I call to order meeting number ten of the Standing Committee on Finance. Pursuant to the order of reference of Tuesday, October 29, 2013, we are continuing our study of Bill .
I want to thank our witnesses for being here with us in Ottawa, as well as Calgary and Toronto.
Colleagues, we have about five hours of hearings ahead of us, so I look forward to spending this half day with you.
First of all, I want to thank Mr. David Spiro for being with us here today.
We also have with us Mr. Yvon Bolduc, from the Fonds de solidarité des travailleurs et travailleuses du Québec.
From Calgary, we have Professor Jack Mintz from the School of Public Policy—welcome, Mr. Mintz—and by video conference from Toronto, we have Mr. Michael Colborne, partner at Thorsteinssons. Also from Toronto, we have Mr. Gabriel Hayos, vice-president, taxation, Chartered Professional Accountants of Canada.
Welcome to all of you.
Gentlemen, you have five minutes maximum for your opening statements and then we'll have questions from members.
We'll begin with Mr. Spiro, please.
Thank you very much, Mr. Chair. I will preface my comments by noting that I'm here as an individual. I'm not here as a representative of my firm or of any of my clients. Accordingly, my comments and answers to questions will reflect my own personal views only.
By way of background, I've practised in the field of tax law for nearly 25 years. For 13 of those years, I practised with the Department of Justice in Toronto. Both before and after my time with the federal government, I've represented taxpayers and tax controversies and litigation with various tax authorities, including the Canada Revenue Agency.
Having seen the world from both sides, then, I'd like to offer a bird's-eye view of certain amendments to the Income Tax Act in Bill , particularly those that are commonly referred to as loophole-closing provisions. In general terms, those provisions aim to preserve Canada's broad tax base so that our low corporate tax rates can be maintained. If our tax base is compromised in any significant way, new taxes will have to be imposed or rates of existing taxes will have to rise in order to make up the difference.
In today's competitive global marketplace, it's more important than ever for Canada to maintain its corporate tax rates at the lowest possible level to enhance job creation and investment in Canada. Of equal importance is the integrity and perceived integrity of our tax system. Canadians must be confident that all taxpayers are subject to the same set of rules. When some taxpayers take advantage of benefits that were never intended for them, other taxpayers lose confidence that the system is, indeed, just, equitable, and fair.
The loophole-closing provisions in Bill include measures aimed at precluding the enjoyment of unintended benefits from the use of, or avoidance of, various provisions of the Income Tax Act. For example, Bill C-4 aims at ending the use of leveraged life insurance arrangements by investors who took advantage of multiple tax benefits offered by various provisions of the Income Tax Act that were never intended to be used together.
Other provisions of Bill deal with character conversion transactions. Through the use of derivative forward contracts, investors could effectively convert ordinary income into capital gains, only one half of which would be subject to tax. Bill C-4 proposes to put all investors on a level playing field, so that ordinary income cannot be converted into capital gains through the use of derivative forward contracts.
Other provisions of Bill deal with synthetic disposition arrangements. Because the Income Tax Act is generally based on the legal attributes of transactions, one could avoid realizing a capital gain and thereby defer tax by transferring all, or substantially all, of the risk of loss and opportunity for gain in respect to a property, while at the same time retaining bare legal ownership of that property. Until there's a disposition in law, no capital gain will have been realized. From an economic point of view, though, the taxpayer has effectively disposed of that property. In those circumstances, Bill would deem a disposition to have occurred and a capital gain to have been realized as soon as the risk of loss and opportunity for gain is eliminated.
To prevent profitable corporations from artificially reducing taxable income by purchasing losses from other companies, the Income Tax Act restricts the use of losses where one corporation acquires legal control of another. In law, control is acquired when one corporation acquires more than 50% of the voting shares of the other. Bill proposes to treat the acquisition of economic control of a corporation in the same way as the acquisition of legal control for purposes of these rules. So when a corporation acquires more than 75% of the economic value of another company, the acquisition of control rules would be triggered, thereby precluding the acquiring corporation from using the losses of the other. Bill C-4 also proposes to extend the same acquisition of control rules to trusts. For trusts, the rules would be triggered when a majority interest in the trust is acquired.
Finally, there is an incentive for non-residents to fund their Canadian subsidiaries with as much debt as possible, as interest is deductible in computing taxable income in Canada. To preclude the undue extraction of profits from Canada, the Income Tax Act has thin capitalization rules that require that a certain debt-to-equity ratio be maintained by Canadian subsidiaries owned by non-residents. Bill proposes to extend those thin capitalization rules to trusts resident in Canada, as well as non-resident trusts and branches of non-resident corporations.
Additional fine tuning to these rules may be required going forward, to the extent that any of these amendments affect transactions that are not offensive from a policy point of view. The Canadian Bar Association and the Chartered Professional Accountants of Canada have a joint committee that works closely with the Department of Finance to reduce the extent of any unintended consequences that arise from such changes.
Mr. Chair, I'd be happy to answer any questions.
Thank you, Mr. Chair, for giving us the opportunity to come speak to you about the consequences of eliminating the tax credit for labour-sponsored funds and about the offer we have made to the government.
First, I would like to give you a few figures about the Fonds de solidarité FTQ. The fund has more than 615,000 shareholders, or nearly 15% of the Quebec workforce, principally from the middle class, people who are unionized and non-unionized. The proportion of unionized workers to non-unionized workers is around 50-50. 205,000 of our shareholders had never contributed to an RRSP before becoming shareholders of the fund. The FTQ also has 2,395 partner companies, principally SMEs in all the regions of Quebec, and it has invested $5.5 billion over the last 10 years, of which $2.2 billion were invested in venture capital.
Now I would like to explain first the consequences of the measure, and also to talk to you about the offer we have made to the federal government. As concerns the consequences of the measure, you have to understand there are three groups that will lose out: Quebeckers with savings, the Quebec economy, and finally, the entire venture capital industry in Canada.
Quebeckers with savings will lose a tax incentive that allows hundreds of thousands of Quebeckers to better prepare for retirement. In reality, these peoples' taxes will increase. Furthermore, the Quebec economy will lose out because eliminating the tax credit will reduce our cash inflows, which will immediately and significantly reduce our ability to invest in the economy. Finally, venture capital in Canada will also be affected. With less money to invest, there will be no choice but to significantly reduce investments in venture capital, and consequently, our fundamental role as a fund.
I will conclude my presentation by explaining the offer that we have made to the federal government.
Our proposal was as follows. In return for maintaining a tax credit and a review of the program in 2018, labour-sponsored funds in Quebec would firstly reduce the immediate cost for the government by 30%. This decrease could come from a cap on our cash inflows and, if necessary, a reduction in the rate of the tax credit.
Secondly, we would invest two dollars in venture capital for every dollar of tax credit for the duration of the venture capital action plan. More specifically, we proposed to the federal government to invest $400 million in private funds outside of Quebec and $550 million in private funds in Quebec—funds that would have the opportunity to invest across Canada.
Finally, we would also invest directly $1 billion in venture capital businesses in Quebec.
Labour-sponsored funds in Quebec have offered the federal government a total of $2 billion in venture capital, in exchange for reducing the tax burden and reassessing the situation based on the program's 2018 results.
In conclusion, I would repeat that if the bill is adopted in its current form, our cash inflows will be reduced by around $4.5 billion over 10 years, which means $4.5 billion less in retirement savings for Quebeckers. It also means there will be around $3 billion less to support SMEs or private funds over the next 10 years.
I respectfully entreat the committee to remove all provisions dealing with this tax credit from Bill , and to urge the government to consider the offer of the Quebec labour-sponsored funds. At the very least, your committee could amend the bill to reflect the offer we have made to the government.
Thank you for your time. I am ready to answer your questions.
Thanks, Mr. Chairman. It's my pleasure to appear before the committee.
As you know, tax reform has been a topic near and dear to my heart, especially since I chaired the commission for Paul Martin, the Technical Committee on Business Taxation, back in 1998. We argued very strongly that it's very important to have a business tax structure that has internationally competitive rates but also neutrality, where we have a level playing field amongst different types of business activities to make sure we get a proper allocation of capital resources in the economy. I would echo many of the things that David Spiro said.
I wanted to point that out because I feel there were a number of changes made since 1998 that did a lot to bring rates down, but I think the governments could have done better in terms of achieving more neutrality. For quite some time I have also felt that the labour-sponsored venture capital corporation credit that has been in existence needed to get changed as well, as it had distorted venture capital markets.
I want to focus on this particular credit and start with some empirical observations that have been made by a number of papers. In fact, one of them is our own, which I'll show the committee, and it's one you can get off our website. It was by Jeffrey MacIntosh, entitled “Tantalus Unbound: Government Policy and Innovation in Canada”. I recommend that the committee look at this paper because it provides a lot of interesting observations that are quite relevant to today's subject. This paper was peer-reviewed, and I think it expresses a lot of the state of economic knowledge as well as legal knowledge with respect to many policies that we use for innovation, including the labour-sponsored venture capital corporate credit.
To begin with some observations, this is one I found in an article I wrote. It seems that Canadian venture capital returns have been particularly low. In particular, this has been true of the LSVC credit. For example, in the past decade the average rate of return has been 3% per year, compared to the United States which has been 20% rate of return to venture capital. We've had a policy in place that hasn't worked very well. In fact, it's not surprising that many Canadian pension funds, when they do decide to invest in venture capital, often go to the U.S. where the rates of return are far better than what you find in Canada.
As Jeffrey MacIntosh notes, one of the reasons is the very small scale of many of the labour-sponsored venture capital credit firms. As a result, they have had very poor returns because of that low return. But even large ones have not done particularly well.
The Quebec Solidarity Fund, for example, as Jeffrey notes, over a 20-year period has had half the rate of return as treasury bills. Now if you're investing in more risk, you would expect a higher rate of return not a lower rate of return. This is actually a rather surprising result. In fact, in 2011, $8.8 billion had been invested in solidarity funds. However, only 4.9% had been what's called development capital assets, where you might find some investment in venture capital.
As Jeffrey MacIntosh notes, most of this capital has been funded in bonds, not very much in equity, of private companies. In fact, only 5% of the total solidarity funds have been invested as what you might think of as venture capital, according to Jeffrey MacIntosh in this paper that we published.
I think that is a very important result because it shows that the program has not worked as ideally as it should.
I'll very quickly say why there are three reasons for the problems of this credit, and why it should be abolished.
First of all, there's been a separation of control and ownership in the LSV and poor governance, and MacIntosh's paper goes into some detailed discussion of that. But, effectively, there has been a divorcing of the ownership and control of the funds. Therefore, the incentives have not been particularly good for better returns.
Secondly, there's been a crowding out of private equity investments by labour-sponsored venture capital firms. This has been shown in several papers that have been published in the past. But there is good reason for that, because what happens when you have a generous tax system that encourages investment in certain types of firms is you end up distorting signals in the market and you end up getting too many poor firms coming in and displacing the investments of good firms. That undermines the market as a result, which is one of the reasons why our venture capital market has had such poor returns, as I noted earlier.
Then, finally, it's not surprising that investors get such low rates of return because of the various tax benefits, including their RRSP deductions, which are piled on top of it. Really, they're only worried about the tax returns that they might get and pay less attention to the economic returns from getting their investments. Depending on the province, it can be almost three-quarters of the cost being covered. Therefore, it is really not sensible for our government to have a policy that is turning capital investments into poor rates of return.
Honourable members, thank you for inviting me to speak today on Bill .
I'm a tax lawyer with a law firm that is Canada's largest law firm that practises exclusively in the area of taxation. I act for large and small mining companies both Canadian and foreign-based. That role I'm privileged to say has taken me around the world. It has taken me everywhere from the Atacama Desert to the far north of Canada. I spend a lot of time in remote and rural Canadian communities.
You can probably guess what I'm going to talk about today. I am going to talk about the aspects of this bill that deal with certain measures that repeal some deductions for mining companies. But before I get into that I'd like to start by saying it's fair to say, in fact it's fair praise to say, that this bill contains a lot of good measures. Like Mr. Mintz I'm a fan of tax neutrality. I am actually a fan of the invisible hand, and I do see the benefit of a broad base and a low rate. However I'm not an economist. I'm a simple lawyer and in some circumstances I can be convinced that there are exceptions to these rules and they should be made for circumstances where it's merited.
One of these I share with long-standing government policy is the marriage that we've had in place since at least 1972, and indeed in other forms before that. This measure is something that we call accelerated capital cost allowance and we also have accelerated deductions for certain types of other investments made by mining companies in relation to the construction of new mines.
Essentially what these measures do is allow you to take your capital out before you share the profit reward with the government in the forms of tax. These rules are being proposed to be repealed by the budget and I'll be magnanimous about this and say that the government is being very generous in terms of the way they're phasing the rules out. They recognize the fact that the timelines to build mines are long and a significant capital decision has been made long before the decision to repeal the rules was made.
I find it a bit ironic though that the proposal is made at a time when build costs are at an historical high and while mill prices, which are always volatile, are perhaps more volatile than ever in a situation where we have Canadian companies looking at investing in very mature areas like Canada where projects require very complex engineering and a lot of capital, and are very risky.
I think the historical reason for these rules is pretty clear in the record going back to 1966. You can read the Carter Commission and there are lots of reasons for these, but ultimately the government settled on these rules because they recognized that it was a good policy to provide an incentive for people to invest in capital-intensive, highly risky ventures in remote areas in rural Canada. They are a deliberate and conscious departure from tax neutrality. I think that government after government has realized to date that this departure is merited.
The reasons for the departure stated in the budget papers are that the repeal of these rules puts mining on the same footing as the oil and gas industry and it furthers the government's environmental objectives. I'm not an economist but I can tell you anecdotally that I don't think that we're comparing apples and oranges when we compare conventional oil and gas, or even oil sands oil and gas, and hardrock mining in mature areas of Canada. I will leave that to experts to think about.
As for the environmental objectives it's not entirely clear to me what the correlation is. The government says this is to assist their medium-term goals for the use of inefficient fossil fuels. At the same time the government is doing what I think are very good things in terms of funding and encouraging work training and the like in communities that service mining. So we have two messages that are being given by the government here and I don't see how they correlate to environmental objectives.
It goes without saying that mining companies are very large investors in rural and remote Canada, northern Canada. They may be the very largest outside the oil sands. I have read, and I am told by my friends, that some advocacy groups purport that some of the mining companies in Canada are the largest employer of first nations persons. I can tell you by having gone to talk to mining engineers and dealing with communities in terms of the impact benefit agreements that the effect that these employers have in these rural communities is enormous.
I've seen the other side of it—
Thank you, Mr. Chairman and committee members, for inviting the Chartered Professional Accountants of Canada to comment on Bill , which implements certain measures from the 2013 budget. I'm pleased to be with you via video conference this afternoon.
In my role as vice-president, taxation, I oversee the activities of CPA Canada’s tax committees, including the tax policy committee and the commodity tax committee as well as the Canadian Bar Association/Chartered Professional Accountants of Canada joint committee on taxation.
We are generally supportive of the bill. It introduces technical tax provisions that are focused primarily on protecting the tax base. They include restricting corporate and trust loss trading; broadening Canada’s thin capitalization rules; ensuring that capital gains tax cannot be avoided by a taxpayer entering into transactions that are economically equivalent to a disposition of a property; eliminating unintended tax benefits related to leveraged insured annuities and leveraged insurance arrangements; clarifying legislation to respond to court decisions; and restoring the intended tax policy results in the areas of farm losses, non-resident trusts, and future reclamation costs.
As you can appreciate, these can be very complex issues. If I could make one observation, it is that the proposed legislation was released on September 13 and the comment period ended October 15. The bill was then tabled three days later. I think we all would have benefited from a longer period of time to fully analyze, digest, and comment on legislation of such complexity.
CPA Canada has provided comments on some of these provisions through written submissions of the CBA/CPA Canada joint committee, including derivative forward agreements, synthetic disposition arrangements, and amendments to the thin capitalization rules.
Our comments were of a highly technical nature and detailed our concerns that in many instances the provisions are too broad in application. Consequently, they capture circumstances that do not appear to be intended by the government’s public policy objectives. The joint committee will continue to work with Finance to modify these rules appropriately while ensuring that the tax base is protected.
We note that Bill makes certain changes to the capital cost allowance rules. Our comment here is focused on what has not been done. We believe that in future capital cost allowance rates should be reviewed for all classes of equipment so that they correspond to the true economic life of the asset. Updating CCA rates would encourage manufacturers and others to invest in the most modern, productivity-enhancing equipment available, thus ensuring their competitiveness in a truly global economy.
Finally, I would like to comment broadly on the introduction of various anti-avoidance rules in Bill . We support these changes, but they open up the broader issue of anti-avoidance rules and tax evasion. Last week, CPA Canada released a white paper entitled “Corporate tax evasion, avoidance and competition: Analyzing the issues and proposing solutions”. I believe all members of the committee have been sent a copy of this paper.
The topic of tax evasion versus legal tax planning and the related concept of corporations paying their fair share of tax is big and is getting bigger. In fact, the OECD is working on behalf of the G-20 to develop global solutions aimed at stopping tax evasion. Our white paper offers some food for thought to Canadian policy-makers and influencers, and I commend it to you. We would be pleased to return to this committee sometime in the future if you decide you would like to explore the issues of tax evasion and tax planning.
Mr. Chairman, I wish you and your colleagues well in your deliberations on Bill , and I look forward to your questions.
Allow me a few minutes here.
The fund's primary mission is to encourage people to save for retirement. Then its goal is to invest 60% of that money in economic development and job creation in all sectors of economic activity, that is to say in eligible companies, usually SMEs, all through the region, and to encourage innovation, productivity, and the creation and preservation of jobs. That is the fund's mission.
We project that if the tax credit disappears, there will be a decrease in incoming funds. Our mission of economic development will be reduced drastically. A study carried out by Deloitte and Secord shows that approximately 16,000 jobs will be lost per year and 400 SMEs will lose our support. Over a 10-year period, retirement savings will drop by $4.5 billion, at a time when saving for retirement is an enormous problem in Canada.
Our solution is to encourage retirement savings and redirect that money towards supporting economic development. In this sense, I am not just talking about venture capital, but also conventional capital. However, that is what is currently being eliminated. There are assets...
Well, I think you're absolutely right; the Canadian Venture Capital Association sees the elimination of the tax credit as being bad news, as being probably not the wisest decision to be made at this time. Why? Because we've become over the years a very important source of capital for VC in particular, and that has been acknowledged by the players in the industry.
We've been able to restructure, particularly in Quebec, a very strong industry. That places Quebec, in a table that was prepared by Thomson Reuters and based on the statistics of Thomson, in third rank worldwide if Quebec were a country. If we look at Ontario, where the tax credit has been abolished, they're trailing at the back here. We can table these documents for the committee.
My point is why not learn from what we've been doing right in Quebec and apply it across Canada? Why not find a solution that would be Canadian-based, where we would be able to continue to contribute to the development of the industry in Canada?
You know, we've learned a lot over the past 10 years. From that learning, I think we can certainly make the country benefit and the industry benefit. The CVCA is in accordance with that. We've become co-investors. We are not there to crowd out the money. We're co-investors, and we're a leading source of fund of funds capital.
Now I'd like to ask a question of Mr. Hayos of the Chartered Professional Accountants of Canada. Thank you for being with us as well.
In your written report, you said a couple of things: one on process, and one on substance. You mentioned in your remarks these complex issues. The proposed legislation was released on September 13, and the comment period ended a month later. The bill was tabled three days after that, and you gently said you could have benefited from a longer time to analyze a piece of legislation of such complexity. I appreciate your bringing that to the attention of the finance committee. It is extremely frustrating when complex matters are not subject to adequate time for review, and I appreciate your association's raising that.
In the content part you addressed after that, you said you were concerned about the provisions in the context of synthetic disposition arrangements. You were also concerned that the amendments to the thin capitalization rules might be so broad in application as to capture circumstances that do not appear to be intended by the government's public policy objectives.
I wonder if you could spend a little bit more time on what you meant by that.
In terms of what's been missing, first of all, let's go back to the issue of neutrality. People make investments. Right now we have a general RRSP system that encourages people to invest in whatever they wish to invest in, but in the case of the labour-sponsored venture capital credit we have a special credit that is provided for investments that are supposed to go to venture capital. However, it doesn't necessarily go into venture capital. In fact, again I encourage you to read Jeffrey MacIntosh's paper, but just to quote from him, he said that with $4.2 billion—and this is in 2011—of the $8.8 billion that Solidarity had, $1.5 billion was invested in public companies—you should be getting a relatively good return if you're just making the market return on that—hedge-fund units, $216 million; bonds, $2.3 billion; and money-market instruments, $154 million.
The other part of the money, $4.27 billion, which are called developmental capital assets, are not all venture capital. In fact, in the end only a small part of that is actually invested in the private equity of smaller firms. Then the question is, why do we give a 15% credit for that to encourage savings? Why not just give 15% for everybody to invest savings if that's the idea?
The problem is, what we're doing is directing funds into relatively low rates of return, and that goes back to my point about venture capital. We're trying to encourage more venture capital in this country, and venture capital is risky. If you were making a relatively good economic return on venture capital, then because of the risk you have to earn more than, let's say, a treasury bill, which is a government riskless rate of return of say just 3% or 4%. We should be making in venture capital at least 8% or 10% on average over time, but that's not been the experience in Canada. We've been getting money in venture capital firms that are earning very low rates of return. Clearly, the policy is not working. It's not creating jobs as much as we think. In fact, if you just have money that's being invested in public companies or bonds, that's not really doing much either.
If we're misdirecting funds into low rates of return, then we're actually hurting productivity in this economy because what we're doing is directing capital into the wrong investments, and that's why neutrality is often very important because the market will sort out what are the best places to invest. If we feel that we need to play out some direct action on venture capital, and I think those are questions that need very careful examination, I think what many experts have concluded over time is that scale is very important. What's been achieved so far has been a lot of very small VC firms earning very low rates of return, and we're not achieving what we really think we were hoping to achieve. So it's been a failure of policy, and Ontario recognized this in getting rid of the same credit, and some other provinces haven't had it, including my own, Alberta. Frankly I think we do need a better approach, and this credit is not the one that's going to achieve it.
I understand. Thank you very much.
Mr. Mintz, I read Mr. MacIntosh's study and I must admit that it reflects a very poor understanding of what labour-sponsored venture capital funds did in Quebec.
You are concentrating on the return rate and trying to see that it's not only venture capital but that's the mandate of the fund. You were saying it hasn't been successful but it has been shown that if you are looking all the OECD jurisdictions, Quebec has a share of its GDP as the third-largest investment and venture capital under management after the U.S. and Israel. It's almost three times as high as Canada's and four times as high as Ontario's, so in that aspect it has been very successful.
I think it also explains why there is so much support for this especially from the Fédération des chambres de commerce du Québec, the Chambre de commerce du Montréal métropolitain, and Manufacturiers et exportateurs du Québec.
All of these organizations are against eliminating the tax credit because they understand the role these funds play in Quebec, especially their countercyclical role.
Ontario followed the prescription to scrap that tax credit after 2005 and as a result Ontario's share of Canadian venture capital has dropped dramatically since 2005. It is at 36%. With a much lower GDP Quebec is investing as much as Ontario in terms of venture capital.
I call this meeting back to order, the tenth meeting of the Standing Committee on Finance, continuing our deliberations of Bill.
I want to thank our second panel for being here today.
We have, first of all, from the Canadian Restaurant and Foodservices Association, the executive vice-president, Joyce Reynolds. Welcome.
We also have Mr. François-William Simard, Director of the Federation des chambres de commerce du Québec.
We have, from GrowthWorks Atlantic Ltd., the president and CEO, Mr. Thomas Hayes. Welcome.
From iNovia Capital Inc., we have the president, Mr. Chris Arsenault.
We are scheduled to have, by video conference from British Columbia, Wildsight's executive director, John Bergenske. I'm hoping he's going to show up here as we deliberate.
Each of you will have five minutes.
We will start with Ms. Reynolds.
Thank you, Mr.Chairman.
It's nice to be back so soon. I appreciate the opportunity to talk to the committee today about parts 1 and 2 of the second budget implementation bill.
I'm going to keep my remarks very brief so maybe you'll catch up some time. I'm going to focus my remarks on the new penalties and criminal offences to deter the use, possession, sale, and development of electronic suppression of sales software that is contained in this bill.
I would also like to say that we are very supportive of the increase to the lifetime capital gains exemption, and of indexing it to inflation.
As we presented to the committee just this past Thursday, the restaurant industry is made up of thousands of small to medium-sized businesses—over 80,000 of them, as a matter of fact. They collectively serve 18 million customers every day and they provide rewarding jobs and careers for more than one million Canadians. Restaurants are the number one source of first-time jobs, and one third of us have worked in a restaurant at some point in our lives.
Many people have a romantic notion of opening their own restaurant, but reality hits when they see the incredibly long hours that restaurant owners must work, including holidays and weekends when the rest of us are out having fun. They give us a place to gather with friends, family, and colleagues, or sometimes just a place to grab a quick cup of coffee on the way to the office or a snack for the kids after school. They nourish our communities.
Restaurant owners are honest, dedicated business owners who pay their fair share of taxes and they want those who try to cheat the system to face the appropriate penalties.
A few years ago, the Quebec government addressed concerns around fiscal evasion by requiring restaurants to have sales recording modules on every cash register. This added a huge financial burden and red tape to thousands of law-abiding businesses to catch a few who were trying to cheat the system.
The Quebec government offered some financial assistance to business owners to install the black boxes. This was in response to concerns we raised, but restaurants had to bear the cost of the printers, as well as the cost to reconfigure their existing computer systems and point of sale registers. There is also the ongoing expense of maintenance of the equipment, which is considerable, along with ongoing training of staff to achieve compliance. These moneys could be put to better use creating jobs than penalizing companies that are already compliant.
Quebec's legislation also requires that every customer be provided with a printed paper receipt whether they want it or not. In businesses where speed of service is critical to success, this has resulted in significant service slowdowns, not to mention the environmental impact of millions of pieces of paper daily that customers don't want and leave behind.
We ask the federal government for a fairer and more targeted approach to fiscal evasion, an approach that would go after the source of the problem rather than the hard-working business owners who pay their taxes and operate in full financial transparency.
We support measures in Bill C-4 that introduce significant penalties and make it a criminal offence to create, supply, and use electronic sales suppression software. We think this is a smarter approach that gets at the root of the problem rather than unfairly targeting one industry. These measures will rightly target the underground economy, not the above-the-ground economy.
We look forward to working with government and the Canada Revenue Agency to ensure that our members are aware of these new measures.
Members of Parliament, members of the Standing Committee on Finance, Ms. Bertrand sends her apologies for not being able to come here this afternoon because of an unforeseen event, so I am replacing her today.
First of all I would like to thank you for allowing the Fédération des chambres de commerce du Québec to present its point of view today on the gradual phasing out of the federal tax credit for labour-sponsored venture capital funds. This is a critical issue for our members. Our organization represents close to 150 chambers of commerce in Quebec, 60,000 companies and 150,000 business people. Furthermore, 1,200 companies are directly linked to our federation as members. Many of them have become what they are today thanks to the support of one of the workers' funds. That is why we are asking the federal government to uphold the current tax measures, and to not replace the workers' fund tax credit by venture capital programs.
We adopted this position after having consulted our members. Recently published studies and statistics confirmed to us that we are on the right track. These studies and statistics clearly demonstrate that workers' funds are essential for economic development in Quebec and that they significantly contribute to collective prosperity.
Since 1990, savings invested in companies have created and maintained close to 500,000 jobs in Quebec. As you know, startup businesses, which face a number of challenges including growth, profitability and access to capital, were able to count on workers' funds as a source of financing in addition to that of financial institutions.
Many of our members therefore benefited from the support of these funds, allowing them to start doing business and gradually become profitable and flourishing companies. According to data taken from a 2010 study by the firm SECOR-KPMG and Regional Data Corporation, each year workers' funds invest close to $750 million in companies that have a major impact on the economy. That means investment in over 2,200 Quebec companies, including small, medium and large-sized businesses.
I would like to give you two examples of companies that have benefited from these funds. The first one is Enerchem International Inc., a company that operates two plants in Quebec and creates biofuel and ecofriendly chemicals from waste. It benefited from an investment by the Fonds de solidarité FTQ of $4.3 million from 2002 to 2008. The second one is the Osisko gold mine in Malartic in Abitibi, which, since 1999, has benefited from $33.3 million to start up its open-pit mine. We are well aware that access to capital is crucial in the exploration and startup phase of a mining project.
These figures speak for themselves, but that's not all. Governments can also benefit from this arrangement. They recover the tax credits given to fund shareholders within three years through increased economic activity.
In addition, workers' funds have been useful over the years in educating thousands of people about finances. Thanks to these funds, workers have made investments and improved their financial situations. What's more, it encourages workers to save. Out of almost 4 million workers in Quebec, close to 1.8 million of them do not pay into a group pension plan. We should therefore be thrilled that the funds are a savings option chosen by 600,000 people in Quebec, which is 15% of the labour force. These are positive points that simply cannot go unnoticed.
In conclusion, I would like to underscore that maintaining the tax credit for workers' funds unites Quebeckers, whether as citizens, employees or employers.
Through these remarks and other communications we've had over the last months, I hope to have demonstrated that the business community speaks with one voice to call on the government to reconsider its position and uphold tax credits for workers' funds, and to work together to find a solution.
Thank you for your attention.
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—
Good afternoon, Mr. Chairman and members of the committee. My name is Chris Arsenault and I am the CEO of iNovia Capital.
I would first like to thank the members of the committee for inviting us here today. We are very pleased to share with you our comments and concerns concerning the bill's provisions aimed at gradually eliminating the labour-sponsored funds tax credit.
I will briefly introduce iNovia Capital so that you can see where we fit in the ecosystem of Canadian venture capital.
iNovia is currently one of the largest venture capital fund managers in Canada. We manage some $270 million allocated among three different funds. The most recent one, Fund III, was closed just under two years ago and invests in information technology startup companies.
Since iNovia capital was launched in December 2001, it has invested in 47 Canadian high tech startups. Of that number, 27 are still active and remain in our 3-fund portfolio. These three companies now employ 1,250 people. They have attracted over $330 million in Canadian and foreign capital and have generated over $260 million in revenues in the past 12 months. There is no doubt that most of these companies would not have been launched or succeeded as well without the involvement of iNovia and our partners.
Our first investment fund of $46 million was created in December 2001, with the Fonds de solidarité FTQ holding around 21% of the capital owing to an investment of $10 million. Fourteen university spin-offs have been created.
Our second fund was created in April 2007 from a total of $112 million from some 30 investors. Some of the largest investors in this fund are the Fonds de solidarité FTQ Fondaction and FIER Partenaires, of which the Fonds de solidarité FTQ and Fondaction are major partners. Taken together, these three entities account for over 30% of our Fund II, which has invested in more than 17 Canadian startups since 2007.
Finally, our Fund III was launched in December 2011, using $111 million committed by 27 investors. Teralys Capital is our largest investor and partner, having put in $50 million, or 45% of the fund. The Fonds de solidarité FTQ holds a 33% partnership in Teralys Capital.
As you can see, iNovia is a very active investor in early-stage technology companies in Canada. The highly innovative companies we back are creating high-paying jobs and are making Canada a place to build industry leaders.
I offer a few examples. We backed and enabled the growth of a company called CoolIT, based in Calgary. Now with 20 employees, it is already establishing itself as a worldwide leader in computer liquid cooling. A four-year-old company out of Montreal, Beyond The Rack, now has over 300 employees, generating over $100 million in revenue. That company has three VC funds, all backed by the Fonds de solidarité FTQ.
iNovia, as is the case for many other Canadian VC funds, has been very fortunate in being able to benefit from the direct and indirect financial implications of the labour-sponsored funds. I believe it's safe to state that none of our funds, II or III, could have existed without the direct or indirect financial implications of the Fonds de solidarité FTQ and Fonds d'actions.
Labour-sponsored funds, and more particularly the Fonds de solidarité FTQ, have become a vital part of Canada's venture capital ecosystem. iNovia fully endorses the opinions expressed by Canada's Venture Capital & Private Equity Association in its July 23 letter addressed to the honourable Minister of Finance, Mr. Flaherty. With all due respect, we believe the federal government has understated the importance and impact labour-sponsored funds have on the Canadian economy. We therefore respectfully request that the government reconsider its proposal to progressively eliminate the federal tax credits of labour-sponsored funds as proposed in the 2013 budget.
Mr. Chairman, I wish to thank you and all committee members for listening to iNovia's position on this matter. It will be my pleasure to answer any questions.
I don't know if one could say there's unanimity but one can certainly say that in Quebec there's a rather broad consensus within society, within political parties, within the public and within businesses that labour-sponsored funds have had a very significant impact on regional economic development, among other effects.
Unfortunately our board is not necessarily the best example of good governance standards because it is made up of approximately 80 individuals. However, one of the advantages of having so many members is that we are in a position to take the pulse of businesses all over Quebec. When we raised this issue, people were very clear: the federal government must reconsider its position quite simply because these funds do not play the same role that, for example, strictly private funds play.
It is important to understand the distinction. First, the investment horizon is not at all the same. The investment horizon for strictly private funds is approximately five years, whereas the horizon is much more long term for labour-sponsored funds. That makes a very big difference for business startups that are much riskier in the beginning.
I think there are two more factors that explain this consensus. Labour-sponsored funds are present throughout the regions and they invest throughout the regions. I have a list of the numerous investments that have been made in all areas of Quebec and that I would be happy to share with you later.
Furthermore, these funds involve all sectors. Rather than focus on specific sectors, these funds truly focus on all sectors. This also makes a difference for some businesses that need funding but that aren't necessarily within a trendy sector.
Okay, that's brief enough. Thank you very much.
I'm going to take the next round. I want to follow up with you, Mr. Hayes. We've been dealing together for years and I've always appreciated your input, your advice. I don't think it's fair, though, to ask taxpayers to provide both indirect and direct support for the venture capital sector.
My impression from discussions with you over the past number of years is that, even prior to the fiscal financial crisis in 2008, the venture capital sector was not doing well and some changes needed to be made.
There was the 2011 Expert Review Panel on Research and Development. From this panel the government has taken the approach that it ought to redirect more support into direct support. That's why the venture capital plan is as it is.
Would you prefer that the capital plan be stopped and we simply revert to the indirect support? I don't think it's fair to ask the small business owner or the restaurant owner to provide support for the venture capital industry in both the direct and indirect measures. At least it's not fair to pursue this to the extent that it seems you're asking for today.
I had hoped to present a brief overview today of some of the history, but also some recommendations in terms of disbursement of the Dominion Coal Blocks. Very briefly, the coal blocks do lie in a critical wildlife corridor between the two world heritage sites of Waterton-Glacier International Peace Park and our Rocky Mountain system that includes Banff. Because this area is seen as so critical to wildlife, and as a global opportunity to maintain wildlife populations in the Rocky Mountain system in the face of climate change, we feel that any disbursement of these particular lands is critically important. It is important that there be particular covenants placed on these lands.
Those concerns grow out of three specific areas that we've been looking at. The first one was the fact that the UNESCO mission of 2009 was very clear about the importance of this area and the need to minimize barriers to wildlife connectivity in that zone.
As well, it called for a moratorium on mining developments in the corridor. That was followed up in 2011 by the Flathead Watershed Area Conservation Act, which was legislated in British Columbia to ban mines, oil, and gas within the Flathead River. I note the federal government's announcement supported that and suggested that, should there be lands in the Dominion Coal Blocks sold, the areas within the Flathead would maintain that ban on development.
Thirdly, on the Species at Risk Act, which presently applies to those lands, we are very concerned that this application to federal lands be carried over to any change in the status. I think the other piece of important background is the Ktunaxa Nation, of course, is engaged in treaty negotiations with the Government of Canada and the Government of British Columbia at the present time. There's a responsibility to consult and reach accommodation with the Ktunaxa Nation before moving forward with changes.
Our suggestions in regard to any disbursement of those lands are that these particular pieces of background information have to be taken into account and actually addressed when that sale takes place. Along those lines, we're suggesting there are several options, the first of which is perhaps a conservation covenant on any of the blocks that should be sold that would include the conditions of the no mining, oil, or gas development within the Flathead watershed. Also...to fully apply sections 32 and 33 of SARA, on no harming, killing, or harassing of listed species, as well as section 58, the protection of critical habitat.
The issue in the Elk Valley itself is a very, very significant one. That is around selenium loading in the river. The provincial government in the spring of this year mandated the Elk Valley water quality plan, which is presently just basically getting rolling. That plan has at the table the governments of Canada, British Columbia, the Ktunaxa Nation, the United States, and the State of Montana. At present, the mandate for that plan is to make sure that there is no further loading and, in fact, that we reduce and gradually bring the health of the Elk River back in place. It's our feeling that sale of these lands could definitely jeopardize that plan, should there not be very clear conditions around selenium and cadmium nitrate loading included in the plan.
With that, I'll leave that in the hope that through questions we can get maybe a little bit deeper into that. I'm very interested in the location of the lands in terms of their importance to wildlife, but also in terms of what they mean economically to the region.
Okay. Thank you very much.
I'd now like to ask a question of Chris Arsenault, who's been sitting there so patiently this whole time. I think he deserves to have some questions asked of him as well.
First of all, I'll go back to the LSVCCs, which is the hot topic today.
I'd like to quote from Professor Jeffrey MacIntosh, who couldn't join us today, from the University of Toronto. He says:
||LSVCCs have generated poor returns, displaced more effective private funds, and in net, have impoverished, rather than enhanced the Canadian venture capital industry.
I'd now like to quote from Professor Jack Mintz at the University of Calgary. He says:
||These credits have not only been ineffective in generating more venture capital, but they have also helped finance poor projects that should have never been funded in the first place.
The C.D. Howe Institute says:
||Providing tax relief to LSIFs has been, overall, a disappointing use of taxpayers’ money.
The LSVCC is an example of an LSIF.
Finally, the OECD recommends the phase-out of the tax credits to labour-sponsored capital corporations
So there seem to be a lot of people speaking against these funds. There are obviously some who are here today who are speaking for them as well.
Do you believe that taxpayers are receiving sufficient value for their investment in LSVCCs? That's really the crux of this matter—value for taxpayers.
Obviously I can only speak from our perspective, from iNovia's perspective, and my own.
I could add a quote, which is that on average, North American venture capital funds are not returning capital. Yet the few that are have created Google, have created Apple, have created every single technology company that we're using even in this room today. Therefore, without venture capital, you do not have that type of innovation that can come to bear.
Canada is late. We have lost ground with Nortel and with RIM to a certain extent. We need to up our game and we need to be more active in supporting our companies. More than 300,000 Canadians are based in the valley. More than 40 VCs are Canadian but working for U.S-based valley funds.
So when I wake up in the morning and look for the next entrepreneur to back, I look at the available capital that I have to fund these companies. It happens that, yes, the Fonds de solidarité FTQ and the Fonds d’action have been my biggest and best partners over the last 13 years.
From my perspective with regard to why we're delivering today, they've played a big role in that, and it is up to us to come up with backing the next generation of entrepreneurs in order to build these big businesses in Canada. If today you list the top 10 technology companies in Canada, you will notice that the majority of the capital raised by these companies is not from Canadian VC funds.
Thank you, Chair. Thank you all for being here.
I'm sure you're aware that the expression “my ship came in” is something that came from the old Dutch Indies shipping company and basically was probably the greatest venture capital that ever existed in the history of mankind. Of course, these ships would go out into the wild and they could get shipwrecked, they could get hit by pirates, but if that ship came in, somebody became an instant millionaire. Back in those days it was probably worth a whole lot more than our millions are worth today.
When I think about the concept, the very concept of virtually where capitalism grew from, it was from those institutions, and then it spread off from New Amsterdam that became New York and Wall Street and all that trading. There was that understanding that when somebody had an idea or a product, if one were to invest in that, the greater the risk, the greater the reward would be.
I think about what happened in 2008-2009, the meltdown in the United States with the real estate bubble, and I wonder—I really don't wonder too long—had they not instituted a policy to lend money to people who really could never afford to pay it back or could never imagine to pay it back, if that meltdown would ever have happened. I think the answer is obvious; it wouldn't. Fannie Mae and Freddie Mac existed as an arm of the government to move that project forward.
I guess what I'm getting at is that I'm still looking for a good example of when government.... I know government has a role to play, but when government starts to mess with the natural flow of money.... In other words, banks normally don't lend money to people who can't afford to pay it back, and people with money are averse to lending money to somebody if the return isn't such that it's going to be worth the risk. So I'm sorry that our other witness couldn't attend, because I am certainly not a scholar in this field. I only learn what I've learned in life and what I've observed.
I'm going to go to you, Mr. Arsenault. You mentioned companies...I think you said Microsoft and Google and a number of others. Do you think maybe that the money would have come regardless of whether or not there would have been...? I think in the United States there was, if my understanding is correct, no program like we have here. Would that money have flowed naturally? Did they simply not recognize it?
Colleagues and members of the finance committee, I know you work very hard, and I appreciate what you do.
The consultations you do matter a lot in terms of the formulation of each year's budget, so I thank all of you for that. I know that you travel a lot and you're away from your families and it's not easy, so I thank all of you for that.
My officials are here tonight in case you ask anything complicated. They will attempt to deal with it.
I would like to thank the committee for its work on the pre-budget consultations.
The committee's pre-budget consultations are a key part of the budget process. Your recommendations inform the budget, and that's for real, because you can go back and look at the budgets over the last six or seven years and see a lot of recommendations that were in the report of this committee over those years.
For the budget this year, this included
ensuring the fairness and impartiality of the tax system while continuing to eliminate loopholes
— which is about tax loopholes; and enhancing the neutrality of the tax system by eliminating inefficient fossil fuel subsidies consistent with our G-20 commitments. I should add that we have eliminated all of the tax subsidies that once existed for the oil sands, and for those who think otherwise, they ought to check the record. We are trying to enhance the neutrality of the tax system by eliminating inefficient fossil fuel subsidies. This is consistent with our commitments in the G-20.
We are reviewing legislation and regulations to ensure the safety and security of our financial sector and modernizing Canada's immigration system to better focus on lever market needs. Let me provide some context to this. When we became the government in January, February 2006, what was there to worry about economically? Well, the Prime Minister and I thought perhaps the United States because they're running large deficits and accumulating significant public debt. So how do we protect Canada? My view was that we pay down public debt, which we did. We paid down about $38 billion of public debt in the first couple of years that we were the government. And then the great recession happened, but it didn't start there, as you know. It started with a credit crisis and then it moved into a crisis in the real economy. Then we had to make a choice about what were we going to do: continue to try to balance or give it up. And what we decided to do was to run a very large deficit of almost $58 billion in January 2009. But the plan always was to get back to balance in the medium term, and we're almost there.
In 2015-16, the budget will be balanced. I think it's important for business confidence in Canada. At the same time—and others have different points of view on this—I think it was very important that we spent that money, borrowed the money and spent it in 2009. And I give the public officials a lot of credit at Treasury Board, Infrastructure, Transportation, and Finance for getting the money out the door because that was the danger. The danger was millions of people unemployed and a long, deep, dark recession.
We can always look back and say that it didn't turn out that way, but we did some things that it helped it not turn out that way. And our plan worked, unlike some of our colleagues in the G-7 who are still struggling.
Moody says, and all the rest of them say, that we have the only economy that has created over a million net new jobs since the depth of the recession. We have, of course, a triple-A credit rating, and now there are only a handful of countries in the entire world that have a triple-A credit rating, which is regrettable.
The World Economic Forum for the sixth straight year has ranked Canada's banking system the soundest in the world.
The International Monetary Fund and the Organisation for Economic Co-operation and Development have forecasted that Canada will have the strongest growth of the G7 members over the coming years.
Now, this is not huge growth, and I don't sit here and say to people who are knowledgeable, like the members of the House finance committee, that things are rosy. Things are okay. But we're only growing at 1.8% or 2%, or a little bit better than that. The American economy is doing a little bit better now, which is a good thing. The European economy, as you've seen in the most recent statistics, is weakening, which is a concern.
Dealing with deficit and debt, I think the most important thing we can do for our country is to get rid of our deficit, which we will do in 2015-16. In the annual financial report, the deficit fell to $18.9 billion in 2012-13. This is nearly $7 billion less than projected. And that's down more than one quarter from the deficit of $26.3 billion in 2011-12, and down by nearly two-thirds from the $55.6 billion deficit recorded in 2009-10.
A lot of this has to do with the way we spend. I won't go on too long, Mr. Chair, but as you know there are three major areas of spending federally. One is transfers to the provinces. We have not reduced transfers to the provinces. We have maintained the 6% health transfer. We have maintained the 3% Canada social transfer. We've stuck to it—even during the bad times. And then with the transfers to individuals, persons with disabilities, seniors, and so on, we have continued at the same level of funding. We've also continued the same level of funding for research, development, our granting councils, the money we give to universities, the money we give for post-doctoral fellowships, and all of those things, because they're vitally important for the future of our country.
So where do you save money? You know this from looking at these subjects. You save it by looking at your own program spending, which we have done, and which we have tightened. The result of all of that is that we have a situation now in which we can easily balance in 2015-16. I'll spare you some of this other stuff.
I think we're doing some important things in this bill, one of which is to extend the hiring credit. It actually works. We're all members of Parliament. I'm sure you hear it at home. It creates jobs, especially among small—or smaller—entrepreneurial businesses, so that's a good thing. We're increasing and indexing the lifetime capital gains exemption, and this is the first increase since 1988, which was a long time ago. And we're expanding the ACCA, the accelerated capital cost allowance, to further encourage investments in clean energy exploration. We're closing some tax loopholes. We're, again, modernizing the Canada student loans program. We are phasing out—and this is controversial in Quebec—the tax subsidies such as the labour-sponsored venture capital corporations tax credit, which quite frankly is inefficient and was not accomplishing the goal for which it was intended, and was phased out by Ontario about five or six years ago.
So there you are. I will hand the chair back to David Frost.
Voices: Oh, oh!
Thank you and welcome, Minister, to the finance committee.
Since this is another omnibus bill that affects matters far beyond the world of finance that you've referenced, I want to talk about something quite different and quite distinct, if I may.
I have a question that begs another question. Namely, why are health and safety protections that are found in the Canada Labour Code in a budget bill in the first place?
Minister, my specific question is on something very troubling that was just brought to our attention. It appears that departmental officials at the human resources committee might have provided misinformation. My colleague, the member for Newton–North Delta, asked how many refusals of unsafe work resulted in some sort of enforcement action. Officials told her the “administrative data doesn't allow us to make that direct link”. However, this committee has just been provided with evidence that that claim is not true. Somewhere between 45% and 52% of work refusals could result in an enforcement action.
Minister, could you explain why officials presented only the fact that 20% of refusals result in a finding of danger while failing to tell us that nearly half of refusals result in an enforcement action?
I want to thank my parliamentary secretary for that challenging question.
I think the biggest thing is the hiring credit for small business. This is a big deal. All of us are members of Parliament, we talk to people in our ridings, we talk to small business people. Tons of people have been hired because of this hiring credit for small business, so this is important.
It's also not inexpensive to the federal treasury, but it is important, so we're going ahead with that again. Since 2006, we've reduced the small business tax rate from 12% to 11%. We've increased the small business limit to $500,000. We've also provided up to $1,000 to help defray the cost of hiring new workers.
But the more important thing is to try to get people into the workforce. I see it in my riding, you probably see it in your constituencies as well, young people who are talented, who are good men and women; they just need a chance. And I think the hiring credit for small business helps give them that foot in the door.
Good evening, Mr. Chair.
With respect to the lifetime capital gains exemption, as you've indicated, it's increasing from $750,000 to $800,000 and then will be indexed for inflation. With respect to the impact, we don't have any specific intergenerational information. What we do know is that approximately 68,000 filers, I believe it is, benefit from the LCGE, and the expectation is that, at least at the front end, between 2,000 and 4,000 people will be able to take advantage of the growth in the LCGE limit.
The other thing I'd like to point out for the committee is that with the change to an indexed system, when an individual accesses the LCGE, as the indexed amount increases, that will generate new LCGE space for the individual.
Good afternoon, Minister.
I'll be asking questions about the phasing out of the tax credit on labour-sponsored venture capital.
It's a very big deal in Quebec. There is 90% of the tax credit right now that goes to the savers; those who are actually contributing to the two major funds in Quebec. It's a model that has worked well. Quebec is actually third among all jurisdictions in the OECD in terms of venture capital under management as a share of GDP—after Israel and the United States. As a share of GDP, Quebec invests almost three times more than the Canadian average, and over four times more than Ontario.
Now, both funds came to you with a deal asking for the government to not phase out the tax credit, but in return to control the tax expenditure, reducing it by about 30% over the next 10 years and injecting about the equivalent of $2 billion in the venture capital action plan. That would be five times the contribution of the federal government. Yet they haven't received any answer.
We had Mr. Gupta from the Canadian Information Technology Association saying it was a good deal. We had Canada's Venture Capital and Private Equity Association saying it's a good deal. You had the
the Quebec Federation of Chambers of Commerce, the Regroupement des jeunes chambres de commerce du Québec, the Board of Trade of Metropolitan Montreal, and the Quebec Manufacturers and Exporters. All these organizations claim that this is a good deal and that the government should accept it.
Why didn't you say so? Why did you refuse?
Minister, we have a minute and a half or two minutes for my last question.
Outside of a Paris-based study from the OECD, outside of the testimony of Jack Mintz—
Hon. Jim Flaherty: It's transparent.
Mr. Guy Caron: I'm just saying that we had witness after witness, especially from Quebec, who were telling you it's been very effective and has kept Quebec as a leader in Canada.
I asked one of the officials who came here to meet with us whether any impact studies had been undertaken. What impact will this decision have on the levels of venture capital invested in Canada and on the levels of savings in Quebec? People are not using this fund as a tax loophole or a tax shelter. They are using it to save up for their retirement, which is what the government is encouraging them to do. Has there been a comparative impact study done between what these funds have to offer and what the government plans to do? No, no impact study was done.
How can such an important decision be made about such an important model for Quebec without studying the impact it will have on these various aspects?
Thank you. I appreciate that.
I want to ask the minister about the freezing of the EI premiums and about the hiring tax credit, but I want to preface my comments by saying that in the riding of York Centre we organize year-round business round tables, a minimum of two a month, just to keep a pulse on what the business people and the business leaders are saying.
They have said unanimously that the freezing of the EI premiums and the small business hiring tax credit have led to job creation and have created stability in terms of the EI premiums, which is what business needs. Business demands stability. With that stability and with the advantage of the hiring tax credit, they have been able to hire more people, which in turn has more people paying more taxes, and we're able to fund, of course, more of our government operations and what needs to be funded.
I want to ask the minister to comment on the necessity and the importance of freezing EI premiums for small business and how important that is in the job creation grand scheme of things.
Could you comment also on the small business hiring tax credit and how successful that has been for Canadian small business in particular?
Minister, thank you for appearing before the committee. The opposition parties, especially the NDP, worked very hard to convince you that circumstances were very bad, given the impending crisis.
That being said, I would like to come back to the issue of workers' funds. Let's not hide from the fact that the Bank of Canada has forecasted lower growth for the Canadian economy. The bank's deputy governor, when giving a speech in Toronto, talked about the disappearance of our exporters. It would seem that one out of five businesses has either changed its mandate or gone bankrupt. Also, we are betting a great deal on a global upturn.
Let's come back to the issue of workers' funds. Since the credit has been abolished, Ontario has seen its position deteriorate. With respect to venture capital funds across Canada, 36% are from Quebec and 36% from Ontario. Yet, Ontario's population is much higher than that of Quebec.
Minister, would it not have been preferable to take the deal offered by workers' funds and still implement your initiative for creating a $400 million venture capital fund? This seems to be betting a lot on the future.
And thank you, Minister, for being here this evening and taking time to spend it with us. I know you're a very busy individual.
I'm listening to my colleagues across the table here talk about EI. It makes me think about what they were proposing a couple of years ago, a 45-day work year where you could work 45 days and all of a sudden go on EI. Now Mr. Brison's talking about lowering EI rates even more. Here's a party that one day is going to make it so easy to get EI that provinces like Saskatchewan are going to have an even tougher time finding people, and then the next day he wants to lower EI rates. So we're not sure how he's ever going to get the money to spend on what he wants to spend it on.
That comes back to what you talked about in terms of stability, creating stability for the business community, whether it's EI rates or Canada Pension Plan rates. We just brought out the pooled pension plan. That is a program that I think will have some benefit once people start to give it time and take it up.
There's one thing I wanted to ask you about the break-even mechanism in seven years for EI, when you looked at EI going forward. Can you just touch on that, what that will do to EI rates going forward once that's in place?
Thank you very much, Mr. Chair.
First of all, I'll give an introduction and a context for my comments. Thank you very much for the invitation to appear before the committee, as members of Parliament review the second budget implementation bill for the 2013 budget. It's a particular honour to be able to appear as a witness since this committee, I understand, will be restricted to hearing only seven hours of witness testimony in addition to what you just heard from the minister over only two days of hearings.
In these two days, parliamentarians will not have an opportunity to meaningfully review the impact of all of the measures embedded in this legislation, which run from tax and spending changes, to EI reforms, to conflicts of interest in financial institutions, a brand new system of processing economic immigrants, and new rules for choosing Supreme Court justices. I have left out dozens of additional changes, including more than 60 amendments to the Canada Labour Code and a new restricted definition of “danger”, an appeal of that definition of danger that the Canadian Bar Association says turns the clock back by decades on health and safety concerns for workers.
In 1994, a freshly elected MP Stephen Harper asked the Speaker of the House of Commons to rule a budget bill out of order because of its sweeping scope. It affected public sector pay, it affected EI measures and payroll taxes, and a reduction in federal spending through the Canada assistance plan. It offered an extension of transportation subsidies and the ability for the CBC to borrow money for the first time.
At that time Mr. Harper said, “The subject matter of the bill is so diverse that a single vote on the content would put members in conflict with their own principles”. That omnibus bill, ladies and gentlemen, was 21 pages. This omnibus bill is 308 pages. It amends 50 pieces of legislation on a diverse array of topics, many of which have zero to do with the federal budget of 2013. it makes a mockery of the process of public oversight.
Consequently, and in keeping with the spirit that brought Mr. Harper and his Conservatives to power in 2006 and since on a pledge of accountability and transparency, this committee should split Bill C-4 into fiscal and non-fiscal measures in order to permit sufficient scrutiny of these incredibly important policy changes that are being proposed. Further, this committee should treat as separate and apart the non-fiscal measures that are major policy initiatives. These include the selection of Supreme Court justices, the fundamental changes proposed to the Canada Labour Code, and the selection process for new economic immigrants who will build the Canada of our future.
One simple way of accomplishing this proposal is to defeat these measures in Bill C-4 and invite the government to reintroduce these measures as separate pieces of legislation. This approach can also be used for matters that you view as time-sensitive, with such items put in a separate bill.
The Parliamentary Budget Officer has queried why the federal government has under-spent its budgetary allocations by $10 billion each year for the past three years. Yet the second round of supplementaries that parliamentarians are considering are requesting $5.4 billion more to spend.
The finance minister's economic and fiscal update notes that the deficit is a surprising $7 billion smaller than forecasted just a few months ago.
It is hard not to feel that the public is being somehow gamed, that payments are suppressed in order to be able to declare great fiscal prudence, then picked up through supplementaries for which parliamentarians have even less time for scrutiny than this budget implementation bill.
In 2013, the budget implementation bill was delayed because of prorogation. Supplementary budgets will have to be passed with even less than usual oversight and there is no time to study a request for $5.4 billion. The integrity of the democratic process that assures there are checks and balances on the government's ability is at risk.
Though the Stephen Harper of 1994 has silenced his concerns over these procedural sleights of hand, he has inflamed that same ardour in many other people.
In conclusion, the Supreme Court controversy that led to the measures in this bill did not even arise until after the budget was tabled. The budget is being used as a Trojan horse to rewrite the Canada Labour Code and our immigration policies. These are not add-ons. They turn the workhorse of a budget implementation bill into a Trojan horse. I fear that Bill C-4 is starting to look alarmingly like a Duffy budget bill, stuffed with hidden measures and designed to mislead the public. But it can and should be amended.
Accountability and transparency were great principles in 2006. They are great principles in 2013 as well.
Thank you, Mr. Chair, and good evening.
Hello again to the members of the committee.
As many of you heard last week, CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small and medium-sized businesses across Canada that collectively employ more than 1.25 million Canadians and account for $75 billion, or nearly half of Canada's GDP. Our members represent all sectors of the economy and are found in every region of the country. Addressing issues of importance to them can have a widespread impact on job creation and the economy.
You should have a slide presentation in front of you that I would like to walk you through in the next few minutes.
CFIB's October business barometer on slide 2 shows that after a rough spring, small business optimism has trended into more positive territory so far this fall. The barometer showed a gain of a half point to 65% from September's reading, but it generally remains in line with the average value from the past four months.
Full-time hiring plans are basically unchanged this month and typical for this time of year. We take this as a sign that business owners remain cautious. Only 41% of owners report a generally good state of business.
The barometer has shown us that the economy is still a bit sluggish. To help us get through this sluggishness, we believe the government needs to address the issues of greatest concern to small business owners so that business owners can focus their attention on hiring staff, growing their business, thereby growing the economy. What are those concerns? As you see on slide 3, the top issue of concern to small businesses is the total tax burden, which includes taxes from all levels of government. Another high-priority issue is government debt and deficit. Small business owners understand the importance of paying down debt and we have seen this issue grow in importance as the deficit itself has grown over the last few years.
Employment insurance is a high-priority issue for over half our members, the reasons for which I will get to in the next few slides.
As the previous slide has demonstrated, one of the top issues of concern to small business owners is their total tax burden. There's only one taxpayer and they pay taxes to all levels of government. With so many taxes, it's important to understand which ones have the biggest impact on the growth of their business. As you can see on slide 4, payroll taxes have by far the greatest impact on growth. Why? It's because they are effectively a tax on jobs. They must be paid regardless of whether the business has posted any profit that month.
Since EI is a payroll tax that can have a big impact on hiring decisions, our members have told us repeatedly how much the EI hiring credit has helped them maintain their workforce, especially during uncertain economic times. As you see on slide 5, 64% of our members indicated that the EI hiring credit would help their business. The stability of the EI rate is just as important to our members, and 85% of our members indicated that a steady and predictable EI rate is critical for small business to help keep their businesses afloat during unstable economic times, and in turn help them grow their business as the economy improves.
Even a few years after the recession started in 2008, as you'll see in slide 6, over half our members were in support of the EI hiring credit. The EI hiring credit has given those small businesses that received it a break from payroll taxes, this particular tax being EI. The hiring credit also allows small business owners to keep their employees, increase wages, and hire when they might not otherwise have been able to.
On slide 7, our research from 2011 shows that the rapid rise in premiums prior to the EI rate freeze would have resulted in the fund coming into balance in 2017. We see from the government's recent economic update that the fund will be in surplus prior to this time. While the recent rate freeze announcement has provided some predictability to the rate-setting process, which our members welcomed, we do recommend that the seven-year rate-setting process begin as early as possible.
CFIB recommends a fixed-rate approach as it provides the most stability in premium rates, which is a very important factor for small firms in their business planning. To conclude, CFIB supports the EI hiring credit and its expansion. It has given small business some measure of security during uncertain economic times.
Second, rate stability is a critical component of a well-managed EI program. The current projections indicate that we are close to the break-even rate and that the EI account will be in surplus in 2016. We suggest the government reduce rates as soon as the EI account is in balance, and do not let surpluses accumulate.
Last, CFIB encourages the government to maintain a separate, independent EI account. Transparency and accountability to the taxpayer are key to creating business confidence in the EI system.
Thank you, Mr. Chair.
Thank you Mr. Brison. I would also like to thank the committee for having invited us this evening.
When I appeared before you to speak on behalf of Imagine Canada during the pre-budget consultations, I said that we had to change the way we think about the charitable sector's contribution to Canada and to the whole world. Charitable and not-for-profit organizations employ two million Canadians, represent more than 7% of GDP, and involve 13 million volunteers. We create jobs, we stimulate economic growth, and nine out of ten Canadians believe that charitable organizations are an essential part of our quality of life.
It is in that context that we would like to speak to one part of Bill , that is the enhancement and extension of the Hiring Credit for Small Business.
As committee members are aware, the hiring credit for small business would provide a rebate of up to $1,000 to eligible employers whose EI contributions increase from one year to the next. Despite the name of this initiative, this provision is available to all small employers including those in the non-profit sector. This initiative is most welcome and yet reinforces my point about changing our mindset.
When the credit was announced in the 2011 federal budget, given its labelling, charities unfortunately did not take note immediately. It was only when Imagine Canada made inquiries months later that we learned, albeit happily, that it applied to our sector as well.
We appreciate that the credit was designed and implemented without discriminating between for-profit and not-for-profit employers. Greater clarity, however, about its applicability to our sector would have enabled the government to recognize more publicly its support for charities and non-profit organizations' roles as employers. In a climate where every dollar counts, greater clarity would also have enabled organizations to make payroll decisions with the immediate knowledge that the credit applied to them.
For policies aimed at promoting jobs and growth to achieve their full potential, we need to make sure not only that they are inclusive, as was done in this case, and most appreciated, but also that they are described and marketed accordingly.
Using the most recent information available to us on staffing and payroll costs, we've assessed the potential impact of the renewed and extended hiring credit for charities. Based on the level of employer contributions paid in 2011, we estimate that almost 40,000 charities could benefit from the hiring credit included in Bill . This represents almost 90% of all the charities that have paid staff. That's 40,000 charities in every community in Canada that will find it a little easier to meet their payroll obligations if they, for example, turn a part-time job into a full-time job, take on new staff, or provide staff increases.
While this is not a magic bullet for charities, it does suggest how government can, through instruments at its disposal and programs already in place, add another plank to its support for charities as engines of economic and social prosperity.
In addition, charities will continue to pursue earned income activities and access to grants and contributions and to depend on the generosity of Canadians supported by the federal government through tax incentives such as the new super credit and the proposed stretch tax credit.
We encourage the government to extend the sector-neutral approach taken with the hiring credit to other policies aimed at job creation and economic growth.
As I explained in my recent testimony, there are numerous federal initiatives that could help charities expand their earned income activities, and thus their financial sustainability and their ability to create jobs.
We look forward to working together to ensure that federal programs such as the Mitacs-Accelerate program, the Business Development Bank, the Community Futures program, and the industrial research assistance program, to name just a few, could assist charities as employers and social entrepreneurs, and that they be fully and unambiguously open to them.
Addressing this issue across all government programs would further reinforce the positive support provided the hiring credit in Bill .
Mr. Chairman, good people doing good things here in Canada and elsewhere in the world are an important part of the story of charitable organizations, but the story is much more than that. The story is about jobs that we create throughout the country, about the economic activity and opportunities that we create, and the enormous and positive impact that we have on quality of life. In short, it is a story about building a stronger Canada and working with Canadians, the private sector and all levels of government to achieve that.
I would like to thank you for this initiative that goes in the right direction and maximizes the contribution of charitable organizations.
Good evening and thank you for your invitation.
I am going to be speaking to the part on unemployment insurance.
What I basically see is that this bill is making the dissolution of the Canada Employment Insurance Financing Board official. It was created in 2008 in order to respond to several concerns that had been voiced by the labour movement. The purpose was also to improve the transparency and independence in the managing of the Employment Insurance Fund and to compensate for the misappropriation of funds. Sixty billion dollars had been taken from the employment insurance surplus.
The board was intended to respond to these concerns and to establish a $2 billion reserve. It would have done so had the legislation been implemented. The funds would have come out of the Consolidated Revenue Fund. It would have been a way to deal with the resentment. By dissolving the Canada Employment Insurance Financing Board, one will also be eliminating this reserve that, of course, never existed ultimately. It could have existed. Two billion dollars would have perhaps somewhat stabilized the employment insurance system during an economic downturn. I think it was a prudent decision.
Now it looks like the idea is to make sure that the Employment Insurance Fund is merely sufficient. There is simply an attempt to balance the numbers, that is all. That may become more difficult if there is an economic downturn. If premium increases are kept at 0.05%, that is one way of ensuring that the system will not be able to adapt during an economic downturn, I believe.
There is something else that we are quite concerned about. When these kinds of caps are set that prevent increases in premiums and when the board and the idea of a reserve are abolished, then the funds themselves are limited. We feel that doing this puts an end to any ability to improve the system that, in our opinion, does not adequately fulfil its mission because it is not adequately protecting the unemployed. Improving the system and providing real protection become impossible when premium increases are so rigidly set.
Several stakeholders spoke about the Hiring Credit for Small Business. Replacing employment insurance premiums and employers' premiums in this way was supposedly meant to foster hiring, employment, etc. In our opinion, this measure does that goal a disservice. Yes, the social security contributions of employers are reduced, but does that foster employment? We doubt it.
Furthermore, this measure is a way of removing the burden from employers having to face the problem of unemployment. I realize that some may be pleased about this measure, but we feel that the part of the bill on unemployment insurance does not necessarily go in the direction that we feel it should. Premiums will be reduced, the amount of money in the account will be reduced, and this means that the protection of unemployed men and women will be reduced; at the very least it will not provide any increased protection.
Those were my remarks. Thank you.
Mr. Chairman, let's come back down to earth.
Ms. Arruda, I very much enjoyed your opening remarks. It reminded me of when I had just graduated from university in the mid-1990s. For three years I went from one small contract to another. I also received social assistance, the huge income of $510 a month. Fortunately, at the time housing in Limoilou was half as expensive as it is now. Of course, I was receiving employment insurance at the time.
It is very difficult to go through the joblessness cycle. Allow me to tell you what the times were like. In Quebec City, unemployment was approximately 10%, 11% or 12%, which is radically different from the current situation. You have to have the means to deal with that. Income comes in, however there are expenses, housing, travel, food, appropriate clothing, etc.
For a long time now, radical changes have been made to employment insurance and not only by the conservative government. Do you think that the trap that catches people who are unemployed has become tighter, that it has a tighter hold on people, against their will and against their wishes?
I have to say, though, that I am grateful to you for coming here and putting in context what we are doing as a committee. You will be happy to know you are in good company. The radical organization, the Chartered Professional Accountants of Canada, today also pointed out the inadequate time available to study such a complicated bill.
I'm grateful to you for pointing out that railed against a 21-page omnibus bill and today we have to deal with a 308-page bill. This is the fifth hour. We will be here for five hours today to do it, as the government prorogued and took a month away from the scrutiny. Your points are very well taken.
I asked the Minister of Finance what the amendments to the health and safety provisions of the Canada Labour Code had to do with a finance bill, and he said something like, “Well, mediators and the like have to take into account financial issues.” The Supreme Court amendments were an example where, really, I couldn't think of anything financial, but they threw that into the omnibus bill as well.
So thank you for bringing to the Canadian public's attention what I call “legislation by exhaustion” and the inadequate way to address these issues.
On a more substantive, not process, side, you talked about the under-spending each year. You talked about how the deficit looks smaller. You used a provocative expression; you said that it may be that the public is being gamed.
Could you explain what you meant by that?
I'd like to ask Ms. Moreau a question. My question is about how you'd characterize what the minister today called the “contributory plan”, the Canada Pension Plan, which you refer to on your slides as a payroll tax. I would reference slide 4 of your presentation.
First of all, the context is that today the Canadian Association of Retired Persons released a survey of Canadian voters produced by the Forum poll, that showed a majority, 53%, want the CPP contributions increased, and that half of Canadians agree that the CPP's target of replacing about 25% of pre-retirement income is too low.
My question, I suppose, is that if Mr. Flaherty acknowledges that this is a contributory plan, and since a tax is something that goes to the consolidated revenue fund, why is this a payroll tax? Or is that just a convenient shorthand that you're using?
Thank you Mr. Chairman.
I would like to come back to Ms. Arruda. Your organization assists unemployed individuals. Of course, unemployed individuals who have lost their job go to see you to talk about their circumstances so that you can help them.
Let us be clear that the official closing, abolition or dissolution of the Canada Employment Insurance Financing Board is something that was added to the reform, that had started before the bill was tabled. Pilot projects will end, including the five additional weeks of benefits for those living in areas of high unemployment.
The reform included many things, including pilot projects for the changes contained in the bill, such as the quota system, the elimination and replacing referees by the Social Security Tribunal. As well, organizations like your own, third parties, will no longer be able to officially represent unemployed individuals before the tribunal. What has your experience been and what is your vision of an overall reform from the perspective of helping those who are most vulnerable?
I am now going to ask a question of Ms. Yalnizyan.
Your presentation was clear. You referred to the abuse by the government of 500- to 600-page omnibus bills that include just about anything when they should deal with budget measures.
Something else should be noted. Most committees, and the government in general, decided to prevent, to a certain extent, independent members from bringing forward amendments because they are not sitting at the table and they do not have a voice. Only those members who belong to an official party in the House can attend and fully participate in the procedures.
However, they found a way around the system and told them that if they wanted to bring forward amendments, they could do that at the Standing Committee on Finance or other relevant committees. What that means is that if they have an opportunity to propose amendments in a specific committee, then they can no longer table them and speak to them in the House. Were you aware of this measure?
I'm going to take the final round here, as the chair.
I just want to clarify the process. We are discussing the overall bill, but this panel is largely focused on part 3 of the bill, division 1, which discusses employment insurance, EI hiring credit, EI premium rate, EI fishing regulations. All the questions with respect to EI are completely germane to this division of the bill.
I want to address a larger part of the process. The full briefing given by the Department of Finance is now online, thanks to this committee's work. We're one of the committees that does everything online. We're a very open committee. You can in fact go to our website and see every single study or every single witness who has ever presented on any pre-budget thing.
In regard to this bill: part 1, measures related to income tax; part 2, the Excise Tax Act; part 3, you have employment insurance, financial institutions—two sections on that. It's true, you have the Canada Labour Code, the reorganization of certain crown corporations, the Financial Administration Act, and the Canada Pension Plan Investment Board Act.
But I'd like to take it back to the process. This is the second Budget Implementation Act. The government presents the budget in February or March of each year, following up with one act in the spring and one act in the fall. But the start of this process is actually the pre-budget consultations at this committee.
Ms. Yalnizyan, I'm going to ask you the questions I ask my political opponents. We get submissions on every single topic at this committee every summer and fall. So if we don't want sections on environment or labour in the budget bills, and that's in the budget, do we as a finance committee say no to people who want to present on the environment, on labour, on immigration?
We take submissions at the pre-budget consultations on everything. We accept submissions on everything. The budget is the largest document each year and the budget act is to implement that. So if we're not going to allow it at the Budget Implementation Act process, we should probably cut it out of the pre-budget consultations. I'll tell you, if I did that as the chair, I wouldn't be a very popular person in this country.
Can you respond to that?