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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 50 - Evidence for the meeting of April 27, 1999

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OTTAWA, Tuesday, April 27, 1999

The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:30 a.m. to examine the state of the financial system in Canada (Equity Financing).

Senator Leo E. Kolber (Acting Chairman) in the Chair.

[English]

The Acting Chairman: Honourable senators, I apologize to the witnesses for the paucity of senators, but apparently there are all kinds of things happening today. We are certainly anxious to hear your testimony.

Our witnesses today are Mr. Denzil Doyle and Mr. John Cranston. I assume the witnesses have a statement to make, so I call on Mr. Doyle.

Mr. Denzil Doyle, Chairman, Capital Alliance Ventures Inc.: Capital Alliance Ventures Inc. is a labour-sponsored venture capital fund that invests in high-technology companies. We are headquartered in the Ottawa area. We are one of those labour-sponsored venture capital funds that raise their funds from the public. Those subscriptions are encouraged by fairly lucrative tax concessions, which I will not go into here, but labour-sponsored venture capital funds pretty well dominate the Canadian venture capital industry. The Canadian venture capital industry has total assets now of about $10 billion; probably about $6 billion of that is managed by labour-sponsored venture capital funds.

I am quite familiar with the whole business of financing innovation in Canada, and I am here today to draw to your attention what I consider to be a number of deficiencies in that financing process.

I brought several copies of a little diagram showing a company going from the idea stage into the R&D stage, product development, production and distribution, and finally into a public company. That is right in the middle of your chart. Immediately below that is the cash flow of the company, which you can see goes quite negative until the company gets into production and distribution, and then it becomes a public company. The financing stage is shown at the bottom, and these are just definitions.

The venture capital industry keeps track of its various investments. In other words, the Association of Canadian Venture Capital Companies can tell you on a year-by-year basis how much money goes into seed capital financing and how much goes into start-up and how much goes into the first stage, second stage, and third stage. At the risk of jumping ahead a bit, I will say that there is not much going into the seed stage from venture capital companies; nor can the venture capital companies really afford to do that type of financing. I will recommend what I consider to be the right source of financing for that stage of the investment spectrum.

At the top of the diagram, a number of boxes show where the money comes from at various stages in a company's evolution. You see government grants. By government grants, I mean things like IRAP, the Industrial Research Assistance Program, and ACOA. A number of government grants are available for high-technology companies.

I am talking about "new economy" companies as opposed to high technology, although new economy companies automatically include high-technology companies. If you want to get into that, perhaps we can do that with a question later. I do not want to restrict my comments just to high technology; I want to deal with new economy.

For example, Nuala Beck, who is the authority on the new economy and has written several books on it, points to a number of industries that are in fact new economy industries, although we do not normally think about them as being high-tech industries. For example, she talks about the ceramic tile industry being a new economy industry because so many changes are taking place in the ceramic tile industry. Forty years ago, all ceramic tiles were used on bathroom walls and around your bathroom, and they were all three inches by three inches or so. Nowadays, as you know, ceramic tiles are used in vestibules and walls and floors and every place else. Interestingly enough, she makes the point that North American manufacturers are losing market share to Italian, Greek and Spanish manufacturers because they recognize the change in the consumer demand.

I take that little sidestep to illustrate that there is not exactly a one-to-one correlation between new economy companies and high-technology companies, but high-tech pretty well dominates it.

A better way to look at it perhaps would be to look at a company in terms of its gross profit. Gross profit in a company is the difference between the selling price and the cost of actually producing the product. In a high-technology industry, a high-technology product must be produced with a gross profit of at least 55 per cent; that is to say that, if you sell something for $100, you had better be able to make it for no more than $45, because you must plough a great deal of money back into doing future product development and market development and so on.

I think the debate about Canadian productivity misses that point completely. We wring our hands about our lack of productivity and so on. I think we are as productive as anyone else at doing the things that we do. The problem is that we are doing the wrong things. How much more productive is it possible to get in making two by fours, for example?

We can sure get much more productive if we in fact make high technology products of the type made by Newbridge or Nortel or those kinds of companies. In case you are wondering whether or not we are holding our own in that respect, I have an Industry Canada document from 1995 that looks at the information and communications technology industry only. Our exports in that sector were $19.5 billion, which was an increase of approximately 7.5 per cent over the previous year. The imports, however, were $35.6 billion, for an increase of 16.7 per cent. This is only one of many documents that prove that Canada is actually losing market share in the new economy. We are not a new-economy country.

To go back to 1972, when they first started tracking trade in high-technology products around the world, Canada enjoyed approximately 4 per cent of the market demand for high-technology products. High-technology products are, for instance, automatic switches and anything that requires an investment in R&D exceeding 10 per cent; those are generally looked upon as high technology. Canada, in 1970, had approximately a 4 per cent market share. Today its share is less than 1.5 per cent. Therefore, we are actually losing market share in the new economy. Do not let anyone tell you that we are not. One of the huge problems we have in this government is that we do not have reliable statistics on that. No one thinks it is very important to have reliable statistics on it, but I beg to differ.

The sources of financing for a start-up company is government grants, and I talked about IRAP as being one, and there are many government grants. If I might be so blunt, I believe they are mostly cruel hoaxes in the sense that you spend so much time filling out paperwork to get them and they are limited to people who are willing to go through that drudgery of filling out the paperwork. I do not feel that is a good way to finance innovation in the country. That is perhaps the subject of another discussion.

Government grants is one source of financing and they are available at every stage of the innovation spectrum. A start-up company can go and get IRAP money; however, that only pays for research and development. It does not pay for marketing and all of the other things you need to start a company with and that is why I suggest they are a bit of a cruel hoax.

At the upper end of the spectrum you have things such as the Technology Partnership Program, which hands out huge sums of money to companies like Bombardier and Pratt and Whitney, and so on.

The next source of financing, and it is the one I will really focus on today, is angels. Angels are high net worth individuals who are willing to roll the dice on a start-up company and who are willing to put the time and the effort into it. Then there are venture capital companies, and I have broken venture capital companies into type A and type B. There are type A companies which do take a somewhat of a hands-on approach to investing and to managing companies, and at some early stage they will at least jump in when the product is under development. Typically even they will not jump in when the company is down at the idea stage or the R&D stage.

Then there is another type of venture capital company that jumps in just before the company is ready to go public on a public exchange, and they are called mezzanine financiers, and they are listed here as VCs of type B. Then there are the banks. If there is anything that really annoys me is when I had hear politicians scolding the banks for not financing innovation in this country. The banks have no business down at this front end of the spectrum. The best people to do that are the so-called angels, and the angels should develop the companies so that there is better product flowing up to the venture capital companies and then the venture capital companies should supply better product to the banks.

The situation you have today is the average high-tech company is so badly financed all the way up that it never does get a decent balance sheet under its belt. Therefore, it goes to a bank with a bad balance sheet and the banks may take a look at it and may not. If it does take a look at it, it insists upon all kinds of management fees and so on that are very punitive to a small company. There is literally no competition, whereas under my scheme of things, if we could fix the front end, get the angels developing better product for the VCs and the VCs developing better product for the banks, I believe we would force the banks into doing some beauty parades in this country, whereas at the present time the beauty parades are all in the other direction.

Then finally we have the public. As I say, many of these venture capital companies jump in at the very later stage and their whole goal in life is to dress up the company to take it public. Then, of course, it goes public and by that time the pension funds, the mutual funds and others get into the act and hopefully someone makes some money at it.

Unfortunately, it is not quite that simple. If you look at this investment spectrum, the front end of it is as dead as a doornail and the back end of it is overheated. The front end of it is dead as a doornail because we have chased those angels off the scene with our obscene capital gains tax situation in the country, and at the back end you have too much heat in the system and what happens is that most high technology companies go public at way too high a price. There is so much competition amongst the various underwriters to take these companies public that invariably most companies that should go public, say, at a market cap of perhaps $100 million, are being taken public at $200 million or $300 million. Guess what happens. They might take a little run upwards on the public exchange and then they will fall down to what they should have been in the first place. By now the pension funds and mutual funds of everyone have jumped in and they get fed up because they see their stock dropping, and they say, "To heck with that high technology business; we don't know how to make a buck out of that, so don't ever come and talk to us about it."

The fact is that we, as a venture capital company, have attempted to go and get pension fund money to allow us to manage the pension fund money so as to get them down in the front end of the spectrum. If you talk about high technology to the pension funds and mutual funds in this country they say, "Forget about it. We don't know how to make money at it, and we are sure you don't know how to make money at the front end when we cannot even make money at the back end."

Those are some of the issues. Now, I am sure you will ask me what it would take to get angels on the scene -- and, believe me, angels are the answer to this problem. I know enough about early-stage investing to tell you that. I have done a great deal of it myself on a personal basis. I have probably personally invested in about 20 high-technology companies and our venture capital company has invested in 17 of them. I can tell you it is tough sledding. It is particularly tough sledding for a venture capital company, because we do not have the time nor the effort to put into it. Typically, in that early stage investment, they only require a small amount of money. However, if you have large pools of venture capital, you have to invest that money in large chunks, not small amounts.

Large pools of venture capital are building up in Canada now, some of those pools being as high as $700 million or $800 million. In the case of a venture capital company that is trying to move $800 million, if, say, a young team of entrepreneurs from Carleton University comes along and says it needs $200,000, the venture capital company would tell them to get lost, because they must invest that money in chunks of $2 million or $3 million at a time.

That is another issue that I will not go into any further today, except to say that we have very large pools of venture capital in this country that do not have a clue on how to do that early stage investing, and it annoys me when I hear bureaucrats saying that we have enough venture capital in the country. Yes, we do, but it is all tied up in those large pools of capital and is doing nothing more than overheating the upper end of the spectrum, while the front end of the spectrum remains totally cold.

How do angels arrive on the scene? Angel investors typically do not have their money sitting in a bank. They usually have their money sitting in equity in an established company.

I will mention the case of Mr. Terry Matthews, the Chairman of Newbridge Corporation. He is probably the foremost angel in this country, in that he has started a number of affiliated companies and has done so with his own money. When a company begins to be successful, Mr. Matthews allows Newbridge to invest in that start-up company. It is an excellent model, by the way. If you are serious about addressing the issue of financing innovation, you should look at the Newbridge affiliate model. It should be applied to our resource industry companies in this country. Most of our resource companies are loaded with cash, but they do not have a clue how to exploit the technology they run into. The Newbridge model would be a good one for them to look at.

I will now return to the realities of angel investing. If someone went to Mr. Matthews and said, "I need $1 million to launch this company of mine," Mr. Matthews would have to sell $1.666 million worth of Newbridge shares and pay $666,000 to the government in taxes in order to free up $1 million to launch that new company.

The situation in the United States is somewhat different. They have identified what they call a qualified small business. A qualified small business is not a one-on-one correlation with the new economy. For instance, I could not finance a consulting company that way; it would have to be a company that was in the business of producing marketable products and services, usually on an export basis; but it would be a qualified small business.

Under the 1993 Tax Act in the United States, the capital gains tax on gains made from investments in a qualified small business were cut in two; namely, from 28 per cent, down to 14 per cent. In Canada, as I keep pointing out, it is 40 per cent across the board for Mr. Matthews or anyone else who wants to free up some existing invested capital in order to do this early stage investment.

In 1997, the Americans came up with a system called a roll-over provision. In other words, in the case of Mr. Matthews, he could actually roll over his investments, provided Newbridge was a qualified small business when he made the original investment, which, of course, it was. In order to free up money to invest in yet another qualified small business, he can roll it over tax-free, provided he does it within 60 days.

That is freeing up angels in the United States like you wouldn't believe. They are a phenomenon that is creeping into the whole new economy financing system down there. For example, in California, there is what they call the "band of angels," which was started by a friend of mine about four or five years ago. There are now over 300 people involved in that group.

The band of angels meet via the Internet. They trade deals back and forth. If an entrepreneur goes to one of the angels and the angel says, "Yes, I think this looks pretty good; I will make it known to this or that particular group within the band of angels," then in no time at all that entrepreneur has a hearing with a group of angels and the group of angels starts making out cheques to launch the company.

Another thing that is happening in the United States is that, since there are venture capital firms, the angel investors are realizing that maybe it would be worth getting together to provide proper management to this pool of capital. For example, there is a company in Boston, called Vimac, that will actually manage those pools of capital for the angels. Incidentally, that Boston company is now up in Ottawa making investments in Ottawa. When we cannot get our own angels freed up to do it, they are coming up from the United States. I have met with these people three or four times; they are absolutely amazed at the quality of the opportunities in the Ottawa area.

I think you will agree that what I have laid in front of you is a bit of a disastrous situation when it comes to the financing of innovation in Canada. Our country is paying a terrible price as a result of this situation. We are losing market share in the world's fastest growing segment of tradable products and services around the world.

You do not have to be a rocket scientist to know that losing market share in the highest growth segment of a market spells disaster. It is no accident that Canada has a 60 cent dollar. It is no accident that we have a productivity problem. We are doing the wrong things in this country, and that has nothing to do with brain power; it has nothing to do with our education system, and it has nothing to do with management.

People say that Canadians are not good managers. Well, I ran a multinational company in this country for 18 years. I sent 200 people down to the United States. They stole 200 people away from me, because they were better managers than they had in the United States. Five of those people became senior vice-presidents in my parent company. So there is nothing wrong our management and there is nothing wrong with our education system. I submit to you that what is wrong is the investment spectrum, and this is my best attempt to lay it out in front of you.

Senator Angus: Mr. Doyle, the points you have made are really right on the money in terms of what we have been looking at in the last two or three weeks. You may have read that we had a day dedicated to hearing two opposing schools of thought, the pros and cons of having a monetary union in North America. That discussion highlighted the productivity debate more than anything else, but, as you know, the arguments against some of these innovative ideas can be rather spurious.

Then in November we had the Governor of the Bank of Canada here insisting yet again that the fundamentals are good, that everything in Canada is hunky-dory, and yet right around him all the things you have mentioned, Mr. Doyle, are happening. When he came here in November he said that our currency is not a commodity-based dollar.

From what I have read and understand from what you have said, the fact is that we are still more hewers of wood and drawers of water than adapters to the new economy. The government is wrong when it denies we have a productivity problem. The issue is highlighted by the fact that you have to measure it not in the old terms, but in terms of the new economy.

Your statistics were right on the money when you showed the loss of market share in those areas and our failure to get involved and take advantage of the new technology in our manufacturing sector. When you couple that with the environment question, then we have the problem we have.

The capital gains issue is front and centre. When you spoke about the structural situation, I heard you say that it is not that we do not have good education or management skills in Canada, but that the rewards are just not sufficient to keep our people here. The government keeps saying, "Well, it will cost too much and we will not be able to afford all of these wonderful give-away programs."

Could you tell us how we could change the capital gains tax here and benefit from it?

Mr. Doyle: No. 1: Copy the American roll-over system for angels. If we do not copy that system, it tells me that we are just not serious about being in the new economy. For heaven's sake, send someone down to the United States to say, "Tell us about your 1997 Income Tax Act revisions that allow this roll-over for angel investors." That is the first point.

Senator Angus: On that, sir, I have read some of your writings and your speeches, and I have to believe that you are in touch with the government. What are they saying to you when you outline these issues to them?

Mr. Doyle: Let me tell you what they say to me. I think it is a huge problem we have in government and I will be very blunt here.

Senator Angus: That is what we want, sir. You are looking at the alternative government here -- Senator Meighen and me.

Mr. Doyle: I do not know if you have read my latest writings, but I think the problem with "United Alternative" is that it is not a brand name. What we need in this country is an innovation party. At least everyone understands what "innovation" means. Canada does not have much of it, so I think it is time for an innovation party, but that is another subject.

What does the government say when I communicate with them? I have had many discussions with Minister Manley, for example. When he first came to power he called me up and we spent half a day together. I told him that, if we were ever to get into the new economy, first and foremost we needed measurement systems. No one knows how bad it is in Canada. No one knows what the underlying problems are. I told the minister that, first and foremost, he should set up a system that measures how Canada is doing.

The high-technology industry is broken down into approximately 10 sectors. There are the aerospace sector, software products, computers, multimedia, pharmaceuticals, and so on. The OECD does keep track of the high-technology trade on a world basis. The Americans keep track of it. As a matter of fact, the Americans have two different systems.

In Canada, however, we do not even keep track of it, and you cannot get anyone to keep track of it here. If you go to Statistics Canada, you will get a song and dance about it: "Well, our definition of `high technology' is different from every other country's." Well, give me a break!

I hate to be so blunt about this, but I am afraid it is a lack of accountability. Civil servants do not want to be held accountable. They will talk about silly things. One of the cruellest things that civil servants do is they tell their ministers to scold Canadians about not doing enough R&D.

I was one of the attendees at the conference in Cleveland a couple of weeks ago, at which the Nortel president spoke up. There was a government official there and his only answer to this whole thing was, "Well, the real problem in Canada is that we have these lucrative R&D grants and tax systems for doing R&D in Canada, but Canadian industry will not do enough R&D." That is just crazy talk. The problem is that we have a Canadian industry that does not need any R&D. How much R&D do you need to make two by fours? Until we get more Newbridges, more Corels and more Jetforms, and those types of companies, we do not have a need for any more R&D. We are probably doing too much at the moment. And we are not going to get those companies until we fix the financing problem. That is really what I am saying. All right?

You asked the question about what the government says when I talk to them. They shirk away from the most fundamental management process, which is measurement. You cannot manage something you cannot measure. You cannot get this government to measure our performance in the new economy.

Senator Angus: What do they say on the capital gains, just simply put?

Mr. Doyle: I was once asked by someone very senior in the Department of Finance, whose name I will not mention, and he laid out a number of taxes. He said, "If you had your choice of decreasing the corporate taxes, personal income taxes, employment health taxes or the capital gains tax, which one would you drop?" And I said, "No question: the capital gains tax." He said, "That is interesting, because that is probably the most difficult one to sell politically."

I know it is difficult to sell politically, but sooner or later parents will understand that there is something going fundamentally wrong in this country when their kids cannot get jobs, and you hear this crazy talk about a skill shortage. There is no skill shortage in this country. You have a problem where companies are so badly financed that they cannot afford to hire kids right out of school and give them the kind of education they need. Instead of that, the kids are going directly to the United States and working for Microsoft, or other properly funded companies that can give them that early training.

Senator Angus: When you went through the range of levels of available financing, the first thing on your list was the government grants. Along with their talk about R&D, I suppose they would say that IRAP and all these things are available. Is it correct to understand from your comments that this is counter-productive, that you do not see this as a good way to finance these start-up companies?

Mr. Doyle: IRAP is a good program. IRAP is run by the National Research Council. It is a good program because it is managed primarily by very technical people. Unfortunately, it only finances R&D, and we have way too many companies just becoming R&D junkies. They will start out by getting perhaps a $15,000 grant from IRAP, and when that runs out, rather than getting on with marketing the product, they go to IRAP for a $50,000 grant, and then perhaps it is $100,000, and so on.

Senator Angus: Those kids you mentioned from Carleton University, or Ottawa University, who need only $100,000 or $200,000 for their idea to get going with a little business -- they cannot get a government grant, I understand?

Mr. Doyle: That is right. They can get IRAP typically, but it is a $15,000 IRAP grant. I am in the process of helping someone right now launch a company, and he did indeed go and get a $15,000 IRAP grant. I quickly told him not to go back there for more. Surely we could get some proper money from some of my friends to launch this company and spend some money on marketing and advertising.

Senator Angus: Do you have the secret list of Canadian angels?

Mr. Doyle: That is another problem. Angels do not want to be identified. We have municipalities in this country all going around trying to compile a list of angels. I tell the municipalities that that is not the way to do it either. Let the angels find the opportunities themselves. It must be lucrative enough for them. You will not do it, though, if you put a tax right at the front end of the whole process of 66 per cent, in effect. Every time I raise $100,000, if I have to pay $66,000 to the government, I will simply put my wallet back in my pocket.

Incidentally, this capital gains tax is also what is killing the thing at the upper end of the spectrum. What typically happens is that even after a company goes public, it can never build up a retail market for its products. Most people buy and sell high-technology stocks because of the capital gain. They do not do it for dividends. High-technology companies do not pay dividends. We have a system -- just to show you how stupid we are in this country -- where our capital gains tax rate is higher than the dividend tax rate. That tells you how tuned in we are to the new economy.

Another impact of the capital gains tax rate is that at the upper end most companies cannot build up a retail market for their shares. It is, again, heavily related to the capital gains question. If I am sitting there in the month of September, having made some capital gains on my Newbridge shares, I might think of selling; however, if I think about the consequences of being required to pay 40 per cent of that to the government, I might consider waiting until January. January comes and maybe the stock is down and then I wait until next year.

The capital gains tax is a drag on the circulation of that innovative capital, which is what really must get moving in this country.

Senator Meighen: You have made my day, Mr. Doyle. This is a great start to the day. I have rarely agreed so completely with a witness since I started sitting on the banking committee. It is too bad we are in such a minority. Either we are living in a different world or the people who are in positions of authority, elected or otherwise, are living in another world. Perhaps the other world is the right one, but it certainly seems crazy to me.

You mentioned the effect of the capital gains tax, which is really an effect of promoting inertia. It is the same in the charitable sector, where finally the Minister of Finance, to his credit, moved to lessen the capital gains treatment of the appreciated shares of publicly traded companies when given to a charity. Before that was instituted, however, my information is that the chief objection of the bureaucrats in the Department of Finance was that it would run the risk of encouraging large donations of money to fringe religious organizations. Of course, the effect has been to free up money that has been sitting in safe investments, let us say, which is now being given to hospitals and universities, and other charitable organizations across the country.

If the minister could overcome the old-world opposition of his officials and move the whole way, possibly we could fill most of the void created by government when it pulled back from those sectors to save money.

In any event, do you see any role for government in this area? You spoke approvingly of IRAP. When these programs are instituted are they not very subject to abuse, such as the Finance Minister's R&D program a few years back, which was widely abused?

If we are worried about money being diverted or improperly used, surely the answer is to cut back on those programs and let people deal with their own money directly through a reduction on capital gains.

Mr. Doyle: I think you are absolutely right. Even the so-called ITCs, the investment tax credits that companies get, you are right, about ten years ago we did have the SRTCs where people could forward-sell their R&D expenditures and then they be financed with debt and then you could flip the debt. You did not need a brain in your head to see that that whole program was premeditated failure.

They have now replaced that program with the Scientific Research and Experimental Developmental Program, whereby that small company that I told you about, on which we will probably spend about $100,000 this year on R&D, will be eligible for a 35 per cent rebate next year.

There are several things wrong with it, however. What is happening at the moment is that armies of consultants have been hired by Revenue Canada to go out and challenge these R&D expenditures. The kind of nonsense that goes on is that Revenue Canada will go right into a company they have that authority -- and get right down at the bench level with the engineers and say things like, "This is not really R&D you are doing." The engineer will say, "It sure as heck isn't that fancy stuff I did back when I was doing my master's degree. This is really just blacksmithing."

The Revenue Canada representative then puts a big square through the whole submission. To avoid that, the companies are now hiring consultants to tell them how to behave when the Revenue Canada auditor comes to talk to them. As a result, there are just armies of consultants all fighting over this miserable investment tax credit. Meanwhile, our competitors in the United States are building products and gaining market share around the world. We have to remove the government from this process and let the money be spent by the individuals.

Senator Meighen: Much as I agree with you, perhaps we could just go to another area briefly.

Have you anything to say about inflow of foreign capital into this sector? Is there anything that is lacking in order to attract that? My information is that you need a lead domestic investor, or investors, before a foreigner will come in.

Mr. Doyle: We do have the capital in Canada. I would far prefer to see us build this industry with Canadian capital. This industry is footloose and fancy-free and it tends to go where the capital is. I am not saying cut out American or foreign capital, but that is not the answer to our problem. We have plenty of capital in Canada. All of our resource companies -- Enbridge, Stelco, Dofasco, and the rest -- are loaded with cash. They are all using their cash to buy back their own shares at this point in time. Why can we not find a way of marshalling that cash to build up pools of venture capital and let the venture capital managers manage that for them. I do not think we need the foreign capital.

In fact, one thing that is really bothering the industry now, and bothering the trade associations -- and again this is related to the capital gains tax -- is the foreign takeover of our Canadian companies. That is related to the fact that you cannot get any action on the market. A company in Vancouver called MDA, MacDonald Dettwiler and Associates Ltd., was the darling of the Vancouver high-tech industry. Canadians spent a fortune on that company in R&D grants and space contracts and so on. It cost the Canadian taxpayers a fortune to get MDA to where it was, and then, a couple of years ago, the company was sold to an American company called Orbital Sciences. The main reason it was sold was that there was no float; there was no action on the market for its shares. The venture capital people who had put money into MDA 10 or 12 years before realized that they were never going to get the payback from the public market because there was no trading in their shares; so they called up a few American companies and asked if they would be interested in buying MDA. They could buy out their equity, and it would be very easy to buy the rest in the public market.

Our Canadian companies, as you very well know, are just being picked off one by one. It is due to the fact that we simply do not have an investment community in Canada that knows how to keep them Canadian.

Senator Meighen: That then allowed MacDonald Dettwiler to pick off Spar Aerospace, where similarly there was a lack of float in the stock.

Mr. Doyle: Yes, that is right. Many people think that MacDonald Dettwiler is a Canadian company, but it is not.

Senator Meighen: My information, which is from a report of the Canadian Labour Market and Productivity Centre, is that the pension funds in the U.S. and Australia are much more active players than they are here. Why are Canadian labour funds the only ones seemingly in the industry? If there were more pension funds in the industry, would there be a trickle-down effect going to the angel level? If so, what can we do to encourage them?

Mr. Doyle: I mentioned why I think the pension funds are gun-shy about this, because they are only familiar with investing in high-tech companies after they go public. They have all been taken on this very high IPO price.

If you go to the average pension fund manager, they are not interested in high technology. I know that from experience. My venture capital company is managed by Capital Alliance Management. We are managing this $40 million fund, and we are fully invested, but we have been out trying to raise other pools of capital and manage other pools of capital for the pension funds. If you go to them, they say, "We are not interested in high technology. If you were into building sports arenas, we might talk to you, but we are not interested in high technology because we do not know how to make money at it." That is what you are up against.

Senator Meighen: Why are the labour funds in?

Mr. Doyle: The labour fund program is an outgrowth of the solidarity fund in Quebec, as you probably know. About 10 years ago, the federal government decided to allow the labour unions to get into the venture capital business.

The way our fund got going was that a bunch of us decided that Ottawa needed a venture capital fund. Despite all of the high technology going on in Ottawa there is no venture capital fund here; it is all in Toronto -- which is another problem you might want to address. Toronto is not where the entrepreneurship is; it is where the money is, but it is not doing much good sitting on Bay Street.

We decided that Ottawa needed a venture capital company. Therefore, we decided to find a union to sponsor us. The union that we contacted was the Professional Association of Foreign Service Officers. The way it works is that you write a prospectus and you go out and raise money from the public.

I would say, however, that it is a somewhat clumsy vehicle. For instance, I have 11,000 shareholders; every time I communicate with the shareholders it costs $20,000. You get calls from civil servants at both the federal and provincial level about every month asking you how many jobs you have created this past month. It is not the way to do it. We are in the business, but I cannot help but feel that there have to be better sources of venture capital than that.

Senator Callbeck: The first question I have is on the amount of angel capital investment allowed. In Canada it is about $100,000; in the States and other countries we are told that they have a ceiling of $50,000 or less. Why is that?

Mr. Doyle: I am not aware of any statistic that says that there is any real difference between the size of the angel deal in Canada versus the States. Do you have some data that I am not aware of?

When you talk about angel investors, you are literally talking about people who go all the way down to $25,000. I know of people in this city who, if a couple of kids came to them from Carleton University and said, "We have this idea for a new multiplexor," or something, it would not be unusual for a couple of these angels to make out a cheque for $25,000 each. They would then say, "Let us see where we go from here. If you need more, write us a business plan and we will take it to the next step."

People say that the angel investor typically tops out at about $500,000, but I know of angel investors, even in this city, who will go all the way up to $4 million and $5 million.

Senator Callbeck: That is what Professor Allan Riding from Carleton University said when he was before us as a witness.

You say there is nothing wrong with management in Canada. We are told that Canadian angels turn down 97 per cent of proposals that come to them; and they reject three-quarters of them before reading the business plan. The most frequent reason they give is the perception that the management skills are not in place. Am I right in assuming you feel that we have enough people with the knowledge, the skills and the know-how?

Mr. Doyle: We have enough people with the native skills, but those skills have to be developed. That is the point I am making. Whenever I do an angel investing, for example, I typically get three or four of my buddies into it with me. If some of these brains from Carleton come to me with an idea, I will not invest in it personally myself. I will go to four or five of my friends and say, "Let us each one of us put $20,000 or $50,000 into this thing. Let's form a board of directors and put some formality into the management of this company right away. If one of the founders is not suitable to be the president, then we can parachute in our own president."

That is what I call the heavy lifting that has to be done at the early stage of the investment spectrum. It is the kind of work venture capital companies do not have the time to do; nor do they want to do it. Angels are best equipped to do that. If you put the effort into it, you can help to turn the situation around.

I will give you one example in that regard. Here in Ottawa there is a professor from Carleton University who has developed a new type of software for designing microchips. He quietly went out and got an angel investor in the city to help him out. That angel investor mentored him along. When it got to the point where he needed a bigger pool of capital, the angel came to us, the venture capital company, and we put $2 million into it. We built a proper board of directors around him. We put a lot of effort into it -- much more than most venture capitalists ever would. That company will do about $15 million in sales this year. Its growth is doubling every year. The innate skills were there. This fellow was a professor. I can guarantee you that he will be one of the world's top presidents. If the desire is there, I am convinced you can make a manager out of anyone.

Senator Callbeck: Is there anything that governments should be doing to try to develop those innate skills?

Mr. Doyle: Do you mean to train managers or something like that?

Senator Callbeck: I mean to help get more people who have the knowledge and the skills.

Mr. Doyle: I think they are out there. I would be willing to bet you could start 50 more companies in this city today if you had a more vibrant angel market. I will bet that same statistic holds true across any major city in Canada. The people with the ideas are there. They do not know much about management. However, if you can get them in contact with wise old birds and tough old birds like myself, we will pound the management into their heads one way or another or we will not get our money. I do not think governments belong in that space at all.

Senator Callbeck: What about bringing these people together? There seems to be a problem in getting the angels, the people who have the money, in contact with the people who have the ideas.

Mr. Doyle: That could be the subject of another speech here. I think that is a role for economic development officers at the municipal level. The people who really want to make technology happen in this country are economic development officers in Cornwall, Brockville and Red Deer, et cetera. The problem is they do not have any tools at their disposal. If you are going to do something, I would suggest you have some kind of program where they might upgrade their skills in marrying up the angels with the entrepreneurs.

I see one government department that has a program to allow towns and cities to make themselves investment ready. Unfortunately, those are nothing more than sales pitches. That is encouraging the Red Deers and the Monctons of the world to make trips to Silicon Valley. Those things are totally non-productive. You are far better off to teach those people how to build their own high-tech industries back home.

Senator Callbeck: Are you talking about something that I think is called the Canadian community investment program?

Mr. Doyle: That sounds like it. I do not believe in it at all.

Senator Callbeck: Are there ways you think government could improve that?

Mr. Doyle: There are two ways in which a community will get into the new economy. The first is to import it. The second is to grow your own. I am saying you can grow your own faster and better than trying to import it. Unfortunately, if you look at that program, you will see that it is all geared toward an importation strategy. Anyone who knows anything about the new economy will tell you that an importation strategy is a mug's game.

Senator Callbeck: The other day Professor Riding said that one of the things that discourages angels is the liability insurance.

Mr. Doyle: Yes.

Senator Callbeck: What can be done about that?

Mr. Doyle: I mentioned a minute ago that the first thing I do when I invest as an angel is to try to round up five or six of my friends; we then form a board of directors. However, the minute you become a director of a company, you have no idea of the liabilities you will be taking on. There are all kinds of them. You might put together a task force to look at the liabilities. The other thing is that I cannot get insurance. The boards of directors of an early stage company cannot get liability insurance for directors and officers.

First, the government must stop loading so many liabilities on to directors' shoulders. Every time a budget comes out, a director finds that he has more liabilities. Whether it be in regard to unremitted GST or some new environmental legislation, guess what, they pierce the corporate veil and go right after the director. It is a huge problem. It is a major impediment to angel investing because they simply do not want to take on directors' liabilities. Yet, without forming an official board of directors, you cannot enforce the discipline on the kids.

Senator Kenny: Three points struck me in your presentation. You talked about reliable statistics, government grants and the rollover provision. I have questions on all three points.

Concerning reliable statistics, in the course of Senator Angus's comments you said that the problem was principally one of definition. Can you be more specific?

Mr. Doyle: For example, as I said earlier, the OECD is a recognized authority on industry classifications, and so on. Canada will simply not accept those and say that what the OECD calls a software company we will also call a software company. For some reason or other, we have the attitude that our high technology industry needs a different classification system from others. It is very difficult.

A reporter from one of the newspapers called me up the other day and asked me if I could tell him the total sales of the Canadian high-technology industry. I said, "No, I cannot. Nobody else can either."

The publication of Industry Canada's, which I mentioned earlier, refers only to the information, communications and technology sector. That is because there is one of those sectors inside Industry Canada. If you try to get your arms around the total high-technology community, you cannot do it in this country.

Senator Kenny: We are members of OECD. OECD operates by consensus, which essentially means unanimity. You are saying we do not follow the definitions that OECD develops.

Mr. Doyle: That is right. We do not even attempt to track them. In other words, if you go to Statistics Canada, they will say, "Tell us who wants this stuff. Tell us what Canadian company wants it." It is not Canadian companies that want it; it should be our Canadian policy makers who want it.

Senator Kenny: Why do they say they are not interested in OECD definitions?

Mr. Doyle: The Americans also have a definition, which is a more refined version of the OECD's, but they are not interested in that either. They are simply saying that no one has told us that it is important to keep track of how Canada is performing in the new economy. I think that is a pretty fundamental problem in this country. If you do not have any data to manage something by, then you sure as heck are not going to manage it.

Senator Kenny: I hear you.

Mr. Chairman, if we do not have on the list of witnesses someone from Statistics Canada, perhaps we could consider that.

Moving to government grants, the message I received from your remarks was that, with the exception of IRAP, you did not think that any were useful at the start-up stage of a company.

Mr. Doyle: With the exception of IRAP, none of them work at the start-up stage.

Senator Kenny: Would you do away with them all?

Mr. Doyle: Yes. In return for a significant break in the tax system, I would do away with all grants to the high-technology community. Many of my friends in the high-technology community, when they read these proceedings, are going to tar and feather me, but it is time we stood up and got serious about building this industry, and you will not do it with government grants.

Senator Kenny: You covered yourself by saying it would be in return for a significant tax break.

I have a question with respect to the rollover provision. It seems to me that, in the scheme of things, you are talking about a fairly small exemption if the rollover provision was applied in Canada.

Mr. Doyle: That is right. That is what is so insidious about the whole capital gains tax system. As I understand it, it does not really generate that much tax for Canada in general, and, if Canada did some of the fine tuning that the Americans have done, the impact would be peanuts.

Senator Kenny: Let us not talk about all of capital gains, because that is a big bite. Let us just talk about the small bite you are speaking of in terms of the rollover provision. That would be a fairly small part of the capital gains bite.

Mr. Doyle: That is right.

Senator Kenny: You could, in political terms, describe it as an exemption to capital gains.

Mr. Doyle: Yes.

Senator Kenny: I gather you talk to the people at the tax policy branch. When you get into a debate, what are the pros and cons they give you? For every tax proposal, there is an upside and a downside. What are the negatives? Is it unfair? Does it hurt someone? Is it that they do not think it is revenue?

Mr. Doyle: They seem to throw up their hands and say it will never sell politically. Then, when I go back to the politicians and say, "Your civil servants say it will not sell politically," the politicians pound the table and say, "Let us decide what will sell politically." For one reason or another, there is a disconnection there.

I think it is a matter of civil servants second-guessing what their politicians want to hear and what the politicians will try to sell. If this rollover provision were properly explained, if it were related to our ineptness as a trading nation and our ineptness in the new economy, I personally think it should be pretty easy to sell.

The Acting Chairman: Thank you very much, Mr. Doyle. Your presentation was quite illuminating.

Our next witness is Mr. John Cranston.

Mr. John Cranston, Chairman, Alberta Capital Market Foundation: Mr. Chairman, I may depart a bit from my presentation to comment on what Mr. Doyle said this morning. I agree with him in almost every aspect except one: I think there is a huge and fundamental flaw in our education system in this country.

I appreciate your invitation to discuss the Alberta Capital Market Foundation, to tell you why we exist and what we do. I will also be pleased to answer any questions you may have about the foundation or other matters related to capital formation.

By way of background, my personal background encompasses approximately 20 years of experience in the investment industry, both as a direct participant with a large, national investment firm, and with various bodies charged with industry oversight. I am the founding chair of the Alberta Capital Market Foundation. We are the new kid on the block. I am also a member of the board of the Alberta Securities Commission, a member of the board of the Investor Learning Centre of Canada, and a past chairman of the Alberta Stock Exchange.

The Alberta Capital Market Foundation was established last year by the Securities Commission in Alberta as an arm's-length organization which would provide funding to educational projects designed to improve the level of understanding and competence of both entrepreneurs and investors. We see the capital market as a two-sided enterprise and want to see what we can do about both areas. It is a private-sector organization set up by the commission so it could lever its interest in these areas with private-sector participation.

We have just over $1.4 million. Initially, we received $1 million from the commission, $200,000 from the stock exchange as capital, and $200,000 somewhat involuntarily from a certain investment dealer, who ran afoul of some regulations, the penalty for which stipulated that the money go to educational purposes. The commission has made no further funding commitment to the foundation. That does not mean we will never see another dollar from them, but we will to have ask, and there are some legal and arm's-length reasons for that. We are also free to seek funding from any other organization or company.

The foundation board is made up of representatives from the commission, the Alberta Stock Exchange, the Alberta District Council of the Investment Dealers Association, the Treasury Department of the Alberta government, the Law Society of Alberta, and from both the entrepreneur and educational communities. We have no staff. We have an administrative agreement with the Securities Commission that enables us to "borrow" the time of one of their commission lawyers -- and we are doing that more and more often -- and to obtain some other services as we need them.

The foundation is not restricted as to the amount of money that it can distribute in a given year. Traditionally, with that amount of capital, we would be limited to about $70,000 a year, but we cannot afford to make large grants. Our intent therefore is to partner with various groups or individuals in the public and private sectors. We will respond to initiatives brought forward from those groups as well as being a bit of a gadfly and encouraging proposals where we see a need. We will say, "Come to us with this and we might look favourably on it."

Our first grant illustrates that point. As part of Investor Education Week, which incidentally is this week, the Canadian Securities Administrators, which is the overseeing council -- perhaps I should call it the virtual National Securities Commission -- worked with the Investor Learning Centre to develop a presentation on understanding risk to be presented at public forums across Canada this week. In Alberta, Calgary and Edmonton were chosen as the logical centres, as they always are. However, at that meeting I asked the organizers how much it would cost to do it in 10 places instead of two. They did not know. I said, "Give me a budget and we will look at it." They did. We looked at it. It is now happening in 10 places, such as Peace River and Grande Prairie and Fort McMurray and Red Deer and Brooks and Medicine Hat and Lethbridge. In this way, everyone in Alberta will get exposure to this, not just the people in the major cities.

One of the areas that the foundation wants to examine is spreading out what is happening both with respect to entrepreneurs and investors.

We have also undertaken, in conjunction with the two major universities in Alberta, a survey of information and educational programs that are currently available to investors and entrepreneurs. It relates a bit to some of the things Mr. Doyle was saying. We hope to survey the scene and find out what is out there, because we have been led to believe, anecdotally, that there is a lot out there, but it is not connected in any way. We hope to create that connection, provide some kind of a database to people on our web site, look at what is needed, and be able to make a better judgment about whether a proposal fills a hole.

The fragmented approach seems particularly true with respect to entrepreneurs. I will give you an anecdote that relates to what Mr. Doyle was saying earlier this morning. When our foundation was launched, I received a lot of phone calls, letters, e-mails, and so on, related to what we were about to do. I added them up a while ago. I had 13 inquiries from agencies of one level of government or another who wanted to talk to us about what we were going to do. I went back to them and attempted to ascertain exactly what it was they wanted and discovered that, in most cases, they were out there not knowing what they were doing and wanting someone to give them some suggestions. "We are here," they would say. "We have been established. We are here to help. What do you think we ought to do?" Some of these organizations have been in place for several years.

I am in agreement with what Mr. Doyle was saying earlier. We have a whole lot of folks out there trying to do something. They do not talk to each other. They report to different levels of government, and, as a net result, not a whole lot that is very good happens.

We are hoping to serve some useful purpose by saying, "This is what is out there. Do you know that you three folks are all doing the same things? You all report to different levels of government. You are all spending money, and it is perhaps not being spent very effectively." If we can contribute in that, we think we will be useful.

In a report for Industry Canada entitled, "Investment Funds in Canada and Consumer Protection", Glorianne Stromberg hesitantly concludes that education may be the answer to many of the problems she was asked to address. She tends to be a fan of regulation. As a regulator, I am not a fan of regulation. I think it is necessary in some areas, but as little as possible, please. We have no hesitation about the problem with education, and we agree with Ms Stromberg that the simple provision of information will not do the job. There is a fundamental flaw in our education system. As I was listening to the conversation earlier, I was tempted to ask the senators around the table, "How many of you learned what you know about business in school at any level below the MBA level?" I dare say the answer would have been none.

There is something really wrong in the way that we in Canada look at business. Business is wrong, if you listen to a large part of the population. We all depend on it for what we do, and yet somehow it is wrong.

Let me give you a little more of my background. At one time, I was a reporter. I have also worked for several educational institutions. I tend to know many people in those areas. In my investing business, I ended up with perhaps a disproportionate number of teachers and reporters as clients. In terms of their personal knowledge of fundamental economic issues, they are at the bottom of the pile. They really do not have a clue. This lack of knowledge leads to suspicion, because if you do not understand something, you are suspicious of it. I would ask you how we can conclude that they could pass on to their students, to their readers, to their listeners, a better understanding of economic issues than they have themselves. There is a problem there.

It also causes them to look to government for solutions in areas where I think it is not appropriate for government to be. There is a great temptation, particularly in tax policy, to attempt to promote one area of the economy at the expense of others. In Alberta, the investment community has recently encouraged the treasurer not to provide special tax incentives for technology. We told the treasurer, "You put them up there, and we will grab them. We will take you for every penny we can, and we are very good at that, but it may or may not do any good for what you want to do."

I was personally involved a number of years ago with a critter called the Alberta Stock Savings Plan. We managed to give investors a 13.6 per cent compounded annual rate of return for two years with zero risk because the company never did business. However, we benefited from a 30 per cent tax break, paid out a little bit of dividend from our return in the money markets, and everyone went home happy, except presumably the government.

If you put up a deal, the investment community in this country is sufficiently entrepreneurial to be able to take maximum advantage of it -- such as the scientific research and tax credits. I know a fellow who built a houseboat for the tourist business with that. It qualified and was a wonderful deal.

The foundation shares the view of the investment community in Alberta that we should not be providing selective tax breaks. Government, frankly, is lousy at picking businesses. We believe the market should determine which business ideas should move forward.

We think the tax on capital gains, agreeing again with Mr. Doyle, is just generally too high. We believe that current legislation skews the investment decision by providing greater tax relief for investors in the shares of companies not listed on a stock exchange. Ironically, we are about to face this issue head on as we contemplate the merger of the VSE, the ASE and the CDN market, along with certain parts of the Montreal market and the smaller companies on the TSE.

As an investor in shares traded -- I will not use the word "listed," because that is the key word -- but as an investor in shares traded on the CDN over-the-counter market, you can take advantage of the small companies' $0.5 million capital gains exemption. You can also write off your losses in the trading of those shares against any other income. You do not benefit from that exemption if the shares are listed on the Alberta, Vancouver, Toronto or Montreal stock exchanges.

A recent witness here, and my sometime boss, Mr. Hess of the Securities Commission in Alberta made reference in his testimony to the financing of Big Rock Breweries that was done in California. He mentioned that they did it down there because they got a better price, and that is certainly one of the reasons. Another reason was that they could do their deal in California, trade their shares on NASDAQ, which is not a recognized exchange in the Tax Act in Canada, and therefore qualify for two more years of beneficial tax treatment because they were not a listed public company in Canada. There is rampant perversity there.

When she was looking this over, my wife asked me if the word "perverse" was the right word. I said, "You bet it is." I hauled out the dictionary and looked; "perverse" means departing from what is reasonable. That is exactly what we are doing with regard to many of our tax incentives; they were designed to provide a benefit but do not.

If you agree that we need lower capital gains or indeed the elimination of them in some areas, that would be wonderful; but stop there; do not go any further than that. Give us a level playing field, give us a reasonable return on our money, and then get the heck out, because the market will make the determination. The market works.

We heard Mr. Doyle earlier talking about angels and what they need to do a break. I went through a small company for a fellow the other day trying to help him out in his investment decision, and we concluded at the end of the day that, after tax, he was probably better to stay where he was, invested in large blue chip common stocks, than he was to help another fellow out with his storage business, because he would not make any more money.

Senator Meighen: Even if successful?

Mr. Cranston: Yes. It was because of the taxes. As Mr. Doyle said, we tax dividends less than we do capital gains. Why would I go out as an individual investor, as an angel, as anyone else, and put money into a company where I have more risk, if I do not get more reward? I need more reward. You have the tax system backwards.

As you may gather, I have some strong views on some of these matters, but I think that concludes my formal presentation. I would be happy to answer any questions you have about the way we are trying to approach things with the Capital Market Foundation and the problems we are trying to solve.

Senator Angus: Thank you Mr. Cranston. It has been very enlightening. You can give your wife some comfort about your use of the word "perverse," because Mr. Doyle used the word "obscene" as an adjective for the same horrible structure that we have in our capital gains tax.

I have been looking over your foundation's very interesting Web site. I want to ensure that I understand what you do. You are not angels.

Mr. Cranston: No.

Senator Angus: You are not there to finance small business.

Mr. Cranston: No.

Senator Angus: You are there to educate, similar to the Adam Smith Institute.

Mr. Cranston: We are not there to educate in the direct sense. We are there to work with other people who will provide education. We will work with anyone. We will even work with a government agency, although I have a personal bias against that, wondering why we should provide more money when it is already being funded. Our primary objective is to work with existing institutions and provide some seed capital, if you will, for educational enterprises.

I would like to see the establishment in Calgary and Edmonton, for example, of what I will call entrepreneurial clearinghouses. If an entrepreneur has an idea, he could go to that clearing house and discover how to improve his management skills and how to write a business plan. He could take a two-day course or a two-year course. All of those sorts of things would be made available to him.

It is entirely possible we could include in that, for example, places to go to look for money and places to go to look for mentoring and assemble a database at one point where people could go to find out, at the early stage, whether their idea had any merit. Would people who have experience think it was any good?

If it is any good, now what do they do? What is the next step? Here is where you can go to fill in all the things you need to fill in.

Senator Angus: I understand now. There are applications referred to here.

Mr. Cranston: They would be from colleges, universities, private companies, anyone who wishes to do things. We have four or five in the mill right now, a couple from people who were previously in the investment business, a couple from people currently at institutions. We have one in the mill from the investor learning centre, an experiment with something in Alberta. We have another one from a professor who has just left the University of Calgary and set up his own business of educating entrepreneurs.

Senator Angus: The idea is to help you put the deal together. For example, if one had an idea for a real estate project in Alberta but did not know just how to get the developer and all the different elements together, could you help?

Mr. Cranston: We would help you to develop a database that would show you where to go and how to get the job done.

Senator Angus: I am from Quebec. We have the Quebec Stock Savings Plan, which has had mixed reviews over the years. It is probably a good plan, but has not been used properly. It tweaked my interest when you mentioned the Alberta Stock Savings Plan, because I thought maybe you were going to get into this as a "good" thing, but then you concluded by saying, "Don't do any of these things; just remove the capital gains tax, and we will all do fine."

I kind of like that, but I am not convinced that the Quebec Stock Savings Plan is a bad thing. However, I would be interested in your comments on these types of things. For example, I have often wondered if they go far enough. Let us say you have the incentive to buy a struggling, small-cap company, and you do and you get the going-in, front-end, tax break; but then you are nailed later on with the capital gains tax. Then there is this false sort of cost base, and instead of your cost base being what you paid for it, it is zero, and then you are paying an even bigger slug of capital gains tax and everyone goes away feeling sick.

Mr. Cranston: I can tell you how they are all sold, because I used to do that. They are sold on the basis that the government is taking your risk; so how can you lose? You can still lose, as it turns out. There is a great deal of history on that. That is how they are sold. Let the government take your risk. We are selling you a higher risk investment, but because of the government tax break that reduces your risk; therefore, you should do it. At the end of the day, in my opinion, it does not make much sense.

People should take appropriate risk for their circumstance and they should be appropriately rewarded for taking that risk. We have it backwards in this country. I will go back to what I said about the education system. The average Canadian -- I am probably overstating the case here, but the average Canadian coming out of our education system, in general, believes that the making of money is not a terrific thing. There was a survey reported in the papers yesterday by an agency that talked about the fact that Canadians' greatest fear is their economic circumstance. I am sorry I cannot think of the name of the agency, but the conclusion was that we need to beef up the safety net. I do not agree. The logical conclusion from their fear of their financial situation is that they do not understand their financial situation. They do not understand where they are and they do not understand what to do about it. If they understood these things, there would be less fear. That probably starts in grade 3. It does not start with an MBA program. We need to do something about that.

I realize that this is a federal body and that education is a provincial responsibility. Frankly, as a citizen of Canada, I do not care. Somebody has to do something about it.

Senator Angus: Does it flow naturally from what you are saying that the political saleability will be there? I asked Mr. Doyle what the government says to him when he says these things are happening in Canada because of this perverse and obscene capital gains tax. He told me that they say it will not fly politically; however, if we started educating Canadians in grade 3 to be proud to say there are not enough millionaires in the country and to be proud to say they will make capital gains, then it would be more politically saleable. Is that your thinking?

Mr. Cranston: I think that is exactly right. I come back to my comments about teachers and the media. I worked for a number of years in a media organization that is still quasi-funded by the Government of Canada; just knowing the people I worked with I realize that I was thought of as a bit of an oddball. The general perception is that it is not really a good thing that there be millionaires and it is discouraged. We take great pride in almost denigrating the salaries of all the CEOs in the country. The figures are trotted through the newspapers at great length. You do not see that in the United States. I am not a fan of things American, particularly, but why we are so hung up on that?

Senator Angus: Exactly.

Mr. Cranston: It goes back to day one.

Senator Angus: I remember so vividly when Finance Minister Michael Wilson made the statement, almost as an aside, that what we need are more millionaires in this country. From that day on, the guy was torpedoed, pilloried and held up to ridicule by another political organization. It seems to me that he was so right. You can go down to any one of thousands of resorts in Florida, or places where not only rich people go to get away from the winter here, and you will find that there are more millionaires on one street than there are in all of Canada.

Mr. Cranston: It is the millionaires who are the angels, who fund the companies, who start the companies, who create the jobs. If you do not understand how business works, you cannot do the math and make the connection.

Senator Angus: I was first intrigued and then dismayed by a recent incident. I thought it was so wonderful when I read Diane Francis's column, when she got the inspiration to phone Paul Desmarais, and he made his statements quite candidly and in good faith. In effect, he was somewhat blind-sided on the telephone during the holidays. The next day a certain person in power in Ottawa, who probably benefited greatly from that same Mr. Desmarais, denigrated him. The same thing happened with Jimmy Pattison a few days later.

I feel it is good that we get these successful people to come forward, but it troubles me that it is turned against them and they are criticized, and it makes me want to jump to their defence.

Mr. Cranston: There is a downside from a political point of view in creating a greater understanding of business among the general populace. We have a few people talking about tax reform, or changes in the tax system, now. If the general populace begins to understand, all hell will break loose because everyone will be demanding some changes.

The Acting Chairman: I agree with what both Senator Angus and the witness are saying, but does it not go beyond business? Is there not some kind of culture problem in Canada where we do not applaud winners? That is true of the arts. It is true of many endeavours. Hollywood is loaded with Canadian expatriates who are doing very well. There are other reasons for that, because our industry here is not sophisticated or advanced, or whatever. However, the fact is we do not applaud winners.

Senator Kenny: How about size of market?

The Acting Chairman: The size of the market, of course, encourages people to move. There is no question about that.

Senator Angus: We punish success.

Mr. Cranston: Who are our famous sports heroes? Ben Johnson? The people who have not lived up to the mark. We have venerated Gretzky, but until he went to the States and was made famous he was not as famous here in his own country.

Senator Kenny: You are from Alberta. He used to play for Edmonton.

Mr. Cranston: Yes, and we hated him.

Senator Angus: I am fascinated by what your foundation is doing and I applaud you. I am fascinated by the work of the Adam Smith Institute, which is something in the eastern part of the country run by a guy named John Dobson, who has similar views to your own of the Formula Growth Fund.

This need to educate and to turn this tidal wave of abuse to make it politically acceptable to advocate these views is why I am here. This is the biggest challenge we are facing. People who have paid a bit of tax in their lifetime and are proud of it feel they now have a right to say something.

Mr. Cranston: There is a program in incubation being developed by the Industrial Learning Centre of Canada in conjunction with various provincial ministries. I am somewhat concerned that it will not get off the ground. It has been around for a couple of years now. It involves three levels of education. The intent is to have this built into the core of education in all of the provinces. The program would start in about grade 3 or 4, talking about the neighbourhood and the development of the shoe store and how the shoe store works. That would be taken through to a senior high program. It costs a significant amount of money. It has been kicking around, but it is not off the ground yet.

Senator Angus: Many people have been talking lately about the thresholds in certain protected industries in Canada. I am talking about radio and telecommunications, transportation, banking and so forth. It is inevitable, it seems to me, that these thresholds will be removed. Then the real entrepreneurs will be coming in and, perforce, perhaps the worm will turn. Do you think I am barking up the wrong tree?

Mr. Cranston: You are correct in a sense. However, we run a risk in the interim. The way we are handling foreign investment makes us very subject to cherry-picking by foreign companies that can come in, trade their stock on a much higher multiple than our company's stocks for these companies in a takeover. We risk losing the very best businesses.

Again, I return to the fear of success or the negative way of looking at things. You spoke about the banks as a protected industry. Do not try to tell them that right now. They do not feel very protected. We must be careful about how we handle this situation or we will lose the whole industry to other countries where things are already more open.

Senator Angus: When I say "protected," the concept is not to protect the banks but to protect all these poor little Canadian people who, it is alleged, do not want to be millionaires.

Mr. Cranston: We have on our foundation board the CFO of the Canadian Western Bank, which is not one of the big five, certainly. She is fond of telling me, "Well, give us a chance. If they do not want to be there, we will be there. If there is a business case for it, we will be there."

Senator Meighen: Just to follow up, Mr. Cranston, I applaud your long-term solution of education. That is absolutely necessary for there to be a change in altitude in this country. However, I am not sure I will live that long. I would like to see some change before it is too late. It seems to me that the only way that that could possibly come about is through some political leadership. When you exhibit leadership, you take a risk. You said earlier that all hell would break lose, or words to that effect; you were probably less vulgar.

Mr. Cranston: Those were my exact words.

Senator Meighen: Tell me, do you really think that?

Mr. Cranston: When I said that all hell would break lose, I meant that there are a few of us now who are calling for reductions in capital gains taxes and for a better playing field for business.

Senator Meighen: Are you making progress? Did you find a more receptive ear?

Mr. Cranston: Every one talks about Alberta as an unusual circumstance. I think we are finding a very receptive audience in Alberta. One of the reasons we want to get out to the smaller communities is that there is a receptive audience out there, in particular.

Senator Meighen: I understand the situation in Alberta. What is the situation in Ottawa?

Mr. Cranston: For those of us from Alberta, it is a different world. Perhaps we do not understand it as well as we might. We are hoping, by doing what we are doing in Alberta, to show leadership and to show some results in the near term.

The education program for grade 3 and up is very long-term, as you say. We are in the renovation business. We are trying to fix the house as it sits. We are hoping that by short-term programs, filling holes and building bridges to get things going quickly, we can show some results. We hope to show within a very few years that there is an impact on the GDP in Alberta, because more people are starting more businesses and the employment situation, which is already pretty good, is getting better, so that people will look and say, "They must be doing something right."

Senator Meighen: You touched on something that has always fascinated me. Why are governments, particularly the one in Ottawa, so loathe to try something. They seem to think that, if they take a particular position, it is there for all time. It could be removed with the stroke of a pen. Does it happen in Alberta at all that the authorities are willing to try something and, if it does not work, to remove it?

Mr. Cranston: I guess the foundation exists and that is evidence of that. We are not government; we are about two steps removed from it, because the commission is officially not government now, although it reports to the treasurer and the treasurer was very sympathetic to and encouraging in the establishment of the foundation. He has said, "If you want to change something, let us know."

Senator Meighen: Do you feel that he is watching your progress, or that you are spinning your wheels and going nowhere?

Mr. Cranston: That is why we have $1.4 million. That is the end until we prove ourselves.

The Chairman: I thank both witnesses for their presentations. It is interesting to note that they were met with some very receptive ears here.

The committee adjourned.

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