Talk about contrast.
First, Jim Balsillie, one of the founders of BlackBerry was being interviewed on the radio and criticizing, again, the Trans-Pacific Partnership. He was explaining how Canada got outsmarted, how government and industry (unlike the U.S.) didn’t work together and just how the deal will mean a continuation of Canada being in the “low-margin” resource business, unless drastic changes are made.
Second, there was a report from the college of Public Policy at the University of Alberta saying because flow-through shares “did not generate reasonable and positive rates of return after adjusting for the corresponding benchmark returns,” the idea “may not be the best vehicle” when the government chose to extend it beyond the resource sector. The study covered the period from 2008 to 2012.
How to square those views – the necessity to make a move and the plea to complete nothing – with regards to diversifying the economy, a debate that’s growing because of the dramatic slide in commodities and natural resources. That objective – and possiblity to achieve it – might be front and centre in the upcoming budget. Tax changes and regulations in many cases are considered a fast method to direct resources to specific regions of the economy.
One solution ended up being to call Rick Sutin, a senior partner at Norton Rose, who has spent a long time developing the idea of extending flow-through shares (FTS) towards the biotechnology and technology sectors. FTS currently allow mining and oil and gas issuers to boost capital, spend it on exploration and rise in Canada, and transfer the deductions to investors. FTS have been in existence for Half a century.
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Sutin is really a strong supporter because of the similarities between innovation and resources where lots of capital is spent chasing the following popular trend.
“Given the significance of scientific and technology and Canada’s insufficient real success so far, there is a very compelling argument that extending FTS towards the innovation sector is really a low-risk experiment to see if we can duplicate the made-in-Canada success we’d in resources,” he declared.
Sutin says such an extension would take advantage of the country’s capital markets strength through a match-up of those wanting capital and those who want a tax advantage to provide it.
As for the quality of those investments and the returns to investors, Sutin says the market will provide the help you need. “Over time investors will figure that out and stay away, just as they’ve completely abandoned the resource sector in the current market.”
While there’d be a cost to this type of move, Sutin chooses a broader perspective arguing FTS may have helped Canada be a leading light within the resource sector. There’s “powerful circumstantial evidence that FTS played a part, and perhaps a catalytic part, in creating global leadership in resource finance, which then drove the introduction of the key cluster.” And clusters – as Bloomberg noted recently in an article on investment capital in the San francisco bay area of California – are great.
In 2014, the Department of Finance said FTS allow junior companies “whose use of other sources of financing may be limited” to raise capital, noting that exploration and development spending “were closely correlated with mineral and metal prices.” The paper estimated FTS cost the government about $440 million a year and added the “estimated returns are highly dependent on the marketplace conditions during the time period analyzed.”
Maybe Ottawa is listening.
Financial Post
bcritchley@nationalpost.com
