When Liberal Finance Minister Bill Morneau tables the next federal budget on March 19, organizations that represent Canada’s investment industry will be looking for some key measures to address persistent issues that they say inhibit the country’s long-term growth, competitiveness and productivity.
Those issues include nagging deficits, a creaky and over-complicated tax system, the need to enable better ways to finance infrastructure and new business development, and an update of tax-assisted retirement programs as Canada’s population continues to age.
“Canada has a competitiveness problem. The federal government must change policy course,” says the Investment Industry Association of Canada (IIAC), which represents 120 investment dealers, in its pre-budget submission.
“There has been a steady drop-off in direct private-sector investment, for both large-scale and small businesses,” explains Ian Russell, the IIAC’s president and chief executive officer. Specifically, he notes that non-residential private investment peaked in 2014 and dropped by almost 20 per cent in the next three years, without recovering to peak levels since.
To make matters worse, foreign direct investment dropped dramatically in 2017 to its lowest level since 2010. Although it recovered somewhat in 2018, it still isn’t nearly as robust as it ought to be to ensure steady economic growth and productivity in Canada, Mr. Russell says.
“We also don’t know how a stronger U.S. economy will affect investment in Canada,” he adds. “Will Canadian capital move south?”
Mr. Russell says he understands that governments always find it difficult to resist offering short-term goodies to voters in an election year rather than focusing on the country’s longer-term fiscal health. Nevertheless, the IIAC would like to see Ottawa be more explicit about when and how it’s going to get rid of persistent annual deficits.
“The economic statement in November was a tentative move in that direction, but what happened in the three months after suggests that the move was insufficient,” he says.
In November, Mr. Morneau said this year’s deficit would rise by almost $2-billion, largely to buffer Canada against U.S. corporate tax cuts that make U.S. businesses more competitive.
The problem with persistent deficit spending is that it limits the government’s ability to respond to a volatile world economy and major shifts, such as an aging population in Canada. These social and demographic changes can affect both retail and institutional investors as well as the financial services industry – and the government needs to keep up.
“There’s an opportunity for a much more vigorous fiscal response,” Mr. Russell says. “The government needs fiscal flexibility to respond to changing circumstances, deal with the demographic crunch and tackle areas critical to Canada’s long-term competitiveness, such as high marginal personal income tax rates.”
Thus, the IIAC is calling for a general review of the tax system to identify roadblocks to competitiveness and productivity and to make the necessary changes to attract more investment within Canada.
The IIAC is not alone in calling for more fundamental reforms. The Investment Funds Institute of Canada (IFIC) also is proposing specific changes to boost Canada’s competitiveness.
One of IFIC’s key recommendations is to update the “safe harbour rule” in Canada’s Income Tax Act. This rule was introduced in 1999 to allow foreign collective investment vehicles (CIVs), in which investors pool their money to share returns, to use the services of Canadian asset-management firms. The rule was introduced to make it easier for these companies to provide services globally and to compete with service providers in other jurisdictions that had their own safe harbour rules.
Since then, other countries have either updated or introduced their own safe harbour rules to keep their domestic asset-management sectors competitive, says IFIC’s pre-budget release, whose members include 150 investment fund managers, dealers as well as professional and business services firms that support the industry.
“Canada has not kept pace with these developments and, as a result, our safe harbour rule is more restrictive and less competitive than most,” says Paul Bourque, IFIC’s president and CEO.
This issue can be fixed with some revisions to Canada’s rule, such as expanding the definition of which investments and advisory services qualify for the safe harbour treatment. Such changes would align Canada’s rules more with competing countries, Mr. Bourque says.
IFIC also wants Ottawa to broaden Canada’s tax framework to accept legal structures for CIVs that foreign investors will understand better. Right now, the most favoured CIV structure in Canada is the trust, but this can be inefficient for foreign investors.
“Generally, foreign retail investors are more comfortable with corporate-class CIVs over the trust structure favoured in Canada. Other jurisdictions have changed their tax and legal frameworks to attract foreign investors into their local CIVs,” and Canada can do the same, Mr. Bourque says.
Meanwhile, the biggest forward-thinking changes the IIAC would like to see are those that would make it easier for private-sector money to participate in infrastructure improvement, as well as changes that make business transition easier, Mr. Russell says.
“There are many mid and large-sized infrastructure projects across the country desperate for capital. At the same time, large pools of private-sector institutional and retail capital are searching for high-yield opportunities,” he says.
The government can help if the budget provides “catalytic” seed capital to make large projects more viable and includes measures that encourage a “social return” that shows up in increased productivity through better functioning infrastructure.
The IIAC is also calling on Ottawa to introduce tax incentives that would make it easier for smaller companies to attract equity capital, encourage startups and help the growing numbers of large-scale business owners who are reaching retirement age shift their businesses to new owners. Mr. Russell and his group would like to see a program modelled on the British enterprise investment scheme, which provides a 30-per-cent tax credit and other benefits for those who reinvest in small businesses.
Now is also time for the federal government to rethink rules for registered retirement savings plan (RRSP). Specifically, the IIAC is calling for an increase to the annual contribution limits as well as increase the eligible age to make RRSP contributions past the age of 71.
“People are working longer and living longer,” Mr. Russell says, “and 71 doesn’t necessarily make sense any more."