Piers McDonald
Minister of Finance
Government of Yukon
P.O. Box 2703
Whitehorse, Yukon

Dear Piers,

RE: REVIEW OF TAX REGIME TO SUPPORT ECONOMIC DIVERSIFICATION

In May of this year, the Yukon Council on the Economy & Environment (YCEE) contracted contracted MacKay & Partners to explore the use of the tax regime to support sustainable economic diversification of the Yukon economy. Enclosed is a copy of the paper prepared by Norm McIntyre, entitled "Tax Incentives To Increase Access to Financing for Yukon Businesses".

We asked that the review explore what opportunities exist and what changes could be made within our tax regime to meet the objectives for a more sustainable diversified economy as adopted by the YCEE at our February '98 meeting.

At its last meeting in June, the YCEE had a fairly animated discussion with McIntyre reviewing the draft of his paper. The YCEE directed the Working Group on Diversification (WG) to review the document in more detail and make recommendations to the Government.

The following is a summary of the WG's recommendations for further work. It is suggested that five areas be explored in more detail to support implementing progressive change to develop a more dynamic and competitive tax regime that supports the sustainable diversification of the Yukon economy:

• Research & Development

  The Working Group believes that there is a need to support research and development programs for at least two key reasons:

  • the need for continued intellectual growth and vitality in any sustainable community;
  • the need for business to establish new and better ways of providing goods and services.
  To avoid some mistakes of the past with these types of programs, accountability is key. One method is establishing conditions for eligibility. For example, a business could not qualify for a tax credit in research and development unless the work is directly linked to the Yukon College, the Northern Research Institute, or a recognized research institute operating in the Yukon. In light of the Circumpolar Conference, and this Government's support for such fora and associated principles, the credit could also be conditional to research & development that would directly assist peoples living and/or industries operating in Circumpolar areas.

  Not only does this approach support business as the report states by "assist[ing] in the establishment of partnerships between the college and industry", it also supports the development and/or maintenance of the intellectual vitality of the institutions, the community at large and ensures a certain level of professional accountability.

  Further work in this area is recommended.

• Film & Video Production

  The YCEE is aware that the Government is exploring this option in more detail. We would support this proceeding and hope the information in this document is of some assistance to both your department and Mr. Harding's in reaching an agreement on a program to provide tax support for the film & video industry in a comprehensive and speedy manner.

• Manufacturing & Processing

  As the paper states on page 21:

  "...careful thought would have to be put into the definition of a qualifying manufacturing and processing business to ensure that the objectives of Providing access to capital to those in need is adhered to".

  Further exploration in this area may look at the possibilities of "zoning" as an approach to support the development of manufacturing and processing and its spin off. It is also suggested that a review of what other provinces, such as Alberta, and other countries, such as Ireland, have done to use manufacturing and processing tax credits may be of interest.

• Access to Capital for Equity Financing

  The objective of this area is two fold--create a pool of capital for the `gap' in access to capital in the Yukon can be occupied; and to get Yukoners investing in Yukon and slow down the outflow of dollars from the territory.

  The paper focuses mainly on the option of a Labour Sponsored Venture Capital Fund (LSVCF) as a method of raising capital for distribution. The WG had a number of questions regarding the implementation and operation of a LSVCF. (These questions and some answers are in the Appendix of the document). A key disadvantage to the LSVCF is the potential effect on an already fragile' tax base -- with up to 15% cost to government.

  Discussion was also had on the advantages and disadvantages of a Government Bond Issue as a source of capital. It was believed that a "Yukon Bond" Issue, similar to the Canada Savings Bond, would not necessarily effect the tax base, and would be limited to the competitive interest rate set to market the bond. this could be marketed for all Yukoners and is more `popular/mass' oriented than the LSVCF which is mainly aimed for the RRSP market.

  The Working Group believes that either is an excellent source of a manageable amount of dollars to place in the yukon to support the objectives for a sustainable diversified economy. If there is not the appetite to effect the tax base, then focus should be on a Yukon Bond Issue.

• Green Initiatives

  You will note that this was not dealt with in the paper. The WG believes this is an area that needs to be explored, to consider both the pros, cons, and possibilities of punitive and/or progressive tax initiatives.

We look forward to exploring these and other issues with you in more detail. The Working Group would hope that this could take place sometime before our next full Council meeting, at your convenience. We believe there is much that can be done to support and progress to a more sustainable diversified economy and alleviate some of the weaknesses that our present in our economy today.

Look forward to hearing from you.

Sincerely,

Jennifer Mauro
Chair