Industry Reaction: Prudent budget misses growth opportunities

By Philip Porado | March 4, 2010 | Last updated on March 4, 2010
4 min read

While efforts to return to fiscal normalcy sat well with the investments industry, the Federal Budget released in Ottawa today contained some disappointments, according to industry associations and analysts.

Specifically, the Investment Industry Association of Canada had hoped Finance Minister Flaherty’s speech would include some incentives to boost investor spending, especially as it relates to small businesses. In pre-budget comments, the IIAC had recommended some capital gains tax relief on shares of small publicly listed companies.

Selective reduction in capital gains tax on the shares of smaller public companies, it said, would have been positive for business expansion and job creation.

“There are a lot of small market cap companies that are finding it difficult to raise capital. And they don’t benefit from the investment incentives such as the R&D tax credit, the $750,000 capital gains exemption and the preferred corporate rate,” says Ian Russell, president and CEO of the IIAC. “Those incentives apply only to private companies. So if you’re a small company that goes public because you need to raise significant capital, you’re disadvantaged. Something should be done to address that.”

On the positive side, consulting firm Deloitte notes amendments to the definition of “taxable Canadian property” to exclude shares of Canadian private companies (in cases where not more than 50% of their value is derived from real property in Canada, Canadian resource property or timber resource property), will significantly reduce administrative and, in some cases, economic barriers to foreign investment.

“The Canadian government has listened to the financing community, understood the severity of the problem and removed the major tax barriers that have prevented critically needed international investment capital from crossing our borders,” says John Ruffolo, global tax technology, media and telecommunications leader, Deloitte.

In the vast majority of cases, non-residents who were not taxable on the disposition of their investments in such shares, due to Canada’s broad international tax treaty network, are now exempt from tax under Canadian domestic law without having to apply for treaty relief. Many venture capitalists considered the previous administrative requirements and economic delays for each investor to be strong deterrents to investing in Canada, Deloitte notes.

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Some retirement help Barbara Amsden, director, strategy and research at the Investment Funds Institute of Canada noted the budget contained neither new major measures, nor immediate negatives.

“We were quite positive to see that there was an agreement to do spring consultations about ways to improve Canada’s retirement income system and we’ll participate in that,” she says. “We’re going to look to see what other measures will be announced after the consultations at the federal level, and with the provincial colleagues in May and then later in the summer.”

The IIAC’s Russell also welcomed the talks but noted he would have liked to have seen some interim measures in this budget. Those could have included:

• A retroactive TFSA option to let older Canadians who are closer to retirement put a lot more money in. “It would have been cost effective because the money goes in after tax,” he says. • An increase in the ceilings on RRSPs. • Removal of minimum withdrawal requirements on RRIFs to make them more flexible.

Amsden adds proposed changes to the Registered Disability Savings Plan, including the allowing of a rollover from a parent or grandparent’s RRSP or RRIF into a child’s RDSP is very positive.

Regulation nation As usual, the budget includes reference to the creation of a national securities regulator. But this budget goes a little farther than lip service by indicating the government will, by spring, release draft legislation to be considered by Canada’s Supreme Court. It would then be up to the Court to determine if the Feds have the needed jurisdiction.

“We’re fully supportive of the initiative and are working hard to make it a reality,” notes Russell. “The Supreme Court jurisdictional issue is on a long timeframe and we’re not going to see this move ahead for awhile. The transition office has some great people. It’s vigorous and they’re working hard to finalize this national act that will be part of the Supreme Court reference for jurisdiction.”

It’s expected a request for jurisdiction will be made in late spring, after which will come the process of calling for interveners. So it’s unlikely the matter will be heard before the end of 2010 at the earliest.

Then there’s the matter of how far the authority of such a regulatory body will stretch.

“The minister maintains that a Canadian securities regulator is required to support a strong and competitive financial sector,” says Anthony Ariganello, president and CEO of the Certified General Accountants Association of Canada. “However, to truly realize that goal, a Canadian securities regulator should have responsibility for setting financial reporting standards and for auditor oversight.”

Other positives Proposals to reduce barriers to investment sat well with the Certified Management Accountants of Canada which praised the document’s inclusion of measure that will help the country:

• Develop a digital economy strategy. • Invest in economic sectors of the future, such as green power generation. • Make new investments in public sector-led R&D, including providing incentives to attract the best and brightest research leaders and facilitating the commercialization of innovation; and • Staying the course on corporate tax reductions.

Another well regarded proposal would introduce a legislative framework aimed at permitting credit unions to obtain federal charters and operate across provincial boundaries.

Central 1 Credit Union, a trade association representing credit unions in Ontario and British Columbia, notes this change has been requested for several years. If implemented, it says, credit unions would have the ability to serve members who move to another province and pursue business opportunities outside their home province.

Lastly, IFIC’s Amsden welcomes the budget’s proposed red tape reduction initiative. “We have some ideas there,” she says.


Philip Porado