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BC as a Financial Centre: Competing with the Best

BC as a Financial Centre: Competing with the Best

Good Afternoon, My name is Bob Fairweather. I'm President of the International Financial Centre-British Columbia, and I've been asked to tell you a little bit about my organization and what recent changes to the BC Provincial legislation may mean for companies in Canada and around the world. The work we are doing at the International Financial Centre is having a profound effect on how we in British Columbia can protect our status as a major centre of commerce, as an exporter of goods and services, and as a significant transshipment point for imports from Asia to eastern Canada and the United States, as well as being the recipient of direct investment in the financial services sector. But first, allow me to provide you with a brief history of the IFC and the financial services sector of the Canadian economy. I will then describe what steps the British Columbian Government has taken to make the IFC legislation more attractive and how companies may wish to take advantage of this new legislation.

In the mid 1980's, the Canadian Federal Government at the time was concerned that more jobs, related to international activities of the leading Canadian Banks, were being moved offshore. Canada was not only losing the employment associated with such activities, but, more importantly, Canada was losing the expertise associated with these jobs. As a result, the Minister of Finance at that time, Michael Wilson, tabled an amendment in Parliament with respect to the Income Tax Act. It was known as the "International Banking Act." This provision allowed Canadian Banks to conduct the offshore business of making loans to, and taking deposits from, non-residents from a base within Canada. Any profits that they earned on such activities became exempt from Federal taxes.

But Minister Wilson recognized that the measure would not only be attractive if such activities were also exempt from provincial taxes as well. At that time, Quebec had nascent aspirations of becoming independent. As a consequence, many large financial institutions had begun moving their headquarters to Toronto from Montréal, including such companies as the Royal Bank, the Bank of Montréal and SunLife. In order to help Quebec stem this tide, Ottawa announced that it was designating Montréal as an IFC.

The Federal government also designated Vancouver, under something called the "Asia Pacific Initiative," which resulted in the creation about the same time of other international organizations like the International Maritime Centre. On receipt of the IFC designation from the Canadian Government, the Province of BC passed two pieces of complementary legislation. These acts allowed financial institutions, such as banks, trust companies, brokerage firms, and money managers, to carry on specific international business from a base in the lower BC mainland. Any profits that they earned were exempted from provincial income tax. In the fanfare surrounding the creation of the IFC Vancouver, a number of companies registered. Great things were predicted. However, over the intervening years, the IFC received less and less government support and the legislation, as it turned out, was far too restrictive to be attractive to a broad range of global financial players.

For instance, our legislation dictated that all transactions had to be done at arms length, and since we've seen a blurring of the financial pillars over the last little while with banks buying securities companies and insurance companies. Not being able to deal with related parties was a severe roadblock in the IFC's ability to attract new registrants. Early in 2002, I was asked to consider taking on the role of President of the IFC Vancouver. At first, I rejected this offer out of hand because I knew the organization had become moribund and lacked any visible government support. But members of its Board of Directors were persistent and kept pestering me at least to consider the position. So as part of my review, I look at what other IFC's had done to be successful, like Dublin and Amsterdam, in Holland. Dublin's International Financial Centre had been able to attract over 500 companies to that city and it was the catalyst for the redevelopment of the Docklands area of Dublin. But I especially looked at Montréal, Quebec and what it had accomplished. Its International Financial Centre was growing, and I wondered how that could be? In fact, on two occasions in 1990's, the Government of Quebec amended its legislation, in response to requests from the financial industry, to make it more attractive. From about 1997 on, the Montréal IFC has been growing at the rate of 10 to 15 new companies a year. The roster expanded from about 40 firms in 1996 to well over 120 by 2003, employing about 1300 people. Now you must keep in mind that the success of IFC Montréal came about because it had a supportive government and a provincial budget of over a million per year. This is understandable as the secessionist inclined government of the time recognized that if the Province were to separate, it would need a vibrant financial services sector in Montréal to ease the pangs of separation and add a degree of legitimacy to the action. Concurrently, the many overseas offices of the Quebec Provincial Government were assigned the job of actively going out and promoting the IFC Montréal within their areas of jurisdiction. They did so with good results!

However, the current Quebec Government, in its last budget, implemented changes to its legislation that rendered the IFC less attractive. But we in British Columbia have been receiving inquiries from those companies as they look at the new legislation in this province.

After much soul searching on my part, I realized that if we could convince the provincial government to amend or change the governing legislation in British Columbia, then Vancouver might attain the same level of results as Quebec. So I accepted the job.

I must tell you though that it has not been easy. Soon after taking over in November of 2002, I paid a courtesy call on the Deputy Minister of Finance in Victoria. I said, "I need your help." His immediate response was "the Government has no money." I replied, "We don't need any money! What we do need are changes to the legislation and the ability to meet with senior ministers to introduce potential firms and representatives to them." The deputy minister emphatically replied that the Finance Minister was far too busy to meet with every Tom, Dick and Harriet who comes through Vancouver and on top of that, the legislative agenda was quite full and the IFC legislation wasn't even on the Government's radar screen. His words left me shaken, wondering if I had made a dreadful mistake about taking the job. I quickly realized that I would require help. So I began to seek allies in my quest to get the legislation amended.

People and organizations will always be willingly help you if they have a "need" of some sort. One of the first organizations that I identified as having such a need was the Canadian Manufacturers and Exporters Association. Over the past several years, Canadian banks have been consolidating many of their operations back to eastern Canada or divesting themselves of them entirely. Trade finance is one of these areas. This meant that there are fewer and fewer trade finance specialists located in British Columbia. Such wholesale moves by the Banks meant that export or import companies had to deal with individuals located 3000 miles and three time zones away in Toronto or Montréal.

Imagine an exporter located in British Columbia who is working in their office at 5 or 6 o'clock in the evening trying to finalize a sale with a company in China, the Philippines or Japan. In order to arrange trade finance coverage or a Letter of Credit, they might need to call someone in Toronto where it's 8 or 9 o'clock at night and everyone has gone home, so the trade contract cannot be concluded until the next day. But in the intervening period the market may move against the exporter if he's dealing in pulp or copper or coal or some other commodity. Therefore, the CMEA was very interested in getting IFC legislation changed so that more international traders would be located here. In fact, the Canadian Manufacturers and Exporters Association was the first one to write to the Finance Minister to request changes concerning foreign exchange, letters of credit and what types of firms could be eligible for IFC legislation.

I also enlisted the support of the Investment Dealers Association. They were concerned that, with the move of the Vancouver Stock Exchange to Toronto to form the Venture Exchange, had restricted the ability of companies to raise capital easily in the province.

We talk sometimes of the $1000 cup of coffee. An entrepreneur in BC has to get on a plane and visit Toronto or New York City to talk with those individuals or institutions who might be willing to invest in the start up company. This is a high cost for a fledgling enterprise. So the investment dealers had a need to help companies raise capital in British Columbia, and so they looked to having the legislation changed as well.

The BC Business Council wanted to get the Government more committed to Investment Promotion, and saw changes to the IFC Legislation as a way to encourage firms to consider a location in the province. They too lobbied on our behalf.

In one of my early public statements, I referred to the fact that two BC based forest companies had recently established offices under the umbrella of the Montréal IFC in order to factor their receivables. Something they could not do in Vancouver. You can imagine the political fallout had it become widely known that BC based forestry firms, which were really suffering in 2002 and 2003, that they were setting up offices in Quebec. This certainly got the attention of the politicians in Victoria, and they began instantly to listen seriously to our proposals.

They commissioned a report to investigate whether the IFC should be expanded, and in February of 2003 this report said that the Vancouver IFC could be as competitive as Montréal and a centre for global financial activity. We then continued to press the ministers of the government to make the changes.

The culmination of all the pressure was the announcement in the budget of February 2004, that the Government would introduce legislation to amend the Financial Acts by September 1, 2004. The new International Financial Activities Act, replaces the two previous pieces of legislation, and was proclaimed into law in May of 2004 and became effective on September 1st .

What the government did is quite remarkable. It acknowledged that the changes put forward could create a strong, vibrant financial sector in British Columbia and brought in legislation that goes far beyond what most people could have hoped for. Now any company, not just a financial institution, that carries on international financial activities, like treasury operations, factoring, leasing, back office support, call centres, foreign exchange dealing, cash management and Letter of Credit business, from a base throughout British Columbia, is exempt from provincial corporate income taxes on the income that they earned. This means that they are reimbursed the 13.5% provincial tax and only have to pay 22% federal tax. This makes British Columbia very competitive on a global basis.

Let me give you an example of how a major international company with a presence in North America could take advantage of the new legislation. Let's say it's a Korean company, Samsung. If they were to establish a subsidiary in British Columbia under the umbrella of the IFC, they could factor the receivables of the various subsidiaries located outside of Canada, provide cash management services, foreign exchange dealing for their offices, offer investment banking and merger and acquisition advice, or provide back-up support for such things as lease financing. If these functions are done on a profitable basis, then the profits earned would be exempt from provincial tax; and Samsung would be able to transfer earnings from a higher tax jurisdiction in the United States, perhaps, to a more competitive one-from a level of about 37 to 40% to one of 22%.

This Act also permits so-called specialists to enjoy some provincial income tax relief for up to five years after immigrating to Canada. A specialist is someone who is engaged and resettled by the company to Canada to provide a certain expertise that might not be available elsewhere in the country. For instance, an asset manager may decide that they need to offer their clients a China Fund. They go out and recruit an analyst from Hong Kong to cover Chinese companies and equities. This individual would under the new Act, qualify as a specialist and receive a refund up to 75% of their provincial income tax paid for the first five years of their stay in Canada.

The government also wanted to do more to encourage the film industry to establish roots in the Province, so part and parcel of the new legislation is a clause that allows film distribution companies to set up offices in British Columbia and distribute their films or television programs internationally. And, once again, the profits earned are exempt from Provincial tax.

The word is beginning to spread that British Columbia is a place from which internationally oriented firms can do business profitably. The 2010 Olympics will further focus the spotlight on British Columbia's bountiful assets. We hope to attract many companies to set up offices in the Province in the years to come and hopefully provide greater employment opportunities for the many highly skilled, multi-lingual and productive people that call British Columbia, and Canada, their home.

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BC as a Financial Centre: Competing with the Best

Good Afternoon, My name is Bob Fairweather. I'm President of the International Financial Centre-British Columbia, and I've been asked to tell you a little bit about my organization and what recent changes to the BC Provincial legislation may mean for companies in Canada and around the world. The work we are doing at the International Financial Centre is having a profound effect on how we in British Columbia can protect our status as a major centre of commerce, as an exporter of goods and services, and as a significant transshipment point for imports from Asia to eastern Canada and the United States, as well as being the recipient of direct investment in the financial services sector. But first, allow me to provide you with a brief history of the IFC and the financial services sector of the Canadian economy. I will then describe what steps the British Columbian Government has taken to make the IFC legislation more attractive and how companies may wish to take advantage of this new legislation.

In the mid 1980's, the Canadian Federal Government at the time was concerned that more jobs, related to international activities of the leading Canadian Banks, were being moved offshore. Canada was not only losing the employment associated with such activities, but, more importantly, Canada was losing the expertise associated with these jobs. As a result, the Minister of Finance at that time, Michael Wilson, tabled an amendment in Parliament with respect to the Income Tax Act. It was known as the "International Banking Act." This provision allowed Canadian Banks to conduct the offshore business of making loans to, and taking deposits from, non-residents from a base within Canada. Any profits that they earned on such activities became exempt from Federal taxes.

But Minister Wilson recognized that the measure would not only be attractive if such activities were also exempt from provincial taxes as well. At that time, Quebec had nascent aspirations of becoming independent. As a consequence, many large financial institutions had begun moving their headquarters to Toronto from Montréal, including such companies as the Royal Bank, the Bank of Montréal and SunLife. In order to help Quebec stem this tide, Ottawa announced that it was designating Montréal as an IFC.

The Federal government also designated Vancouver, under something called the "Asia Pacific Initiative," which resulted in the creation about the same time of other international organizations like the International Maritime Centre. On receipt of the IFC designation from the Canadian Government, the Province of BC passed two pieces of complementary legislation. These acts allowed financial institutions, such as banks, trust companies, brokerage firms, and money managers, to carry on specific international business from a base in the lower BC mainland. Any profits that they earned were exempted from provincial income tax. In the fanfare surrounding the creation of the IFC Vancouver, a number of companies registered. Great things were predicted. However, over the intervening years, the IFC received less and less government support and the legislation, as it turned out, was far too restrictive to be attractive to a broad range of global financial players.

For instance, our legislation dictated that all transactions had to be done at arms length, and since we've seen a blurring of the financial pillars over the last little while with banks buying securities companies and insurance companies. Not being able to deal with related parties was a severe roadblock in the IFC's ability to attract new registrants. Early in 2002, I was asked to consider taking on the role of President of the IFC Vancouver. At first, I rejected this offer out of hand because I knew the organization had become moribund and lacked any visible government support. But members of its Board of Directors were persistent and kept pestering me at least to consider the position. So as part of my review, I look at what other IFC's had done to be successful, like Dublin and Amsterdam, in Holland. Dublin's International Financial Centre had been able to attract over 500 companies to that city and it was the catalyst for the redevelopment of the Docklands area of Dublin. But I especially looked at Montréal, Quebec and what it had accomplished. Its International Financial Centre was growing, and I wondered how that could be? In fact, on two occasions in 1990's, the Government of Quebec amended its legislation, in response to requests from the financial industry, to make it more attractive. From about 1997 on, the Montréal IFC has been growing at the rate of 10 to 15 new companies a year. The roster expanded from about 40 firms in 1996 to well over 120 by 2003, employing about 1300 people. Now you must keep in mind that the success of IFC Montréal came about because it had a supportive government and a provincial budget of over a million per year. This is understandable as the secessionist inclined government of the time recognized that if the Province were to separate, it would need a vibrant financial services sector in Montréal to ease the pangs of separation and add a degree of legitimacy to the action. Concurrently, the many overseas offices of the Quebec Provincial Government were assigned the job of actively going out and promoting the IFC Montréal within their areas of jurisdiction. They did so with good results!

However, the current Quebec Government, in its last budget, implemented changes to its legislation that rendered the IFC less attractive. But we in British Columbia have been receiving inquiries from those companies as they look at the new legislation in this province.

After much soul searching on my part, I realized that if we could convince the provincial government to amend or change the governing legislation in British Columbia, then Vancouver might attain the same level of results as Quebec. So I accepted the job.

I must tell you though that it has not been easy. Soon after taking over in November of 2002, I paid a courtesy call on the Deputy Minister of Finance in Victoria. I said, "I need your help." His immediate response was "the Government has no money." I replied, "We don't need any money! What we do need are changes to the legislation and the ability to meet with senior ministers to introduce potential firms and representatives to them." The deputy minister emphatically replied that the Finance Minister was far too busy to meet with every Tom, Dick and Harriet who comes through Vancouver and on top of that, the legislative agenda was quite full and the IFC legislation wasn't even on the Government's radar screen. His words left me shaken, wondering if I had made a dreadful mistake about taking the job. I quickly realized that I would require help. So I began to seek allies in my quest to get the legislation amended.

People and organizations will always be willingly help you if they have a "need" of some sort. One of the first organizations that I identified as having such a need was the Canadian Manufacturers and Exporters Association. Over the past several years, Canadian banks have been consolidating many of their operations back to eastern Canada or divesting themselves of them entirely. Trade finance is one of these areas. This meant that there are fewer and fewer trade finance specialists located in British Columbia. Such wholesale moves by the Banks meant that export or import companies had to deal with individuals located 3000 miles and three time zones away in Toronto or Montréal.

Imagine an exporter located in British Columbia who is working in their office at 5 or 6 o'clock in the evening trying to finalize a sale with a company in China, the Philippines or Japan. In order to arrange trade finance coverage or a Letter of Credit, they might need to call someone in Toronto where it's 8 or 9 o'clock at night and everyone has gone home, so the trade contract cannot be concluded until the next day. But in the intervening period the market may move against the exporter if he's dealing in pulp or copper or coal or some other commodity. Therefore, the CMEA was very interested in getting IFC legislation changed so that more international traders would be located here. In fact, the Canadian Manufacturers and Exporters Association was the first one to write to the Finance Minister to request changes concerning foreign exchange, letters of credit and what types of firms could be eligible for IFC legislation.

I also enlisted the support of the Investment Dealers Association. They were concerned that, with the move of the Vancouver Stock Exchange to Toronto to form the Venture Exchange, had restricted the ability of companies to raise capital easily in the province.

We talk sometimes of the $1000 cup of coffee. An entrepreneur in BC has to get on a plane and visit Toronto or New York City to talk with those individuals or institutions who might be willing to invest in the start up company. This is a high cost for a fledgling enterprise. So the investment dealers had a need to help companies raise capital in British Columbia, and so they looked to having the legislation changed as well.

The BC Business Council wanted to get the Government more committed to Investment Promotion, and saw changes to the IFC Legislation as a way to encourage firms to consider a location in the province. They too lobbied on our behalf.

In one of my early public statements, I referred to the fact that two BC based forest companies had recently established offices under the umbrella of the Montréal IFC in order to factor their receivables. Something they could not do in Vancouver. You can imagine the political fallout had it become widely known that BC based forestry firms, which were really suffering in 2002 and 2003, that they were setting up offices in Quebec. This certainly got the attention of the politicians in Victoria, and they began instantly to listen seriously to our proposals.

They commissioned a report to investigate whether the IFC should be expanded, and in February of 2003 this report said that the Vancouver IFC could be as competitive as Montréal and a centre for global financial activity. We then continued to press the ministers of the government to make the changes.

The culmination of all the pressure was the announcement in the budget of February 2004, that the Government would introduce legislation to amend the Financial Acts by September 1, 2004. The new International Financial Activities Act, replaces the two previous pieces of legislation, and was proclaimed into law in May of 2004 and became effective on September 1st .

What the government did is quite remarkable. It acknowledged that the changes put forward could create a strong, vibrant financial sector in British Columbia and brought in legislation that goes far beyond what most people could have hoped for. Now any company, not just a financial institution, that carries on international financial activities, like treasury operations, factoring, leasing, back office support, call centres, foreign exchange dealing, cash management and Letter of Credit business, from a base throughout British Columbia, is exempt from provincial corporate income taxes on the income that they earned. This means that they are reimbursed the 13.5% provincial tax and only have to pay 22% federal tax. This makes British Columbia very competitive on a global basis.

Let me give you an example of how a major international company with a presence in North America could take advantage of the new legislation. Let's say it's a Korean company, Samsung. If they were to establish a subsidiary in British Columbia under the umbrella of the IFC, they could factor the receivables of the various subsidiaries located outside of Canada, provide cash management services, foreign exchange dealing for their offices, offer investment banking and merger and acquisition advice, or provide back-up support for such things as lease financing. If these functions are done on a profitable basis, then the profits earned would be exempt from provincial tax; and Samsung would be able to transfer earnings from a higher tax jurisdiction in the United States, perhaps, to a more competitive one-from a level of about 37 to 40% to one of 22%.

This Act also permits so-called specialists to enjoy some provincial income tax relief for up to five years after immigrating to Canada. A specialist is someone who is engaged and resettled by the company to Canada to provide a certain expertise that might not be available elsewhere in the country. For instance, an asset manager may decide that they need to offer their clients a China Fund. They go out and recruit an analyst from Hong Kong to cover Chinese companies and equities. This individual would under the new Act, qualify as a specialist and receive a refund up to 75% of their provincial income tax paid for the first five years of their stay in Canada.

The government also wanted to do more to encourage the film industry to establish roots in the Province, so part and parcel of the new legislation is a clause that allows film distribution companies to set up offices in British Columbia and distribute their films or television programs internationally. And, once again, the profits earned are exempt from Provincial tax.

The word is beginning to spread that British Columbia is a place from which internationally oriented firms can do business profitably. The 2010 Olympics will further focus the spotlight on British Columbia's bountiful assets. We hope to attract many companies to set up offices in the Province in the years to come and hopefully provide greater employment opportunities for the many highly skilled, multi-lingual and productive people that call British Columbia, and Canada, their home.