EVIDENCE

Standing Committee on Finance NUMBER 010 2nd SESSION 41st PARLIAMENT Monday, November 25, 2013 Le lundi 25 novembre 2013 Standing Committee on Finance CANADA [Recorded by Electronic Apparatus] EVIDENCE November 25, 2013 Committee Edited Evidence * Table of Contents * Number 010 (Official Version) Official Report * Table of Contents * Number 010 (Official Version) Témoignages * Table des matières * Numéro 010 (Version officielle) 10 25 11 2013 2013/11/25 15:30:00 House of Commons Comité permanent des finances Standing Committee on Finance FINA Chair Mr. James Rajotte 41 2

(1530) [ English ] The Chair (Mr. James Rajotte (Edmonton—Leduc, CPC)) : 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 C-4, A second act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures . 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. [ Translation ] We also have with us Mr. Yvon Bolduc, from the Fonds de solidarité des travailleurs et travailleuses du Québec. Welcome, sir. [ English ] 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. Mr. David Spiro (Dentons Canada LLP, As an Individual) : 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 C-4 , 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 C-4 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 C-4 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 C-4 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 C-4 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 C-4 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 C-4 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.

(1535) The Chair : Thank you very much, Mr. Spiro. [ Translation ] Mr. Bolduc, you have the floor. [ English ] Mr. Yvon Bolduc (Chief Executive Officer, Fonds de solidarité des travailleurs et travailleuses du Québec) : Thank you. [ Translation ] 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. (1540) [ English ] 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. [ Translation ] 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 C-4 , 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. The Chair : Thank you, Mr. Bolduc, for your presentation. [ English ] Next we will go to Mr. Mintz in Calgary. You have five minutes to make your presentation, please. Dr. Jack Mintz (Director and Palmer Chair in Public Policy, School of Public Policy, University of Calgary, As an Individual) : 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.

(1545) The Chair : Mr. Mintz, you have about one minute remaining. Dr. Jack Mintz : Yes. 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. Thank you. The Chair : Okay, thank you. We'll now go to Mr. Colborne, please, for your presentation. Mr. Michael Colborne (Partner, Thorsteinssons LLP) : Thank you. Honourable members, thank you for inviting me to speak today on Bill C-4 . 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—

(1550) The Chair : Mr. Colborne, you have about one minute remaining in your opening statement. Mr. Michael Colborne : I'll be brief. Mining companies have a lot of flexibility in terms of their capital allocation choices. Factors such as this, while unlikely to really enrich the government purse much, can tip the balance between investment here on the ground in Canada and elsewhere. In conclusion, it is my hope that the repeal of these rules is done with the full knowledge that it is a deliberate change and rejection of long-standing policy at a time when that policy seems as relevant as ever.

It likely will have an effect on remote communities across the country. Personally I can't see it being a positive effect. Thank you very much. The Chair : Thank you very much for your presentation. We'll now hear from Mr. Hayos, please.

(1555) Mr. Gabriel Hayos (Vice-President, Taxation, Chartered Professional Accountants of Canada) : Thank you, Mr. Chairman and committee members, for inviting the Chartered Professional Accountants of Canada to comment on Bill C-4 , 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 C-4 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 C-4 . 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 C-4 , and I look forward to your questions. Thank you. The Chair : Thank you very much for your presentation. [ Translation ] I will now give the floor to Mr. Caron for five minutes. Mr. Guy Caron (Rimouski-Neigette—Témiscouata—Les Basques, NDP) : Thank you very much, Mr. Chair. My first question is for Mr. Bolduc.

Concerning the offer you made to the federal government, you said that you offered, if the government went back on its decision to eliminate the tax credit, to invest $2 billion directly over 10 years in the federal venture capital action plan, and cap the number of shares you would issue to reduce tax spending. Is that correct? Mr. Yvon Bolduc : Yes. Mr. Guy Caron : When did you make this offer to the government and what was its response? Mr. Yvon Bolduc : It was during a consultation session. There were two consultations. The first was in July. We submitted an official written offer on October 15. Mr.

Guy Caron : And what was the government's response? Mr. Yvon Bolduc : We have not had any feedback on the subject. Mr. Guy Caron : No response? Mr. Yvon Bolduc : Not at all. Mr. Guy Caron : Not even an acknowledgement of receipt? Mr. Yvon Bolduc : They sent us an acknowledgment of receipt, but no discussion has been started on the proposal. Mr. Guy Caron : You asked the government to go back on its decision concerning the tax credit, but were you prepared to make compromises? Mr. Yvon Bolduc : Certainly. We were ready to cooperate with the government and, in fact, that was the spirit of the proposal.

We think the federal venture capital action plan is a good thing for the venture capital industry. However, the fact that the program replaces what we have been doing in this area for several years effectively takes away a source of shared investment as well as an important... (1600) [ English ] leading source of fund of funds capital for independent funds in Canada. [ Translation ] In fact, that is what Canada's venture capital and private equity association said. That is what the government is eliminating. You have to see what that means.

It is all well and good to have theoretical academic analyses, but on the ground, you have to see what will happen. If the fund has 615,000 shareholders, it must mean that we are doing something right. Our returns must be respectable. Mr. Guy Caron : I am trying to understand the government's thinking. Initially, it gave only $400 million to the federal venture capital action plan. Over a period of 10 years, $400 million will have been invested. Mr. Yvon Bolduc : That is correct. Mr. Guy Caron : You suggested investing $2 billion in the activities of this plan. Mr. Yvon Bolduc : Yes. Mr.

Guy Caron : Knowing that the government wanted to eliminate this tax credit, you asked it to in fact reduce it by 30%. Mr. Yvon Bolduc : Yes. We felt that, for the government, the tax credit was not really effective from a venture capital point of view. So we agreed to spend $2 in venture capital for every dollar of the tax credit. The fund is mainly concentrated in Quebec, but we reached an agreement with the Quebec government to make all investments made outside of Quebec in funds outside of Quebec eligible.

It would also be possible to invest funds that we support in Quebec in venture capital outside of Quebec, while making these investments comply with the 60% rule. Mr. Guy Caron : In that case, what would become of the federal government's venture capital action plan and the $400 million that will be invested over 10 years? Mr. Yvon Bolduc : Once again, we believe that it is a matter of cooperation. Both sources of capital must be maintained. [ English ] Why not keep two sources of capital available? [ Translation ] One source of capital is working well. We have invested over $2 billion in venture capital.

Can you name anyone else in Canada who has done that? We have invested $2 billion over the last 10 years. In venture capital alone, the last 3 years have given our shareholders a 9.7% return on their investment,

whereas Thomson Reuters says the average return was 2%. We are doing better than the other venture capital funds in Canada, and yet this source of capital may be withdrawn. In regard to funds that will be available, we still don't know if that matter has been settled or not. We are told that it has been. We have shown that we are able to provide capital to the venture capital industry all over Canada, and now this may be replaced by a program that has not been set up yet. No one knows exactly how the program will work nor if it will produce the expected results.

Why not maintain these two sources of capital, at least for the next 7 to 10 years, after which we can decide if adjustments are necessary? The Chair : Thank you. Thank you, Mr. Caron. [ English ] Mr. Saxton, please, for your round. Mr. Andrew Saxton (North Vancouver, CPC) : Thank you, Mr. Chair. Thanks to our witnesses for being here today. My first questions will be along the same lines and on the same issue, and that is the labour-sponsored venture capital tax credit. My first questions will be for Professor Mintz. Professor, you've been quite critical of the labour-sponsored venture capital tax credits.

In fact, in your opening remarks, you said that not only have these credits been ineffective in generating more venture capital, but they have also helped to finance poor projects that should have never been funded in the first place. That's a fairly negative review. Can you explain why, in your opinion, these tax credits are not achieving their intended results? Dr. Jack Mintz : As I tried to say in my opening remarks, the rates of return to venture capital firms have not been particularly good. In fact, I would say the policy is broken in Canada, as we've had such a poor performance.

I think we have to remember there's a difference between what the shareholders get as a rate of return and what the economy gets. The shareholders will look at all the tax benefits they get on top of the economic returns that they might get from an investment in venture capital. But if you look at the actual rates of return, without taking into account taxes, the tax credits, and the RRSP treatment as well, the system does not actually generate very good returns. In fact, they're much inferior to what you find in the United States. I think there are a number of reasons for that, as I've tried to explain.

There have been a number of papers that have made it very clear that there's been a crowding out effect, that we've been squeezing out perhaps better performers in the market. I think it's been a policy that has not worked well. Theoretically, you end up encouraging too many poor projects coming into the market because of the way we subsidize equity, which is an important signal to the market.

(1605) Mr. Andrew Saxton : Then, in your opinion, are these funds primarily tax driven? Dr. Jack Mintz : Absolutely. When you look at a rate of return that's barely 3% for 20 years, and even for a solidarity fund it's been an inadequate rate of return over 20 years—only half of the treasury bill rate—surely we're not doing very well, especially compared with the United States, where you get far better rates of return on venture capital. There's no question in my mind that we need a completely new approach to what we're doing.

Trying to direct funds into low rates of return is not exactly healthy for the Canadian economy because we have to use resources that are taken away from others that could be better invested in the economy. Mr. Andrew Saxton : In your opinion, then, people are simply investing in these funds to get the tax credit? Dr. Jack Mintz : Primarily, because the actual economic returns are pretty poor on average. Mr. Andrew Saxton : Are you familiar with the government's new venture capital plan? Dr. Jack Mintz : Yes, I am, to some degree.

I don't know all the details, since they weren't completely announced in the budget. Mr. Andrew Saxton : Right. In your opinion, can you tell us what would be a good plan to replace this? Dr. Jack Mintz : I think one of the things we have to remember is that pension funds and others can't take advantage of the labour-sponsored venture capital credit, so there is a need for a new approach in Canada. When I chaired the savings commission for the Government of Alberta in 2007, we observed that one of the key differences between the United States and Canada was the lack of scale.

With scale, you would get more experts, like scientific experts, who are involved with funds. One of the successes in the United States has been these large-scale venture capital funds that have been operating there. To the extent that you can encourage a larger scale in achieving venture capital management, I think you might be able to start pushing the system into a far better one than we have currently. I'm hoping that perhaps these partnership funds that some of the provinces have been doing, as well as what's been proposed by the federal government, might be the approach to achieve that.

But I think we need some careful evaluation of that point. Mr. Andrew Saxton : Okay. Thank you, Mr. Mintz. Very quickly, Mr. Bolduc, there's been some testimony today against labour-sponsored funds and I'll quote from you: [ Translation ] “If ever the credit were to disappear, my message is that the fund is on solid ground [...] We have $9 billion in assets, not debts. Everything belongs to our shareholders.” [ English ] If things are so solid, why do you still need that tax credit? The Chair : A very brief response. We are over time. Mr.

Yvon Bolduc : Allow me a few minutes here. [ Translation ] 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... (1610) [ English ] The Chair : Sorry to interrupt, but we are way over. Colleagues, just as a reminder, you do have to allow enough time for witnesses to answer. We will come back to this subject later on, I'm sure, but I do have to go to Mr. Brison, please. Hon. Scott Brison (Kings—Hants, Lib.) : Mr. Chair, you shouldn't say that you “have” to go to Mr. Brison; you should indicate that you're “delighted”. The Chair : With pleasure, I go to Mr. Brison. Hon. Scott Brison : Thank you.

On the change to the labour-sponsored venture capital tax credit, the CVCA, representing the industry across Canada and also representing the companies that have received funding and investment, has come out very clearly against this change. The CVCA doesn't represent only labour-sponsored venture capital funds; it represents also venture capital funds like Round13 Capital, with John Eckert and Bruce Croxon, and all of these funds that are private sector funds that invest in innovation.

Given the challenges faced by the venture capital industry in Canada right now, is it not terrible timing to actually withdraw funding at a time when the industry's already struggling? What could be the effects of these changes on biotech and IT discovery five years, ten years, fifteen years out? Mr. Yvon Bolduc : 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. Hon.

Scott Brison : How important were labour-sponsored fund investments in early-stage technology-type deals over the last few years? It's my understanding, and I think CVCA has presented evidence, that there are deals, a lot of deals, important deals, that would not have been closed without the labour-sponsored funds participation. So these companies, these technology, biotech companies creating future wealth and innovation for Canadians, would not have been funded. Mr.

Yvon Bolduc : Just to give you an example, in the venture capital action plan program there was a decision made to support four funds, three of which we have started. Lumira, CTI, and Real Ventures were supported by the venture capital action plan. The other fund is Summerhill, and they were talking to them. That shows that we're probably making good decisions in that field. Otherwise, I don't know why the venture capital action plan would have decided to go with those funds.

(1615) The Chair : You have about 30 seconds left. Hon. Scott Brison : The point is that these investments in Atlantic Canada, and also in places like Saskatchewan, are nationally important. To Mr. Colborne, I have just a final point on the changes to the mining tax approach. Would this imperil Canada's role...in the financing of 80% of the mining transactions in the world over the last 10 years? Could this have an effect on that success in the future? The Chair : Just a brief response, Mr. Colborne, please. Mr. Michael Colborne : It may.

I think the greater risk is that the decision to employ capital in-ground, usually in existing mature mining areas, may be imperilled. I think that's the greater risk. The Chair : Thank you. Thank you, Mr. Brison. I'm going to go to Mr. Adler, please. Mr. Mark Adler (York Centre, CPC) : Thank you very much, Chair. Thank you all for being here today. This is a very exciting session. I wish I had a lot more than five minutes and I would love to have an hour with each of you to go over all the fine points. I do want to focus my questioning on Mr. Spiro.

Our government, as you know, is committed to a fair tax system and we've been very earnest in closing as many loopholes as we can possibly identify. There are some that we closed in Bill C-4 , which have been overly exploited in the last number of years—somewhat outdated—for example, synthetic dispositions and leveraged life insurance arrangements. Could you comment on what those loopholes were costing the federal treasury? And how important was it to actually close those? Mr. David Spiro : Well, Mr.

Chair, I believe the Department of Finance would have all the numbers in terms of taxes to be recovered respectively, as a result of these changes, of plugging the loopholes, which I believe is an important part of preserving the integrity and fairness of the entire tax system. The government has been very diligent over time in addressing those kinds of concerns. I think there are some measures in Bill C-4 that are anticipatory.

The Department of Finance has picked up signals, either through the Canada Revenue Agency and its relationship with them, or on their own, that certain things might be on the verge of taking off in terms of fiscal effects. Others are simply things that have been in effect, like the leveraged life insurance schemes. Those have been used for many years and I'm sure the cost of that has been significant over the last number of years. Mr. Mark Adler : Was the use of these loopholes widespread, from your experience in the field? Mr.

David Spiro : I know from my own experience the leveraged life plans for investors were certainly quite popular. Mr. Mark Adler : Okay. The bill also gives CRA a three-year extension to reassess the foreign income verification statement. Could you comment on how important that would be for CRA to reassess people who right now do not fall under that regime but who subsequently will? As well, how important will that be for closing, again, another avenue of tax avoidance? Mr. David Spiro : As you know, the Canada Revenue Agency administers and enforces the Income Tax Act.

They have a daunting task, especially when taxpayers do not fulfill obligations imposed on them under the Income Tax Act, particularly with respect to assets that they own offshore that may produce income that's taxable in Canada, because they are Canadian residents so all their worldwide income is taxable in Canada, sometimes with credit and sometimes not. But in any event, they have to report all of that income. That form, T1135, which is called the foreign income verification statement, is an important part of that effort in terms of enforcement and tracking assets and income.

In Bill C-4 it has been proposed to extend the audit period, essentially, the period that the Canada Revenue Agency has to look at the taxpayer's affairs for a particular year. If the taxpayer hasn't reported income from a specified foreign property in their return for the year, and hasn't filed that form T1135, or hasn't filed it with all the required information on it, that then extends the audit period effectively for three years from the date on which the form was filed or was filed properly.

That's an important enforcement tool for the CRA to have in its tool box in order to track down foreign income that should be reported on Canadian tax returns.

(1620) The Chair : There is one minute remaining. Mr. Mark Adler : From your practice, have you seen a lot of cases that would verify that a lot of people are taking advantage of that loophole, if you will? Mr. David Spiro : I think people are taking this obligation very seriously. I think the government is beefing up the form itself to require more detailed reporting and more specified sources of income. So I think people have taken heed of that step and are being very diligent in terms of reporting their foreign-based income. Mr. Mark Adler : More resources would be needed to enforce that provision. Mr.

David Spiro : Yes, with the additional time given for reassessing, I think that's also of assistance to the CRA. Mr. Mark Adler : We've had a number of organizations appear before committee that claim to be not-for-profit organizations. Is there a requirement for not-for-profit organizations that claim a profit in a given year to pay tax on that? The Chair : Make this a very brief response, please. Mr. David Spiro : They may no longer be a not-for-profit organization if they are in business and making a profit. That may actually take them out of that scheme. Mr.

Mark Adler : It may take them out of the not-for-profit scheme. Thank you. The Chair : Thank you, Mr. Adler. [ Translation ] Mr. Côté, you have the floor for five minutes. Mr. Raymond Côté (Beauport—Limoilou, NDP) : Thank you, Mr. Chair. Mr. Bolduc, I came to realize the importance of your investment fund when I learned that it included approximately 10,000 investors in the riding of Beauport—Limoilou alone. These investors are people who are putting money aside for their future, their retirement.

I can assure you that when it was publicly announced that the tax credit would be eliminated, people reacted very quickly. I was paid some visits at my office and the things people said to me cannot be repeated in committee. Obviously, when someone's assets are affected, we can expect them to react strongly. I would like to discuss another topic, that being your impact on SMEs and employment. You mentioned Deloitte's study. What I find fascinating is your countercyclical role in a recession. You help keep companies afloat and preserve jobs.

I think that is probably one of the most positive aspects, especially given the comments made by the former secretary of the Treasury of the United States, Lawrence Summers, a few days ago. Among other things, he acknowledged the failure of austerity measures. Mr. Yvon Bolduc : I can give you as an example the credit crisis that we went through in 2008-2009. I think that everyone around the table remembers that tragic and very serious period that was extremely important. While banks and other private funds withdrew from the markets, our fund committed $1.3 billion. How did we manage to do it?

Our size, for one, and our mission, which is to invest in a countercyclical fashion. It also consists in supporting companies other funds would not. We take somewhat greater risks, but there is the tax credit to offset that. This is what balances the system. The tax credit is an incentive to save, but it also helps the individual investor understand and accept the risks we take. That is the raison d'être of the tax credit, and that is what allowed us to invest $1.3 billion when no one else would.

This allowed Quebec flagship companies, who benefited from our support, to go knocking on the doors of other financial institutions. Indeed, our capital is patient, unsecured and independent of the banks' capital. It completes the financial ecosystem in Quebec. That's why it is important and why 200 entrepreneurs stood up in the chamber of commerce to ask why such a measure had been taken. It's important to understand that in Quebec the everyday person sees the importance of our contribution. I am in favour of jobs, innovation, business start-ups, retirement savings and financial literacy.

In my opening remarks I mentioned that 200,000 Quebec taxpayers had invested money in an RRSP for the first time thanks to the fund. That is a huge number.

(1625) Mr. Raymond Côté : That is indeed a considerable amount. In your opinion, will the government's proposed venture capital action plan completely make up for the venture capital you will lose as a result of eliminating the tax credit in Canada? As you said, you are not limited to the province of Quebec, we are talking about all of Canada. The Chair : You have 30 second left. Mr. Yvon Bolduc : We would like to work hand in hand with the Canada economic action plan. We propose investing heavily outside of Quebec, with the government of Quebec's permission.

We believe it is a winning solution for all three parties. Both industry and government come out ahead, because there is a reduced tax credit; everyone contributes to make it a success. We also win because we can continue doing our work, which is to encourage savings and investments in Quebec, of course, but also outside of Canada, and at a lower cost. Mr. Raymond Côté : Thank you. [ English ] The Chair : Merci, Monsieur Côté. We'll go to Mr. Keddy, please. Mr. Gerald Keddy (South Shore—St. Margaret's, CPC) : Thank you, Mr. Chairman. Welcome to our witnesses. I want to pick up a bit more from Mr.

Bolduc on the labour-sponsored venture capital tax credit. You're tossing out some large numbers there, on investment that's been made, especially at an important time in a downturn in the economy. I guess the question has to be asked, what's the return to labour on that? Is it more than simply going after the tax credit, or is this an investment? Mr. Yvon Bolduc : Let's take the last five years, which have not been easy years. I think everybody would agree with that. Our overall profits were over $2 billion. The increase in the share value has been $6.20—a 28% increase in the value of the shares.

We've been able to increase the number of net shareholders because people who are retiring are leaving the Fonds and new shareholders are coming. Over the last five years, we've increased the number of shareholders by 45,000. That tells me we must be doing something right, and we must be doing our mission properly; otherwise, we would not have this kind of undertaking by the workers in Quebec. Of the shareholders, half are unionized and about 46% are not unionized. It's not a question of labour. It's become a fund recognized in Quebec as doing its job. Mr.

Gerald Keddy : I appreciate that, but I guess my question was, if you looked at the same investment and a return on that investment, what's the rate of return? Mr. Yvon Bolduc : Overall, in the last three years, we've provided a return of 5.5% to our shareholders. Mr. Gerald Keddy : That's the number I was looking for, thank you. Mr. Yvon Bolduc : That’s 5.5% to our shareholders, without the tax credit. If you compare this performance with our mission, which is to invest principally in Quebec in SMEs with unsecured capital, that's a good return. Mr.

Gerald Keddy : One quick question because I do have others, but it's 5.5% annually? Mr. Yvon Bolduc : Annually, that’s correct. Mr. Gerald Keddy : Thank you. To the chartered professional accountants, I want to pick up on the same line of questioning that Mr. Spiro answered. It's a great challenge for any government to make sure that taxpayers are confident in the tax system and that the tax system has a huge degree of integrity, quite frankly. One thing we've been doing to improve that public confidence is to try to track down Canadians who are investing their money abroad, oftentimes hiding that money abroad.

I think we've done that. Bill C-4 extends, in certain circumstances, the reassessment period for taxpayers who have failed to correctly report a specified foreign property on their annual income tax return. We heard from Mr. Spiro on that. I'd like to hear from the Chartered Professional Accountants of Canada, on reporting specified foreign property and how those changes should affect that reporting.

(1630) Mr. Gabriel Hayos : In general terms, we're supportive of the changes and the new form that's come out. The form T1135 implements that. The three-year time period is important, to give the government more time to track down the people who are not complying. I think our only concern with the rules is, like a lot of these, that they have to be careful. The form creates quite an onerous reporting obligation on those who want to comply.

There aren't sufficient exceptions for what is called “specified foreign property” actually located in Canada and under the control of the Canadian brokerage or banking industry. Mr. Gerald Keddy : I think we can all appreciate— Mr. Gabriel Hayos : I think our only concern here is to make sure they are dealing with the people who are the problem and not with the ones who are trying to comply. Mr. Gerald Keddy : I appreciate that, and we all appreciate the importance of keeping the forms reasonable. Do you have any idea on the numbers? We've heard all different numbers put forward here.

Any idea on the number of Canadians who are actually not complying, or who are attempting to comply? Mr. Gabriel Hayos : No, I don't have any statistical information on that. Mr. Gerald Keddy : Thank you. The Chair : Thank you, Mr. Keddy. We'll go to Mr. Rankin. Mr. Murray Rankin (Victoria, NDP) : Thank you, Mr. Chairman, and welcome to all of our witnesses. I'd like to take up where Mr. Adler left off with you, Mr. Spiro. I appreciate your being here. I know of your work at Dentons LLP, and your expertise in tax litigation is well known.

We're very concerned on this part of the committee about tax havens and international tax, in which you have a great deal of expertise. You talked in your remarks about the thin capitalization rules, and this bill purports to broaden them. You talked about its extension to non-resident trusts. But you also said there needed to be some additional fine tuning so these would not be offensive from a policy perspective. I'd like any insights you might be able to provide about whether we're on the right track, and how we might do a better job on enforcement in respect of tax havens. Mr.

David Spiro : In my remarks, my intention was to mention the fine tuning, and this goes on in a number of different venues including the joint committee of Mr. Hayos's group and the Canadian Bar Association—lawyers and accountants with expertise in tax. They sit down, and they work very closely with the Department of Finance to fine-tune these rules so they don't exceed the scope of the policy.

In other words, if there are transactions caught by these rules technically that don't offend any policy, and therefore shouldn't really be caught by those rules, then there needs to be some amendment or modification, and those take place over time. Those are the technical amendments the Department of Finance people often come in and testify about, and they do this in the case of Bill C-4 as well. There are a number of those cleanup measures and amendments in addition to what was announced in the budget. I wasn't speaking specifically about the thin capitalization rules.

I was speaking about any of these amendments where sometimes the scope of them exceeds the policy or the mischief the Department of Finance seeks to address. Mr. Murray Rankin : I appreciate that. 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.

(1635) Mr. Gabriel Hayos : It is similar to what Mr. Spiro said: these arrangements as written in legislation often capture normal commercial transactions as opposed to capturing transactions where a real disposition is disguised as not being one. There are transactions that can fit in that are not dispositions and are treated as such. Mr. Murray Rankin : I see. Mr. Gabriel Hayos : In the joint committee, we made a submission on these concerns. I can bring them to the committee's attention if you would like to read the joint— Mr. Murray Rankin : Thank you for your white paper on corporate tax evasion.

You talked a bit about that in your remarks as well. You said the topic of tax evasion versus legal tax planning and corporations not paying their fair share of tax is big and getting bigger. Then you referenced the work of the OECD in that regard. I wonder if you could talk a little bit more about any insights your organization might have on how we might address the issue of unfair tax planning, or tax evasion where the use of international tax havens is engaged. Mr. Gabriel Hayos : First, I would tell you that I think Canada is actually doing on its own, unilaterally, a very good job.

We have a general anti-avoidance rule, and you see the rules that are introduced in Bill C-4 . I think the issue on an international basis is the ability of these different countries to collaborate where there are asymmetries between the rules of one country and another. At the moment I think the OECD has, while it's an ambitious plan, the only approach that will properly address this area.

In my view, Canada has to be very careful to not jump the gun in this area because, at the end of the day, there's still an issue of our tax system being competitive with other countries, and we want to make sure that we do things collaboratively and in a coordinated way. So that would be my comment to you. Mr. Murray Rankin : Thank you very much. The Chair : Thank you, Mr. Rankin. We'll go now to Mr. Van Kesteren, please. Mr. Dave Van Kesteren (Chatham-Kent—Essex, CPC) : Thank you, Mr. Chair, and thank you all for being here. It's a very interesting discussion. Mr. Mintz, I was watching you while Mr.

Bolduc was making his comments and his plea for continuance in the program that the government has. I want you to just air your concerns about that because I want to hear the other side. He makes a compelling argument, so I wonder if you could just tell us what we're missing here. Dr. Jack Mintz : 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.

(1640) Mr. Dave Van Kesteren : I was listening to Mr. Colborne, who hasn't had a chance to speak. I'm sorry, I wanted to go to you, but I'm running out of time quickly. You mentioned the unguided hand, and I think what you're saying, Mr. Mintz, is that we need to let the market follow where the best rate of return is going to.... It's just a natural occurrence, and we shouldn't mess with that. Do I have that right? Dr. Jack Mintz : Generally that's the best policy. I've been very supportive over the years of things like the RRSP system and the tax-free savings accounts. These are general policies.

They don't tell people how to direct their funds and they'll direct them properly. I think this particular incentive has been harmful to the venture capital industry because a lot of pension funds and others will not invest in venture capital in Canada because the rates of return are so poor. Mr. Dave Van Kesteren : Thank you. The Chair : Thank you, Mr. Van Kesteren. Mr. Caron, we have two minutes if you want it. I'd like the time to change over as well. Mr. Guy Caron : 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. [ Translation ] All of these organizations are against eliminating the tax credit because they understand the role these funds play in Quebec, especially their countercyclical role. [ English ] 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. The Chair : Mr. Mintz, can you respond to all that? Dr. Jack Mintz : First, I think if you ask which policies are effective in Quebec you will find quite a few of them have been adopted by the provincial government with respect to research and development technology. We have to remember a whole bunch of policies have been directed at venture capital there. So you have to sort that out in terms of what is or is not effective. As far as the drop goes in Ontario, yes, it has dropped. It has dropped in other provinces too.

But I think something more endemic is going on in the field. I think it particularly has to do with the fact that the rates of return on venture capital have been particularly poor. Again, one just has to look at the Solidarity balance sheet. You may criticize Jeffrey MacIntosh's paper but I can tell you the referees didn't. Certainly those balance sheet numbers suggest there's not as much money going into venture capital as you think, so maybe that policy is not working very well.

(1645) The Chair : Thank you. Merci . I want to thank all our witnesses for being with us here in Ottawa and Toronto and Calgary, and for participating in our deliberations on Bill C-4 . I will now suspend the meeting for two or three minutes and we'll bring our next panel forward. (1645)

(1650) The Chair : I call this meeting back to order, the tenth meeting of the Standing Committee on Finance, continuing our deliberations of Bill C-4 . 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. [ Translation ] We also have Mr. François-William Simard, Director of the Federation des chambres de commerce du Québec. Welcome. [ English ] 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. Ms. Joyce Reynolds (Executive Vice-President, Government Affairs, Canadian Restaurant and Foodservices Association) : 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. Thank you.

(1655) The Chair : Thank you very much for your presentation. [ Translation ] Mr. Simard, you have the floor. Mr. François-William Simard (Director, Strategy and Economic Affairs, Fédération des chambres de commerce du Québec) : Thank you, Mr. Chair. 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.

(1700) The Chair : Thank you for your presentation. [ English ] Next we'll go to Mr. Hayes, please. Mr. Thomas Hayes (President and Chief Executive Officer, GrowthWorks Atlantic Ltd.) : 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—

(1705) The Chair : You have one minute. Mr. Thomas Hayes : —just like every other early-stage company struggled in the first few years trying to find its feet and, as a result, we invested a second round of $1.5 million to provide them further runway to achieve success. The product offering was refined; new products were developed; new senior managers were hired; and the company has now blossomed into one of the most innovative and fastest-growing marketing solution companies in Canada. Employment increased from seven when we invested to well over sixty well-paying, high-value jobs in Nova Scotia.

I think it's fair to say that without our equity capital in those early years this company would not have achieved the results it did, including recently attracting $17 million in new capital from a Toronto-based private equity firm. Our $2 million investment was recently turned into a $6 million exit for our fund shareholders. With the phase-out of the federal tax credit, our ability to make follow-on investments like this one in existing portfolio companies may be seriously compromised, forcing these companies to look for other sources of capital under duress.

These companies may have to accept punitive terms from new investors or not raise the necessary capital at all, thereby negatively affecting the asset value for our fund shareholders who are generally middle-class Canadians. How ironic would it be if one of our companies had to accept a new round of funding at a lower valuation from one of the new VCAP funds sponsored by the federal government? That's what I would call a negative transfer of wealth. I have some other comments I'll make, hopefully, in the Q and A session. Thank you. The Chair : Okay. Thank you very much, Mr. Hayes. [ Translation ] Mr.

Arsenault, the floor is yours. Mr. Chris Arsenault (President, iNovia Capital Inc.) : 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. (1710) [ English ] 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. The Chair : Thank you very much for your presentation. We'll begin members' questions. [ Translation ] Mr. Caron, you have the floor. Mr. Guy Caron : Thank you very much, Mr. Chairman. Mr.

Simard, you represent the Fédération des chambres de commerce du Québec, but you are not the only one to support the Fonds de solidarité FTQ and Fondaction, that is, the Quebec model. Other organizations, such as the Board of Trade of Metropolitan Montreal, the Regroupement des jeunes chambres de commerce du Québec, Manufacturiers et exportateurs du Québec, as well as Canada's Venture Capital and Private Equity Association, are all opposed to a decision to phase out the federal tax credit. Why do you think that is? Mr.

François-William Simard : 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. Mr. Guy Caron : Thank you. Mr. Arsenault, I was very impressed with your remarks. You drew an extremely interesting connection between the work done by labour-sponsored funds, and the labour-sponsored funds in Quebec, and private capital funds. Earlier today we heard from Mr. Jack Mintz. He told us that he doesn't see any reason to have this tax credit. First, it intrudes into the market and prevents the private sector from developing.

Second, he says the rate of return of Canadian labour-sponsored venture capital funds is lower than that of American venture capital funds because of these tax credits and the involvement of labour-sponsored funds. Could you give us your perspective on that?

(1715) Mr. Chris Arsenault : I read the report and I quite simply do not see what that has to do with us. It does not reflect our reality. In Quebec, this fund was a key partner from the very beginning, more than 13 years ago. [ English ] When I think about the Fonds FTQ, I've never seen them as a competitor in any deal. I saw them as a partner, and a transparent partner. For us, their substantial investment in each fund has enabled us to actually do what we do. We are a top-tier fund in North America, and we can compare ourselves to the best returns in North America. Okay, we still have a long way to go.

Canada has a long way to go. This is innovation and technology, and I'm sorry, but if you want to build category leaders, you need to have people who understand the long-term prospects of it, and long-term investments require long-term commitments of 10 to 12 to 13 years from limited partners. In our case, the Fonds have enabled us to actually play that role. [ Translation ] Mr. Guy Caron : My last question will be brief, Mr. Simard. Mr.

Sean Keenan, the director of the Sales Tax Division in the finance department appeared before this committee, and I asked him if the government had done any impact studies for this measure. I wanted to know if there had been an impact study in terms of the level of risk capital in Canada, in terms of the level of savings of individuals in Quebec, and whether a comparative study was done on the impact of the offer made by the workers' funds, which called for the government to not proceed with this measure. He stated clearly that there had been no impact study for those three cases.

What do you think the impact of the government's measure would be in those three cases? Mr. François-William Simard : An impact study has not been done. Unfortunately, I missed the beginning of the testimony of the previous guests, but I heard Mr. Bolduc mention that if the federal government decides to go forward and uphold this decision, for them, I believe it means that they will lose 16,000 jobs. I am not sure if he said that 400 or 4,000 businesses would no longer have access to these funds. I will let you figure out the numbers, but for us, this is very worrisome. We have always said it.

Of course, we are more active in the Quebec Federation of Chambers of Commerce and in Quebec's National Assembly, but no matter which decision is made, we are asking for some economic impact studies to be done. For several years, we have been repeating ad nauseam that this is very important to us. We would be very pleased if we could obtain this data, if we could get it from an independent organization like the federal government. We think that it would support our arguments. The Chair : Thank you very much. Thank you, Mr. Caron. [ English ] I'm going to go to Mr. Keddy, please. Mr. Gerald Keddy : Thank you, Mr.

Chairman. Welcome to our witnesses. I have a couple of questions for Ms. Reynolds, with the Canadian Restaurant and Foodservices Association. As a point of clarification, in your testimony you talked about the requirement of giving a receipt. Can you explain that a little further? I can tell you as a consumer, any time that I don't get a receipt I assume I've made a contribution to the underground economy. Ms. Joyce Reynolds : In our industry we have 18 million transactions a day. Mr. Gerald Keddy : Of course. Ms.

Joyce Reynolds : When people are purchasing their coffee and their muffin in the morning most of them actually don't want a receipt. They don't want to take the receipt and they leave the receipt behind. Mr. Gerald Keddy : I appreciate that, but you have to explain this to me because I seldom pick my receipt up. There is no purpose for me to pick that receipt up, but I know when I have a transaction and there's a receipt involved, that I've not made a contribution to the underground economy.

As a business person, I would want to have a receipt so I can tally all my information up at the end of the day and know exactly where I am. How can we get away and not have a receipt? Ms. Joyce Reynolds : We have no objection to a requirement that you have to provide a receipt upon request. We have absolutely no problem with that. They will always provide a receipt upon request. The issue is that you have to give it to the customer whether they want it or not. That's the issue. Mr. Gerald Keddy : Often we don't want it. Ms. Joyce Reynolds : Yes, that's right. Mr.

Gerald Keddy : The other part that you touched on in your testimony was about the zapper technology that changes the receipts. We know this technology is out there. We've tried to close in on that as a government. What has the restaurant association done on your part, as the industry that is directly affected by this? Ms. Joyce Reynolds : We've worked very closely with Canada Revenue Agency. Mr. Gerald Keddy : And we appreciate that.

(1720) Ms. Joyce Reynolds : We've come up with guidelines and checklists for our members which we put on our website. Then we distribute it to our members on occasion, the five things that Canada Revenue Agency is looking for when they inspect your business. We try to increase awareness and educate our members about what the responsibilities are in terms of their reporting. Mr.

Gerald Keddy : On the issue of tax fairness and the issue of making sure everyone plays by the same set of rules, I was a little shocked learning and doing research into this zapper technology that actually businesses often have the technology in place and they don't even realize it's in place. We have to come up with some type of a much more simple test for people to know, for businesses to know, whether they're compliant or non-compliant. Have you looked at that? Have you tried to talk to your individual membership about that? Ms.

Joyce Reynolds : I have to tell you, when this fiscal evasion issue first surfaced in Quebec we would have questions put to us about how prevalent zappers are in the industry. We have absolutely no idea. For us, it's very difficult. We know that a lot of our members were very concerned about the cost of the solution that Quebec put forward, but no one is going to voluntarily tell us that this is something they've purchased from their point of sale supplier, or something like that. It's our belief that it's out there, not only in our sector, but in all retail.

We're prepared to work with the government to get at the source. The Chair : You have 30 seconds. Mr. Gerald Keddy : Maybe just a comment, Mr. Hayes, and hopefully you'll get a chance to reply to this to someone else. When we look at the LSVCC tax credit there are a number of players out there who have a differing opinion than yours. The Organisation for Economic Co-operation and Development, as well as venture capital industry stakeholders...there are a number of OECD group countries that are looking to shut this venture capital source down.

The Chair : It's not really fair to the witness to make a statement and then not allow him to respond. Mr. Gerald Keddy : Fair enough. The Chair : I'll come back to you, Mr. Hayes. Mr. Gerald Keddy: I'll catch you later. The Chair: Okay, thanks. Mr. Brison. Hon. Scott Brison : Mr. Hayes, earlier today Jack Mintz spoke of a crowding out of private investments in the venture capital industry. People I know in the venture capital industry have not described a crowding out by too much investment in the last while; in fact, they have described a dearth of investments. It's been a real challenge.

You referred to the leverage of private capital. Your message is exactly the opposite of Professor Mintz's message, and you're in the industry. The chamber of commerce, representing venture capital firms and companies within which they have invested—Mr. Arsenault, again, an industry participant.... What do you think of Professor Mintz's assertion that there has been a crowding out of private investment by labour-sponsored funds, particularly given your figures that one third of Canadian VC is actually labour-sponsored venture capital? Mr. Thomas Hayes : Mr.

Mintz is a very well-known and highly regarded economist, but I guess it proves that we don't get it right 100% of the time. Some of this misinformation that has been out there for years is outdated and factually incorrect. There is a dearth of venture capital. The issue here is access to capital for entrepreneurs, and that's exactly why the federal government is taking measures to address it through the VCAP program. At the same time, to remove one of the prime sources of risk capital in the Canadian economy makes no sense from my perspective, and from a policy perspective.

The crowding out argument that we have heard over the years is just not factual, and this is exactly why the Canadian Venture Capital Association has strongly opposed this move. On the one hand, the government is taking a positive step in creating the VCAP program, but all of the positives of that could be offset by the negative impact, the unintended consequences, of removing the federal tax credit. The leverage is tremendous. It's 15¢ on the dollar from the federal government which attracts 85¢ of additional investment.

(1725) Hon. Scott Brison : When will the VCAP program be fully operable and firing on all cylinders? Mr. Thomas Hayes : That's a good question, and that's a concern that many in the industry have. In fact, some would suggest that the industry has gone on hold in terms of the private sector players waiting for these details to be announced. I honestly don't know. We've been very supportive of the program and we encourage the federal government to move along as quickly as it can. But it could be a couple of years before cheques are ready. Hon.

Scott Brison : Would the organizations that each of you represent support not moving forward with these changes to the labour-sponsored venture capital tax credit until the VCAP is fully operable? That would give us more of an opportunity to study and consider the potential impact. Should the government at least put on hold these changes until the VCAP program is operable? Mr. Thomas Hayes : I can only speak for myself. Obviously an ideal situation would see a reversal of the decision that the government announced in its March budget, but realistically I don't think that's going to happen.

From my perspective, I would like to see the Department of Finance agree to review the implementation plan they have currently outlined, to sit down with the industry and work out a system that would provide us with more runway and a softer landing, that would protect the interests not only of the portfolio companies we have currently invested in but also the middle-class Canadians who are shareholders in these funds. We ask that you extend the runway, extend the transition period, which would allow a much better outcome for everyone involved. Hon. Scott Brison : Thank you. Ms.

Reynolds, the EI account will balance in 2015; we have seen this from the most recent economic update. But the government wants to freeze the EI premiums where they are until at least 2017. Would it be good for your industry if we were to immediately reduce EI premiums after the account goes into balance, as opposed to keeping them high for the next several years? The Chair : Just give us a brief response, please, Ms. Reynolds. Ms. Joyce Reynolds : Yes. The Chair : 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. Mr. Thomas Hayes : Well, I'm on the board of the Canadian Venture Capital Association.

For the past three years or so, we've been encouraging the federal government to look at additional ways to assist in creating a greater supply of VC. There has been a dearth of VC available to Canadian entrepreneurs over the last number of years. Mr. Mintz is correct when he says that the returns in the VC industry generally have not been great in Canada over the last number of years. That is not attributed to the labour-sponsored model; that's private funds throughout Canada. That is changing. In our own fund, our rates of return have changed significantly in the last couple of years.

I think the labour model is a very effective tool for unleashing private capital. As I said, 15¢ generates $1 in investment. How much more leveraged can you get with that model? I compliment the federal government for also trying to bolster and introduce new measures through VCAP. But whenever we were involved in talking about other measures the federal government could take, in all of the consultations across the country, we never thought for a moment that the government would remove what we consider to be a very effective program to introduce an untested one.

It was announced two years ago, and we still haven't seen a cheque written to an entrepreneur seeking capital.

(1730) The Chair : But with respect, you say the model works. My understanding, from our conversations over the years, is that the model was not working. The finance department minces no words whatsoever. They call this an inefficient and ineffective tax subsidy. You heard Jack Mintz, in the earlier panel, say that the rate of return is low, and he also mentioned how it's invested in normal equities. There are some very strong criticisms of that model, so the government is responding by saying that it's not fair. I'll point to Ms. Reynolds and her organization.

It's not fair to tell the average taxpayer or small business owner that he's going to continue to provide additional support indirectly and directly to the venture capital industry. We have to make choices here. There is a plan in place to provide $400 million of direct support. Would you say we should cancel that and go back to indirect support? Mr. Thomas Hayes : I'm a believer in the labour-sponsored model and the accomplishments it's achieved over the years. I think there are a lot of myths and there is a lot of misinformation. If Mr.

Mintz were going to use rates of return simply, he'd do away with the BDC venture capital program, if you looked at their rates of return over the last 10 years. Is that what he's suggesting? I don't think so. The federal government has always been actively involved in— The Chair : But as you and I both know, there has been a lot of criticism of the BDC venture capital plan as well, which is why this new fund is being established, in part. Mr. Thomas Hayes : Look, I'm not here to criticize the new fund. I've been very supportive of that initiative. But it's an unproven model,

whereas in the labour fund model we have a proven model that works. Over one third of all of the venture capital that's been made available to Canadian entrepreneurs has been generated by that model. We just led a round of financing for a New Brunswick company. We haven't announced it yet. We approved it last week. We're putting in $1 million of investment and we're bringing three other funds to the table, for a total round of $4 million. That's what we do: we bring other investors to the table from within the region and outside the region to help entrepreneurs grow their businesses. The Chair : Mr.

Hayes, I have a challenging time squaring that with this model that has been in place for years and years, with a lot of the comments that we've had—with discussions you and I've had earlier—about the venture capital industry in Canada. I'm struggling with that. Mr. Thomas Hayes : The discussions I've had with you earlier were around some of the challenges, the structural challenges, of the labour model when it comes to the annual limits. When the program was created in the 1980s, the RRSP deduction was $7,500 and the labour fund deduction was $5,000.

The RRSP deduction today is around $22,000, I believe, and the labour fund model is still at $5,000, so the issue was in the distribution channel. Investment advisors didn't want to support the product because they didn't earn enough commission in selling it. Those were the kinds of things that I was suggesting needed to be changed. The Chair : Okay. We'll have to continue that discussion. My time is up, unfortunately. Colleagues, we now have our witness from Kimberley, British Columbia. I think I have agreement from the parties. Mr. Bergenske, could I ask you to give a brief opening statement?

We're sort of halfway through our panel here. If you give a brief opening statement we'll then return to questions by members. Could you make a two-minute opening statement?

(1735) Mr. John Bergenske (Executive Director, Wildsight) : Okay, that's fine. First of all I want to make sure the members have the maps I forwarded, which are somewhat helpful for this discussion. The Chair : Yes, they do. Mr. John Bergenske : Okay, great. 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. Thank you.

(1740) The Chair : Thank you very much. We are going to go to members' questions with Mr. Rankin, please. Mr. Murray Rankin : Thank you. I'd like to welcome you, Mr. Bergenske, to our proceedings. I've long admired your work, formerly with the East Kootenay Environmental Society, and now as executive director of Wildsight. You're certainly a prominent environmental leader in British Columbia and I salute your work on this file as well. There are the two coal blocks that are at issue. My first question is, are you referring to both of those—the northern and the southern one—in the same way?

Would you apply the recommendations you've made to both? Mr. John Bergenske : I think they do have to apply to both, but I think there is very much an opportunity, not only for both blocks, but for possible a subdivision of those blocks to look specifically at the values that are on those blocks and then to be able to apply the wildlife management conditions specifically to areas.

The area in terms of selenium loading I think that would very much apply to all of the area and I think it's important to note that block 73, the smaller of the two blocks, is in fact totally surrounded right now by lands on which Teck operates, which is the major player in the coal blocks. The other block, which is independent and would probably have the higher value in terms of wildlife, only has a portion of that block in which the coal values are seen on assessment to be very high.

Mr. Murray Rankin : So therefore it might be possible.... I understand your recommendations apply to both, but the conservation covenant certainly on the southern, larger block, you're arguing for that and for the application of

section 58 of the Species at Risk Act, critical habitat, certainly on the southern block. The selenium loading issue, though, is probably more pertinent to the northern block since it's surrounded by coal land anyway and would likely be the more likely of the two to be developed. Am I right about that? Mr. John Bergenske : I think you're right. I think it has to be taken into account on both blocks should there be development, but certainly the likelihood of development is on the northern block.

It also would likely not be until the distant future at which time we would hope the Elk Valley water quality plan would account for whatever was going to have to happen on that block. Mr. Murray Rankin : You referenced the Flathead Watershed Area Conservation Act, the British Columbia statute. I was pleased that you also noted that the federal government seems to have supported that initiative.

I'm wondering therefore if it's likely or conceivable...or if you're able to provide some current information about the status of the proposed Flathead national park and the relevance, if any, of this southern Dominion Coal Blocks land. Is the federal government talking about a Flathead national park and if so, would this be potentially included in such a park? Mr. John Bergenske : The coal blocks themselves are not within the area of the park proposal in the maps that you've seen.

The national park within the Flathead is a very important piece of core area for wilderness and wildlife, but the connectivity corridor, which moves up through the Rockies, is as important and it's where the Dominion Coal Blocks lie.

So there are two parts to the work that we're doing with the coalition of groups here and one of those is the national park itself and the other is the connectivity, which means there would be other types of activity taking place, but what we want to see on that land are certain types of covenants or basically a management plan that ensures that wildlife connectivity is maintained into the future. The Chair : One minute. Mr. Murray Rankin : All right. I'd like to talk to you a little bit more about the problem of selenium loading. That's a general issue. The Globe and Mail had an

article on it a couple of days ago and there is an Elk River plan being hatched. I'm not entirely clear, though, what you're saying the impact of the Dominion Coal Blocks disposition would be. What is your position on that?

(1745) Mr. John Bergenske : We've taken the position that we wanted to see the outcome from the technical advisory committee that's presently sitting in regard to selenium loading in the Elk River. If people have seen the article—and obviously you have—in the Globe it points out very much what our position has been and that is we are not wanting to see coal mining shut down in the Elk Valley. We think it's very important that Teck operate and over time bring into place control of the selenium.

Should there not be any coal mining taking place and no one engaged, we fear that the history of 40 years of coal mining and the leachate that is there would not be sufficiently dealt with. As far as the piece on the Dominion Coal Blocks is concerned, we feel that will have to be part and parcel of any discussions moving forward. Teck has been clearly mandated to come up with guidance that will happen in coordination with the governments so they will have to meet that. So we are hoping that if there were ever development, we would have the mitigation plan in place before that took place.

The Chair : Thank you very much. We'll go to Mr. Saxton, please. Mr. Andrew Saxton : Thank you, Chair. Thank you, Mr. Bergenske, for joining us via video conference, and also for providing your presentation to us. My first question is for you. You are aware that any future potential development of either of these coal blocks would be subject to full environmental reviews; you are aware of that, correct? Mr. John Bergenske : Yes, I am. Mr. Andrew Saxton : 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. Mr. Chris Arsenault : 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.

(1750) Mr. Andrew Saxton : Our government agrees, and fully recognizes the impor