Thanks, Mr. Chairman. It's my pleasure to appear before the committee.
As you know, tax reform has been a topic near and dear to my heart, especially since I chaired the commission for Paul Martin, the Technical Committee on Business Taxation, back in 1998. We argued very strongly that it's very important to have a business tax structure that has internationally competitive rates but also neutrality, where we have a level playing field amongst different types of business activities to make sure we get a proper allocation of capital resources in the economy. I would echo many of the things that David Spiro said.
I wanted to point that out because I feel there were a number of changes made since 1998 that did a lot to bring rates down, but I think the governments could have done better in terms of achieving more neutrality. For quite some time I have also felt that the labour-sponsored venture capital corporation credit that has been in existence needed to get changed as well, as it had distorted venture capital markets.
I want to focus on this particular credit and start with some empirical observations that have been made by a number of papers. In fact, one of them is our own, which I'll show the committee, and it's one you can get off our website. It was by Jeffrey MacIntosh, entitled “Tantalus Unbound: Government Policy and Innovation in Canada”. I recommend that the committee look at this paper because it provides a lot of interesting observations that are quite relevant to today's subject. This paper was peer-reviewed, and I think it expresses a lot of the state of economic knowledge as well as legal knowledge with respect to many policies that we use for innovation, including the labour-sponsored venture capital corporate credit.
To begin with some observations, this is one I found in an article I wrote. It seems that Canadian venture capital returns have been particularly low. In particular, this has been true of the LSVC credit. For example, in the past decade the average rate of return has been 3% per year, compared to the United States which has been 20% rate of return to venture capital. We've had a policy in place that hasn't worked very well. In fact, it's not surprising that many Canadian pension funds, when they do decide to invest in venture capital, often go to the U.S. where the rates of return are far better than what you find in Canada.
As Jeffrey MacIntosh notes, one of the reasons is the very small scale of many of the labour-sponsored venture capital credit firms. As a result, they have had very poor returns because of that low return. But even large ones have not done particularly well.
The Quebec Solidarity Fund, for example, as Jeffrey notes, over a 20-year period has had half the rate of return as treasury bills. Now if you're investing in more risk, you would expect a higher rate of return not a lower rate of return. This is actually a rather surprising result. In fact, in 2011, $8.8 billion had been invested in solidarity funds. However, only 4.9% had been what's called development capital assets, where you might find some investment in venture capital.
As Jeffrey MacIntosh notes, most of this capital has been funded in bonds, not very much in equity, of private companies. In fact, only 5% of the total solidarity funds have been invested as what you might think of as venture capital, according to Jeffrey MacIntosh in this paper that we published.
I think that is a very important result because it shows that the program has not worked as ideally as it should.