with the 60% rule.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
In that case, what would become of the federal government's venture capital action plan and the $400 million that will be invested over 10 years?
4 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
Once again, we believe that it is a matter of cooperation. Both sources of capital must be maintained.
Why not keep two sources of capital available?
One source of capital is working well. We have invested over $2 billion in venture capital. Can you name anyone else in Canada who has done that? We have invested $2 billion over the last 10 years. In venture capital alone, the last 3 years have given our shareholders a 9.7% return on their investment, whereas Thomson Reuters says the average return was 2%.
We are doing better than the other venture capital funds in Canada, and yet this source of capital may be withdrawn. In regard to funds that will be available, we still don't know if that matter has been settled or not. We are told that it has been. We have shown that we are able to provide capital to the venture capital industry all over Canada, and now this may be replaced by a program that has not been set up yet. No one knows exactly how the program will work nor if it will produce the expected results. Why not maintain these two sources of capital, at least for the next 7 to 10 years, after which we can decide if adjustments are necessary?
4 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Caron.
Mr. Saxton, please, for your round.
4 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Thank you, Mr. Chair.
Thanks to our witnesses for being here today.
My first questions will be along the same lines and on the same issue, and that is the labour-sponsored venture capital tax credit. My first questions will be for Professor Mintz.
Professor, you've been quite critical of the labour-sponsored venture capital tax credits. In fact, in your opening remarks, you said that not only have these credits been ineffective in generating more venture capital, but they have also helped to finance poor projects that should have never been funded in the first place. That's a fairly negative review. Can you explain why, in your opinion, these tax credits are not achieving their intended results?
4 p.m.
Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual
As I tried to say in my opening remarks, the rates of return to venture capital firms have not been particularly good. In fact, I would say the policy is broken in Canada, as we've had such a poor performance. I think we have to remember there's a difference between what the shareholders get as a rate of return and what the economy gets.
The shareholders will look at all the tax benefits they get on top of the economic returns that they might get from an investment in venture capital. But if you look at the actual rates of return, without taking into account taxes, the tax credits, and the RRSP treatment as well, the system does not actually generate very good returns. In fact, they're much inferior to what you find in the United States.
I think there are a number of reasons for that, as I've tried to explain. There have been a number of papers that have made it very clear that there's been a crowding out effect, that we've been squeezing out perhaps better performers in the market. I think it's been a policy that has not worked well. Theoretically, you end up encouraging too many poor projects coming into the market because of the way we subsidize equity, which is an important signal to the market.
4:05 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Then, in your opinion, are these funds primarily tax driven?
4:05 p.m.
Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual
Absolutely.
When you look at a rate of return that's barely 3% for 20 years, and even for a solidarity fund it's been an inadequate rate of return over 20 years—only half of the treasury bill rate—surely we're not doing very well, especially compared with the United States, where you get far better rates of return on venture capital.
There's no question in my mind that we need a completely new approach to what we're doing. Trying to direct funds into low rates of return is not exactly healthy for the Canadian economy because we have to use resources that are taken away from others that could be better invested in the economy.
4:05 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
In your opinion, then, people are simply investing in these funds to get the tax credit?
4:05 p.m.
Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual
Primarily, because the actual economic returns are pretty poor on average.
4:05 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Are you familiar with the government's new venture capital plan?
4:05 p.m.
Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual
Yes, I am, to some degree. I don't know all the details, since they weren't completely announced in the budget.
4:05 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Right.
In your opinion, can you tell us what would be a good plan to replace this?
4:05 p.m.
Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual
I think one of the things we have to remember is that pension funds and others can't take advantage of the labour-sponsored venture capital credit, so there is a need for a new approach in Canada. When I chaired the savings commission for the Government of Alberta in 2007, we observed that one of the key differences between the United States and Canada was the lack of scale. With scale, you would get more experts, like scientific experts, who are involved with funds.
One of the successes in the United States has been these large-scale venture capital funds that have been operating there. To the extent that you can encourage a larger scale in achieving venture capital management, I think you might be able to start pushing the system into a far better one than we have currently.
I'm hoping that perhaps these partnership funds that some of the provinces have been doing, as well as what's been proposed by the federal government, might be the approach to achieve that. But I think we need some careful evaluation of that point.
4:05 p.m.
Conservative
Andrew Saxton Conservative North Vancouver, BC
Okay. Thank you, Mr. Mintz.
Very quickly, Mr. Bolduc, there's been some testimony today against labour-sponsored funds and I'll quote from you:
“If ever the credit were to disappear, my message is that the fund is on solid ground [...] We have $9 billion in assets, not debts. Everything belongs to our shareholders.”
If things are so solid, why do you still need that tax credit?
4:05 p.m.
Conservative
4:05 p.m.
Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec
Allow me a few minutes here.
The fund's primary mission is to encourage people to save for retirement. Then its goal is to invest 60% of that money in economic development and job creation in all sectors of economic activity, that is to say in eligible companies, usually SMEs, all through the region, and to encourage innovation, productivity, and the creation and preservation of jobs. That is the fund's mission.
We project that if the tax credit disappears, there will be a decrease in incoming funds. Our mission of economic development will be reduced drastically. A study carried out by Deloitte and Secord shows that approximately 16,000 jobs will be lost per year and 400 SMEs will lose our support. Over a 10-year period, retirement savings will drop by $4.5 billion, at a time when saving for retirement is an enormous problem in Canada.
Our solution is to encourage retirement savings and redirect that money towards supporting economic development. In this sense, I am not just talking about venture capital, but also conventional capital. However, that is what is currently being eliminated. There are assets...
4:10 p.m.
Conservative
The Chair Conservative James Rajotte
Sorry to interrupt, but we are way over.
Colleagues, just as a reminder, you do have to allow enough time for witnesses to answer.
We will come back to this subject later on, I'm sure, but I do have to go to Mr. Brison, please.