Skip to main content

The Globe and Mail

Bill Morneau needs to go ‘full U.K.’ to solve capital-formation crisis

Finance Minister Bill Morneau

Adrian Wyld/The Canadian Press

Campbell Deacon is chairman of Echelon Wealth Partners, an independent, integrated investment firm based in Toronto. He is a former chairman of the Investment Dealers Association of Canada.

How to grow our economy and withstand the heavy weather of current geopolitics is the elephant in the room for Canadian governments at all levels. The key to the strong and innovative growth everybody professes to want? Access to capital for our fledgling companies.

Yet capital formation in Canada is in crisis, with many independent investment-banking firms disappearing over the past few years due to a variety of factors, including market domination by the big banks and increasingly onerous regulatory oversight. These independents are focused on small and emerging growth companies while the big Canadian banks, which see startups as high risk, prefer to put their wealth-management clients into proprietary products such as large-cap funds.

Story continues below advertisement

There is a time-tested, wildly successful answer to providing capital to home-grown enterprises, but it's not the one Finance Minister Bill Morneau recently announced.

Instead, he has chosen to launch a Canadian Business Growth Fund, which will "target" investing $1-billion over 10 years to fill the capital needs of small businesses. The participants in the fund are Canada's biggest banks. The decision makers in the fund have yet to be announced but it is safe to assume it will be bankers and government representatives and not individual taxpayers investing their own funds.

This fund is a copy of a British program called the Business Growth Fund, one of three venture-growth initiatives the British government undertook about 20 years ago. These initiatives are the main reason why the British economy has outperformed all its European neighbours.

Of the other two, the Enterprise Investment Scheme is in fact the smartest solution to be borrowed from Britain. It's been 10 times more effective in growing small and mid-sized businesses and creating high-paying technology jobs than the Business Growth Fund. And it depends on investors – not government appointees and big banks – for its success.

This program gives a 30-per-cent tax credit to individual investors who put their money into small, innovative, growth-oriented enterprises. The results speak for themselves: In 2015, the British Business Growth Fund did 31 deals amounting to £257-million ($428-million). Meanwhile, the Enterprise Investment Scheme facilitated £1.8-billion in capital investment for 3,265 companies.

Over the past 20 years, more than 24,000 new companies have been created – obviously, not all of them successful – but they are the types of corporate startups that economic growth depends on.

Why not go with the initiative that's been proven to have an impact?

Story continues below advertisement

Certainly, a tax-credit program of this magnitude could create a fear of large tax-revenue loss. But the reality is much different. In 2005, while working and living in London, I saw first-hand the effect the program had on creating jobs and generating payroll taxes. Just one example: Rotala PLC, a clean-energy transport company that won a contract to provide services to Heathrow Airport over competing bids from big operators. At that time it obtained tax-credit-fuelled financing of £1.3-million from investors.

Last year, the company's payroll was more than £24-million, sending many millions in income taxes to the British treasury as well as corporate taxes, VAT and fuel taxes.

Perhaps the real answer is optics. The proposed Canadian Business Growth Fund, which is dependent on the participation and leadership of Canada's big banks, looks safe and voter friendly. The optics of giving a tax break to individual investors –many of them actual members of the middle class – is no doubt politically unpalatable.

If the sheer size of the success of the EIS doesn't convince the Finance Minister then perhaps this would: Forbes magazine recently lauded the EIS for enabling tax-efficient investing for individuals of all ages who want to diversify into early-stage businesses through online platforms. The article noted that British investors are accessing EIS investments on line because their big financial institutions (such as our big banks) haven't made them aware of the opportunities.

This is a huge opportunity for independent firms to expose their clients to early-stage equity funds.

It's clear that Ottawa is committed to its Business Growth Fund, even though it's not apparent how it will free up even one dollar of new capital otherwise not available to our growth companies. But, Mr. Morneau, how about going "full U.K." and also adopting the Business Growth Fund's far more successful cousin, the highly efficient tax-credit program aimed at investors?

Story continues below advertisement

Let the market, not big bankers and federal bureaucrats, decide what new ventures deserve the vote of confidence that comes with putting hard-earned investor money on the table.

Report an error

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at