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OTTAWA — Finance Minister Jim Flaherty's budget promises to pursue free trade in securities with the United States and other Group of Seven countries, as Ottawa also works to reduce barriers to trade between the provinces and review competition policies.
Those are elements of the government's plan for “creating a Canadian advantage in global capital markets,” which also includes moving towards a principles-based common securities regulator and cracking down on white collar crime and tax havens.
In addition, the budget proposes to consolidate the debt issuance of some of the major crown corporations — Canada Mortgage and Housing Corporation, Farm Credit Canada, Business Development Bank of Canada — with the government's debt program to reduce overall borrowing costs and improve the liquidity of the government securities market. And it aims to modernize bankruptcy and insolvency rules to “ensure full protection” for collateral arrangements supporting financial contracts.
Other elements of the plan include promoting financial literacy among young Canadians and introducing a new principles-based disclosure regime for bank investment products with complex features.
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Canada has almost 3,800 publicly-listed companies, far more per capita than many other developed economies. And the Toronto Stock Exchange is the seventh largest in the world by market value. But “Canada's global ranking cannot be taken for granted,” says a companion document to the budget. The rules that govern capital markets increasingly affect the location of investment and opportunities for investors and firms, it noted.
“Other key jurisdictions – the United States, the United Kingdom, Asian economies and Australia – are developing concerted strategies to enhance the competitiveness of their capital markets,” it said. “Canada must act now to further develop vibrant capital markets that serve the needs of Canadian businesses, investors and the economy.”
“We must pursue free trade in securities so Canadians can more easily buy foreign securities, and so foreign investors can more easily invest in Canada,” the document said. “Our country is spearheading discussions with the United States and other Group of Seven countries to achieve these goals.”
The discussions with the United States are being pursued under the Security and Prosperity Partnership. And, at a meeting in Germany in early February, the G7 finance ministers committed to explore free trade in securities, the government said.
The aim is to allow Canadian investors to directly access securities listed on foreign exchanges through a Canadian or a foreign broker (as long as the foreign exchange or brokers is recognized by Canadian regulators as being regulated in a manner that protects investors). In addition, foreign investors in all participating jurisdictions would be able to invest directly in the securities listed on Canadian stock exchanges through their domestic broker or a Canadian broker.
Free trade in securities would raise opportunities for diversification, as well as opportunities for returns, for investors, the government said. Competition between stock exchanges and brokers would lower investment and trading costs, thereby reducing capital costs and encouraging economic growth.
“Under mutual recognition, the laws of the jurisdiction in which the exchange is located would protect investors,” the budget document said.
It noted that moving forward on the initiative will require action on behalf of not only the Canadian governments, but provincial securities commissions, self-regulatory organizations and market participants.
The government also said that a revised tax treaty with the United States will decrease barriers to the flow of capital between the two countries. That will include a complete exemption from withholding tax in respect of cross-border interest payments between the two countries, as well as extension of treaty benefits to limited liability companies commonly used by U.S. venture capital firms.
Canada and the U.S. have agreed in principle to update the tax treaty. When the revised treaty comes into force, the government proposes to eliminate Canadian withholding tax on interest paid to all arm's-length non-residents, a move aimed at expanding funding opportunities for investment.
Meanwhile, the government will have an “expert independent panel” do a comprehensive review of Canada's competition policies and report – before next year's budget – on options for future legislative amendments, the budget said. It cited the industry minister's policy direction to the Canadian Radio-television and Telecommunications Commission – instructing it to rely on market forces as much as possible – as a good start.
