Budget 2007 lacked focus: IIAC

Monday’s federal budget has received a rather tepid response from the head of the Investment Industry Association of Canada, who says Finance Minister Jim Flaherty could have done a lot more to encourage more risk investment.

“I was surprised by the lack of focus,” says Ian Russell, president and CEO of the IIAC. “The last couple of Liberal budgets and the first budget of the current government had really focused on the need to address the competitive problem of the Canadian economy.”

Declining productivity and a lower standard of living point to Canada’s struggle to keep up in an increasingly competitive global market, he says. The IIAC had offered budget recommendations to address these issues, largely encouraging the government to maintain course with the past three budgets.

“I was disappointed that some of the key policy measures that we’d been advocating were not in the budget,” he says.

First among the IIAC’s recommendations was a reduction in the effective tax-rate on capital gains, to a rate comparable to that in the U.S. At the very least, Russell says, the Conservatives should have made some reference to the party’s own election promise to allow tax deferral on reinvested capital gains.

The current capital gains inclusion rate of 50% should be cut to 25%, which would be roughly equivalent to the 15% tax rate Americans pay on long-term capital gains, he says.

“There is a need for more risk capital in the marketplace, particularly equity capital — which is the highest risk — at smaller companies,” Russell says. “You have a large number of small and mid-sized public companies that are very dependent on accessing capital markets. That’s where the tax system can provide a real incentive to encourage investment in it.”

Aside from changing the inclusion rate, or allowing deferral, the IIAC has also suggested the federal government extend the same flow-through tax benefits offered to the resource sector, to investors in knowledge-based industries.

“Scientific R&D tax credits are available for private companies but not for public companies,” he says. “We’re saying they should extend that to smaller public companies as well.”

Allowing unprofitable publicly listed research companies to flow their tax credits out to investors would encourage innovation and help close the “competitive gap” with other countries.

Russell does appreciate the calls for regulatory reform and tougher enforcement that were contained in the budget but says the role of the federal government will be largely restricted to guidance and support.

“The reality is that it will be a collaborative process involving all governments,” he says. “Furthermore, there is not unanimity at this stage on the reform agenda. Because of the nature of securities reform, you’re not going to see much in the way of concrete results in the short run.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com