Sovereign Wealth and Pension Funds Controlling Canadian Businesses: Tax-Policy Implications

In a world without taxes, investors that take over companies would do so because they expect to be able to operate the business efficiently and at a high rate of return. But in Canada today, some acquirers enjoy tax advantages over others. And that could mean that certain buyers, who may not be best suited to owning a particular company, are able to outbid those who are better positioned to run that company at optimal efficiency. That is a problem not just for investors who end up outbid, due to Canada’s uneven tax policy, but for the Canadian economy, which suffers from the resulting economic inefficiency. With respect to registered pension plans, the so-called 30-per-cent rule puts a cap on the amount of voting equity in a company that they are permitted to own. Meanwhile, however, sovereign wealth funds — whether controlled by China or Australia — face no such limit when purchasing stakes in Canadian firms. The number and size of sovereign wealth funds, globally, is only growing — and rapidly. But as Canada increasingly attracts foreign capital, with foreign-controlled government-affiliated funds seeking out Canadian takeover targets, much of the discussion around public policy has focused primarily on the Investment Canada Act and the “net benefit test” for foreign direct investment. Another component in ensuring that Canadian interests are preserved, however, is the question of whether Canadian institutional investors can operate on a level playing field with foreign sovereign wealth funds. With the 30-per-cent rule limiting equity purchases for one but not the other, it would appear that they are not. The most appealing remedy to this imbalance is a tax solution: limiting the corporate deductions on interest, fees, royalties, rents, and the like, that so often factor in to the takeover calculation, as part of a tax-minimization strategy. This would not only put pension funds and sovereign wealth funds on equal footing, but it could also be applied to investors operating from low- or zero-tax jurisdictions, as well. This approach is not without disadvantages. But overall, the neutrality it could achieve among different types of institutional investors, and the potential it has to enable those investors best able to maximize management excellence and synergies, make it the preferable policy direction for ensuring the greatest level of efficiency in the Canadian economy

The Lifetime Capital Gains Exemption: Corporate Financing, Risk-taking and Allocation Efficiency

The impact of LCGE on financing of Canadian corporations and investment and risk-taking behaviour of individual Canadians is examined. The post-LCGE period shows a significantly higher reliance on external equity by large corporations, an increase in the number of taxpayers reporting dividend and foreign income. Also clear is the marked increase in 'unlocking' of capital gains. These trends seem to be specific to Canada; no such trends are found for U.S. corporations or taxpayers. The direction and the magnitude of these trends are consistent with the intent of the LCGE. The question of causality may still be open for debate.

Les effets du financement public sur les entrepreneurs et leurs entreprises : le cas des PME du Québec

Un sondage mené auprès de nombreux PDG de PME devenues publiques grâce au programme québécois du RÉA, sondage s'étalant de 1984 à 1987, est à l’origine de ce document de recherche qui vise essentiellement à évaluer les effets de la décision de recourir au financement public sur le statut de l'entreprise, sa gestion interne et son PDG en tant qu’individu. Les résultats de cette enquête démontrent que la majorité des PDG qui ont répondu sont très satisfaits de leur décision. Selon eux, l’influence la plus grande et la plus importante porte, surtout, sur le statut de l'entreprise qui devient alors crédible aux yeux du monde extérieur. D’autres effets importants et positifs sont aussi ressentis surla structure et sur les communications en général. Contrairement à la croyance populaire, les PDG de nos entreprises devenues publiques ne perdent pas le contrôle de leur entreprise; ils deviennent beaucoup plus intéressés à adapter leur structure aux nouveaux besoins et à rationaliser leur processus de prise de décision. Que les dirigeants n’apprécient guère l'évaluation de la valeur en bourse des actions de leur entreprise ne change pas la conclusion générale de cette recherche : devenir une société ouverte implique des changements significatifs quant au statut de l’entreprise, à sa structure administrative et chez son dirigeant. Presque tous ces changements sont positifs et favorisent une telle orientation.The study documents results of a survey conducted with the CEOs of small and medium-sized businesses which went public between 1984 and 1987 using the QSSP (Quebec Stock Savings) Program. The emphasis of the research reported here was to evaluate the impact of the going public decision on three specific dimensions : the status of the business, the management of the business, and on the CEO as an individual. The results of this research indicate that an overwhelming majority of the CEOs who responded to the survey consider their decision to go public in a very favorable light. The largest and most important impact of going public, according to them, is on the status of the business itself -it improves significantly as seen by outsiders; it is followed by the impact on the management structure of the business, and communications in general. Contrary to common beliefs, CEOs do not convey a significant loss of control and actually welcome the more structured and decision-making resulting from going public. Although they do not like the valuation of their shares by the market place, the overall conclusion of this research remains unchanged : going public does imply significant changes to the status of the firm, management structure, and the entrepreneur, but almost all these changes are positive and welcomed by those who took their firms public.El estudio fue realizado con un centenar de dirigentes de empresas medianas y pequeñas (PyME) que se volvieron publicas en acuerdo con el programa REA entre 1984 y 1987. Este documento tiene como objetivo la evaluación del impacto de la financiación publica sobre tres niveles, o sea el statuto de la empresa, su gestión interna y su dirigente como individuo. Los resultados de este estudio demuestran que la mayoría de los dirigentes que han contestado a nuesta encuesta están muy satisfechos de haber tomado la decision de acudir al finandamiento publico. Según ellos, el impacto mas grande e importante es el que se hace sentir sobre el estatuto de la empresa que se transforma en una entidad mucho mas importante a los ojos del mundo exterior. Otros efectos importantes y positivos se recienten al nivel de la estructura de la empresa y de las comunicaciones en general.Contrariamente a la opinion general los dirigentes de las PyME que se transformaron en empresas publicas dicen no haber perdido el control de su empresa; haber optado por una posicion mas flexible para ajustar las estructuras a las nuevas necesidades y para racionalisar el proceso de toma de decision en la empresa Aunque los dirigentes no aprecian la valuación de las acciones de su empresa en el mercado bursátil, la conclusion de esta investigación es : transformarse en una empresa publicaimplica cambios significativos sobre el estatuto de la empresa, su structura administrativa y su dirigente. Casi todo los cambios son positivos favoreciendo por consiguiente una tal orientación

Changements de la structure et de la dynamique managériale dans les entreprises devenues publiques : Perceptions des employés, des gestionnaires et des PDG

Un nouveau sondage, cette fois incluant des gestionnaires et des employés, confirme les effets positifs du financement publique sur leur entreprise et corrobore donc révaluation faite préalablement par leur PDG (Desroches et Jog, 1989). L’étude a été menée au printemps de 1990 auprès d’un échantillon représentatif de l’ensemble des entreprises qui se sont inscrites à la Bourse de Montréal dans le cadre du programme québécois RÉA. Les résultats démontrent une étonnante mais concrète unanimité entre les trois niveaux de perceptions sur le degré et la nature des changements suscités par le nouveau statut de l’entreprise, surtout en ce qui a trait á la formalisation, á la spécialisation, á la décentralisation et á /'utilisation accrue de méthodes analytiques de gestion.A new survey; this time including managers and employees, confirms the positive effects of going public for smaller enterprises, thus corraborating an earlier study of Desroches and Jog (1989) which only looked at the perceptions of CEO’s. This study was undertaken in the Spring of 1990 using a representative sample of firms which went public on the Montreal Stock Exchange through the Quebec Stock Savings Plan. The results show a clear consensus amongst the three different levels on the degree and nature of the changes a new public status has meant. Structural changes took place with respect to formalization, specialization, decentralization and the use of analytical decision making techniques.Una nueva encuesta, esta vez incluyendo a Gerentes y Empleados, confirma ios efectos positivos del financiamiento público para las empresas, pequeras y apoya por consiguiente, la evaluación hecha anteriormente con los Directores (Desroches y Jog, 1989).El estudio fue realizado en la primavera de 1990, con una muestra representativa del conjunto de empresas que se inscribieron en la Bolsa de Montreal en el marco del programa « REA » de la Provincia de Quebec, Canadá.Los resultados demuestran una unanimidad sorprendente entre la percepción de los tres niveles, sobre el grado y la naturaleza de los cambios introducidos por el nuevo estatus publico de la empresa, particularmente en lo que se refiere a la formalización, a la especialización, a la decentralización, y a la mayor utilización de los métodos analíticos de gestión