The federal government should reduce the capital gains tax to spur investment into the capital markets, according to Ian Russell, president and CEO of the Investment Industry Association of Canada.
"A cut in capital gains tax rates would get right to the psychology of the investor," he said in prepared remarks to the Vancouver Board of Trade Thursday. "It would make it clear if you invest, you will have the opportunity to keep more of your gains. It would encourage risk-taking by investors, whose appetite for risk has been devastated by the collapse of the financial markets. It would lower the cost of capital to encourage productive investment by business.
"The budget addressed illiquidity in banks and other federally regulated institutions, but more needs to be done to enhance liquidity in the capital markets."
The investment industry has been hammered by the global financial crisis and subsequent recession. Russell noted that portfolio values have declined roughly 20%, and equity investments have plummeted 30% to 40%. Many investors have retired to the sidelines as a result of market volatility. Financial advisory fees have consequently dropped.
Independent firms have been particularly hit, he said, with operating profits for independent wealth management firms falling 60% in the past year. Russell said there were 78 firms with revenue of less than $5 million in 2008, he and expects that number to decline as boutique firms merge with their competitors or disappear.
Led by the collapse in investment banking, profits for institutional firms had declined by as much as 50% by the end of last year. Russell noted that industry profits are expected to fall another 50% if current trends continue.
Despite the challenges, Russell said that with, one of the world's soundest financial systems, Canada's investment industry has an opportunity to attract more business and investment into the country. "Canada has demonstrated that this is a good place to do business even in the toughest of times. We must turn this crisis into an opportunity."