A path to economic diversification that Ottawa should consider

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 offer means a continuation of Canada finding yourself in the “low-margin” resource business, unless drastic changes are created.

Second, there is a study 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 concept “may not be the best vehicle” when the government chose to extend it past the resource sector. The research covered the period from 2008 to 2012.

How to square those views – the necessity to make a move and also the plea to do nothing – when it comes to diversifying the economy, a debate that’s growing because of the dramatic slide in commodities and natural resources. That objective – and possible ways to achieve it – might be front and centre in the upcoming budget. Tax changes and regulations are often considered a fast method to direct resources to particular areas of the economy.

One solution ended up being to call Rick Sutin, a senior partner at Norton Rose, that has spent a long time developing the idea of extending flow-through shares (FTS) to the biotechnology and technology sectors. FTS currently allow mining and gas and oil issuers to boost capital, spend it on exploration and development in Canada, and transfer the deductions to investors. FTS have been in existence for 50 years.

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Sutin is really a strong supporter due to the similarities between innovation and resources where plenty of capital is spent chasing the following popular trend.

“Given the significance of scientific and technological innovation and Canada’s insufficient real success to date, there is a very compelling argument that extending FTS towards the innovation sector is a low-risk experiment to ascertain if we are able to duplicate the made-in-Canada success we’d in resources,” he declared.

Sutin says such an extension would make use of the country’s capital markets strength via a match-up of these wanting capital and people who want a tax advantage to provide it.

As for that quality of these investments and the returns to investors, Sutin says the marketplace will give you the help you need. “Over time investors will figure that out and remain away, just like they’ve completely abandoned the resource sector in the current market.”

While there would be considered a cost to this type of move, Sutin opts for 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 component, and maybe a catalytic part, in creating global leadership in resource finance, which in turn drove the development of the key cluster.” And clusters – as Bloomberg noted recently in an article on venture capital in the Bay area of California – are good.

In 2014, the Department of Finance said FTS allow junior companies “whose access to 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 federal government about $440 million a year and added the “estimated returns are highly dependent on the marketplace conditions in the period period analyzed.”

Maybe Ottawa is listening.

Financial Post
bcritchley@nationalpost.com