Finance Committee on Nov. 25th, 2013

[Murray Rankin, NDP, Victoria, BC]

Thank you, Mr. Chairman, and welcome to all of our witnesses.

I'd like to take up where Mr. Adler left off with you, Mr. Spiro. I appreciate your being here. I know of your work at Dentons LLP, and your expertise in tax litigation is well known.

We're very concerned on this part of the committee about tax havens and international tax, in which you have a great deal of expertise. You talked in your remarks about the thin capitalization rules, and this bill purports to broaden them. You talked about its extension to non-resident trusts. But you also said there needed to be some additional fine tuning so these would not be offensive from a policy perspective.

I'd like any insights you might be able to provide about whether we're on the right track, and how we might do a better job on enforcement in respect of tax havens.

[David Spiro]

In my remarks, my intention was to mention the fine tuning, and this goes on in a number of different venues including the joint committee of Mr. Hayos's group and the Canadian Bar Association—lawyers and accountants with expertise in tax. They sit down, and they work very closely with the Department of Finance to fine-tune these rules so they don't exceed the scope of the policy.

In other words, if there are transactions caught by these rules technically that don't offend any policy, and therefore shouldn't really be caught by those rules, then there needs to be some amendment or modification, and those take place over time. Those are the technical amendments the Department of Finance people often come in and testify about, and they do this in the case of Bill C-4 as well. There are a number of those cleanup measures and amendments in addition to what was announced in the budget.

I wasn't speaking specifically about the thin capitalization rules. I was speaking about any of these amendments where sometimes the scope of them exceeds the policy or the mischief the Department of Finance seeks to address.

[Murray Rankin, NDP, Victoria, BC]

I appreciate that.

Now I'd like to ask a question of Mr. Hayos of the Chartered Professional Accountants of Canada. Thank you for being with us as well.

In your written report, you said a couple of things: one on process, and one on substance. You mentioned in your remarks these complex issues. The proposed legislation was released on September 13, and the comment period ended a month later. The bill was tabled three days after that, and you gently said you could have benefited from a longer time to analyze a piece of legislation of such complexity. I appreciate your bringing that to the attention of the finance committee. It is extremely frustrating when complex matters are not subject to adequate time for review, and I appreciate your association's raising that.

In the content part you addressed after that, you said you were concerned about the provisions in the context of synthetic disposition arrangements. You were also concerned that the amendments to the thin capitalization rules might be so broad in application as to capture circumstances that do not appear to be intended by the government's public policy objectives.

I wonder if you could spend a little bit more time on what you meant by that.

[Gabriel Hayos]

It is similar to what Mr. Spiro said: these arrangements as written in legislation often capture normal commercial transactions as opposed to capturing transactions where a real disposition is disguised as not being one. There are transactions that can fit in that are not dispositions and are treated as such.

[Murray Rankin, NDP, Victoria, BC]

I see.

[Gabriel Hayos]

In the joint committee, we made a submission on these concerns. I can bring them to the committee's attention if you would like to read the joint—

[Murray Rankin, NDP, Victoria, BC]

Thank you for your white paper on corporate tax evasion. You talked a bit about that in your remarks as well. You said the topic of tax evasion versus legal tax planning and corporations not paying their fair share of tax is big and getting bigger. Then you referenced the work of the OECD in that regard.

I wonder if you could talk a little bit more about any insights your organization might have on how we might address the issue of unfair tax planning, or tax evasion where the use of international tax havens is engaged.

[Gabriel Hayos]

First, I would tell you that I think Canada is actually doing on its own, unilaterally, a very good job. We have a general anti-avoidance rule, and you see the rules that are introduced in Bill C-4. I think the issue on an international basis is the ability of these different countries to collaborate where there are asymmetries between the rules of one country and another. At the moment I think the OECD has, while it's an ambitious plan, the only approach that will properly address this area.

In my view, Canada has to be very careful to not jump the gun in this area because, at the end of the day, there's still an issue of our tax system being competitive with other countries, and we want to make sure that we do things collaboratively and in a coordinated way. So that would be my comment to you.

[Murray Rankin, NDP, Victoria, BC]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Rankin.

We'll go now to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair, and thank you all for being here. It's a very interesting discussion.

Mr. Mintz, I was watching you while Mr. Bolduc was making his comments and his plea for continuance in the program that the government has. I want you to just air your concerns about that because I want to hear the other side. He makes a compelling argument, so I wonder if you could just tell us what we're missing here.

[Dr. Jack Mintz]

In terms of what's been missing, first of all, let's go back to the issue of neutrality. People make investments. Right now we have a general RRSP system that encourages people to invest in whatever they wish to invest in, but in the case of the labour-sponsored venture capital credit we have a special credit that is provided for investments that are supposed to go to venture capital. However, it doesn't necessarily go into venture capital. In fact, again I encourage you to read Jeffrey MacIntosh's paper, but just to quote from him, he said that with $4.2 billion—and this is in 2011—of the $8.8 billion that Solidarity had, $1.5 billion was invested in public companies—you should be getting a relatively good return if you're just making the market return on that—hedge-fund units, $216 million; bonds, $2.3 billion; and money-market instruments, $154 million.

The other part of the money, $4.27 billion, which are called developmental capital assets, are not all venture capital. In fact, in the end only a small part of that is actually invested in the private equity of smaller firms. Then the question is, why do we give a 15% credit for that to encourage savings? Why not just give 15% for everybody to invest savings if that's the idea?

The problem is, what we're doing is directing funds into relatively low rates of return, and that goes back to my point about venture capital. We're trying to encourage more venture capital in this country, and venture capital is risky. If you were making a relatively good economic return on venture capital, then because of the risk you have to earn more than, let's say, a treasury bill, which is a government riskless rate of return of say just 3% or 4%. We should be making in venture capital at least 8% or 10% on average over time, but that's not been the experience in Canada. We've been getting money in venture capital firms that are earning very low rates of return. Clearly, the policy is not working. It's not creating jobs as much as we think. In fact, if you just have money that's being invested in public companies or bonds, that's not really doing much either.

If we're misdirecting funds into low rates of return, then we're actually hurting productivity in this economy because what we're doing is directing capital into the wrong investments, and that's why neutrality is often very important because the market will sort out what are the best places to invest. If we feel that we need to play out some direct action on venture capital, and I think those are questions that need very careful examination, I think what many experts have concluded over time is that scale is very important. What's been achieved so far has been a lot of very small VC firms earning very low rates of return, and we're not achieving what we really think we were hoping to achieve. So it's been a failure of policy, and Ontario recognized this in getting rid of the same credit, and some other provinces haven't had it, including my own, Alberta. Frankly I think we do need a better approach, and this credit is not the one that's going to achieve it.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I was listening to Mr. Colborne, who hasn't had a chance to speak. I'm sorry, I wanted to go to you, but I'm running out of time quickly.

You mentioned the unguided hand, and I think what you're saying, Mr. Mintz, is that we need to let the market follow where the best rate of return is going to.... It's just a natural occurrence, and we shouldn't mess with that. Do I have that right?

[Dr. Jack Mintz]

Generally that's the best policy. I've been very supportive over the years of things like the RRSP system and the tax-free savings accounts. These are general policies. They don't tell people how to direct their funds and they'll direct them properly. I think this particular incentive has been harmful to the venture capital industry because a lot of pension funds and others will not invest in venture capital in Canada because the rates of return are so poor.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

Mr. Caron, we have two minutes if you want it. I'd like the time to change over as well.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I understand. Thank you very much.

Mr. Mintz, I read Mr. MacIntosh's study and I must admit that it reflects a very poor understanding of what labour-sponsored venture capital funds did in Quebec.

You are concentrating on the return rate and trying to see that it's not only venture capital but that's the mandate of the fund. You were saying it hasn't been successful but it has been shown that if you are looking all the OECD jurisdictions, Quebec has a share of its GDP as the third-largest investment and venture capital under management after the U.S. and Israel. It's almost three times as high as Canada's and four times as high as Ontario's, so in that aspect it has been very successful.

I think it also explains why there is so much support for this especially from the Fédération des chambres de commerce du Québec, the Chambre de commerce du Montréal métropolitain, and Manufacturiers et exportateurs du Québec.

All of these organizations are against eliminating the tax credit because they understand the role these funds play in Quebec, especially their countercyclical role.

Ontario followed the prescription to scrap that tax credit after 2005 and as a result Ontario's share of Canadian venture capital has dropped dramatically since 2005. It is at 36%. With a much lower GDP Quebec is investing as much as Ontario in terms of venture capital.

[The Chair, Conservative, James Rajotte]

Mr. Mintz, can you respond to all that?

[Dr. Jack Mintz]

First, I think if you ask which policies are effective in Quebec you will find quite a few of them have been adopted by the provincial government with respect to research and development technology. We have to remember a whole bunch of policies have been directed at venture capital there. So you have to sort that out in terms of what is or is not effective.

As far as the drop goes in Ontario, yes, it has dropped. It has dropped in other provinces too. But I think something more endemic is going on in the field. I think it particularly has to do with the fact that the rates of return on venture capital have been particularly poor. Again, one just has to look at the Solidarity balance sheet. You may criticize Jeffrey MacIntosh's paper but I can tell you the referees didn't. Certainly those balance sheet numbers suggest there's not as much money going into venture capital as you think, so maybe that policy is not working very well.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

I want to thank all our witnesses for being with us here in Ottawa and Toronto and Calgary, and for participating in our deliberations on Bill C-4.

I will now suspend the meeting for two or three minutes and we'll bring our next panel forward.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order, the tenth meeting of the Standing Committee on Finance, continuing our deliberations of BillC-4.

I want to thank our second panel for being here today.

We have, first of all, from the Canadian Restaurant and Foodservices Association, the executive vice-president, Joyce Reynolds. Welcome.

We also have Mr. François-William Simard, Director of the Federation des chambres de commerce du Québec.

Welcome.

We have, from GrowthWorks Atlantic Ltd., the president and CEO, Mr. Thomas Hayes. Welcome.

From iNovia Capital Inc., we have the president, Mr. Chris Arsenault.

We are scheduled to have, by video conference from British Columbia, Wildsight's executive director, John Bergenske. I'm hoping he's going to show up here as we deliberate.

Each of you will have five minutes.

We will start with Ms. Reynolds.

[Joyce Reynolds, Executive Vice-President, Government Affairs, Canadian Restaurant and Foodservices Association]

Thank you, Mr.Chairman.

It's nice to be back so soon. I appreciate the opportunity to talk to the committee today about parts 1 and 2 of the second budget implementation bill.

I'm going to keep my remarks very brief so maybe you'll catch up some time. I'm going to focus my remarks on the new penalties and criminal offences to deter the use, possession, sale, and development of electronic suppression of sales software that is contained in this bill.

I would also like to say that we are very supportive of the increase to the lifetime capital gains exemption, and of indexing it to inflation.

As we presented to the committee just this past Thursday, the restaurant industry is made up of thousands of small to medium-sized businesses—over 80,000 of them, as a matter of fact. They collectively serve 18 million customers every day and they provide rewarding jobs and careers for more than one million Canadians. Restaurants are the number one source of first-time jobs, and one third of us have worked in a restaurant at some point in our lives.

Many people have a romantic notion of opening their own restaurant, but reality hits when they see the incredibly long hours that restaurant owners must work, including holidays and weekends when the rest of us are out having fun. They give us a place to gather with friends, family, and colleagues, or sometimes just a place to grab a quick cup of coffee on the way to the office or a snack for the kids after school. They nourish our communities.

Restaurant owners are honest, dedicated business owners who pay their fair share of taxes and they want those who try to cheat the system to face the appropriate penalties.

A few years ago, the Quebec government addressed concerns around fiscal evasion by requiring restaurants to have sales recording modules on every cash register. This added a huge financial burden and red tape to thousands of law-abiding businesses to catch a few who were trying to cheat the system.

The Quebec government offered some financial assistance to business owners to install the black boxes. This was in response to concerns we raised, but restaurants had to bear the cost of the printers, as well as the cost to reconfigure their existing computer systems and point of sale registers. There is also the ongoing expense of maintenance of the equipment, which is considerable, along with ongoing training of staff to achieve compliance. These moneys could be put to better use creating jobs than penalizing companies that are already compliant.

Quebec's legislation also requires that every customer be provided with a printed paper receipt whether they want it or not. In businesses where speed of service is critical to success, this has resulted in significant service slowdowns, not to mention the environmental impact of millions of pieces of paper daily that customers don't want and leave behind.

We ask the federal government for a fairer and more targeted approach to fiscal evasion, an approach that would go after the source of the problem rather than the hard-working business owners who pay their taxes and operate in full financial transparency.

We support measures in Bill C-4 that introduce significant penalties and make it a criminal offence to create, supply, and use electronic sales suppression software. We think this is a smarter approach that gets at the root of the problem rather than unfairly targeting one industry. These measures will rightly target the underground economy, not the above-the-ground economy.

We look forward to working with government and the Canada Revenue Agency to ensure that our members are aware of these new measures.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Mr. Simard, you have the floor.

[François-William Simard, Director, Strategy and Economic Affairs, Fédération des chambres de commerce du Québec]

Thank you, Mr. Chair.

Members of Parliament, members of the Standing Committee on Finance, Ms. Bertrand sends her apologies for not being able to come here this afternoon because of an unforeseen event, so I am replacing her today.

First of all I would like to thank you for allowing the Fédération des chambres de commerce du Québec to present its point of view today on the gradual phasing out of the federal tax credit for labour-sponsored venture capital funds. This is a critical issue for our members. Our organization represents close to 150 chambers of commerce in Quebec, 60,000 companies and 150,000 business people. Furthermore, 1,200 companies are directly linked to our federation as members. Many of them have become what they are today thanks to the support of one of the workers' funds. That is why we are asking the federal government to uphold the current tax measures, and to not replace the workers' fund tax credit by venture capital programs.

We adopted this position after having consulted our members. Recently published studies and statistics confirmed to us that we are on the right track. These studies and statistics clearly demonstrate that workers' funds are essential for economic development in Quebec and that they significantly contribute to collective prosperity.

Since 1990, savings invested in companies have created and maintained close to 500,000 jobs in Quebec. As you know, startup businesses, which face a number of challenges including growth, profitability and access to capital, were able to count on workers' funds as a source of financing in addition to that of financial institutions.

Many of our members therefore benefited from the support of these funds, allowing them to start doing business and gradually become profitable and flourishing companies. According to data taken from a 2010 study by the firm SECOR-KPMG and Regional Data Corporation, each year workers' funds invest close to $750 million in companies that have a major impact on the economy. That means investment in over 2,200 Quebec companies, including small, medium and large-sized businesses.

I would like to give you two examples of companies that have benefited from these funds. The first one is Enerchem International Inc., a company that operates two plants in Quebec and creates biofuel and ecofriendly chemicals from waste. It benefited from an investment by the Fonds de solidarité FTQ of $4.3 million from 2002 to 2008. The second one is the Osisko gold mine in Malartic in Abitibi, which, since 1999, has benefited from $33.3 million to start up its open-pit mine. We are well aware that access to capital is crucial in the exploration and startup phase of a mining project.

These figures speak for themselves, but that's not all. Governments can also benefit from this arrangement. They recover the tax credits given to fund shareholders within three years through increased economic activity.

In addition, workers' funds have been useful over the years in educating thousands of people about finances. Thanks to these funds, workers have made investments and improved their financial situations. What's more, it encourages workers to save. Out of almost 4 million workers in Quebec, close to 1.8 million of them do not pay into a group pension plan. We should therefore be thrilled that the funds are a savings option chosen by 600,000 people in Quebec, which is 15% of the labour force. These are positive points that simply cannot go unnoticed.

In conclusion, I would like to underscore that maintaining the tax credit for workers' funds unites Quebeckers, whether as citizens, employees or employers.

Through these remarks and other communications we've had over the last months, I hope to have demonstrated that the business community speaks with one voice to call on the government to reconsider its position and uphold tax credits for workers' funds, and to work together to find a solution.

Thank you for your attention.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Next we'll go to Mr. Hayes, please.