In his pre-budget submission to the federal Finance Minister today, Investment Dealers Association president and CEO, Joe Oliver, calls on the federal government to take action in the upcoming budget to support confidence and improve the efficiency of the capital markets.

Specifically, Oliver says that the government should: reduce the capital gains inclusion rate from 50% to 25% on shares of small publicly-listed companies; broaden the Qualified Limited Partnership rules; broaden the capital gains tax rollover provision; double the RRSP limits; and, push for a national solution to securities regulation.

The IDA stops short of calling for a national regulator as the solution. Rather, Oliver says that the feds should, “engage the industry and provincial governments in seeking a national solution to harmonize securities regulation in Canada.” He says that the Minister of Finance “must drive efforts to eliminate the inefficiencies that flow from our fragmented regulatory structure. Canada’s multiple regulators need determined political encouragement to achieve a comprehensive harmonization of securities rules.”

On the RRSP issue, the IDA calls for higher contribution limits. Oliver says that the federal government should increase RRSP contribution limits so that small and medium business owners and their employees can save adequately for retirement. “We suggest increasing the current limit of $13,500 to $27,000, phased in over the next five years.”

The other recommendations focus primarily on improving the capital environment for small firms. The IDA notes that current tax relief for small business is skewed towards private companies. “While important, these incentives, coupled with high regulatory costs, tend to encourage companies to stay private longer, and do nothing to promote public participation in Canadian junior public markets, or keep Canadian junior companies in Canada.” It suggests that the feds should cut the capital gains inclusion rate to 25% for gains on initial public and treasury offerings of shares in small, publicly-listed companies.

Oliver argues that a broadening of QLP rules is needed to encourage greater participation in venture capital investments by institutional investors, such as Canadian pension funds. “While the removal of the 30% ownership limitation in the December 2001 Federal Budget was a positive step, further technical adjustments to the definition of a QLP related to general partner compensation, unit design and the accounting of foreign property are needed to make the vehicle a more practical option for Canadian institutional investors.”

Finally, the IDA would broaden the capital gains tax rollover provision. “Current limitations on investments and time periods for reinvestment need to be broadened, and investor eligibility extended to corporations, trusts and partnerships,” says Oliver. “Although Budget 2000 introduced these rules to allow angel investors to defer capital gains on reinvested small business share proceeds, their limited nature has not resulted in the desired increased flow of venture capital.”

In addition to its primary recommendations, the IDA says that lowering corporate taxes and cutting the capital tax must remain a priority. “The IDA has implemented and will continue to implement concrete measures to restore investor confidence in the Canadian market,” Oliver concludes. “We believe that an effective federal strategy for capital formation, as outlined above, will further the process for a renewal of confidence and set the stage for longer term productivity gains.”