Finance Committee on May 8th, 2014

[Thomas Hayes]

Yes, they are.

We've done a lot of work not only with the crown agencies like NBIF, but the investor tax credit has been utilized in all provinces to try to get angels more active in this sector.

They're all important parts of the ecosystem; not any one has the entire solution. You need the family money, you need the angel money, you need the early-stage investors, and you need the series A and the series B investors. So it's a range of solutions to a pretty significant challenge for entrepreneurs.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Allen.

We'll go to Mr. Cullen, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you to our guests. I'll endeavour to treat you as guests.

Mr. Hayes, I apologize for missing your earlier presentation.

How would you describe the general trending right now in venture capital markets in Canada, particularly in comparison to the United States? Are we trending up? Are we trending down?

[Thomas Hayes]

It's about the same. On a per capita basis we're at about 40% of what is happening in the U.S., and that affects the portfolio companies because they have to compete against U.S.-funded companies.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Again, I apologize for missing.... You made a comment about the phasing out of the labour-sponsored venture capital. Is this going to improve the situation or—

[Thomas Hayes]

Not at all.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

How important is venture capital in stimulating particularly new entrepreneurial, innovative businesses in any market, and particularly in Canada?

[Thomas Hayes]

It's critical, particularly in the knowledge-based industries because there are no assets other than the knowledge and the entrepreneurs. None of these deals are bankable, so it's critical.

If you look at Quebec, for example, if you look at the aerospace industry or biotech, a lot of that was funded—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

This is the very lifeblood of the industry, these innovative, knowledge-based....

[Thomas Hayes]

Yes, absolutely.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Here in Canada we've often lamented about productivity and competitiveness, particularly versus that of the United States. The solution coming from the current government consistently seems to be that it's about tax regime. It's simply the effective tax rate that companies are paying, and if we're more competitive there, then we will have a more productive and more competitive and more innovative economy.

Does the aspect of what we've just talked about, the ability of venture capital money to enter the market, also bear some effect on our ability to be effective, innovative, and competitive?

[Thomas Hayes]

Well, it goes without saying, that's where—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I think it needs saying sometimes.

Let me express it more plainly.

I'm confused with a government—my Conservative colleagues can help me out—where jobs, growth...and what is the third one?

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Long-term prosperity....

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Long-term prosperity, thank you.

I've heard it so many times you would think I would have this. Those are the hallmarks of the government. If it is trademarked, I will pay the trademark later.

With that being the alleged fixation of the government, and venture capital playing such a key role in jobs, growth, and long-term prosperity, I'm confused. Why phase out a program like this?

[Thomas Hayes]

Well, we've attempted to explain to the federal government the importance of this program. No program is perfect, and certainly we all agree—those of us who are practitioners—that there are ways of improving the program. But to cancel it, we think was a regressive step.

I also said in my presentation that we're pleased with the introduction of the VCAP program, but it's going to take a significant period of time to get that up and running and—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Whether it's of scale and effective....

[Thomas Hayes]

Exactly, and whether it will achieve the goals that were initially set and the targets that were initially set, it's anyone's guess at this point.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Call it the F-35 venture capital program and we'll get some money behind this thing.

Ms. Tedds, I will try to include you again. You made some comments just around the effectiveness of various tax credits in helping and aiding the economy and the Canadian taxpayer in general.

There has been some debate around income splitting, but not the growth yet. We didn't see it here. Do you have any particular comments in the research that you've done over the effectiveness of this? If you haven't, you can say that as well, of course.

[Prof. Lindsay Tedds]

Income splitting predominantly benefits high-income households. Very few benefits accrue to low- and middle-income households. So it depends on what you're trying to achieve with the policy, but the academic research on income splitting has been clear that there are better ways of addressing the inequities in the tax system, which that proposal is trying to address.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you.

To you, Mr. Howlett, you were talking about the ability to go after tax evasion and tax avoidance. Any government would be interested in this.

Often the claims of what you can get through a tax evasion scheme are overinflated, but you certainly can't get those if you don't have the people going after those who are avoiding or evading taxes. Can you quote back from the Auditor General, again, what particular problems...? I want to understand these.

For a government that makes a claim in the budget—in its attempt to balance the budget—of how much money it's going to be able to recoup from those who have offshore money or avoided taxation, to then go through and cut $250 million off the very agency that's meant to go out to do that, I'm trying to connect those two dots and make some sense of what the government is claiming.

[Dennis Howlett]

With regard to the Auditor General's report, he identified a number of problems, but the two I would underline are, first, problems with the training of auditors. It's very difficult to go after tax cheats using tax havens, and companies pushing the envelope on profit shifting, and so on. Some of that is allowed, but a lot of companies are going over the line—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Sure.

[Dennis Howlett]

—and exceeding what is really allowed by law.

So the training of auditors is critical because a quarter of the CRA top-level auditors are due to retire in the next five years. They are already seriously understaffed. They were hit with more staff cuts than any other government department, and even though the international audit program was spared the full brunt of the tax cut, they still have reductions from previous years in the staff working in that area. So that situation is going to get worse if we don't address the training needed.

The other thing is Finance Canada's lack of sharing of information on what exactly they are doing on legislative measures to improve the capacity. It really is important that the government give the tools necessary to the CRA auditors to do their jobs. One of the problems is that we still have too many loopholes and holes in our tax law that allow all kinds of ways for tax evaders to shift profits and avoid paying taxes.