Study claims tax credits for investors are not justified by outcomes
Investors are encouraged to make investments in tax-advantaged funds, particularly labour-sponsored venture capital corporations (LSVCCs) in Quebec, but a new study says its an outdated and costly policy.
The provincial government’s incentive of a 15% tax credit in addition to a federal credit of 15% means that, up to a certain limit, the benefits for investors total 30%. Quebec’s small and medium sized businesses are intended to gain from capital flows designed to stimulate economic growth.
But a new report from The HEC Montréal Centre for Productivity and Prosperity – Walter J. Somers Foundation – finds that continuing with the policy is not in the best interests of the province’s taxpayers and does not effectively deliver its aims.
"The government is stubbornly applying tax strategies based on the needs of another era," explains Robert Gagné, CPP Director and co-author of the study. "On average, the Quebec government gave up revenue of approximately $156 million a year to finance the credit for contributions to labour-sponsored funds between 2012 and 2019, meaning an average cost of $45,594 for each job created. Given that job creation hasn't been an economic development concern for at least 10 years, this is obviously a disproportionate expenditure."
The report was conducted within CPP’s mandate from the Ministère des Finances du Québec to analyze the effectiveness of fiscal policy relating to income tax credits for tax-advantaged funds. It also investigated claims of the profitability of funds.
"It takes an average of 15 years for the government to recover the tax expenditure committed to finance a round of investment. And even then, a large part of the amount recovered in taxes would be financed by increased contributions to the Health Services Fund associated with the jobs created, which assumes that these jobs could not have been created without the help of the funds," noted Jonathan Deslauriers, CPP Executive Director and co-author of the study. "Although we know that the policy is not intended to increase tax revenue, maintaining these associated credits for purposes of economic development seems hard to justify."
Gagné also warned that the US threats of tariffs meant that Quebec’s government should address productivity rather than trying to save jobs.
"The tariffs must not be used as an excuse to focus even more on job creation, if the objective is to improve Quebec's lagging productivity,” he said. “Over 80% of the fiscal support that goes to businesses is still intended to stimulate employment, directly or indirectly, rather than competitiveness. The fiscal policy concerning income tax credits for tax-advantaged funds unfortunately is one in a long list of outdated and costly tax policies that the government must rethink.”
