Canada must revamp regulation, tax rules: IIAC

Voluntary collaboration is key, he says, as many provinces are “not prepared to take the leap of faith” required to create a common regulator. To get there, he suggests focusing on “evolutionary change” rather than “revolutionary change.” In other words, the industry needs to take small steps, not huge leaps.

He points to the federally appointed “Expert Panel on Securities Regulation” as the group that might kick-start the change that Russell says is sorely needed. The panel’s mandate is to focus on the merits of a proportionate and principles-based approach and provide suggestions for improved enforcement of securities law. The group will then develop a common securities act and a transition plan for implementation.

“At first blush, the challenge looks daunting,” says Russell, pointing to numerous commissions in the past that have explored this area. It will be hard for the new panel to improve on what’s been done before.

However, he explains that the new commission could “move existing efforts at uniformity further along the road towards a common regulator” by working with the Canadian Securities Administrators (CSA).

The Expert Panel should use the Uniform Securities Act — draft legislation developed by the CSA several years ago — to eliminate regulatory overlap by creating one set of rules. “That would also facilitate a principles-based system of regulation,” he says.

Russell explained that the Uniform Securities Act is a provincial initiative, so by incorporating some of that legislation, such as the rules around prospectus disclosure or multiple electronic markets, the provinces might be more willing to accept these changes in their own rules.

Using the CSA’s existing policies is a good starting point, says Russell, but a single securities regulator would work best if the CSA were the ones in charge. “The CSA could serve as the administrative and decision-making structure, administering the Uniform Securities Act and national polices with some form of federal cooperation and assistance and national securities enforcement authority,” he says.

However, in order for the CSA to lead the way, Russell says its governance structure needs to be updated. “The structure would have to be refined and formalized,” he says, adding that the Crawford Panel provides some guidance on structural design.

He also says that the CSA needs to change with the fluid marketplace. “Too many jurisdictional barriers stand between our various regulatory bodies whose policies influence market behaviour,” he said.

Russell pointed to the issues with asset-backed commercial paper as one area in which having too many regulatory players resulted in big problems. “These problems involve significant regulatory issues that fall within the mandates of both bank and securities regulators.”

Regulators need to share more information between each other, says Russell, as decisions from one organization could have an effect on the others. He suggests that the CSA invite the Office of the Superintendent of Financial Institutions and provincial regulators to the discussion table. “Each regulator has to be able to understand and anticipate the impact of policy decisions on participants within their jurisdiction,” he says.

Besides calling for a single regulator, Russell’s speech also dealt with the way Canada taxes businesses. “We need to revise our tax policy,” he says.

He calls out the federal tax policy as one area that needs to be revamped, as it “punishes growth.” Companies earning $400,000 in profits are taxed at 11%, he explained, but if they make more than that, the tax rate nearly doubles. If a business grows to $15 million in assets or more, the rate increases again.

Small private companies can receive a $750,000 capital gains tax exemption on shares, but if they become too large or go public, they can’t claim the exemption.

Canadian-controlled private companies can get a 35% federal research and development tax credit, but if they get too large, the credit shrinks to 20%. If they go public, the credit disappears.

Statistics Canada surveyed small- to medium-sized enterprises and found that the greatest barrier to business development was taxation, Russell revealed. “If we want growth, shouldn’t our tax system stop penalizing it?” he asks.

He calls on the provincial governments to harmonize the GST and PST — with the GST, companies can claim Input Tax Credits; there’s no equivalent benefit with PST — but it needs to be done “in a way that avoids any net increase in provincial sales taxes paid by intermediaries,” he says.

Once changes are made to taxation and regulation, Russell says, Canada’s business climate will be stronger than ever. “We need to encourage investment in Canada. Our tax system and our regulatory system must support that,” he says. “Canada needs to bring both in line with the realities of a competitive world. If we are to compete and prosper, we have to deploy capital to do new things, and do the same things better than the rest of the world.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(05/15/08)