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.
In a global environment fraught with a seemingly unending litany of unpleasant economic and public finance surprises, the so-called “ho hum” Canadian budget announced Thursday afternoon stands out as a welcome splash of positive news. The investor community in Canada and abroad will give it a thumbs-up on two counts. First, the Finance Minister has set out a reasonable plan to support business and working Canadians through a period of economic weakness, bring public finances into balance without much deterioration in public debt, and lay the foundation for sustained economic recovery. The Minister’s track record of good stewardship of public finances, an effective stimulus response to assist business and Canadians weather the recession and the soundness of Canadian financial institutions lends credibility to his plans.
Second, the budget papers illustrate the enviable position of Canada in the global economy, in terms of sound public finances, a competitive business climate and well functioning capital markets. Canadian business, financial institutions and public finances withstood the global financial meltdown and recession better than most countries, leaving Canada well positioned to seize opportunities in the global economy, particularly the rapidly growing markets of Asia. This success has caused foreign investors to stand up and take notice.
As with all plans, there are risks to the outcome. One concern is that domestic economic growth will fall short of projections as business and consumer spending fails to gather sufficient steam as the stimulus unwinds. Another is that our major export markets, notably the United States, will turn out much weaker than expected. These downside risks are judged small, however, given a conservative growth outlook of 2.5-3 percent for the next four years, evidence of improving economic conditions in Canada and abroad, and more positive business and consumer sentiment. However, concerns raised that the structural budget deficit has been underestimated means the downward trajectory to fiscal balance may not materialize, even if growth meets expectations. In that event, investors still have confidence that, based on previous actions, the Minister will recalibrate policy to include spending cuts, if necessary, to meet stated fiscal targets.
There are other reasons to be positive about the outlook. The fulsome recovery of Canadian debt and equity markets have provided the capital needs for Canadian business to rebuild balance sheets and position for opportunities in a recovering global economy. As well, several subtle policy decisions, notably removing foreign ownership restrictions in the telecommunications sector, will stimulate corporate restructuring, and provide new sources of capital, expertise and efficiencies for Canadian companies to compete in the domestic and global marketplace. The decision to remove remaining tariffs on capital goods, and keep focused on streamlining the overall regulatory burden, will reduce costs and the administrative burden for Canadian companies. And finally, the continued effort to build a single securities regulator to strengthen the efficiency and integrity of capital markets regulation is positive.
That said, the second phase of the Economic Action Plan, totaling $19 billion, could have placed greater emphasis on incentives to stimulate investment spending, particularly by small companies. The more than 3,000 small and mid-sized companies listed on the TSX and TSX Venture Stock Exchanges contribute importantly to economic growth and job creation in the country, and have encountered difficulty raising new equity capital in the past two years. This can be traced to investor reluctance to purchase common shares of small and mid-cap companies. Common equity underwritings for these companies totaled $2.8 billion last year, similar to the previous year but one-half of the equity capital raised in 2007. Only companies in hot resource sectors and with well known sponsorship found access to competitively priced equity financing. Targeted capital gains tax relief for these companies would attract individual investors into venture markets, and lower the cost and improve access to needed equity capital.
Further, investment incentives targeted to the small business sector are restricted to small private companies. As these companies grow into mid-sized businesses, say with capitalization of $1 billion or higher, many of them will look to public equity markets to deepen access to capital and displace existing venture capital and angel investors. But once those companies list on the stock exchanges and become public companies, even if earnings remain at or below $500,000 (the qualifying rate for the small business tax rate), they lose eligibility for the small business tax rate, access to R&D tax credits and the $750,000 capital gains tax exemption. The loss of these incentives unfairly penalizes these businesses and discourages investment and expansion of a thriving mid-sized business sector to compete effectively in the global marketplace. The stimulus program could have extended these incentives to small and mid-sized public companies.
Numerous Canadians will find something to complain about in the March 2010 federal budget, particularly in a year with limited fiscal maneuverability. However, all can take comfort the Minister has built a sound fiscal framework to position Canada for a bright future, a framework recognized by domestic and foreign investors alike.
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