Thank you, Mr. Chair, for the opportunity to appear before you and your colleagues today to address important issues that relate to the venture capital ecosystem in Canada.
In its March 2013 budget, the federal government announced a surprise phase-out of the long-standing 15% federal tax credit for Canadian investors who have chosen to support budding entrepreneurs across Canada who want to start and grow their businesses. This federal tax credit has resulted in the levering of billions of private dollars of risk capital, from millions of Canadians, being invested in thousands of early-stage companies since the early 1980s.
In fact, since the program was created by the Mulroney government, well over one third of all venture capital available in Canada has come from labour-sponsored venture capital funds in British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island, Newfoundland and Labrador, and, of course, Nova Scotia, my home province.
The decision to phase out the federal tax credit came as a complete surprise and shock to the VC industry in Canada. There was no consultation with entrepreneurs, no consultation with existing shareholders in labour funds, no consultations with fund managers, and to my knowledge no consultation with the provincial governments, which, in certain cases, also provide a matching provincial tax credit to investors in these funds.
Since this decision was announced by the federal government in March, the industry players most affected by this change have worked hard to convince the federal government of the negative unintended consequences of this phase-out. Many documents have been prepared by knowledgeable persons on the negative impact this will have on the supply of capital to our entrepreneurs and the negative impact this will have on the retirement savings of many Canadians who invested in these funds. Reports have been submitted; letters have been written; petitions have been presented; and briefings with senior officials of the Department of Finance have been held, all to no avail.
The Canadian Venture Capital Association, an industry group representing all parties in the Canadian VC ecosystem, has gone on record as opposing this phase-out and has clearly articulated why this decision should be reviewed and a better solution should be found before serious damage is inflicted in the marketplace.
We are told the federal government is changing its approach to ensuring that an adequate supply of venture capital is available to Canadian entrepreneurs and companies by directly investing $400 million of new capital into the industry. Many of us in the industry are strongly supportive of this initiative known as the VCAP program and we remain supportive. But this support for VCAP was never based on the idea of phasing out the federal tax credit of 15%, which generates much-needed private investment dollars that can be used to grow and diversify our Canadian economy. Think of it: the federal government puts up 15¢ on the dollar to raise an additional 85¢ on the dollar—that’s what I call significant leverage at minimal risk to the federal treasury. And remember, no one forces Canadian retail investors to invest in this asset class. Tax credits aside, retail investors have a wide array of investment choices, including thousands of mutual funds, available to them, and fund managers must demonstrate a reasonable expectation of return on investment to investors or they'll go elsewhere with their savings. With this announced phase-out of the tax credits, ongoing fund liquidity becomes a major challenge and how this affects the fortunes of the existing companies in our portfolio is a serious issue.
Perhaps, in closing, I can use a quick example to illustrate the point I would like to make. In 2007, the fund I manage made a $500,000 investment in a Halifax-based early-stage company in the pharmaceutical space called Sampling Technologies Inc. This company was started by three local pharma reps who came to the conclusion there had to be a better way to distribute drug samples from doctor to patient. Drug companies can now provide physicians with STI smart cards rather than physical samples. The patient takes the card to the pharmacy where they are issued the sample at no cost. This new system cuts costs, improves patient safety, and provides real-time information to the drug company on the distribution of their samples. STI—
