Finance Committee on Oct. 27th, 2014

[Mark Adler, Conservative, York Centre, ON]

There is downward pressure on the return on equity. The regulatory environment outside of Canada is certainly changing. The plates are shifting underneath the Canadian banks. We know where we stand today.

Is there anything that we could do as a government to make sure that we maintain the position and the strength of Canadian banks on the global scene?

[Terry Campbell]

The strength of our system is that the Bank Act is reviewed every five years. That's coming up in 2017. We would encourage that there be a good, thorough review of what is already a strong system to see what can be improved.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Adler.

Monsieur Caron, for seven minutes.

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

Thank you very much, Mr. Chair.

My questions will probably mostly be for Mr. Parker, because the whole issue of venture capital is of great interest to me, fascinates me in fact.

Let's compare Canada's current situation to that of other OECD countries. How would you describe Canada's situation with regard to venture capital?

[Brian Parker]

I will focus my comments more specifically to Canada because I'm a Canadian practitioner.

We certainly have a very unique system in Canada and historically, a very robust market for capitalizing small businesses. What's different here, and certainly in the U.S. from where I have more direct experience, is that we tend to finance companies publicly earlier than they would in the U.S. For the last 20 years, it's been very robust with ups and downs with the cycles.

In the last four or five years, it's been a prolonged down cycle and we haven't seen it bounce back up.

I look at the U.S. and it's been more robust on their private equity side which is the comparison. I look to Canada and say there just needs to be a bit of the priming of the pump to kick-start the animal spirits and get people back in investing in the earlier stage companies.

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

Your venture capital figures are quite interesting.In fact, I am going to quote your brief on this. It contains the following paragraph, and I quote:

Over the past year or so, financing activity in venture markets has collapsed to near-record levels. The amount of capital raised by TSX-V companies over the past three years has fallen 63% from $10.1 billion in 2011 to $3.8 billion in 2013. Over the same period, new listings on venture exchange have declined by near two-thirds to 76 listings in 2013.

These declines seem quite significant, both as regards capital and as regards new listings.

[Brian Parker]

If your comment is that there was a substantial drop, there was. We've seen a bit of a bounce back in 2014 but not to the levels we've had before. We have what is usually a very healthy market, and to lose 25 competitors normally is a good thing. But in my particular case, as I look around the landscape and see 25 competitors go away I ask if there is a fundamental shift, and I believe there is.

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

You probably followed the debates when the government announced the gradual withdrawal of the labour-sponsored venture capital funds tax credit. In Quebec, that is a very important source of risk capital, not only for workers' funds, but also for their partners. For instance, the Fonds de solidarité de la FTQ and Fondaction often pool their resources with those of investors and private funds so as to invest in high tech areas or other growth areas.

The problem is that the government withdrew that tax credit gradually. As for you, you recommend that there be tax incentives to contribute to strengthening the venture capital market.

Do you think the government is heading in the wrong direction, if it wants to ensure a sound venture capital market?

[Brian Parker]

We tend to take the view that, as opposed to specific targeted investments to be propped up, it's more to encourage a broader initiative. That would be our view. It's not necessarily the wrong direction. It's simply that we look at it as being very hard for anyone, let alone government, to be able to say this is the one sector in which we're going to be the best in the world. It's better to create an environment where all small companies have easier access to capital, and then some smart entrepreneur in a garage somewhere is going to come up with that great idea. Is it going to be in technology, or is it going to be in the oil field? We simply don't know.

To too finely pinpoint where you're going to drive policy would be wrongheaded, in our view.

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

I also believe that the government should not choose the industries investments are made in. It is up to the funds to make those decisions. They do so by taking into account the health of the industry in question and its future perspectives. We agree on that. The venture capital market is really different from the market of investments or established businesses. We talk a lot about start-up companies and solidifying emerging companies. They need venture capital because they cannot necessarily offer guarantees to their investors.

However, in the case of the labour-sponsored funds, the government decided to eliminate that tax incentive. It created its own venture capital fund, but it refused the massive investments the labour-sponsored funds were willing to make.

I wonder if at this time the government has a truly viable strategy to promote the strength and vigour of venture capital in Canada. Indeed, we are lagging behind our partners, in particular Israel and the United States, who are leaders in this area.

[Brian Parker]

I would say that in any initiative there will be pros and cons. I would say with regard to labour-sponsored funds, it's not that it's a bad thing, but it wouldn't be at the top of my list of initiatives to ask how you would kick-start broader investments, more businesses. You want to take away as many restrictions as possible, and the historical rate of return of some labour-sponsored funds have been imperfect, so I don't know that it would attract the capital necessarily that a broader initiative would.

It wouldn't be my favourite. That's not to say it's bad, but my personal view is it wouldn't be the one I'd go after.

[The Chair, Conservative, James Rajotte]

You have about 30 seconds.

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

I will now ask you a question that I also put to the previous group.

The government is heading toward a cooperative securities regulatory organization, but Alberta and Quebec do not want to adhere to this. I doubt that we will able to convince them to change their mind. However, that situation may lead to two-tier, dual regulation.

What risks would you say there are to having two-tiered securities regulation?

[Brian Parker]

In fairness, the Investment Industry Association asked me to come to speak on their behalf in pursuit of positive initiatives. Being an Albertan, my view might not be the same as Ian Russell's on this particular topic, so I'm going to defer comment and allow Ian to answer the question.

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

I can understand that.

[The Chair, Conservative, James Rajotte]

I think we can probably read something into that.

Thank you.

Merci, Mr. Caron.

We'll go to Mr. Van Kesteren, for seven minutes.

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

Thank you, Chair.

Thank you all for coming.

I think I had better clear the air as Mr. Adler mentioned my audits. I'm going to direct this to Mr. Baker, too. An audit is something performed by the government. We're not talking about businesses that bring their boxes in and the guy who's sticking half the money under the table. For most businesses, mine in particular, and I think it's the case with just about every business that would be reputable, goes through an accountant. There's the difference between—and we keep saying this and we need to hear it again and again—tax avoidance and tax evasion. Tax avoidance is legal. If there are $50,000 worth of taxes to be paid, obviously it's within a citizen's right or an organization's right to reduce that by legitimate means, and sometimes the auditor comes down and say “No, no, that's not what that means. You can't do that.”

Am I right in that assumption? Is that pretty much a fair—

[Albert Baker]

Yes, the rules are complex and oftentimes there will be debate. There are grey areas in the law, and sometimes the auditor will have a view and the taxpayer will have a view. Ultimately it's up to the courts to resolve those situations. All of that is fair game and it falls within that tax avoidance, which, as you say, is legal. It's tax evasion that everyone agrees has to be stopped.

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

And auditors are put into the system to make sure everybody is following the rules. It's not as though the government can chase an organization. It can direct or it can say it thinks these guys need to be looked at. In my line of work—and my line of work is here—when I talk to my constituents, I hear all the time, “I got another audit, and it's not fair”. We hear it repeatedly. But it is fair, and it's something the government has to continue to do. Is that a fair assessment?

[Albert Baker]

Audits happen and they always will.

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

Thank you.

I want to talk to Mr. Campbell.

Mr. Campbell, you know, I've been a big advocate of good sound banking. Your organization, Canadian Bankers, has performed very well and we're very proud of what's happened. But I'm also a big fan of credit unions. Would you agree that we need both strong banks and strong credit unions?

[Terry Campbell]

I would agree.

First of all, thank you very much, Mr. Van Kesteren, for your comment. I do appreciate that.

We do need both. We need strong banks and we need strong credit unions. On the latter, I think the more choice in competition there is, the better it is for customers and the better it is for Canadians. You can choose and you have options available to you.

I would say, however, in the interest of strengthening those competitors, one has to look at the nature of the regulatory system across this country that credit unions are under. One of the strengths of our system is that we have OSFI with world-class standards. Because credit unions are now at a provincial level, the quality of that regulation supervision will vary, and some of those credit unions are getting very big. This is why the federal government put in place the option for some of these larger credit unions to transition to the federal sphere, so they can be under that quality of regulation under OSFI. None have done that yet, but the rules are still relatively new. So yes, we should strengthen both sides, but we have to look at the quality of regulation.

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

That leads me to the next question. They have asked for a capital growth tax credit. They don't have the same access to funds that banks have. Would you be supportive of that ask as well?

[Terry Campbell]

I have discussed this quite a bit with my counterpart at Credit Union Central. I will be very honest here: I am not a tax expert, and I cannot really get into the ins and outs of whether that particular ask makes sense or not. I have a sense that the Department of Finance felt that it was a long-standing anomaly, and it had to be addressed. I would say as a general principle that when you are competing for the customer's dollar.... You're right that they don't have access to the same degree of funds, but they do have themselves structured differently, and there are, I think, legitimate tax breaks for credit unions. You do have to ask yourself whether what you're doing is for the good of the customer or whether you are introducing anomalies into the system that may look good now but that will come back to bite you at some future date. I would hesitate to say yay or nay on that specific issue.

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

That's fair.

Mr. Chair, how much time do I have left?