The following is a guest article by Ian Russell, the President and CEO of the Investment Industry Association of Canada (IIAC).
Biography: Ian Russell is President and CEO of the Investment Industry Association of Canada, a position he has held since the Association’s inauguration on April 1, 2006. Under his leadership, the Association has successfully advocated for the industry on a broad range of regulatory and tax issues. Ian is a frequent columnist in industry publications and is a presenter and speaker on industry issues and developments.
Prior to his appointment, Ian headed the Industry Relations and Representation group of the Investment Dealers Association. In his 20-year tenure at the Association, Ian participated actively in many industry committees and working groups involved in regulatory and tax issues that effect securities firms and capital markets in Canada. He was also involved in industry committees dealing with conflicts of interest in capital raising for small companies (The Hagg Committee) and standards for research analysts in the securities industry (The Crawford Committee).
Prior to joining the IDA, Ian worked as a financial analyst for The Bank Credit Analyst, a respected international publication based in Montreal and also spent six years at the Bank of Canada. Ian has an honors degree in economics and business from the University of Western Ontario, and a post-graduate degree from the London School of Economics. He has completed the Partners, Directors and Officers Qualification Examination and is a Fellow of the Canadian Securities Institute.
One Budget Option for Recovery: Judicious Tax and Market Reforms
Minister of Finance Jim Flaherty faces a difficult task when he delivers March 4th, 2010, and the most obvious tools aren’t available to him. He has to maintain the momentum of economic recovery while making the transition from government stimulus spending to increased private-sector demand. And he has to do that while interest rates are already at rock bottom and Canada’s major export market to the south undergoes a tepid and uneven recovery. But there is a solution to his problem if he chooses to use it – modest tax and market reforms that will encourage increased investment spending by Canadian companies.
Stepped-up investment spending by large, mid-sized, and small Canadian businesses across the country is the key to making a shift to private-sector led economic growth, enabling firms to seize expanding technology-focused opportunities in the resource and non-resource sectors in Canada and global markets. For the Minister, the starting point is to build on positive measures already taken to improve the effectiveness of the savings-investment process in channeling risk capital to opportunity-seeking and productive Canadian enterprise.
Governments are already providing an important leg up for capital formation through steady and significant reduction in federal and provincial corporate tax rates to competitive levels. The launch of harmonized sales tax regimes in Ontario and B.C. accelerate the process, creating an environment conducive to business investment.
The mood in Canada is already more favorable to investment than it is in the United States. Investor surveys suggest trust and confidence are relatively high in Canada, certainly more favorable than in the U.S. The reasons are not hard to find – resilient investor participation, better regulation of major financial institutions, a more timely and effective stimulus response to the crisis, sound public finances, and a relative absence of the kind of well-publicized Ponzi schemes and financial fraud south of the border. Moreover, the many initiatives taken by Canadian regulators in the past five years to strengthen transparency of the investment process, disclosure of mutual funds and complex structured products, and toughened rules and oversight of “know your client” and suitability obligations for investment advisors have bolstered investor confidence. Even though risk appetite has waned, evident in cautious retail participation in equity markets, these conditions in the Canadian economy and in our financial regulations open a window of opportunity for further incentives to be effective.
What kind of policies would bolster economic recovery?
First, the federal government should continue to press forward with creation of a Canadian securities regulator. Such a structure would improve regulatory efficiencies in inter-provincial and cross-border securities trading, provide needed rule-making for dynamic, rapidly-changing markets, and enable comprehensive market oversight.
Second, the Tax-Free Savings Account (TFSA) could be modeled into an even more effective tax-assisted savings vehicle, by allowing retroactive contributions by older Canadians. These after-tax contributions would have minimal impact on federal finances as the contributions would be made from after-tax dollars, with only the income sheltered from tax.
Third, the government and the Bank of Canada should continue to encourage and guide the securities industry in building a central clearing and netting system for repos, a means of short-term borrowing by selling Canada bonds as collateral for cash with a promise to buy back the bonds the next day or after a similarly short period. The large volume of these short-term purchases and sales in by an individual dealer offers potential for substantial netting of these transactions at any point in time to reduce capital committed to a given repo trading volume. Such a clearing framework could also be extended to other over-the-counter securities. These important refinements in our financial infrastructure will improve the functioning and liquidity of credit markets through technology, more efficient capital usage, and counterparty risk mitigation.
Fourth, the government and the Bank of Canada should continue to work with market participants on specific measures to deepen liquidity throughout the asset-backed marketplace, promoting broadly based securities issuance.
Fifth, the federal budget should provide modest relief from capital gains taxes on the common shares of Canadian-controlled small companies (public or private) with market capitalization less than $500 million. Such a step will make it easier to raise capital for small businesses – the job-creation engine of the economy. Lower capital gains taxes will not only provide an incentive for making riskier small-cap investments, but free up committed capital for new ventures.
A strong economic recovery is needed to give the government breathing room to make the necessary shift from fiscal stimulus while promoting faster growth. The most solid foundation for growth – immediately and in the long term – is a sound fiscal position, competitive corporate tax rates, tax-efficient incentives to invest, and continued measures to improve the efficiency of capital markets. These policy measures can provide the finance minister with a path to continued economic recovery.
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