Thank you, Mr. Chair and your committee colleagues, for having me here today. My name is Brady Fletcher, and I am the managing director and head of the TSX Venture Exchange.
The Toronto Stock Exchange, or TSX, and the TSX Venture Exchange together represent the world’s premier two-tiered capital formation platform, with over 3,200 public companies listed between the two markets, representing $3 trillion in aggregate market cap. Our markets support companies early in their life cycle by providing access to public venture capital through TSX Venture and then graduating the companies directly onto the TSX. In the last 15 years, we've had some 670 companies graduate off the venture exchange up to the TSX.
This two-tiered structure enables the average Canadian investor to participate in the early phases of growth of Canada’s next global leaders. Companies that have included the likes of Canopy Growth Corp., Wheaton Precious Metals, and Boardwalk REIT have provided the average Canadian with opportunities for life-changing wealth creation by supporting the growth of Canadian-built businesses—businesses that have gone on to employ thousands, all supported by private sector investment.
I am pleased to be here today to share some of our organization’s advice and recommendations as they pertain to the Government of Canada’s upcoming 2020 budget.
In order to continue fostering the Canadian capital markets, the democratization of growth capital and Canada’s competitiveness, we have broken our recommendations into three broad objectives, the first being the need to support Canada’s public markets in an increasingly competitive global landscape while facing increasingly growing pools of private equity supported by a low interest rate environment.
When companies remain private for extended periods of time, it means that the average Canadian investor is precluded from participating in the greatest phases of growth, which are often the best opportunities for wealth creation. In order to support Canada’s markets, we advise adopting a policy of “fairness for growth”, whereby the federal incentive programs afforded to Canadian private companies, or CCPCs, are equally offered to companies that elect to fund their growth through public venture capital and the private investment sector.
Currently, there are a number of different programs that disadvantage the public markets, including scientific research and experimental development credits, support for the private equity and venture capital community and continued delineation between the stage of company based on CCPC status.
In Canada, according to Statistics Canada tests, two-thirds of all public companies are classified as small to medium-sized enterprises of fewer than 500 employees and less than $50 million in revenue. By electing to finance their businesses' growth through public venture capital, these companies are providing the average Canadian with an ability to participate in the growth of Canada’s emerging leaders.
These are firms that in the past have included BlackBerry, first financed by GMP Securities, or Canopy Growth Corp, which went public five years ago and now employs over 2,000 people and is doing $250 million in revenue and boasting a market capitalization of $8 billion. If you had been an early investor in Canopy Growth Corp at one point you could have returned over 3,000%. This is life-changing wealth creation for the average individual.
It's imperative that our government seek opportunities to support these companies that list early in their life cycle, create new jobs, grow Canada’s economy and democratize the wealth creation of a company’s earliest phases. Again, a specific recommendation in this regard is a full exemption of publicly traded SMEs from the new employee stock option taxation regime.
Second, we call on our federal government to seek opportunities to encourage private sector investment into Canadian companies. While initiatives including reducing capital gains inclusion rates would incent Canadian investors to support the growth of Canadian companies, we believe that Canada must maintain a competitive capital gains tax regime in order to foster investment into our Canadian companies by the private sector. We also believe that the evaluating of expanding the flow-through tax credit program to include other capital intensive sectors with long paths to commercialization would be an elegant way to leverage existing federal structures to encourage private sector investment.
We propose the expansion of the flow-through tax regime for the following reasons. Flow-through shares allow Canadians to invest their money in clean technology companies that are driving job creation while accelerating climate and energy solutions. Flow-through shares will help clean technology entrepreneurs focus on developing innovative solutions that grow their companies while helping them achieve Canada’s climate goals, and they will do this by simplified market-led access to capital. This new capital will complement existing grant and funding programs without creating additional transaction costs, reporting burdens, missed timing cycles or other frictions sometimes associated with government-led programs.
Finally, section 11.3b) of the “Final Report of the Expert Panel on Sustainable Finance—Mobilizing Finance for Sustainable Growth” called on ISED to develop “tailored structures” that help capital providers invest in projects that are capital intensive, or don’t necessarily meet provider timelines for returns. Flow-through shares are a proven Canadian financial tool that accomplish this goal, having had lots of success in establishing Canada as a leader in the resource sector.
During the election the Liberal Party promised to have the corporate tax rate for clean-tech companies as a means of growing Canada's clean-tech sector. While laudable, this incentive does not help clean-tech companies in the critical pre-revenue development phases, as they are not yet in a taxable position.
For over 60 years flow-through shares have helped Canada's mining and energy sectors become global leaders by offering access to private capital at an early, often exploratory, stage of development. This innovative financial structure has helped to defray risks and establish Canada as a leader in these industries. The same mechanisms that have built the economy of today can be improved and leveraged to accelerate Canada's energy transition and establish Canadian companies as leaders in the low-carbon economy of tomorrow.
Like Mr. Ball and Mr. Goodis, we appreciate the committee's time, and our final recommendation would be for a wholesome review of Canada's tax act with a view to global competitiveness.
Canada is already very attractive in the global market for entrepreneurship. As global pools of capital have only become more mobile, we must continue to reinforce our reputation. Technology entrepreneurs have ever more choices as to where they incorporate and where they build their businesses. Top talent will tend to pursue the best opportunities available.
Stock options are a critical tool for attracting and retaining talent at the earliest stages of a company's development. Many entrepreneurs rely on options to get the best out of their employees, and even for their own retirement savings. Policy leaders should look toward having a holistic review that develops a detailed understanding of how options can be framed to protect and incentivize both entrepreneurs and investors.
Simply increasing taxation on options could have unintended consequences, including increasing costs to public shareholders, as companies would need to gross up to compensate top-tier management at competitive levels on a net, post-tax basis.
We must seek opportunities to recognize and reward private individuals who fund and support Canada's economic growth and leadership in new industries, ranging from clean technology in battery metals to blockchain to cannabis.
I hope this committee will carefully consider the important issues and recommendations I have raised today. I wish you the best of luck with your ongoing deliberations, and we welcome any questions you might have.