Finance Committee on Nov. 18th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is the sixth meeting of the Standing Committee on Finance. We are televised today. Our orders of the day are pursuant to the order of reference of Tuesday, October 29, 2013, the study of Bill C-4, A second act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures.

We're very pleased to have with us many officials from the Department of Finance and other departments to analyze this bill for us and to help us address our questions and comments on the bill.

In particular, we have three Department of Finance officials before the committee today: Mr. Ted Cook, senior legislative chief, tax legislation division, tax policy branch; Mr. Sean Keenan, director, sales tax division; and Mr. Geoff Trueman, general director, analysis, tax policy branch.

Welcome, gentlemen, and thank you for being with us.

Colleagues, I propose that we proceed this way. There are obviously three parts to the bill. I've asked Mr. Cook to give a brief opening statement focusing in particular on some of the items that members of the committee have identified to me as areas which they wish the committee to focus on.

Mr. Cook will give a brief opening statement and then we'll have questions from members. There will be an allotted time for questions, and we will proceed in the normal questioning order. I am proposing that we do it by parts. We'll start with part 1, move to part 2, and then do part 3.

Mr. Cook, could we have your opening statement at this time, please.

[Ted Cook, Senior Legislative Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Thank you, Mr. Chair.

I understand that there were three measures in particular from budget 2013 that the committee had expressed a particular interest in. I'll provide just a brief overview of each of those three measures. Then we'd be happy to answer any questions the committee members might have.

The first measure has to do with labour-sponsored venture capital corporations, or LSVCCs.

This measure would phase out the federal LSVCC tax credit. The federal credit will remain at 15% when it is claimed for a taxation year that ends before 2015. It will be reduced to 10% for the 2015 taxation year, and to 5% for the 2016 taxation year. The federal LSVCC credit will be eliminated for the 2017 and subsequent taxation years.

The measure will also end new federal LSVCC registrations and the prescription of new provincially registered LSVCCs for tax purposes. An LSVCC will not be federally registered if the application for registration is received after March 20, 2013. A provincially registered LSVCC will not be prescribed for the purposes of the federal credit unless the application was submitted before March 21, 2013.

The second area of interest relates to mining expenses.

With regard to mining expenses, pre-production mine development expenses—these are certain intangible expenses, such as sinking a mine shaft or removing overburden—are currently treated as Canadian exploration expenses for tax purposes, and are therefore fully deductible in the year incurred. They are to be treated as Canadian development expenses, which are deductible at a rate of 30% per year on a declining balance basis. The transition from Canadian exploration expenses to Canadian development expenses will be phased in over the period from 2015 to 2017.

In addition, the accelerated capital cost allowance provided for certain assets, such as plant facilities, roads, and airstrips, acquired for use in new mines or eligible mine expansions is phased out over the period from 2017 to 2020, other than for bituminous sands and oil shale, for which the phase-out was announced in budget 2007.

The last measure relates to the additional deduction for credit unions.

The first budget implementation act, Economic Action Plan 2013 Act, No. 1, included amendments to phase out over five years the additional deduction available for credit unions. The additional deduction provides credit unions with access to the small business tax rate that is not available to other corporations.

This measure remedies a technical issue with that phase-out. In particular, it ensures that during the phase-out period, the portion of the credit union's income that is not eligible for the additional deduction is taxed at the rate of 15%, the general corporate rate. This measure applies to taxation years that end after March 20, 2013, and is therefore consistent with the phase-out of the additional deduction.

Those are my comments, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much for your opening comments.

We'll begin members' questions

with Mr. Caron, please.

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

Thank you very much to all three of you, and to Mr. Cook in particular.

I would like to ask you some questions about the elimination of the labour-sponsored venture capital tax credit. As I am sure you know, Ontario also eliminated this tax credit in 2005.

Before returning to the Ontario example, I would like to know if you carried out any impact studies on the level of venture capital. It is extremely difficult to access such capital. The FTQ Fonds de solidarité and Fondaction, in Quebec, are the two major funds in Canada; they are extremely active and have placed Quebec among the ranks of jurisdictions that have the highest amount of venture capital. Have you analyzed the impact this measure will have on the level of available venture capital in Quebec and in Canada?

[Sean Keenan, Director, Sales Tax Division, Department of Finance]

I would say we don't have a study per se. We anticipated that with the elimination of the credit there would still be an incentive for people to invest in LSVCCs because they are eligible investments under the registered retirement savings plan.

The government has also introduced a new venture capital action plan which is a new approach to supporting venture capital in Canada. That new plan is being put in place and will support venture capital in Canada.

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

Are you telling me that the Department of Finance has not done any impact studies to determine how the elimination of the tax credit will affect the level of available venture capital in Quebec and in Canada?

[Sean Keenan]

We don't have any specific studies that....

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

To go back to the example of Ontario, which eliminated the tax credit in 2005, this had a very serious impact on the level of available venture capital. As of 2005, the amounts available in Ontario dropped precipitously. Currently, even though Ontario has a significantly higher GDP than Quebec, both provinces are at the same level as compared to the Canadian average, that is to say that both Quebec and Ontario have 36% of Canadian venture capital reserves. In short, both provinces are at the same level, even though Quebec has a far lower GDP. So that had a considerable effect on the availability of venture capital in Ontario. I would expect that the effect will be the same on the venture capital available in Quebec.

[Sean Keenan]

The situation in Ontario is a little bit different from the situation in Quebec in the sense that the two funds in Quebec are very well established. They have a much different approach to raising funds in the sense that they have a lot of payroll deductions that individuals can make, and the infrastructure for making contributions is dramatically different from what was in place in Ontario at the time. To make a direct comparison to suggest that the Ontario experience will be the same as the Quebec experience is not.... The situations are different.

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

The existence of the tax credit is a recognition of the fact that these funds have a lower yield in the beginning, especially during the first years. There is a longer-term rate of return, since Quebec law requires that a minimum of 60% of the capital in these funds be invested to either save or start up businesses. This means that their rate of return is much slower than that of other funds, that could now become more attractive to investors or savers. Was that aspect considered?

[The Chair, Conservative, James Rajotte]

Could you give a brief response, please.

[Sean Keenan]

I think it's fair to say the government thought, given the concerns about the LSVCCs and the impact they were having on the venture capital market, that there was a better approach to supporting venture capital in Canada through the venture capital action plan. The new approach will be a better way to support venture capital than the labour-sponsored venture capital corporation tax credit was.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Keddy. Again, we're just focusing on part 1 in this round.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

We're just on part 1.

[The Chair, Conservative, James Rajotte]

Yes.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I'm assuming that includes the lifetime capital gains exemption.

[The Chair, Conservative, James Rajotte]

Yes.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Very good.

The explanation in the budget on increasing the lifetime capital gains exemption from $750,000 to $800,000, so you get half of that, have you costed that out? In most cases, quite frankly, where there are partnerships involved, it is not an $800,000 capital gains exemption but a $1.6 million capital gains exemption, and that's the same for fishing property, or forestry property, or farm property.

[Ted Cook]

In terms of the costing, are you talking about investments through partnerships as opposed to directly?

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Absolutely.

[Ted Cook]

There is no difference in specific costing. The costing we have used in the budget is based on the $800,000. As you point out, it's available with respect to either qualified small business corporation shares, or qualified farm property, or qualified fishing property.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

My question is that if there are two partners, that essentially doubles. Have you figured out the cost of that doubling to the treasury?

[Ted Cook]

You are right in the sense that if there are two partners, then each—

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

They can both claim the full capital gains exemption.

[Ted Cook]

—individual has their own capital gains exemption.

The costing we have in the budget would be the full costing, which includes that for each individual who is able to claim it directly or indirectly through a partnership. The lifetime capital gains exemption is approximately $35 million per year going ahead.