THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, February 12, 2026
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 10:31 a.m. [ET], in camera, to study the subject matter of those elements contained in Divisions 4, 9, 10, 11, 12, 13, 14, 15, 16, 17, 22, 23, 37, 39, 43 and 45 of Part 5 of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025; and, in public, to study and report on access to credit and capital markets for small and medium-sized businesses as a foundation for growth and productivity improvement in the Canadian economy.
Senator Clément Gignac (Chair) in the chair.
[Translation]
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: Honourable senators, my name is Clément Gignac, senator from Quebec and chair of the Standing Senate Committee on Banking, Commerce and the Economy. I wish to welcome all of those who are with us today, as well as those watching us on sencanada.ca. Before we continue, I would ask my fellow committee members to introduce themselves.
[English]
Senator Varone: Senator Toni Varone, Ontario.
Senator Fridhandler: Daryl Fridhandler, Alberta.
Senator Loffreda: Welcome. Senator Tony Loffreda, Montreal, Quebec.
[Translation]
Senator Ringuette: Welcome. Pierrette Ringuette from New Brunswick.
[English]
Senator Karetak-Lindell: Nancy Karetak-Lindell, Nunavut.
Senator McBean: Marnie McBean, Ontario.
Senator C. Deacon: Colin Deacon, Nova Scotia.
The Chair: Senators, this is our third meeting on our special study focusing on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the Canadian economy. I wish to welcome our witnesses. We have here, in person, Professor Daniel Wilson, Chair in Business Law & Regulation and Associate Dean, Academic, Faculty of Law, University of Calgary. Welcome. We also have Professor Bryce Tingle, N. Murray Edwards Chair in Business Law, Faculty of Law, University of Calgary, by video conference. Mr. Tingle, as you appear by video conference, if you have any technical challenges, just let us know.
I think that you have prepared some opening remarks. So you have the floor, and I’m sure that will be followed by questions and answers.
Daniel Wilson, Chair in Business Law & Regulation and Associate Dean, Academic, University of Calgary, as an individual: Thank you very much. Thank you for the invitation on a topic that is very dear to our hearts.
We will split our opening remarks.
It is widely recognized that Canada is facing a major productivity crisis and a competitiveness crisis. This has been widely reported, and it is widely recognized by everybody in this room. In particular, our productivity has declined materially compared to our next-door neighbour the United States over the last 20 years but to an even greater degree over the last decade.
To improve our economic competitiveness, Canada as a country must generate more companies that scale and grow to become significant innovators, employers and revenue generators. This was a matter that Minister Joly pointed out in a key statement about six weeks ago, when she focused on this as one of the priorities of the Carney government — to increase the number of companies that scale in Canada from small to large employers.
The empirical data clearly demonstrates that Canadian entrepreneurs originate innovative start-up companies at a rate that compares to any other country in the industrialized world. However, where we fall down compared to other Western economies, and in particular compared to our neighbours to the south, is that we don’t scale companies at the same rate. We have significantly lagged the U.S. in scaling our best start-up companies.
This is not an idiosyncratic view that is held by a small group. It has been widely reported that this is one of the leading — if not the principal — causes of our decline in economic productivity. We simply need to scale companies better in order to reverse our productivity decline.
The reason for our failure to scale is really quite simple. Once a company takes money in the start-up phase from outside investors, the clock starts. The clock starts to a liquidity event. Outside investors are looking for a return of capital. Most of these are institutional capital. They have defined terms when they must pay out to their investors and generate a return. There are basically only two options to generate liquidity: going public or selling your entity.
The problem is that if the liquidity option is to sell your company to a third party, most of those purchasers are outside Canada. In fact, a recent study showed that, of 154 acquisitions of Canadian technology companies over an eight-month period, only one of the purchasers was a Canadian-based company. So nearly all of our most innovative companies that sell in a trade sale to a purchaser are being sold to foreign interests, and this is highly problematic.
When a company is sold to a foreign interest, a great deal of opportunity is lost. As a company scales, there is much economic gain to be achieved if that company remains in Canada and in the hands of Canadian investors. If a company is sold to an outside investor — a non-Canadian investor — what opportunities are lost? First, the management team almost always moves to become co-located where the investors are. The growth in high-value senior management — senior technology jobs — almost always occurs at the locus of investment. That is where the new employment is. The ability for mid-level employees to acquire the experience of being involved in a rapid growth company and upskill themselves, to the extent that they gain knowledge about how to start other companies when they leave and how to become the next generation of entrepreneurs in spin-off start‑ups, disappears because we lose those opportunities in Canada. These are all highly problematic issues.
The evidence is very clear: When a company scales and is in that rapid growth phase, that is the phase of an economic cycle in which the greatest employment growth happens and in which the greatest investment happens. So when companies sell to foreign interests, all of that benefit is being transferred to foreign countries.
Bryce, if you are okay with it, I would like you to jump in and lead the second part.
Bryce Tingle, N. Murray Edwards Chair in Business Law, University of Calgary, as an individual: The question is this: Why are Canadian companies choosing to sell? There are many disadvantages to selling your company. You often lose your job; you lose the ability to realize your vision as an entrepreneur; you lose the chance to be recognized as an important business person who is building a new institution; and your company loses its distinctive character and culture.
Twenty-five years ago, these sorts of considerations led to nearly all entrepreneurs wanting to go public. Combined with our weak private venture capital industry, Canadian entrepreneurs went public at a significantly higher rate than those in other countries. We had the only successful public venture market in the world, which is the TSX Venture Exchange and its predecessors. Canada had four times the number of public companies per capita as the United States and the United Kingdom.
Going public allows companies to scale up in Canada while permitting early investors to exit the business. It provides locked-in capital and, therefore, the opportunity to build a business for the long term, not in anticipation of a sale in seven years.
Unfortunately, Canadian public markets have been collapsing for decades. We have lost approximately half of the operating companies on the TSX this century. The problem is not that companies have increased the rate at which they leave the TSX. This number really hasn’t changed very much. The problem is that companies are no longer willing to go public. The IPO market has disappeared. In fact, the TSX has to rely almost exclusively on the graduation of junior companies from the TSX Venture Exchange in order to secure new listings.
The Canadian junior market, like the TSX Venture Exchange, has been more resilient than the senior market in terms of operating companies over the past 17 years. However, the number of junior companies graduating annually to the TSX has been insufficient to upset systemic attrition.
Moreover, the Canadian junior public market is also at risk of entering a period of ongoing operating company decline. Since 2008, the companies that are pursuing a public listing are increasingly limited to entities that cannot secure private institutional capital, meme stocks and short-term market bubbles, including things like crypto and cannabis, few of which generate positive cash flow, and mining exploration companies that are effectively lottery tickets. In fact, the last two years have seen the first significant decline in junior public operating company listings occurring during a period of high commodity prices. The number of operating companies listed on the Canadian junior market has declined in recent years by more than 8%.
Improving the quality of our public markets will take significant effort from governments and regulators. Most importantly, it will take a mental shift from running our public markets with an exclusive concern for investors to running them with a view to making them more attractive to entrepreneurs. We have to make corporate managers want to list their companies on our public markets.
I will conclude with this final remark, and then we can talk about possible solutions in the question and answer if people are interested.
The depth of the problem basically means that Canadian governments and regulators are going to have to fundamentally reconsider the foundations of corporate regulation and taxation, and be willing to take a risk at implementing a number of innovative reforms in multiple areas. Thank you.
The Chair: Those were very interesting opening remarks. Thank you for that.
Senator Fridhandler: I want to digress a little bit because I know that you — Professor Wilson — wrote a very interesting paper called “Protecting Who from What? The Case for Opening Up Private Company Finance to all Canadians” a few years ago, published in the Manitoba Law Journal, where you addressed some restrictions on the ability for companies to access capital. In fact, you suggested that it was either 95% or 98% of Canadians that couldn’t even put their money up in a private company, but they can go and buy crypto and they can blow their brains out on VLTs and buy lottery tickets, but they can’t get into the opportunities of private companies. Could you comment on the restrictions and the ability on the equity side?
Mr. Wilson: Certainly. Thank you, Senator Fridhandler. This arises just from the historical evolution of securities regulation. In order to participate in the exempt market, which all private companies are part of, you need to be an accredited investor. We define “accredited investors” according to a wealth-based matrix, and the idea is that, historically, we have wanted to protect investors above all, and that’s one of the issues. Our protection of investors has superseded our desire to promote the markets. We always took the sustainability and viability of the markets as a given — it had always existed and it would always continue to exist. That proved to be a false premise.
We said, okay, if you are not going to be given all of the benefits of this extensive regulatory system designed to protect investors, on what basis do we allow you to make a decision to put your money at risk without full disclosure, without prospectuses, without continuing disclosure and audited financial statements? The regulators, over the course of the last number of decades, decided that if you are wealthy enough, you can take the risk, assuming that you won’t bet it all, that you will retain some of your investment, but regardless, if you have money, you are allowed to take the risk to lose money.
To me, that no longer makes any sense in the modern environment. I’m not sure if it ever did. I understand the rationale for it. But, to me, it no longer makes sense because the best start-up and growth-stage companies have moved away from the public markets and almost exclusively to the junior markets. Bryce referred to the fact that if you look at the junior markets, only meme stocks like crypto and cannabis have had any traction. It has not been the cash-flowing industrial companies. It hasn’t been the roll-ups. Those have all been funded privately.
If you want to invest in that market, you need to meet the accredited investor definition and have money. That means that if you are a middle-class Canadian — a teacher, welder, plumber or retail worker — and want to do more than get a T-Bill return, you either have to invest in a mature senior company, a meme stock on the junior markets or else truly take a risk on things like crypto, which have no underlying value other than what people ascribe to them, or similarly, highly risky stocks that are listed.
I ask this question: Why can’t I, if I were a plumber, invest in my neighbour’s start-up company if I choose to even though I am not a millionaire? I use the term “millionaire” not pejoratively but, in order to be an accredited investor, there is a wealth test. You have to have $5 million in tangible assets or $1 million in liquid assets, excluding liabilities. By definition, as you referred to, that is no more than 5% to 7% of Canadian people. Everybody else is excluded from investing in the start-up ecosystem. Maybe that was defensible when we didn’t allow people to take risk when gambling was illegal. Now I can bet every dollar I have on how many times Taylor Swift will be shown on the Super Bowl before halftime, but I can’t invest in my neighbour’s start-up technology company. That no longer makes sense.
We need to recast things: As I said, “Protect who from what?” We’re protecting the middle class from investing in the high-value growth stage of the economy. That needs to be fixed. I propose that we allow people to invest based on sophistication and understanding of the risk rather than their pre-existing wealth.
The Chair: Just a reminder to our witnesses that the five minutes include the answer as well. But that was very interesting.
Senator Varone: You referenced a speech that Minister Joly gave, and it is actually apropos to the question that I had put together. In one of your research publications on capital markets, you posed this question: Does sufficient political will exist among Canadian regulators and governments to expend the necessary political capital on a topic such as SME capital financing that is not yet a major priority of Canadian voters?
Then you followed it up with this:
. . . the proper role of government is to anticipate significant economic risks and to act to preserve the viability and relevance of the public capital markets.
Can you expand on that notion? What is this government doing right, and what is it doing wrong?
Mr. Wilson: I must say this: I am very heartened by the priorities of the Carney government. I was heartened by the statement of Minister Joly that identified this as a key issue. For too long, it hasn’t been the priority of the government because it has been taken as a given that the markets would remain viable and vibrant, and now they are recognizing that that’s a false assumption, and that we, the people of Canada, represented by the Government of Canada, the Senate and the Parliament, need to prioritize this. I view myself — and I think my colleague Bryce views himself — as a bit of an evangelist in the hinterlands, putting out the data that says that we are already far down the path of systemic decline in our markets. It is not the type of thing that grabs the attention of the public in the way that some other stories grab their attention. How do we get this into the public domain in a way that the electorate begins to recognize that this is a critical issue and that for their children and grandchildren to enjoy the same standard of living that they have grown up with, we need to take this seriously now?
Tax reform for corporations is never going to play well with the broad electorate. Giving public companies, even junior companies, tax breaks or rollovers to incentivize them to remain in Canada and grow in Canada is something you can’t explain in 30 seconds to the electorate. That’s the role of the government. Even though the electorate may not be able to fully recognize the importance of this yet, it is the Senate and the Parliament as the representatives of the Canadian people to get ahead of this, recognize the importance of it and to push it out to the people, saying, in your interests, we are adopting this as a high priority because we want to ensure that you retain the same standard of living or even increase the standard of living, moving forward.
Senator Varone: Thank you.
The Chair: Mr. Tingle, do you have anything to add?
Mr. Tingle: The federal government has a tremendous amount of convening power. Some of the most likely reforms involve changes to the tax system, which lie within the federal government’s control, but some of them will require the co‑operation of the provinces and the securities regulators.
By the way, I should preface my statements by saying that I am a member of one of the securities regulators in Canada, and, of course, nothing I say here reflects the views of that regulator; they are my own.
At present, Canadian securities regulators have not been moving very much on this issue. The TSX has lost half its companies in the last 20 years. That is a massive decline of the most important market in our economy, and there has been little‑to-no action on the part of regulators, partly because it would take a major philosophical shift to improve the attractiveness of the TSX to companies that might consider listing and growing here.
The federal government can’t directly effect securities regulations, but they can create committees like this one. They can convene regulators and provincial governments to get them focused on this issue. They can say:
Look, we’re selling all our most innovative companies to the United States. We need them to stay here and be built, and that means our capital markets need to work better.
So there is a major role for the federal government, even in areas where, constitutionally, they don’t have authority.
Senator C. Deacon: Thank you for being with us, Professors Wilson and Tingle. We have chatted on the phone, Professor Tingle, in the past, or on video conference, and I really appreciated that. I have also done an op-ed with your colleague Ari Pandes this summer.
I want to focus on the economic framework problem that we have in Canada. This is a market framework problem that you identified very well, Professor Wilson, in your opening comments. It is driving our highest potential businesses out of the country. Just as they have achieved their product clarity and the value proposition for customers, they know how to sell this to customers, they have a growth strategy and just want to put gas in the tank and put the pedal to the metal, they are gone. All the hard work has been done. Yes, there is more hard work in growing a company, but the opportunity is there.
For me, I focus on one incident that occurred, which defined the problem for me, and that was the Know-Your-Product rule. About four or five years ago, when the banks’ initial reaction to making sure that there was a rule that brokers and their firms knew a product that was being sold to customers in their banks — well, it is the banks that own most of the brokers — the immediate reaction of the banks was, “Oh, we know how to solve this. We will just sell our own mutual funds.” That was the reflexive response of our big banks, which control the investment industry in this country and have created a burden of rules that have driven out the independents and the smaller firms. It is not that we want deregulation; it is that we don’t want regulation that creates such a barrier that there can’t be new competitors. But that is what has happened.
I see the problem as being this: When the Bank Act was changed in the mid-1980s, and the banks got to get into insurance, payments, banking and investments, they started dominating every sector of our financial industry in the country. I began in the investment industry. I was a broker from 1979-89. The changes are just so dramatic. I don’t even recognize the industry anymore.
You have summed up your comments really well, but can you speak to the importance of deconsolidating our financial sector?
Mr. Wilson: I will start on this and then pass it to my colleague.
This summer, Bryce Tingle and I consulted stakeholders to understand what people thought were the problems and also potential solutions, and we spoke to some very senior brokers who remain in the few remaining independents. They identified the Know Your Client, or KYC, and Know Your Product, or KYP, rules as some of the major impediments. A subset of the Know Your Product changes is that, in order for a broker to recommend a stock to a client, they have to do an analysis of five comparable products and companies. That simply doesn’t exist in many markets, and they don’t have the resources or the time, and they’re not remunerated for doing so. That basically drives them away from recommending any junior stock to their clients. That was a major impediment.
Bryce, I know you are closer to this issue. I’ll hand it to you.
Mr. Tingle: It’s an excellent question, senator. The truth is that the infrastructure around Canadian markets has changed considerably, and one of the biggest changes is that there has been an enormous consolidation. It has had the effect of moving fundraising to the very top end of the market and made it increasingly difficult for smaller companies to find brokers who are interested in helping fund them.
Dan Wilson has indicated one of the problems, which is that it’s very difficult for a broker to recommend a speculative stock. It’s much easier for them to recommend a large, mature company, mutual fund or an exchange rated fund. There’s a problem in the corporate finance area as well, which is that, increasingly, as brokerages have gotten bigger, and the expenses — partly caused by regulation — have gotten higher, the size of offerings that are attractive to an investment banker has also gotten significantly higher. If you’re a software start-up that needs $2.5 million or $4 million for its next funding round, it’s almost impossible to find any broker or investment bank interested in financing something that small.
Yet, given the dearth of venture capital generally in Canada — but especially outside of Ontario and Quebec — if brokers or investment banks aren’t willing to raise the money, then there is no source. So you see many Canadian companies that are unable to raise money either through venture capital channels or through brokerage channels, and they move to the United States because it’s easier to raise capital there. It’s a dynamic that is, in the long run, impossible for Canada to sustain.
The Chair: That reminds me of my days at Lévesque Beaubien three decades ago.
Senator Loffreda: I totally agree; we have a productivity and competitiveness crisis. We need companies of scale.
I remember, in my capital market days, I saw what you just specified. Many of the purchases — I don’t want to name-drop — were from the U.S., and they needed Canadian banks to also be there. We worked day and night to make that happen at times — if not always.
At one point, somebody told me that Fidelity Investments had more liquidity than all of Canada put together. I looked up Fidelity Investments in the U.S., and they’ve got $4.5 trillion in assets under management. Canada’s gross domestic product, or GDP, is $2.3 trillion — you see where I’m going — the Canadian banking system is close to $13 trillion and our GDP is $3 trillion. We have to compete.
We could go the way of public offerings, but why don’t we go the way of tax incentives? If we look at what the U.K. has done, for example, in employee ownership trusts, capital gains are totally tax free. Ten per cent of transactions now of companies sold in the U.K. are through employee ownership trusts. Employees own the companies.
In Canada, we’re trying to extend capital gains exemption of $10 million, and we’re starting to get some traction on that.
We’re not going to compete with capital with the U.S., and this is why I brought up some of those numbers. That horse is out of the barn now. That ship has sailed. We need to compete on tax incentives with competition at every sector.
To finish up on that, I read an article, entitled “Canada’s banks could lend an additional $1 trillion to help economy adapt, federal regulator says,” and Peter Rutledge quoted that during one of his speeches.
For small- and medium-sized enterprises, or SMEs, maybe capital is accessible; it is there if the Canadian banks could lend up to $1 trillion.
I would like to know your thoughts on all that. Do we focus on tax incentives or easier access to public offerings? The Americans will own most of those shares, anyway. How do we do it?
Mr. Tingle: If I could start, and then, Dan, I’ll turn it over to you.
Tax incentives are great, but we’ve already had an experiment that has demonstrated they’re really not sufficient. We have the most generous research and development credits of any country in the Organisation for Economic Co-operation and Development, or OECD, and it hasn’t made a single bit of difference to the trend that we’re talking about.
Even though a software company, for example, would be much better off operating in Canada, the fact that it’s easier to raise money in the United States, or that the buyers for that company are all located in the United States, overwhelms any advantage of the Scientific Research and Experimental Development, or SR&ED, credits. So these companies are sold into the United States.
I’m unfamiliar with the British employee ownership trusts, but unless it’s connected to helping these companies raise capital and then provide liquidity to the earliest investors, they’re not going to solve the problem, which is this: If you’re looking to provide liquidity to investors, and you have to, you have five to seven years before you have to sell your company. In many industries, the only real buyers are going to be foreign. The only alternative to this is to go public in Canada.
The inflection point has to be this: What deters people from going public? How could we encourage managers to go public rather than sell themselves to Google or Apple?
Dan, do you have anything to add?
Mr. Wilson: My answer is yes and yes. I’m a little more optimistic about the ability to have targeted tax incentives and tax reforms that will increase attraction of capital markets.
We’ve created this bifurcation where all of our tax advantages go to private companies in Canada — Canadian-controlled private corporations, or CCPCs — both in terms of lifetime capital gains exemptions but also active business income rates.
In Alberta, the combined tax rate is 11% on the first $500,000 in active business income. It’s 24% or 25% if you’re not a CCPC. There’s an opportunity, especially in the junior markets, at that early stage when you say, “Am I going to access that first piece of institutional private capital from an investor?” That is, an American private equity or junior capital investor, or, like what happened 30 years ago when I started in this space, one would ask:
Will I look at the TSXV or the Canadian Securities Exchange, or CSE, and go get the $5 million I need from there?
The reason is that, once you’re on that path, you’re on a path to stickiness to remain in Canada and grow in Canada.
Companies that go public for the first time in Canada have a much higher likelihood of staying in Canada, growing in Canada and becoming the next Shopify in Canada. To incentivize that, the power of the purse is key.
I wrote an op-ed that the senator referred to. Ari Pandes from University of Calgary Haskayne School of Business and I wrote an op-ed together about six weeks ago in The Globe and Mail specifically on this point, advocating for tax rollovers in terms of a deferral of capital gains of any money made in a junior Canadian public market company.
I invest. I hit a home run. If I reinvest it within 12 to 24 months in similar companies, I get a tax deferral. It’s a deferral, not tax forgiveness. The money remains in the public purse. It just continues to be reinvested and grows in terms of active business income tax rates, which I would like to see extended up to junior public companies that are at an early stage, so they could reinvest those tax savings in growth rather than having to finance them and also roll over.
Thank you.
Senator McBean: I’m not entirely surprised that my questions have been partially answered, but I’m going to ask them of both of you because I’m getting the sense — even on that last question — that you had nicely diverging thoughts.
What structural features — and maybe you can give examples of Canada’s capital markets — most disadvantage our smaller firms trying to raise equity or long-term growth capital?
Mr. Tingle: I’m happy to start.
There are two: The first is that we’re a very big country, and finance tends to centralize; it likes to cluster. It’s New York, it’s London, and, in our case, it’s Toronto for various strongly political reasons, and some in Quebec. In fact, Toronto is a very long way away from most parts of the country, and venture capital tends to be invested very close to the head office of the venture capital firm. Over 90% is invested in the same area code.
That means that if the financial industry is in Toronto, there isn’t going to be a lot of venture capital anywhere west or east of Toronto, and that’s, in fact, what statistics show.
The second problem is that we are right next door to the most innovative, economically successful country in the world and the one that has the largest tech companies, the ones that are most likely to buy our best companies, and there are no cultural or language barriers. There is a large pull that, for example, innovative companies in Sweden don’t face.
Senator McBean: As a person who likes high performance, those disadvantages are hard for me because there’s nothing I can do about those two.
Professor Wilson?
Mr. Wilson: Yes, I support what Bryce said, but also scale and the cost of regulation for the juniors, the cost of compliance.
I started practising in 1992. We used to do a lot of $2-million and $3-million small companies on the Toronto Stock Exchange, or TSX. That was a good, small deal. No broker can earn a living doing $2-million and $3-million deals. As Bryce indicated before, you can’t earn a living doing $10-million deals because your cost of back-end compliance in Know Your Client, or KYC, and Know Your Product, or KYP, and all of these things is so high that it simply doesn’t support it. So the juniors abandon the market, are absorbed or just quit the market. That’s a Canadian scale. For any growth-stage story, the U.S. has 10 times the economic base to deal with.
Our compliance costs might be equal in the U.S. and Canada, but the scale of our economy is so much different that the Canadian market just can’t absorb it. The juniors couldn’t absorb and remain competitive with the modern cost of compliance as a junior broker.
Senator McBean: How could security law modernization or exemptions better support small business participation in venture capital and public markets?
Mr. Tingle: Let me start, and I’ll briefly touch on your comment after my remarks, senator.
You’re exactly right. We can do nothing to affect the size of the company or the country or the fact that we have America as our neighbour, but what we can’t do is just copy what the United States does, which is traditionally how we’ve managed our economy. We have to be innovative; we have to try new things; and we have to be much more aggressive and conscious about what we’re doing.
I do think it is possible to turn some of our weaknesses into real strengths. I’m not at all hopeless, but it will take an adventurous, innovative and aggressive government to do it.
In terms of things that would very immediately improve things, one would be significantly reducing the pain points to being public. This isn’t just a matter of regulation; it’s also a matter of proxy advisers, active shareholders and permitting companies in Canada to do the same things — like classified or staggered boards — that they’re allowed to do in the United States or in Europe. It would mean, as Dan pointed out, equalizing the treatment of private and public early-stage, innovative companies. It would mean providing superior tax treatment of capital gains on companies that entrepreneurs took public, as opposed to sold across the border, and those sorts of things.
Senator McBean: Thank you.
Senator Ringuette: This discussion is fascinating. My question is particularly for Professor Tingle because you mentioned the fact that we’re investing, as Canadians, through our government, billions of dollars in research, and some result in start-ups. But at the base, we have no ownership in all this investment, and I’ve been talking about this at this committee for a number of years.
I look at that, and I see that we need to have proportional ownership. We also have a relatively new product — I think for 10 or 12 years — which is called the Tax-Free Savings Account, where your plumber, your barber and your teacher can put money in an account, and the interest is tax-free, so that’s the element of your tax incentive.
Isn’t there a way that we could link that tax-free account, which is accessible to all Canadians, to small- and medium-sized enterprises, or SMEs, that need those funds to grow? At the same time, there would be a link in regards to Canadian ownership to this entity from our investment in research.
I’m scratching at all the different elements here, and I’ve always maintained the premise that if there’s a problem, there’s a solution, so I’m looking for a solution.
Mr. Tingle: You’ve covered some ground, so let me talk first about tax incentives for retail investors.
To the extent that we’ve tried them before in Canada, they were not as successful as we might have hoped. So labour-sponsored venture capital funds provided really attractive tax benefits to investors who put their money in venture capital funds.
Those venture capital funds significantly failed. There has been a lot of empirical work done, and it suggests that they generated mostly negative returns, and, certainly, it’s very hard to see improvements in the number of new ventures in jurisdictions that had labour-sponsored venture capital fund-enabling legislation and in those provinces that did not.
Now, we might go back and say that the idea was good, but the execution was wrong in a bunch of ways, but what we saw of labour-sponsored funds is that the tax benefits swamped the competence of management. Retail investors would just put the money into the funds without paying much attention to whether or not the management was at all competent at finding attractive investment opportunities. We would need to navigate around that sort of problem.
When you look at this problem, you have carrots and sticks. You can punish people for selling to the Americans or for bringing in foreign investors, or you can make it really attractive for them to stay in Canada and bring in Canadian investors. I’m very much in favour of the carrot approach.
The concern is that if we lean too heavily on the stick approach, fewer start-ups will be formed because the ability to raise money in the United States and the ability to sell to the United States are both part of the economic attraction of starting a very risky new business. So you would hate to interfere with it in a serious way. But we can do a lot to incentivize people to raise money in Canada and to build their business in Canada. Improving our public markets, improving the way the investment industry works so it’s easier for people to tap into retail money, and improving the venture capital infrastructure in Canada are all really good things. Part of that is — as Dan has said, and as you’ve said — improving the tax treatment of Canadians investing in junior companies.
Mr. Wilson: Our Scientific Research and Experimental Development, or SR&ED, program has been very successful at incubating start-ups. It has not been successful at creating any stickiness in Canada. There has been no back-end piece to that.
There are ideas that could be considered that would increase the stickiness, and you mentioned having an ownership interest. Another way would be to have it be a forgivable grant, that if you sell to a foreign interest, it becomes due with a rate of return at the time of the sale that the purchaser has to repay with a return to the Canadian people; whereas, if you remain in Canada and go public in Canada, it is forgiven. That would be a simple way.
The Chair: Thank you. Before going to second round, I have a question, but please be concise with your answers.
You mentioned that the Toronto Stock Exchange, or TSX, erosion is significant. There is Letko Brosseau, which has been pretty loud in Montreal. Twenty-five years ago, 25% of the assets of certain public pension funds were in Canadian equities; now it’s only 5%.
You mentioned the stick and the carrot, but at the end of the day, is there any road, without using the stick, to convince our pension funds to be more active in their role, and what role can they play in the ecosystem? How do you see their role because it’s more than $2 trillion in assets?
Mr. Tingle: One of the problems — and I’ll be really quick — is that we really love centralizing financial power in this country, and so we have only a few banks that are very large relative to the size of the population, and that sets certain incentives.
Similarly, concentrating all our pension money in a single fund, run centrally, sets certain incentives. The main incentive is that if you have to deploy the kind of capital our pension funds do, it’s very difficult to invest in Canadian businesses because they’re too small. Investing in a small business takes just as much time to do due diligence and to monitor it as investing in a huge infrastructure project in the developing world. One thing we might consider is breaking our funds into smaller groups.
It’s also possible to set mandates, as Britain does, requiring them to invest some of their money in third-party venture capital or private equity funds of different types with Canadian mandates. That doesn’t strike me as being obviously problematic.
The Chair: Thank you. You are inspired by the U.K. experience. That is interesting.
Mr. Wilson, do you have anything to add?
Mr. Wilson: Mr. Chair, I would just add, as Bryce said, that pension funds are simply not set up to invest in the smaller scale, and the problem of forcing them to invest more in Canada would be a concentration issue.
We’re going to be below 600 TSX-listed companies this year that are already trading at a high multiple. Directing more capital to those few companies would not help. It would just create a bubble. We have to find a way to direct capital to start-ups, and that may be to direct them to invest a portion in Canadian venture capital companies.
Senator Fridhandler: With regard to measures that might reduce costs for junior public companies to exist, I know you are speaking about accounting issues. Can you give us a couple of highlights that are feasible?
Mr. Wilson: We could eliminate the audit requirements for pre-cash flow companies. That would be a start. That’s a very low-hanging fruit. Let them do a review engagement. There’s no need for an audit when you have no revenue.
Senator Fridhandler: That’s a corporate law requirement as well as a security requirement.
Mr. Wilson: We could reduce it to biannual and streamline it so you only have to do a single Management’s Discussion and Analysis, or MD&A, annually instead of quarterly.
Mr. Tingle: We could allow companies to create classified boards, which would give them some immunity from shareholder pressure, help them manage for the long term and make it more attractive to corporate managers to go public. That would take changes to corporate law as well as the TSX rules.
More than 90% of American initial public offerings, or IPOs, are of companies that have classified boards, and they’re not allowed to do that in Canada.
Senator C. Deacon: I’m going to challenge you to reply to me in writing, if you could, after the meeting because we’re out of time.
In the United States, 10% of their market value is in financials, and 30% is in tech. We’re exactly the opposite: 30% is in financials, and 10% is in tech. The financials are supposed to be enabling wealth creation in the country. They’re not supposed to be the source because they can’t be. They’re not growing our economy.
Our Canadian banks have a 30% return on equity, or ROE, over the last 20 years, three times the global average. We must level that playing field out. We have six men behind six doors who are in control of 90% of our assets in this country. We need more diversity behind more doors.
One of the ways could be to require the deconsolidation of our financial sector and make our pension funds invest in a diverse group of funds that then deploy that capital because it’s at scales that they can’t control.
I would love you to push back on that, maybe in writing after the meeting.
Mr. Tingle: I would say this: We have plenty of evidence now that banks can outcompete other companies in investment banking. If you’re an investment bank, and you are associated with one of Canada’s big banks, you have an advantage. That is just what has happened over the last 30 years. It is undeniable. We’ve seen a hollowing out of investment banking in this country and the bank’s firms taking a much larger share.
Deconsolidating, as you put it, is a very real possibility, and you might decide that we could foster a more level playing field by separating investment banking from commercial banking.
Mr. Wilson: Also, senator, banks love intermediation. They clip a coupon on every transaction that occurs.
Bryce and I are working on a series called “Hunting Sacred Cows” on reforming capital markets. Disintermediation is a big part of that.
The Chair: That’s an interesting topic.
In Quebec, they have Investissement Québec. Do you see from province to province any differences between the ecosystems in Quebec and Ontario because Investissement Québec tried to scale up the companies?
Have you studied anything regarding that? Is it a model that’s interesting?
Mr. Wilson: Yes, Mr. Chair. In fact, I’m the director of the School of Public Policy’s Financial Markets Regulation, and we’ve been doing a series with the Alberta Treasury Board and Finance, and we commissioned Mr. Pierre Lortie — whom I’m sure you know well — to do a paper for us on the Quebec experience and look at a number of the interesting nuances.
There’s much in what has been done in Quebec that is very interesting as a potential go-by for the rest of Canada. It is something that we are evaluating.
Quebec has been willing to stand alone, and I think it’s a great example for Canada.
We need to stand alone as a country. We need to innovate. We need to move beyond following the U.S. and trying to keep up with them. We need to move ahead of them in regulatory reform and innovation. Quebec has been willing to do that and has given us some good examples.
Mr. Tingle: I think Dan is right.
The Chair: Thanks to our witnesses for your very interesting testimony.
Your opening remarks, Mr. Wilson, were so great that I think they should be on YouTube because of how well you have described the situation in Canada.
Our next meeting will be on Wednesday, February 25, at 4:15 p.m. Colleagues, on your behalf, I thank our Senate page, our analysts, our interpreters and our clerk as well.
(The committee adjourned.)