IIAC calls for tax incentives to encourage small business investment

He notes that a variety factors — including weak overall economic conditions, recent tax changes, and high levels of risk aversion among investors — have depressed stock prices and liquidity for small firms, making it harder for these firms to raise capital.

The IIAC reports that total small business equity financings are down 40% this year, and that this was already off 40% from the prior year. Small IPOs are about half of what they were before the financial crisis, and the number of financings is down similarly, it notes; with the energy and mining sectors being particularly hard hit.

This is a significant problem, it says, because public and private markets for small business are critical sources of startup capital in Canada — much more important than venture capital, private equity, hedge funds and angel investors. So, while efforts to rejuvenate the Canadian VC industry are welcome, more needs to be done, Russell argues.

“The federal government should also recognize the greatest policy leverage for capital-raising will come from incentives directed to the established capital-raising infrastructure,” he says, calling for tax incentives targeted at this sector.

“Effective tax incentives will encourage demand for newly offered shares of small businesses, especially non-resource companies, and promote cost-effective capital-raising. An effective incentive will stimulate new financing activity among small business and breathe new life and vigour into the capital- raising infrastructure.”

To that end, he calls for a selective reduction in the capital gains tax targeting small businesses. And, he suggests that the federal government could also introduce a special tax incentive for start-ups, similar to the U.K. Enterprise Investment Scheme, which provides a 30% deduction from income tax for eligible investments.

Reduce regulatory burden on dealers

Also in the letter, Russell argues that it is necessary to reduce the regulatory burden on investment dealers. The letter suggests that the securities regulators’ recent rule making efforts haven’t been subject to rigorous cost-benefit analysis, or post-implementation review. “It is thus likely that the new rule framework for registered advisors and firms, compounded by new tax reporting requirements, has raised transactional costs, resulting in excess rules and compliance costs,” he says.

Russell suggests that the regulatory regime could be improved by better allocating responsibilities between the provincial regulators and the industry’s self-regulatory organizations to reduce duplication and overlap. And, he suggests that regulators should focus more on non-SRO firms.

Moreover, he calls for policymakers to support the proposed co-operative regulatory system that was announced earlier this year in a deal between the federal government, B.C. and Ontario. Russell says that the proposed model provides for greater regulatory oversight and accountability, which could lead to more efficient and cost-effective rule-making; along with lower regulatory fees, and more streamlined regulation; which should benefit dealers and markets.

“We recommend the House of Commons Standing Committee on Finance publicly support the proposed co-operative securities regulator and encourage all Canadian provinces to integrate their existing provincial regulatory bodies into this co-operative regulatory framework,” he says.

“Federal incentives to promote small business investment and a full-court press to implement a co-operative regulator for Canada may be small steps to shore up the financing infrastructure, but they will be important steps,” he concludes.