Thursday 7 May 1992

Labour Sponsored Venture Capital Corporations Act, 1992, Bill 150

Ministry of Revenue

Hon. Shelley Wark-Martyn, minister

John Whitehead, manager, personal income and payroll taxes

Ministry of Industry, Trade and Technology

Bob Marrs, manager, employee ownership section

Ministry of Financial Institutions

Julie-Luce B.Farrell, senior policy analyst

Ministry of Revenue

Jim Evans, executive director, revenue services and operations branch

Gerry Sholtack, director, legal services

Joe Lambert, legislation specialist


*Chair / Président: Hansen, Ron (Lincoln ND)

*Vice-Chair / Vice-Président: Sutherland, Kimble (Oxford ND)

*Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

*Christopherson, David (Hamilton Centre ND)

*Jamison, Norm (Norfolk ND)

*Kwinter, Monte (Wilson Heights L)

*Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

*Ward, Brad (Brantford ND)

Ward, Margery (Don Mills ND)

*Wiseman, Jim (Durham West/-Ouest ND)

Substitutions / Membres remplaçants:

*Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND) for Ms Ward

*In attendance / présents

Clerk / Greffiere: Decker, Todd

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1016 in committee room 1.


Consideration of Bill 150, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments / Loi prévoyant la création et l'inscription de corporations à capital de risque de travailleurs aux fins d'investissement dans des entreprises ontariennes admissibles et apportant des modifications corrélatives.

The Chair (Mr Ron Hansen): Good morning. We'll start the standing committee on finance and economic affairs. On the agenda today, May 7, is Bill 150, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments.


The Chair: We'll start off with the Honourable Shelley Wark-Martyn, MPP, Minister of Revenue.

Hon Shelley Wark-Martyn (Minister of Revenue): Good morning. We are pleased to be given this opportunity to appear today before the standing committee on finance and economic affairs.

The economy of Ontario is undergoing enormous change. A major priority of this government is to help the people of Ontario to successfully respond to those changes, and to respond in a way that involves all the players in the economy. We believe that a concerted and cooperative approach on the part of business, labour, government and other members of the community is needed to meet the economic challenges facing Ontario today.

In response to the economic problems facing business and labour, the Treasurer announced a new two-part Ontario investment and worker ownership program in the Legislature on June 20, 1991.

This was the government's first initiative designed to deal with two important issues raised in the 1991 Ontario budget: the need to promote investment in industries to help them to compete and grow in the Ontario market and the need to provide opportunities for workers to get involved in and initiate economic change.

A discussion paper including draft legislation was released to the public on August 15, 1991. The present bill, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments, was introduced after consultation with business, labour and other investment groups.

The consultation process gave us some excellent ideas on program policy and administrative design, which resulted in improvements and changes to the original proposal. This approach is part of the government's commitment to a process which not only listens to the people of Ontario but also responds to their needs and concerns.

As I mentioned earlier, the present bill represents two programs in one. The first will provide a tax credit to encourage anyone in Ontario to invest in a portfolio of small and medium-sized businesses through a labour-sponsored investment fund. Under the bill before us today, Ontario residents who invest in the fund will get an Ontario tax credit of 20% on the first $3,500 invested annually and a matching 20% federal tax credit.

The second part of the program will provide enhanced tax credits to encourage employee ownership through an employee ownership labour-sponsored venture capital corporation. Employee ownership will be limited to investments in the employer's business. Workers investing in their employer's business will be entitled to receive an Ontario tax credit of 20% on the first $3,500 and 30% on the next $11,500 invested annually in an employee ownership corporation. An employee's total tax credits are limited to a lifetime investment of $150,000.

The federal government has agreed to deliver the Ontario tax credits for both parts of the program in keeping with the Canada-Ontario tax collection agreement.

The Minister of Revenue will be responsible for administering the legislation. In addition, there are also functions to be undertaken by the Ministry of Industry, Trade and Technology's Employee Ownership Advisory Board, the Ontario Labour Relations Board and the Ontario Securities Commission. The Employee Ownership Advisory Board will review, evaluate and make recommendations on the commercial viability of the employees' proposed investment. The Ontario Labour Relations Board will conduct the employee votes and ensure that only those who are eligible vote. The Ontario Securities Commission will administer certain investor protection provisions of the program.

This program is expected to provide new sources of equity capital, increase productivity and competitiveness, create and maintain jobs and build better relationships between business, labour and government, all of which should help contribute to stabilizing Ontario's economy.

Since the introduction of this bill in November and following second reading debate in December, Spruce Falls has been pre-registered as an employee ownership labour-sponsored venture capital corporation, andWorking Ventures has been pre-registered as a labour-sponsored investment fund.Investors in both of these corporations have now received their 1991 tax credit certificates. Employees of Spruce Falls have invested $9.7 million and received $2.55 million dollars in tax credits. Approximately 10,000 Ontario residents have invested $28.3 million into Working Ventures and received $5.67 million in tax credit.

Working with these corporations has given the government experience in the application of the bill, experience which is not normally available until after a bill is passed. Based on these observations, the government is tabling policy amendments to ensure more appropriate approaches to investor protection for employee ownership labour-sponsored venture capital corporations and to reinforce democratic voting processes. There are also a number of additional amendments that support these issues and otherwise improve the administration of the program.

With respect to labour-sponsored investment funds, investor protection will be under the jurisdiction of the Ontario Securities Act. However, in recognition of special investor requirements, the employee ownership investor protection provisions will be administered under this bill.

Bill 150 is an example of this government's commitment to achieving the objective of sustainable prosperity.

I have asked my officials, supported by our colleagues from Treasury, Industry, Trade and Technology, Labour and Financial Institutions, to make a presentation of the legislative framework of Bill 150, to provide a context for the following presentations.

The Chair: Could I call on Mr John Whitehead, the manager of personal income and payroll taxes in the Ministry of Treasury and Economics. That's quite a title.

Mr John Whitehead: I'd like to follow on the minister's comments, if I may, beginning with budget paper E of the 1991 budget document, in which the government noted that the paper was devoted to a discussion of equitable structural change in the economy.

In that document the Treasurer noted that "public policies and private sector practices to provide workers with the security and influence necessary to enable them to accept and initiate change" would be necessary, as well as the need for "greater investment in infrastructure, technology and innovation" and "exploration of better ways to channel the capital resources of Ontario to finance restructuring and promote regional development."

Following shortly on the heels of this budget, as the minister noted, the Treasurer issued public statements on the government's interest in introducing a program to encourage investment and worker ownership.

When the consultation paper and draft legislation were released in August, Treasury, along with colleagues from MITT, Labour, Financial Institutions and Revenue, met with a number of groups and individuals representing business, labour and investment groups.

The consultations, which were held mostly throughout September 1991, resulted in a number of modifications and improvements being made to the original draft legislation. We also benefited from the experiences and legislation available in other provinces in Canada.

The amendments that are being brought forward today I would characterize as being mostly technical items dealing with non-policy-related issues. Some are the result of experience gained through the first few months of the program, as the minister noted, and some reflect concerns that were raised at second reading of the bill.

Again, as the minister noted, the worker ownership program is actually composed of two components. Their primary common feature is that they both encourage investment in Ontario businesses by Ontario residents. The labour-sponsored investment fund corporation component encourages investment indirectly by allowing Ontario residents to invest in labour-sponsored investment fund corporations, which in turn invest in small and medium-sized businesses in the province. The program also encourages direct investment in firms where employee groups wish to become owners of the firm.

Each component of the program has its own objectives. For the labour-sponsored investment funds, it is to provide small and medium-sized companies with a new source of capital which they can use to modernize, for growth and for restructuring of their operations. For the employee ownership component, it is to facilitate worker ownership in order to increase productivity through participation in the workplace. It will help maintain jobs by supporting viable companies that may otherwise close and should go to improving management and labour relations by improving the awareness on both sides of the challenges facing each.

Individuals will obtain their tax credits by filing annual personal income tax returns. The 1991 income tax return contains this program now. Individuals make their investments with after-tax dollars. The tax credits will serve to reduce Ontario income tax, but they are not refundable, and unclaimed tax credits can be carried forward for up to five years to reduce future Ontario taxes if the individual did not have sufficient tax in the year to offset the credit amount. Altogether, the program will probably come in at about $8 million for this fiscal year, and at maturity could cost the province up to about $250 million, depending on the takeup.

The labour-sponsored investment fund corporation component is consistent in virtually all respects with the federal labour-sponsored venture capital corporation program. Prior to the budget, annual investment limits of up to $3,500 for tax credits at a rate of 20% were available. The Treasurer announced in the 1992 budget that Ontario would parallel recent federal changes to their program. As a result, Ontario residents will be able to invest in a labour-sponsored investment fund corporation up to $5,000 a year for tax credits of up to $1,000 a year. The investments made under Ontario's LSIF program are matched by federal credits.


The key differences between our program and the federal program are the carry forward of unclaimed tax credits, reduced recapture where market value has declined, the length of holding of shares until tax credits are not recaptured. With respect to the labour-sponsored investment fund component, I would note that a number of other provinces have similar programs, including Quebec, Saskatchewan, BC and Manitoba.

With respect to the employee ownership component, control of the business must change in order to qualify for the tax credits. The employees can acquire the business on their own or together with a significant partner, as was the case, I would note, in the Kapuskasing deal. Control can be acquired immediately or over the term of a business investment plan filed by the applicant.

The difference in funding requirements between the general investment and mutual fund vehicle in purchase of a specific business is recognized with higher investment limits. On the labour-sponsored investment fund corporation's side of it, an individual is allowed to invest $5,000 in a year. Under the employee ownership component, a tax credit of 20% on the first $3,500 invested is provided and a tax credit of 30% on the next $11,500 of investment is also to be provided. The higher credit amount for the second level of investments that an individual might undertake in his own firm reflects the greater risk to the employee of the higher level of personal investment.

As the minister has noted in her speech, this process involves a number of different ministries, and indeed the creation of the programs certainly involved a number of ministries. The administration of the program will also involve a number of ministries, but together the provisions of this program should go to encouraging otherwise viable businesses to be run by their employees, and will assist the employees in making those decisions.

I think that concludes my remarks.


The Chair: The next presenter is from the Ministry of Industry, Trade and Technology; Mr Bob Marrs, manager, employee ownership section. Welcome to the committee.

Mr Bob Marrs: Good morning. I'm just passing out some slides that will help you follow through the involvement of the Ministry of Industry, Trade and Technology in this new program.

Broadly speaking, the ministry has two roles in this. One will be to act as the economic development agent to encourage, where appropriate, employee buyouts of their firms, whether it be the divestiture of a division of a large corporation, a retiring owner or a variety of scenarios. The other is mandated in the act and includes two roles. It includes the role of the advisory board in evaluating proposals, and the role of the independent investment adviser to advise employees about the merits of their investment.

To walk you through that process, I would ask you to turn to the chart which is three pages in. MITT intends to have an evaluation program that will provide financial assistance to employee groups that want to look at whether this option is feasible. It'll be broken down in two stages. The first will be a cost-shared study with the ministry and the employee group. Up to $25,000 will enable them to hire a consultant to go out and evaluate that proposal.

The second would be to assist them in structuring the deal and putting the business plan together and making application to the board. The advisory board will receive the applications, review them in terms of reasonable commercial viability and the equitableness or the fairness to the employees, and then that will be measured in terms of price and the broadness of the participation by the employee group, the kind of structure that would be put in place and the human resources plan and just a general review of the prospects for success.

At that point an investment adviser will be retained by the employees. We will have a roster or some other similar basis on which employee groups will select an independent adviser who will, at the time they receive a disclosure document from the Ontario Securities Commission, sit down with the employees in town hall sessions or in face-to-face meetings and discuss the merits of those proposals. At that point, then the employees will make an informed investment in terms of the project.

The evaluation program I guess is going to focus on three things. In our research we've seen in the United States, they indicate that, broadly speaking, there's three factors you need to flush out fairly early: (1) Is there a committed employee group and is there broad participation? (2) Is the firm viable? (3) Is the current owner amenable and cooperative so there can be a smooth transition? The feasibility study upfront will of course address the viability, and the employees will be putting up half the funds for the study, so that will be some indication of the support.

The concept of having the two stages: When you look at the decision the employees will be taking, in some cases the option will be a plant closure, and what I think we want to accomplish is that employees look at this as one among a number of employment options that will face them and they will be able to make a quick determination about the merits of pursuing this course or going on and finding alternative employment.

The advisory board, as indicated, is made up of members of business, labour and government sectors. We'll likely have six members, two from each sector to start, and they will be evaluating based on the mandate indicated in section 42.

As I said earlier, MITT sees this as a potential for a situation where there are retiring owners or businesses that have divisions that are profitable that are not being effectively exploited in their current configuration. It might make sense in the hands of the employees. We see them being poor potential where there's excess capacity, they're consolidating plants and the decision to close has been made and you're trying to look at it retrospectively.

In terms of the US experience, their program is not exactly comparable, but they've had about 10,000 ESOPs over the life of their program and about 4% of those relate to employee buyouts. I guess that briefly outlines where MITT is.



The Chair: The next speaker is from the Ministry of Financial Institutions, Julie-Luce Farrell. I thought all the presenters would be sitting at one time and there were going to be questions. Just keep your papers for later on, if you can.

Ms Julie-Luce B. Farrell: Good morning. My remarks on behalf of MFI will be limited to disclosure, investor protection regimes and the role of the OSC.

As you are aware, there are separate regulatory regimes established for employee ownerships and the investment funds. These regimes will operate independently and reflect the distinct nature of both EOs and the investment funds. They will achieve the same objectives, to enable potential investors to make informed decisions about the investments made available to them under Bill 150.

First, we'll discuss the regulation of employee ownership, which I'll refer to as EOs. The securities regulatory regime will prescribe a disclosure document to be given to all employees in connection with any distribution of shares of an EO.

The disclosure document will comply with the requirements of the act and the regulations. The disclosure document will contain a summary of information relevant to the EO and the eligible business in which the EO proposes to invest, including a summary of the business, investment and human resources plan for the eligible business after the EO buyout, disclosure of other material facts relevant to an investment decision, and prescribed health warning language relating to the illiquid and speculative nature of the investment.

The board of directors of the EO will be required to certify as to the accuracy and full disclosure of the information in the disclosure document. If the disclosure document contains any misrepresentations, including material errors and/or omissions, civil liability will be imposed under Bill 150 on the EO, its directors, promoters and others, and investors will have rescission rights.

The disclosure document and business plan or, if any portions of the business plan are to be kept confidential, those portions of the business plan in respect of which confidentiality is not asserted, will be filed with the OSC. The staff of the OSC will review the disclosure document to ensure that it complies with the technical requirements of Bill 150 and the regulations.

No employee vote can take place, the EO cannot be registered under the act, and no shares can be sold to the employees until a final receipt for the disclosure document is issued by the commission. Staff of the OSC will not issue a final receipt if it appears that the disclosure document does not fairly reflect the business plan or fails to comply with the formal requirement of the code. A clearly stated objective is that the disclosure document will be in plain language and adequately disclose the risk involved.

Arrangements relating to the regulation of flow of investment funds will be prescribed under the regulations to ensure that funds provided by employees are actually received by the EOs and used to invest in the eligible businesses. The OSC will monitor these arrangements.

Continuous disclosure: EOs will be subject to a number of ongoing disclosure obligations intended to ensure that employees are constantly aware of the changes in the EO's business that may affect the value of their investment, including disclosure of material changes, circulation of unaudited quarterly and audited financial statements, and valuations audited and quarterly unaudited will be filed with the OSC and placed in the public file which the OSC maintains.

On other matters, the regulation will also cover takeover bid regulation, proxy solicitation and insider reporting obligations, which will be regulated by the OSC and will mirror the requirements of the Ontario Securities Act.

On other issues, given the role of the board, of the independent adviser and of the OSC, given the regulation of flow of funds and also given the nature of the economic decision that employees are expected to make, there will be requirements under Bill 150 that registration be required to sell the shares of the EOs.

Now, for the regulation of the funds: For most purposes, the funds will be treated as mutual funds, subject to the same requirements under the act as those applicable to mutual funds. However, certain modifications will be required.

The disclosure normally contained in a prospectus of a mutual fund will be supplemented by additional requirements to reflect the distinct nature of the funds as an investment instrument. "Health warning" language will be required relating to the speculative and illiquid nature of these investments.

The investment criteria and objectives of the funds are distinct from the current investment criteria for mutual funds under the Ontario Securities Act. Those specific business investments and other restrictions on mutual funds which differ from those of Bill 150 will be modified to accommodate the investment criteria of Bill 150.

That disclosure document will be reviewed by the staff of the commission, and a receipt will be required before any distribution of funds securities will be permitted. The receipting of those prospectuses under the OSA will be based on compliance with Bill 150 requirements.

It is proposed that securities of the funds be distributed by securities dealers and also by mutual fund dealers registered with the OSC, who, however, will meet certain prescribed additional proficiency requirements which will be developed by the OSC in consultation with the Investment Funds Institute of Canada.

As for continuous disclosure, documents with respect to the funds will be filed with the OSC and also placed in the public file maintained by the commission.

The code will also provide for regulation of ancillary mutual fund matters such as advertising rules.

In the general application, secondary market transactions will also be addressed in the code, including the appropriateness of Ontario Securities Act rules relating to such matters.

Enforcement matters relating to the code will be dealt with by the OSC.

That concludes my remarks.

The Chair: Thank you.


The Chair: The next presenter is Mr Jim Evans, executive director, revenue services and operations division, from the Ministry of Revenue.

Mr Jim Evans: Good morning. If I may, I'd like to stand and use the overhead.

The Chair: Can you sit there so the mike will pick up your voice? I think you can operate the slide projector also.

Mr Evans: I'll do my best.

The Chair: Do you need someone to put the slides on for you?

Mr Evans: I will attempt to put them on myself and if that proves difficult we'll move to the alternative.

As the minister has described, the Ministry of Revenue has overall responsibility for the act, and my colleagues who have spoken before me have addressed the roles of the other ministries that are principally involved: Treasury from the perspective of policy, MITT in relation to the advisory board, and MIF and the OSC in relation to investor protection.

The presentation I am going to provide now is a description of the overall background and responsibility of the act as administered by the minister and the Ministry of Revenue.

Bill 150, as has been described, provides for the creation and registration of labour-sponsored venture capital corporations to invest in eligible Ontario businesses and for Ontario tax credits to eligible investors who have purchased shares.

The legislation is intended to advance the government's economic renewal agenda principally through the expansion of the capital markets to provide business with access to new sources of capital, to help them grow and adapt to new technologies and increase globalization of the market.

It is intended to initiate partnerships committed to the development of innovative programs to help Ontario meet the economic challenge of the 1990s; encourage individuals to invest in Ontario businesses and facilitate employee ownership; provide labour with greater opportunities for participation in the decision-making process, and develop new partnerships between business, labour and government to help Ontario increase productivity, improve labour-management relations and set the groundwork for sustained prosperity.


As the minister has described, the Treasurer announced in the Legislature on June 20, 1991, the government's intentions to introduce this new program and thereby to provide workers with the opportunity to invest in their own and other companies and to provide business with access to equity capital to modernize and restructure operations.

Further details were announced on July 31, 1991, and on August 15, 1991. Draft legislation and a discussion paper entitled Ontario Investment and Worker Ownership Program: A Proposal for Discussion were released. During August and September, the government consulted with the public. As a result of the consultation process, improvements and modifications were made to the program, and Bill 150 received first reading on November 6, 1991, and second reading on December 18, 1991.

The program design of the bill does provide for two different types of labour-sponsored venture capital corporations: the employee ownership labour-sponsored venture capital corporations, which we describe as the EOs or employee ownerships for short, and the labour-sponsored investment funds, the LSIFs, sometimes referred to by us merely as "the funds."

The program is administered by the Ministry of Revenue, as you have heard this morning, with the exceptions of the employee ownership function, the Ontario Labour Relations Board in relation to the administration of voting and the Ontario Securities Commission in relation to certain aspects of investor protection.

There is also an intergovernmental relationship within this program and that describes the role of the Revenue Canada -- Taxation working with the Ministry of Revenue for the administration of tax credits through the income tax process. Interministerially, the Ministry of Industry, Trade and Technology is responsible for the Employee Ownership Advisory Board, the Ministry of Labour for the Ontario Labour Relations Board, and the Ministry of Financial Institutions and the Ontario Securities Commission in relation to investor protection.

Within the Ministry of Revenue, there are two organizations involved, the business investment plans section and the guaranteed income and tax credit branch in relation to the certificates.

The basic sequence of steps as it relates to the investment funds has the investment funds being established by a provincially recognized trade union. It has MFI and the OSC providing aspects of investor protection. The Ministry of Revenue will provide ongoing program administration to ensure compliance with the act, and the federal government will deliver the tax credits. In the case of the funds, it will match those credits.

In relation to the administration of the employee ownership labour-sponsored venture capital corporations, the Employee Ownership Advisory Board will, as we have heard in the presentation, review, evaluate and make recommendations on the commercial viability of the proposed investments. The Ontario Securities Commission will administer certain aspects of the investor protection and review the disclosure documents, as we have also heard this morning.

There is an independent adviser in the process to provide a third-party review for the employees considering forming such a group. The Ontario Labour Relations Board will conduct the vote and ensure that only eligible employees vote. At that point, if the approval and support are provided by all of those participants, the labour-sponsored venture capital corporation can set itself up as an eligible investor and apply to the Ministry of Revenue for registration. The Ministry of Revenue will then provide ongoing program administration and the federal government will deliver the tax credits against tax certificates that have been issued by the Ministry of Revenue. In this case there is no matching participation by the federal government.

A brief schematic of how the labour-sponsored investment fund cycle will work is that the recognized labour organization will establish the fund and it will seek to sell class A shares to shareholders, for which it will receive investment. It will then onward provide that investment to the small and medium-sized corporations in exchange for minority positions in those corporations. Under the fund, the labour-sponsored investment fund does not ordinarily take controlling positions in any of the small businesses in which it is investing.

At the present time, as provided by the bill before us, the eligible investors receive 20% Ontario tax credits on the first $3,500 invested annually and there is a matching 20% federal government credit. The maximum credit therefore is $1,400, $700 provincially and $700 federally. As John has otherwise described, the federal budget and now the Treasurer have introduced proposals for increasing both the limit and the amount of the tax credit, the limit going to $5,000 and the maximum credit going to $1,000 each provincially and federally. The design of the labour-sponsored investment fund part of the legislation has been based on the federal legislation and therefore conforms to it in order to qualify for the matching federal tax credits.

In terms of registration, an employee organization may form a corporation for registration as a labour-sponsored investment fund by the Ministry of Revenue. That employee organization must be a trade union or association or a federation of trade unions that is recognized provincially. Federally registered labour-sponsored venture capital corporations will also qualify for registration as LSIFs by the Ministry of Revenue provided they adhere to the eligibility requirements of this act.

Eligible investors may be any Ontario resident who purchases newly issued class A shares of the investment fund registered under this act. A class A share entitles the holder to attend and vote at all shareholders' meetings, receive dividends at the discretion of the board of directors and receive an apportioned share of the investment fund's funds upon dissolution.

Tax incentives: Eligible investors will receive the combined personal income tax credit of 40%, 20% provincial and 20% federal, as previously described, on investments under the bill as it presently stands to $3,500 annually, but as proposed, to $5,000. The unused portions of any tax credits are not refundable on the investment fund side and therefore cannot be carried forward for application in any other taxation year. Generally, an investor in a fund will be making an investment as a matter of choice and will manage his investments accordingly.

Eligible businesses must be taxable Canadian corporations or Canadian partnerships that are active in any industry in Ontario. There are no bars as to the type of industry or business that can be eligible under this act. The business's total assets cannot exceed $35 million under the bill as it presently stands -- it will be $50 million under the modified budget proposal -- and there can be no more than 500 employees. That has not been changed by the budget proposal. At least 50% or more of its full-time employees must be employed in a business activity carried on in Ontario and the business must pay 50% of its wages and salaries to employees whose place of work is ordinarily at a permanent establishment in Ontario.


An investment by a fund in an eligible business will be considered eligible if the investment is the purchase of newly issued shares of the eligible business, the purchase of a partnership interest in the eligible business, an unsecured loan or a secured loan. A fund may also participate as an equity partner with employee ownership labour-sponsored venture capital corporations as a significant investor and an investment fund may invest up to one third of its assets in replacement debt and equity under those circumstances.

The primary purpose, as we have described and as otherwise heard under this bill, is the injection or infusion of new capital. So that's why those limits are in place.

Eligibility requirements: A fund is restricted to investing no more than the lesser of $10 million or 10% of its equity capital in any one eligible business. At least 70% of the fund's issued capital must be invested in eligible businesses within 24 months following the fiscal year in which the class A shares of the fund were issued. This level must then be continuously maintained to remain in compliance with the act. The fund is restricted to a minority position in any eligible business, except that a fund is permitted to take control of the eligible business for a period of no more than one year, where by doing so it would assist in preventing the insolvency of the eligible business or might assist in the restoration of the eligible business to solvency or transfer control of the eligible business to another person. By doing so, the fund is then protecting its investment in the business.

Share valuation: The shares of the fund must be valued annually by an independent qualified person and by quarterly updates of the management of the fund. It is the intention of the fund that it is making long-term investments in business. Therefore, the shares must be held for at least five years to avoid tax credit recapture provisions.

Redemption within five years will result in the recapture of the tax credit, unless the original shareholder dies, becomes permanently disabled or suffers long-term illness, reaches the age of 65 or retires and has otherwise held the shares for a minimum of two years.

Transfer of shares within that period therefore results in recapture, unless those previously mentioned circumstances prevail or the funds are being transferred into an RRSP by the original purchaser. The recapture will be based on the lesser of fair market value of the shares at the time of redemption or transfer or the original tax credit where the shares have appreciated in value. In relation to the sizing of the funds, there is a minimum of $25,000 capitalization proposal, but there is no upper limit.

In summary, the features of the fund provide for the Ontario tax credit of 20% on the first $3,500 of eligible investments, moving to $5,000 on eligible investments based on the budget proposal. An eligible investor may be any individual resident of Ontario. The eligible business must be active in any industry in Ontario and there will be federal matching and delivery of the tax credits. The business's total assets cannot exceed $35 million, and there can be no more than 500 employees. At least 50% or more of the business's full-time employees must be employed in business activity carried on in Ontario, and the business must pay at least 50% of its salaries and wages to people who are ordinarily employed at a permanent establishment in Ontario.

The employee ownership labour-sponsored venture capital corporation investment cycle: Typically, a corporation will be formed by eligible employees and these employees can be any employee group. It is not limited to a recognized trade union or organization of trade unions. The intention is that they create the employee ownership labour-sponsored venture capital corporation and issue class A shares, which are voting shares, to shareholders in exchange for share capital. Those moneys are then used to gain control of the employer corporation, and that can be through an investment that is 50% of the voting shares of the corporation or in conjunction with another significant investor. It can be 40%, but control must change hands.

The federal government will not match tax credits for an investment in shares of the employee ownership labour-sponsored venture capital corporation. This is a function of the eligibility to form a function of the size. There is no upper limit in the provincial legislation -- the bill now before you.

Employee vote: Employees vote on whether to purchase their employer's firm once the Employee Ownership Advisory Board has formally reviewed the proposal, as we heard this morning from Bob Marrs. The employees have been provided with the disclosure document and with advice relating to the proposed investment by an independent investor, as we've heard from Julie-Luce Farrell. The Ontario Labour Relations Board will conduct the vote and ensure that only eligible employees vote.

The vote is conducted to answer the following questions: Do you support the application for registration of the corporation as an employee ownership labour-sponsored venture capital corporation under the Labour Sponsored Venture Capital Corporations Act? Do you support the proposed investment in the corporation for the purpose of reinvestment in your employer as outlined in the business, human resource and investment plans to be filed under the Labour Sponsored Venture Capital Corporations Act? If a majority of employees' votes are cast in support of these questions, the corporation formed by the employees can apply for registration as an employee ownership labour-sponsored venture capital corporation with the Ministry of Revenue.

The approval process requires that a corporation formed by the employees of their employer's firm will be registered by Revenue as an employee ownership labour-sponsored venture capital corporation once the Employee Ownership Advisory Board has evaluated the proposals; the independent adviser has provided the employees with advice relating to the proposed investment; employees are in receipt of a disclosure document; once the Ontario Securities Commission has issued its final receipt of that document; the corporation has received approval through the order in council by the Lieutenant Governor in Council; the employees have voted in favour of purchasing the employer's firm and have met any other registration requirements as provided for in the bill with the Ministry of Revenue.

The board will have equal representation from business, labour and government, as has previously been described, and the board's recommendations are submitted to the Minister of Industry, Trade and Technology prior to referral to cabinet for approval by an order in council by the Lieutenant Governor in Council. An interim board is in operation until such time as the permanent board is established.

Eligible investors, as have been described, are Ontario residents who are eligible employees of the employer firm. An eligible employee is described as any individual who has been employed by his or her employer firm on a continuous basis for an average of at least 15 hours each week, either on a year-round or regular seasonal basis.

The tax incentives are: Ontario will provide a 20% tax credit on the first $3,500 invested and 30% on the next $11,500 invested annually to provide for a total of $15,000 in any year. There is a lifetime maximum limit for tax credits issued to an eligible employee of $150,000. These amendments are not modified by budget proposals. The unused portion of the tax credit is not refundable but, in the case of the employee, ownership components can be carried forward for tax credit purposes for the next five succeeding years.


The business must be a taxable Canadian corporation or Canadian partnership that is active in any industry in Ontario and the business must pay at least 25% of its wages and salaries to employees whose ordinary place of employment is a permanent establishment in Ontario.

An employee ownership labour-sponsored venture capital corporation is permitted to invest in only one eligible business and that eligible business is the employee's place of employment. An employee ownership labour-sponsored venture capital corporation may invest in newly issued or existing shares of a corporation or new or existing ownership interest in a partnership.

At least 80% of the employee ownership labour-sponsored venture capital corporation's equity capital must be invested in an eligible business within one year after the fiscal year in which the class A shares were issued to the shareholders of the employee ownership corporation, and this level must then be continuously maintained.

Where there is no outside investor, the employee ownership corporation must acquire over 50% of the issued and outstanding shares or ownership interest of an eligible business. Control must also be acquired within the time period specified in the approved employee ownership labour-sponsored venture capital corporation business plan.

If the purchase of the eligible business involves investment by both outside investors and the employee ownership corporation, then the employee ownership labour-sponsored venture capital corporation must acquire at least 40% ownership. The key point here is that, on all occasions, control of the eligible business must change hands. Shares of the employee ownership corporation must be valued annually by an independent, qualified person, with quarterly updates by management.

Any investor who holds shares for less than five years will be subject to recapture, unless the redemption within the five-year holding period is as a result of death, the shareholder becoming permanently disabled or suffering long-term illness, has reached the age of 65 or retires and has held the shares under those circumstances for a minimum of two years or has been involuntarily laid off from the corporation.

Transfers within the five-year holding period result in recapture of the credits unless those conditions previously described exist or unless the shares are being transferred, to be held in a registered retirement savings plan. The recapture will be based on the lesser of the fair market value of the shares at the time of redemption or transfer or the original tax credit.

The capitalization limits of the employee ownership labour-sponsored venture capital corporations are a minimum of $25,000, with the upper limit being determined and described by the business plan as approved through the order in council by the Lieutenant Governor in Council. If any additional capital is to be raised by way of secondary subscription, approval must be obtained from the Lieutenant Governor in Council before that action is taken.

The key summary features of the employee ownership labour-sponsored venture capital corporations are:

An Ontario tax credit of 20% on the first $3,500 and 30% on the next $11,500 of investment invested annually, with a lifetime limit of $150,000.

An eligible investor is an employee of the employer corporation.

An eligible business must be active in any industry in Ontario that is paying at least 25% of its wages and salaries to workers who are ordinarily employed at permanent establishments in Ontario and, with the employee ownership labour-sponsored venture capital corporation, there is no matching tax credit.

That concludes my presentation.

The Chair: Thank you, Mr Evans. Maybe you can stay there, because there will be questions coming up very shortly, but we have one more presenter, actually, Mr Gerry Sholtack. He's the director of legal services for the Ministry of Revenue, and he's going to give us a short explanation on the amendments to the bill.

Mr Gerry Sholtack: Good morning, ladies and gentlemen. You all have a package of the amendments that are being tabled by the government. The first two pages constitute an index of those amendments. They are indexed by number. However, they can be categorized under general headings which have been touched on today. The bulk of the amendments deal with the implementation of the investor protection code.

If I might go through them, the investor protection codes amend subsection 1(1) to provide definitions; that's item 2 on the index. Section 1 provides that shares of a specified employee ownership corporation are not subject to the Securities Act, and when the corporation will cease to be a specified employee ownership corporation. The purpose of this amendment is to take the EOs out of the operation of the Securities Act and, as we'll see later, provide for the making of an investor code regulation under the act itself, under Bill 150.

There are provisions to delete, as I said, the reference to the Securities Act; that's item 6 on your index.

Item 35 is an amendment to section 32. The minister is authorized to make inquiries to ensure compliance with the act and may designate the Ontario Securities Commission or the director to make such inquiries, and on that designation they have the same powers as provided under parts III and VI of the Securities Act.

Section 34, which is 36 on your index, provides for higher fines for false and misleading statements in disclosure documents.

Item 37 on your index provides a number of amendments: additions to the act authorizing the minister to apply for a court order to ensure compliance with the act; permitting the minister to issue cease-trading orders on the recommendation of the director; or if the minister is entitled to revoke registration this permits the securities commission or the director to prevent the further sale of shares should there be problems with a particular EO.

Other changes authorize the minister to designate the securities commission or director to exercise her powers under 34.1 or 34.2, which are the changes I just alluded to. There are provisions for an appeal from the order of the director or the securities commission. Also, 34.5 will require the provisions of a disclosure document to be given to purchasers of shares. Section 34.6 provides for civil remedies to investors who suffer loss due to misrepresentations contained in disclosure documents.

Section 35.1 extends the immunity provisions in the act to the OSC and the director and other designated persons performing regulatory functions. In section 35.2 no person will be liable to another for complying with the act or directions, decisions, orders or rulings under the act.

The amendment to section 37, which is 39 in your index, authorizes the making of regulations to implement the investor protection regime applicable to EO. It's an extensive amendment, and that will allow all the various authority necessary to allow the cabinet, on the advice of the Minister of Financial Institutions, to implement the provisions of the investor protection regime.


Section 48 is the equivalent provision for the LSIFs. That in fact is an amendment to the Securities Act and will permit the cabinet, on the recommendation of the Minister of Financial Institutions, to provide for regulations to implement the investor protection code for the LSIFs.

The second main area covered by the amendments deals with the voting procedures to be followed by the EO before it is registered under the act. The main provision is section 4, which provides specifically for the questions to be asked of the employees, whether they approve the registration of an EO and the proposed investment in the employer corporation.

The vote will be conducted by the Ontario Labour Relations Board based on its own procedural rules. There are requirements to be met before the vote will be ordered, basically that the employees receive the disclosure document, that the independent adviser has given his or her advice and that the proposed investment has been reviewed by the employee ownership advisory board. Those three conditions have to be satisfied before the vote can be held.

The Ontario Labour Relations Board will also be able to determine who is an eligible employee in the case of a dispute. As well, the concept of "employee group" is deleted as being unnecessary, and there are a number of changes consequent to that contained in the package whose purpose is to strike out the words "employee group."

Finally, subsection 5(1), which is number 4 in your index, provides for the registration of the EO if at least 50% of the votes are cast in favour of the application and the proposed investment.

There are a number of other areas of amendment. Three amendments relate to the change in case of decline of share value. The amendments provide that where the fair market value of the shares of an EO declines below its issue price any recapture that becomes necessary will be reduced proportionally, and that applies both to the EO and the LSIF shares.

Another area involves amendment with respect to permitted share transfers within the five-year holding period. There are two amendments there. Essentially, class A shares can be transferred within the holding period if the recapture has been paid. That's another option that's added, that if an individual wishes to transfer the shares within that five-year period, he must pay the recapture. Then he can transfer it.

There are also two amendments to clarify the role of the employee ownership advisory board. Clause 26(1)(c) provides that any change of control by an EO within the five years of a share issue must be approved by the board and the Minister of Industry, Trade and Technology. Also, under clause 42(1)(a) the board will review the entire proposal made by the EO to determine whether it's equitable and commercially viable over the contemplated time periods.

As well, a number of amendments relate to the removal of restrictions on investments by a labour-sponsored investment fund. They broaden the ability of the labour-sponsored investment fund to invest in non-voting as well as voting shares. They also permit investment in secured investments that are secured by a floating-charge debenture.

As well, the labour-sponsored investment fund would be entitled to majority ownership interest in an eligible business so long as it does not control the eligible business. With shareholding and non-voting shares, it's possible for a labour-sponsored investment fund to have majority ownership. As long as it does not have control, that keeps it on side the act.

Finally, there's a list of miscellaneous amendments. Clause 6(1)(h) is the removal of the requirement that employee ownership be in the name of the corporation. There is removal of any reference to a federal tax credit for EOs, as there is no matching credit.

Subsection 13(1) will require the LSIF to have a permanent establishment in Ontario. Subsection 27(4) clarifies that a reduction in stated capital of LSIFs is not to include share redemptions and that any recapture of tax credits on such redemption does not include any federal tax credits.

Section 28 eliminates interest on refundable penalty imposed on LSIFs which fail to meet minimum required level of eligible investments. Section 29 clarifies that no interest is payable on recaptured tax credits, and for amounts deemed to be taxed under the Corporations Tax Act, it only authorizes the minister to use the legal remedies available under that act to enforce collection and debt.

Finally, there's clarification that ensures that under the Income Tax Act, 1991 is the first year for which credits are eligible for investments in LSIFs.

The Chair: You might as well just keep a seat there; Mr Evans, perhaps you can come up to the front. The minister's been called away on another issue. Would Mr Whitehead and Mr Marrs take a seat up here. Please put your names up there so we can start rotation on questions and we don't have to keep coming back and forth to the mike and lose time.

We'll start off with the third party. It looks like we've got a total of about half an hour, so we'll divide it up. Let's call it 10 minutes each. If you don't take the full 10 minutes, we'll save the time until the end.

Mr Gary Carr (Oakville South): First of all, thanks to everyone for coming to the presentation and also to those of you who participated earlier in the week in our informal one. I appreciate it very much. I guess I'll throw my questions out to whomever; I'll start and just throw them out.

The cost of the program is going to be $250 million; that is what I think John said at one point. That's based on how many companies, John, and what figures did you base that on? Did you start with the $250 million the Treasurer gave you or did you work back and say these are the number of companies you want to help?

Mr Whitehead: In a new program, it's always difficult to estimate precisely what the costs are. I believe what I said, or I hope what I said, was up to $250 million. It really depends on the takeup of the program. At this stage it would be hard for us to pin down a precise number. Unfortunately, there's not a lot of experience rating even within the country on programs similar to this. A number of provinces have the equivalent of our labour-sponsored investment fund component, but the employee ownership component, which is likely to be the biggest part of the program, has virtually no experience rating in the country that we can rely on at this stage.

We've done our best to estimate what we think will be a reasonable number. We're saying up to $250 million at this point. I'd argue that the ebb and flow of the economy and other external factors will also have a strong influence on that number. It's hard to be really precise about it. We've tried to give a dimension to the program.

Mr Carr: That's only the Ontario portion, too. The feds would kick in an equal amount as well.

Mr Whitehead: Yes. The federal government's share is over and above the costs that we've noted.

Mr Carr: In this committee we're used to not having exact figures, because in the economics and finance pre-budget, people are saying it depends. Even our economists obviously are just giving generalities. But again, how many companies do you anticipate would be looking at the program? I can throw that up to anybody. I don't know whether MITT would be better for that.


Mr Marrs: On the EOs as a planning number, as I said earlier, we looked at the States and when you look at the buyouts they are 4% of the number of ESOPs that have been done. We've looked at British Columbia and they've done about 17, two of which are really employee buyouts. Saskatchewan's done a small number. Most of those have been contracting-out-type situations that wouldn't apply in Ontario.

I guess, as a base, we'd look at perhaps a couple of dozen or 30 companies that would come in, at least go through stage one of the study program, and perhaps half a dozen a year that would come out of that. Depending on who you talk to, that number is either dramatically lower or about right, but I guess it's hard to judge the impact on the taxpayer on this.

Mr Carr: We'll go where it will be judged at the end when we have the definite numbers. Of course, from the taxpayer's standpoint, they'll be looking at the total amount of employees for all the programs through MITT. They judge it on a per-job basis. If it's $100,000, $250,000 or $10,000, they will judge and say it's worth it.

Again, I just want to get an idea of where we are, knowing full well that a lot of our predictions are off. On that, Bob, you mentioned $25,000 worth of studies. I take it that is not included in the $250 million maximum we're talking about?

Mr Marrs: No.

Mr Carr: This is from existing funds or new funds that MITT will allocate, and again, that's the --

Mr Marrs: We're in the process of finalizing the allocation and I'm not sure whether that comes --

Mr Carr: But the way it's coming now, it's probably within the existing programs. That money will come from somewhere else within MITT, I take it, right?

Mr Marrs: I'm not sure whether we'll be getting some new funding or whether we'll get part of it in-house or how we'll --

Mr Carr: So you'll be doing about 30 companies, approximately up to $25,000. Multiply that. That will be additional money on top of the $250 million. In terms of MITT's time and cost, how much time and allocation -- do you have resources of people set aside for this particular function?

Mr Marrs: Again, we haven't finalized the numbers. We're still looking, I hope, to have a couple of people on staff. That will get us started and then we'll gauge from there. I think you're looking at a relatively small staff.

Mr Carr: With all the figures, I gather we're still very preliminary here with everything, with this whole bill.

Mr Marrs: At MITT we intend to have a small staff and then we'll respond as the demand comes in.

Mr Carr: I'm interested in the criteria. Looking at it from the outside, the biggest criteria we're looking at -- just off the top, what will be the most important ones? I may have missed it; you touched that portion. But when you're looking at the company, what will be the biggest factor towards getting money through MITT's standpoint? What will they say? Boy, if they meet these criteria, what will be the --

Mr Marrs: In terms of the initial study?

Mr Carr: Yes, meeting the initial study criteria.

Mr Marrs: Basically, there were three areas. One, do you have a committed employee group? Two, is the firm viable? I guess we'll be able to judge that in a superficial way initially and the study will go some way to addressing the issue there. Do you have a willing seller? Is there a time available to structure an appropriate deal that ensures employees have a good chance of making this a success?

Mr Carr: The whole program is based on the financial aspect of it. I know you've put a plan together for human resources, but the reason most of these people would get money is from the financial standpoint, because I know they're going to reach human resources' criteria. On that, you mentioned -- again, I'm not sure who talked about the human resources plan. I'm thinking from the employee's standpoint. It does touch on labour and I know there are not too many people here from labour, but I guess through some of the regulations, maybe you could help us with this.

As an employee, I will be told that this is the situation we're looking at. This is the human resources side. I take it by human resources the plan will mean we're going to have to reduce to 20 employees or four or so on. That would be one of the big criteria, so that people will be voting on something, knowing full well we have 50 employees now; the business plan is 20. Everybody, all 50, would be voting on that. I see the heads nodding. That's true? Okay, good.

What relates to that, I take it right now -- again, it's through the labour board. Is it a secret vote? You mentioned it will be the equal ones. Secret vote? Heads nodding, way in the back.

The Chair: Could you please answer, because Hansard has a hard time picking up nods. Mr Evans has some answers to the question, if you'd give him a chance to answer also.

Mr Evans: You made a comment earlier about the early nature of the program. The minister, in her opening statement, did indicate that we had issued tax certificates for 1991 to investors in Spruce Falls and to investors in Working Ventures. Spruce Falls is an employee ownership corporation; Working Ventures is a fund. There were 995 investors in Spruce Falls and they invested in the order of $9.6 million and received tax credits in the order of $2.5 million. In the case of Working Ventures, there were around 10,000 investors. They invested in the order of $28.3 million and received tax credits of $5.6 million.

Mr Marrs indicated that, yes, it is tentative. It is early and it's obviously going to be decided on the size and the nature of the businesses that come forward, whether they're labour-intensive or whether they're capital-intensive businesses. Those forecasts are extremely difficult to make, but we can share that factual information on the 1991 tax year.

Mr Carr: So we can get the details on Spruce Falls when, immediately?

Mr Evans: Spruce Falls, 995 investors; $9,648,100 invested; total tax credits paid, $2,552,338.

Mr Carr: But I was thinking in terms of -- and I know it came through some of the disclosures -- the business plan aspect of it. When will be that be made available?

Mr Evans: That was done through the Ontario Securities Commission, so I believe that information is on public record.

Mr Carr: Do you know, offhand, what the business plan calls for? Are they going to keep 995 employees? What are we looking at? Does anybody know?

Mr Evans: I do not know of any details that talk to a running down of the workforce at Spruce Falls.

The Chair: Mr Carr, I've got to carry on to Mr Kwinter.

Mr Carr: Time goes by so fast.

Mr Monte Kwinter (Wilson Heights): Thank you. Again, I don't know who's going to answer this question, but I just want to talk about a couple of general things.

The whole premise behind Bill 150 is to encourage employees and organized trade unions to invest in companies where they can either have ownership or provide venture capital. By its very nature, venture capital is risky. I assume there's unanimous agreement that these will be risky ventures to some extent and there's no guarantee they will all succeed. Some will survive; some will fail.

There's a provision that says there will be an Employee Ownership Advisory Board -- and I underline the word "advisory" -- and MITT will also take a look at the viability, the human resources, the financial implications and make recommendations to cabinet as to whether or not a particular proposal be registered under this act. Even if they do make the recommendations, there are some that will fail.

My question is this: What happens if, in a one-industry town, a corporation is in trouble or whatever -- it doesn't have to necessarily be in trouble, but it could be -- and the employees want to use this particular vehicle to finance an employee ownership. The advisory board and MITT suggest that it is not viable and yet these employees are determined that they want to save their company and they want to get ahead with it. What recourse do they have?

Mr Marrs: I guess the simple answer is they could proceed without tax credits.


Mr Kwinter: All right. Then that leads to the next question. Why would they not be entitled to the same tax credits as someone who may have gotten the endorsement of the advisory board and MITT and fails? They may succeed, where, for whatever reason on paper, it doesn't seem they're going to succeed?

Mr Whitehead: I guess there probably is an opportunity to appeal the decision of the board, but it would seem to me that if the board ruled that it was not a reasonably commercially viable proposition, it would do so on the basis of very strong evidence. It would be unlikely, I would think, that you would have an independent adviser passing on it. You may have some difficulties in the OSC receipting the disclosure document. You may have a number of reasons. I guess it would depend on the situation, but it would seem to me an unusual circumstance where you would have all those bodies determining that the thing was fundamentally not viable and yet the employees being committed to proceeding.

Mr Evans: If I may, commercial viability is an important aspect of this program. Among other things, the government did not want to be inducing people, through the use of tax credits, to invest money since this is an investment of after-tax dollars into firms which had no reasonable prospects for success. Among other things, this program comes out of the government's desire to assist in a variety of ways the restructuring and growth of the economy. That objective wouldn't be well served by permitting tax credits in respect of firms which, for example, had no customers, or firms which were so badly saddled with debt that there was no prospect for immediate success or even success over the long term.

So the commercial viability aspect of the program becomes very important in the overall policy. It's a question of the appropriateness of government providing tax credits which may induce people to make investments which wouldn't otherwise make any sense.

Mr Kwinter: Without getting too political and without mentioning companies, there are several companies in Canada that are surviving even though they have no commercial viability, but because of government policy it is deemed essential that they keep operating because the alternative is worse than the losses they are incurring. There's every possibility that we could have that kind of situation, where it may be deemed advisable, for whatever reason, political or otherwise, to keep that company going. What I don't understand is why there would not be the same tax credits for those people who are investing.

Mr Evans: Yes, it is common policy that an industry or a company needs to be supported because the consequence of its failure would be more dramatic for a community, but that does not have to be through an employee ownership vehicle. Indeed, the whole point of the structure of the safeguards that are described in this bill in relation to the advisory board and the role of the Ontario Securities Commission and the Ministry of Revenue is geared towards investor protection, the protection of employees in what might otherwise be a fairly difficult period in terms of the employment decisions they are being invited to make. Bill 150, in relation to employee ownership, is not intended to be the only mechanism whereby governments make investments in essential industries, and the mechanisms, to answer your first point, are there as safeguards.

There is another point that you made in your opening comment, and that was in relation to employees and trade unions making investments. I want to make sure that I was clear in my own presentation, that although the trade unions are the people who may devise and operate the funds, the opportunity for investment in funds is available to any resident in Ontario. It is not a closed opportunity to invest in the funds; it is an open one.

Mr Kwinter: I understand that. Can I get a clarification on something that was said about, "The venture capital fund cannot own the company; the employee ownership must own the company"? In the employee ownership vehicle, they have to have at least 50%, unless there is an outside investor, and then they have to have 40%. Would you explain to me how that works, how they get control if there is one entity that has 50%, another entity has 10% that is not related in any way to the employee ownership group and the employee ownership group has 40%?

Mr Sholtack: I think in the circumstances of the provision of the act, as long as there is a change of control, that is sufficient. The employee ownership venture capital corporation plus the other investor together have more than 50%, so there would be a change of control. As long as that happens, then the act is satisfied.

The example of that is the Spruce Falls situation, where you had both an employee ownership group plus another investor. Together there was a change of control, so the two organizations would work together to control the employer corporation and that is sufficient for the act. There's a flexibility built into the act, so if there is a significant outside partner, then the EO doesn't have to have the burden all on its own. It can operate with another outside person as long as between both of them there is a change of control.

Mr Kwinter: Can I direct a question to you about the general philosophy behind the fact that to have an employee ownership, all you have to do is have an employee group? They don't have to be a union; they don't have to be organized; they just have to be a group.

Mr Evans: That's correct.

Mr Kwinter: To have a venture capital fund, you must be a trade union.

Mr Evans: You must be provincially recognized, yes.

Mr Kwinter: Why would the same provision not apply where a group -- to give you an example, the employee group at Dofasco -- may decide that it wants to set up a venture capital fund? Why would they be excluded?

Mr Evans: The design of the fund side of the legislation is intended to parallel the federal legislation to ensure that there are federal matching credits. That requirement has been proved, as far as we are concerned in Ontario, by the fact that we could not secure federal matching credits for the employee ownership side when we took that broader set of criteria forward.

I understand under the federal labour-sponsored venture capital corporation they don't have a particular distinction that describes the funds separately from the employee ownership side; they are merely applying their criteria on size and who is in fact managing the proposal. In that case, our legislation, which did not have a size limit on the employee ownership side and did provide for that more general application or description in terms of the employee group, failed the federal test and did not attract matching credits. We believe the decision in terms of the design of the legislation on the fund side was the appropriate one to ensure that we did get the matching credits.

The Chair: Do we have more questions?

Mr Paul R. Johnson (Prince Edward-Lennox-South Hastings): For the information of the committee, I just wanted to clarify, or at least point out, that although this piece of legislation is unique because it only operates within Ontario, there are other jurisdictions within Canada that have similar legislation. I was wondering if Jim or someone else on the panel here could elaborate and give us just generally some comments with regard to how this legislation is similar to other jurisdictions, how it is working in other jurisdictions and, more specifically, how this would be perceived from a securities regulatory regime perspective.

Mr Evans: Gerry, can you answer that? We invite Joe to address that. Joe Lambert is the project manager involved with the implementation of the Ministry of Revenue administration of this bill.


Mr Joe Lambert: That's a very difficult question to answer, Mr Johnson, but I'll try my best. A number of other provinces have similar programs. Those programs also involve employee ownership components as well as the so-called fund components. British Columbia, for example, has an employee ownership component and a fund component. Most recently a Working Opportunities fund was created, after the beginning of the new year. It's a labour-sponsored venture capital corporation fund, the only one, I believe, that's in existence.

I also understand that there are three employee ownership type of funds in British Columbia. Saskatchewan has two types of venture capital corporation funds. One is a so-called type A fund, and that's equivalent to our labour-sponsored investment fund. The so-called type B funds are the employee ownership counterparts to our employee ownership venture capital corporations.

I understand that in Saskatchewan there are no fund type of corporations established to date. We have approximately five, I believe, employee ownership type of funds established there. In Manitoba we have one fund established, and it's referred to as the Crocus fund. That, I believe, is equivalent to the labour-sponsored investment fund type of venture capital corporation.

Quebec has a fund referred to as the Quebec Solidarité fund. It is a labour-sponsored investment fund type of venture capital corporation. It's been in existence since 1983 and has raised almost $500 million in an equity capital.

With respect to the jurisdiction of the securities regimes that are in place in those jurisdictions, I understand that all the provinces have securities acts governing the operation, the provision of investor protection and the other regulatory concerns. They're regulated in that manner. Ontario is slightly distinct in that we have the employee ownership component to be regulated under Bill 150 as opposed to under Ontario's Securities Act. The labour-sponsored investment fund will be regulated under the Securities Act as administered by the Ontario Securities Commission.

With regard to the employee ownership labour-sponsored venture capital corporations, as I said, the investor protection provisions will be taken care of through a regime that's being built into Bill 150 through regulations. That also will be mainly administered by the Ontario Securities Commission. So we're unique, in a sense, with respect to the employee ownership side of things. We're consistent with respect to the labour-sponsored investment funds in regard to how the other provinces administer investor protection.

Mr Johnson: Would you say that these programs have been successful in these other jurisdictions? I guess I would have to define "successful." Have they raised or put into the economy the venture capital that was anticipated? Would you know?

Mr Lambert: With respect to the anticipated venture capital, we don't have information on what was anticipated. We do have some information on the amounts that have been raised. So it's difficult to give you a comparative --

Mr Johnson: That's why I say it's hard to define success.

Mr Lambert: British Columbia has raised, with respect to the three EOs we know about in British Columbia, about $4.7 million. Those were the objectives. With respect to Saskatchewan, I understand the information we have is that about $600,000 was raised by the five fund-type corporations that are in existence there, and as I mentioned earlier, in Quebec they've raised approximately $450 million since the inception of that particular fund. That's the senior fund in the country.

Mr Johnson: That's great.

Mr Lambert: Getting back to your question, Mr Carr, as to the numbers that were anticipated, the $250-million takeup is fairly consistent in relation to -- it's actually below the amount that was raised in Quebec. That's the senior fund we have as a guidepost. So we're well within that $500-million capital to raise.

The Chair: Ms Caplan had a short question.

Mrs Elinor Caplan (Oriole): It's a supplementary. It really is on the use of language. Traditionally the term "venture capital" is for new and emerging firms, as opposed to this legislation, which is for the purpose of buyout of existing companies. How do you differentiate in that kind of language between existing venture capital funds for one purpose and this legislation, which is not traditional as far as venture capital is concerned but would be more considered as a bailout fund or a buyout fund?

Mr Whitehead: I prefer "buyout" a lot.

Mrs Caplan: Okay, but it's not traditional venture capital.

Mr Whitehead: With respect to the EOs, no, it's not really traditional venture capital. It is all brought forward under the one umbrella title for the act, which is labour-sponsored venture capital corporations -- I can't remember the rest of it.

I take your point on the language. The employee ownership aspect of this credit program is very definitely single-purpose. There is, however, the other component of the program, which I think the term "venture capital" does describe relatively accurately, which is a disbursement of funds among a range of small and medium-sized businesses throughout the province.

I don't know if you want to add to that, Joe.

Mr Lambert: In defence of the name of the program, we're not alone in perhaps being guilty of a misnomer in that BC's legislation is called employee venture capital corporations, and it has both components under that mantle; in Saskatchewan as well, I might add.

Mr Carr: In the EO, what would be the average number of employees you're anticipating in the company? Do you say 50, 100 average?

Mr Marrs: I'm not sure. I would think the most likely targets will be companies in smaller communities where they're the major employer, or retiring owners. The retiring owner situation could be a wide range of employment levels. It could be fairly small, but in most smaller communities in Ontario you are looking at employment of 100 to 500 people.

Mr Evans: This is intended to be an act of general application, so it could be anywhere from that small business where the owner is retiring, which could be five or six, to -- there are no top size limits on the EO side, so it could be relatively substantial industries in one-industry towns that are affecting the viability. There is a full range of possibilities. It is certainly not intended to be just saviours of communities. There are opportunities here for emerging industries. They may not be venture capital in terms of the startup connotation of that name but industries, as we were referring to in our presentation, that we're talking to positioning in relation to globalization. If we have a small to medium-sized company that has significant prospects, then the purpose of this act is to encourage that.

Mr Brad Ward (Brantford): I recognize the time, Mr Chair, but briefly, just so we're clear, even though it's Bill 150, there are the two components to Bill 150: the venture capital aspect, which is sponsored by labour organizations or groups that anyone can contribute to, and then the other aspect, which is employee ownership. I hope as this committee continues its deliberations that we don't confuse the two, because they are two separate, distinct aspects of the bill itself, even though the bill's name is all-encompassing. I hope that's clear, Mr Chairman, so we don't enter into some confusion about what this bill is.

The Chair: Thank you, Mr Ward. I would like to thank all of you for your presentation today. It was quite informative. It was a lot to absorb. Good thing we've got Hansard so we can read over some of the answers you've given. You would all be available to members of this committee in your offices for any questions in the future?

Mrs Caplan: Will we have an opportunity to place additional questions on the record at another time?

The Chair: I'll take the direction of the committee here.

Mr Kimble Sutherland (Oxford): What do we have scheduled for this afternoon?

The Chair: I have nothing on the schedule for this afternoon. Does the committee feel they need to ask more questions?

Mrs Caplan: I'd like some questions, if that's acceptable.

Mr Carr: I do, but I don't necessarily need them to come back. If they hadn't planned to, I'm sure they have other things they're looking at and saying, "Oh boy, all the things I was supposed to do this afternoon." I would be quite willing to put them in writing.

The Chair: The other thing, Ms Caplan -- and this is why I wanted to call a subcommittee meeting -- is to have witnesses come forth next Thursday. Maybe after some of the witnesses come forth, there will be additional questions. Certain questions will be raised by the witnesses that we can take a look at.

Mr Sutherland: We could certainly do it that way, if you want: have the staff come back after the witnesses for some more clarification.

Mrs Caplan: The only point I would make is that as long as there's an opportunity for questions to be placed and have the staff either here to answer or commit to answering in writing, I'd be satisfied.

The Chair: That's why I said a telephone call or a letter to any of these people.

I'd like to thank you again for appearing. This committee is adjourned for the day. Maybe we can have a quick subcommittee meeting for a minute or two if there's not a vote.

The committee adjourned at 1202.