Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 27 - Evidence
OTTAWA, Thursday, April 24, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-37, to implement an agreement between Canada and the Russian Federation, a convention between Canada and the Republic of South Africa, an agreement between Canada and the United Republic of Tanzania, an agreement between Canada and the Republic of India and a convention between Canada and Ukraine, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income; and Bill C-93, to implement certain provisions of the budget tabled in Parliament on February 18, 1997, met this day at 6:05 p.m. to give consideration to the bills.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Mr. Dodge, I believe you wish to make a brief opening statement, following which we will proceed with questions. Please proceed.
Mr. David A. Dodge, Deputy Minister, Department of Finance: Mr. Chairman, thank you for the opportunity to appear before you again today, this time to speak about Bill C-93, the 1997 budget omnibus bill.
I will be brief and, hence, rather sketchy in my opening remarks so that we will have plenty of time for discussion.
As you are aware, this proposed legislation would implement a wide range of measures that were proposed in the February 1997 budget. That budget proposed a number of strategic investments for Canada and for Canadians. The purpose of this bill is to give concrete reality to those investments.
I will deal first with three major issues, following which we can cover other issues in the discussion.
First, Mr. Chairman, Bill C-93 paves the way for a national child benefit system through an enriched child tax benefit. The bill proposes an $850 million, two-stage enrichment of this federal benefit, which would bring it to a total of roughly $6 billion. The enriched federal benefit would enable provinces and territories to redirect some of their spending into improved services and benefits for low-income working families.
Under stage one, which is proposed to take effect on July 1 of this year, the working income supplement would be enriched by $195 million per year or roughly $70 million more than had been proposed last year -- hence, Mr. Chairman, the urgency of dealing with this particular bill at this time.
This would translate into a maximum working income supplement, which is currently $500 per family per year, graduated by the size of family, of $605 for a family with one child; $1,010 for a family with two children; $1,440 for a family of three children; and then a further $330 a year for each additional child.
The second stage, which is proposed for July 1998, would combine the working income supplement with an enriched child tax benefit to form a new Canada child tax benefit.
Under this Canada child tax benefit, the maximum benefit for low-income families would be $1,625 per year for one-child families, $3,050 for two-child families, and an additional $1,425 for each additional child above two.
Overall, about 1.4 million Canadian families with about 2.5 million children would see an increase in their federal child tax benefit payments by July 1998.
This Canada child tax benefit represents a major investment in Canada's future and is one that not only has been worked on internally in the federal government but has been the subject of many discussions with the provinces. As a result of this increased federal benefit, the provinces could make significant changes to their welfare programs such that there would be incentives for people to leave the welfare rolls and the positions of low-income families would be improved significantly.
The second important investment contained in this bill, Mr. Chairman, is the Canada Foundation for Innovation. This foundation would provide much-needed financial support for the research infrastructure at Canadian post-secondary education institutions and research hospitals, mainly in the areas of health, the environment, science and engineering.
Moreover, given the design of this foundation, the federal government's $800 million capitalization should lead to as much as $2 billion in needed investment in research infrastructure through partnerships with the research institutions, with the private sector and with the provinces.
Mr. Chairman, as former professors, I think we both recognize the needs of the universities. I have to say that I am particularly pleased to see this proposal for creative and cooperative development of the research infrastructure in the future. By partnering with provincial governments and with the private sector, not only should we get more research infrastructure, but we should get better infrastructure which is much more attuned to the needs of the future.
A third important investment proposed in Bill C-93 has a bit more immediate focus, and that is jobs for Canadians who need and want them now. I am referring to the New Hires Program, which will provide employment insurance premium relief to small firms which create new jobs this year and next. This program, together with the general 1997 premium rate reductions, is expected to generate as many as 20,000 additional jobs this year.
Mr. Chairman, Bill C-93 includes a broad range of additional initiatives, including measures that will discourage tobacco consumption, provide greater self-reliance and autonomy over taxation to First Nations bands and help to ensure the continued viability of a major airline. In short, this is a wide-ranging, forward-looking and highly beneficial set of proposals, all of which have been constructively developed in co-operation with the communities involved.
Mr. Chairman, my colleagues and I would be pleased to answer any questions you have.
The Chairman: As you pointed out in response to either Senator Angus or Senator Stewart this morning, this bill stems from the 1997 budget as opposed to the 1996 budget, and one piece considered this morning was from the 1995 budget; is that right?
Mr. Dodge: That is correct.
The Chairman: On the basis of the comments made this morning, this seems to me to be the earliest a budget bill has ever come forward, at least in my immediate recollection. Is that about right?
Mr. Dodge: That is correct.
The Chairman: Is that because you decided not to go the draft bill route that you would normally have gone, which you described this morning?
Mr. Dodge: No. We have pressed extraordinarily quickly because of the proposed July 1 date with respect of the Canada Child Tax Benefit.
The Chairman: If the bill were not passed by July 1, you would not be able to put into effect the Canada Child Tax Benefit; is that right?
Mr. Dodge: That is right. We absolutely must pass the bill.
The Chairman: Why do you say that? In our discussion this morning, it was clear that many things happen on the assumption that the bill involved will be passed eventually.
Mr. Dodge: Our problem here is that most of this is not in the form of a reduction in the tax withheld from people, but is in the form of cheques issued to --
The Chairman: It is money going out rather than coming in, is that it?
Mr. Dodge: That is right.
The Chairman: It is okay to take money from people without the law, but you cannot give it back to them without the law. Is that a fairly simple description of the situation?
Mr. Dodge: Yes, a good, clear description.
Mr. Mark Jewett, Assistant Deputy Minister, Department of Finance: It is a lay description; not a legal description, Mr. Chairman.
Mr. Barry Campbell, Parliamentary Secretary to the Minister of Finance: Mr. Chairman, from my experience in the House and having been here last year on the budget implementation bill, this is about the time we do this. This is the first bill that you see flowing from the budget, followed some time later in the year, as we were discussing this morning, with more technical measures in Bill C-92. This is budget implementation, authorization to spend flowing from the budget.
The Chairman: Mr. Jewett, that means there will be other legislation, presumably in the fall, which will be akin to the bill we dealt with this morning. That is to say, there will be other bills emanating from the 1997 budget.
Mr. Campbell: Yes. Mr. Jewett will elaborate.
Mr. Jewett: There will be one bill. For the last seven years, we have had a non-income tax budget bill and then an income tax budget bill. Because of the nature of income tax legislation and for the reasons we described this morning, we like to get draft income tax legislation out. It is not as necessary for the other kinds of bills. They are put together, and we do a bifurcation.
The Chairman: So the income tax budget bill will come down later in the year.
Mr. Jewett: Given the times we are in, I cannot say exactly.
The Chairman: I was not pushing for a date.
Mr. Jewett: It will follow.
The Chairman: The aviation fuel tax rebate is the mechanism under which assistance is being provided to Canadian Airlines; is that correct?
Mr. Dodge: That is correct, not just to Canadian Airlines.
The Chairman: I understand that. It was purely coincidental that the program was announced at the time that Canadian Airlines needed assistance. I understand that it applies to more than one airline. That is a fixed duration rebate. Correct?
Mr. Dodge: Four years.
The Chairman: Retroactive to fiscal 1996?
Mr. Dodge: This works on a calendar year basis, so calendar 1996.
The Chairman: Starting in January 1996, then. What is the cumulative loss over the four years, do you know? Do you have a ballpark number? I do not need a precise number.
Mr. Dodge: It will be somewhat in excess of $100 million.
The Chairman: Not per year, but cumulative.
Mr. Dodge: Yes, cumulative.
Senator Kelleher: Mr. Chairman, I do not think we need a further discussion on the tardiness of our getting this legislation. It seems to me we explored that this morning.
I have two items I would like to raise, Mr. Chairman. I was dismayed, frankly, to find in the bill that we are supplying an additional $50 million in capital for the Farm Credit Corporation when our committee strongly recommended that the Farm Credit Corporation be wound up and rolled into what was formerly called the Federal Business Development Bank.
Mr. Dodge: It is now the Business Development Bank of Canada.
Senator Kelleher: I believe our examination led us, Mr. Chairman, to believe that there was duplication and that the Farm Credit Corporation was moving out of the area of farm credit and moving into other areas that we thought were adequately covered elsewhere. In light of our feelings on this subject, could you explain to members of the committee what the rationale is for increasing that organization's capital by $50 million?
Mr. Dodge: Senator, we looked at this matter fairly carefully. The problem we are trying to address is the delivery of more financing for small and agri-business in the rural parts of the country. That is the objective. We looked carefully at how this could be achieved.
One problem is that rural Canada has little or no access to the Business Development Bank because offices of the Business Development Bank are not located in the rural parts of the country where we are trying, through this particular effort, to increase the supply of capital.
For example, in the province of Saskatchewan, the Business Development Bank has only two offices; whereas the FCC has 14 offices, none of which is in Regina or Saskatoon. We have the same problem in southwestern Ontario, as well as in Manitoba and southeastern Alberta.
Given the objective and given the time frame that we are trying to work in here over the next couple of years, the government decided that this was a reasonable way to proceed. At the same time, following up on the suggestions of this committee, although not on the particulars, we have asked that there be greater exchange of officers between the BDC and the FCC so that we do not have to train people, who essentially are used to making mortgage loans on land, in lending money for agri-business and related services, rural services.
Senator Kelleher: Another matter relating to that topic concerned us. One principle of this government is to try to move out of those areas where the private sector can take over, which seems logical to us. I understand your argument that there are more Farm Credit Corporation services available than Business Development Bank services in certain rural areas, but surely that would not mitigate against joining the two. Surely there would have been a saving in doing that. Have you examined the potential for saving by merging the two?
Mr. Dodge: I do not think this particular proposal precludes a merger down the line or other ways to ensure much closer integration, not just between those two banks but also with the EDC. Many exporters find it burdensome to have to come up to Ottawa to deal with the EDC.
I do not think this particular proposal precludes moving toward tighter operations somewhere down the line. Indeed, given the nature of some of the financing we see being done, we are certainly encouraging an interchange, as are the two institutions.
The other point you raise regarding areas in which the private sector could essentially do things better is a more fundamental issue. I think it is fair to say that our analysis indicates that these institutions are feeling a bit of a gap and are in some sense pressing the private lenders to be more innovative because they are doing some things that are, if you will, stretching the envelope. I am not sure I can really agree that these institutions necessarily ought to back out. They are only useful, obviously, if they are creative. You seem to imply that maybe we could just shut them down, and the result would be better delivery of services. I think that is a debatable point.
Senator Kelleher: I am not convinced, but I accept what you have said.
Let me move on to that part of the bill which provides that new employees will not attract additional EI premiums. While that might, at first blush, appear to be somewhat generous, perhaps you can explain why we are being so parsimonious in this area when we seem to be building up tremendous surpluses in the EI fund and why the Department of Finance seems to feel it needs such a huge surplus rather than perhaps lowering the payroll taxes overall to keep the surplus down to, say, $5 billion.
Mr. Dodge: I would like to make two points on this, senator.
First, our job, which we have been working at with some degree of success and certainly with a lot of diligence, has been to try to repair the nation's balance sheet. That repair has come about, first, by a reduction of expenditures. Despite the fact that programs were doing good things, we had to repair the balance sheet. Second, it has come about by not reducing taxes or premiums by as much as the government might have liked.
We have been reducing Employment Insurance premiums, as you know. We have been trying to get the account into a shape where we never again will have the unfortunate experience, which we went through after 1989, where we had to raise premiums sharply right in the middle of a recession. That is not the ideal thing.
As Mr. Martin said, there will come a time -- hopefully in the not too distant future -- when once again the Government of Canada and the Parliament of Canada will have some elbow room and some freedom to manoeuvre with respect to decisions on taxes and expenditures without always having to be concerned absolutely about whether that adds another nickel to the deficit. At that point, obviously, Employment Insurance premiums, along with other taxes, will be on the table. At that point, I guess I can simply say that the Department of Finance will rejoice at finally being in the position where we have the freedom to make decisions that we have not had the freedom to make so far in the 1990s.
Senator Kelleher: How large do you think this fund will have to be before you feel you have some freedom and elbow room, as you suggest, given the large numbers that people appear to be attributing to this surplus?
Mr. Dodge: That is a difficult question to answer. The actuary of the Employment Insurance account has put on the table a number of approximately $15 billion, in terms of the cumulative surplus, which he estimates would be enough to carry us through a recession similar to the 1990-92 recession without forcing us to raise premiums.
Senator Kelleher: We wish you well.
Senator Tkachuk: What would the unemployment rate have be to eat up the $5 billion surplus we are taking in?
Mr. Dodge: It is not just a question of the unemployment rate. It is also a question of where the unemployment hits. Obviously, if high-wage industries are hit hard, the benefits that we pay out rise much more rapidly than if unemployment is spread out across different industries.
As you will recall, at the peak of the 1992 recession we had a national unemployment rate in the order of 12 per cent. That is the calculation that the actuary did.
Senator Tkachuk: The 12 per cent will eat up the $5 billion or the $15 billion?
Mr. Dodge: The issue here is: How much do you need in the bank to avoid having to raise premiums?
Senator Tkachuk: It is not in the bank. It is just an accounting measure. You spend it. You use it to cut down your capital accounts. Correct? It is not in the bank.
Mr. Dodge: Obviously, you can always borrow.
Senator Tkachuk: Yes, but you would be borrowing anyway. That is what I am getting at. If the unemployment rate jumped to 12 per cent today, if I understand what you are saying, you would have to borrow $15 billion because you do not have the money in the account.
Mr. Dodge: You are right. This is a calculation. A calculation is done differently, for example, if you have a recession of the magnitude that we had in 1990-92.
Senator Tkachuk: Frankly, it was just a tax to reduce the deficit.
Mr. Dodge: Wait a minute. The question you asked was: What unemployment rate? In making his calculation, the actuary looked at the worst recession we had had, which was the 1992 recession, and asked: How much of a cumulative surplus would we need to carry us through that without raising premiums? The answer to that question was: roughly $15 billion -- although neither the Finance Minister nor any one of us would guarantee that to the last nickel.
Senator Tkachuk: If you were actually keeping the money in the account, you would not have to raise premiums. The government will have to go back and borrow the $15 billion if it happens again, because you have spent the money. There is no money in the account.
Mr. Dodge: That is right.
Senator Tkachuk: Therefore, it is a tax. It is treated as a tax by the Department of Finance. It is not treated as a fund; it is an accounting measure.
I wanted to point that out because when we are talking about the $5 billion and $15 billion, we are really talking about an accounting number, not real cash.
Mr. Dodge: Absolutely.
Senator Tkachuk: If we got into a recession, we would have to borrow money.
I also want to ask questions about the Canada Foundation for Innovation. Has the amount of money contributed to pure research in hospitals across Canada, particularly the 16 teaching hospitals, gone up or down since 1993?
Mr. Dodge: Perhaps I could ask Ms Park to join us at the table. I do not know the answer to that question.
Ms Ann Park, Executive Director, Economic and Fiscal Policy Branch, Department of Finance: I do not know the answer specifically but, generally speaking, money for research, both for research hospitals and for universities, has been going up for a number of reasons. What has not been going up and has not kept pace with the money going into research is the underlying research infrastructure to allow the research to be done. That is the critical need that was identified by universities and hospitals in the pre-budget discussions.
This particular initiative focuses on the particular need that was identified to deal with underlying research infrastructure.
Senator Tkachuk: Are you are telling me that since 1994 you have increased the amounts of money for pure research grants to these teaching hospitals across Canada?
Ms Park: Are you talking about federal government grants, for example, through the granting councils, the Medical Research Council and NSERC? I do not have those numbers with me.
The Chairman: When you have responded to Senator Tkachuk's questions, could you then tell us in lay terms the difference between what you call "pure research" and what you call "research infrastructure"? I am assuming "infrastructure" means buildings and equipment, but I should like that clarified for the record.
First, answer Senator Tkachuk's questions. You can then answer my supplementary question.
Ms Park: Perhaps I misunderstood the initial question. I thought you were referring to research money generally to universities and research hospitals and whether it was increasing.
As far as federal support for research itself is concerned, that is done primarily through the granting councils, the Medical Research Council and the Natural Science and Engineering Research Council. Like other government agencies, they were affected by deficit reduction. There were some reductions in the amount of expenditures to universities and research hospitals through those agencies. Efforts were made during program review to ensure that they were not affected more than others, but they were part of the general reduction in federal spending. They were affected to some extent.
The research infrastructure that we are talking about is, as you say, essentially things such as laboratories and equipment and, increasingly, things like databases and so forth, which have deteriorated over the years. They have not had much new investment and the granting councils do not provide much in the way of support for research infrastructure. They are precluded from doing that. This is something new that the government would be doing, namely, putting money into research infrastructure to address a gap in the existing support system.
Senator Tkachuk: Pure research money to universities has been going down?
Ms Park: A bit.
Mr. Dodge: I believe that, over the course of the program review period, there will be a decline of about $100 million annually in the funding provided by the MRC.
Senator Tkachuk: A decline?
Mr. Dodge: Yes, a decline of about $100 million.
Senator Tkachuk: Over the last four years, it has been quite substantial.
Mr. Dodge: By the end of the period, it will be about $100 million a year lower than it was in 1993-94.
Senator Tkachuk: The Dean of Medicine from the University of Saskatchewan, who was representing the 16 universities, said that it was actually at crisis proportions. They were very concerned about the actual brain drain of the top research people away from their hospitals to places such as continental United States, Europe, Hawaii, and other places.
I am interested in this Canada Foundation for Innovation, which I do not quite understand. You are giving $800 million to a non-profit corporation, namely, the Canada Foundation. Will the investments from that $800 million be used only once?Is this is a one-time gift and then they are on their own? Is that the way this will work?
Mr. Dodge: Yes, this is a one-time gift or endowment to establish the foundation.
However, the foundation would not simply restrict its grants to the interest it earns on the $800 million. It would use capital over a period of probably five years. Obviously, a future government might see fit to grant additional capital.
The main difference between how this foundation will operate and how we have operated in the past is that The Canada Foundation for Innovation will operate much as a private foundation, providing only partial funding for any given project. The whole idea is that the institution, the provincial governments, and, in particular, the private sector will partner to put together enough money for any individual investment that is made. The partnership idea is really the new and innovative part of this.
Mr. Campbell: Senator, we in the House of Commons hear from people in the research sector and get their reaction to this budget. The brain drain you spoke about, which is a real concern in the research community, is a function perhaps not just of research dollars and whether they are available from time to time but also of what is perceived as a declining base in research infrastructure. There are obviously two parts to doing research: the dollars to carry out the research and the infrastructure in which to carry it out. What is unique about this program is that, for the first time in a very long time, it focuses on restoring spending in the area of research infrastructure.
Even with the declines which are regrettably required to address deficit concerns and even with the decline in pure research dollars, this is new money for research infrastructure, which a very important shot in the arm to keep those jobs here.
Senator Tkachuk: Was the government not spending any money on research infrastructure previous to this?
Mr. Campbell: As I understand it, the granting councils were precluded from funding research infrastructure as opposed to pure research.
Ms Park: A very small proportion of moneys provided by the granting councils is in the form of equipment grants. In the way they are set up, they do not get into that area.
Mr. Campbell: As well, there was some money within the infrastructure programs set aside for that kind of research infrastructure, but this is the first program directed specifically to research infrastructure, where they do not have to compete within that fund with other kinds of infrastructure.
Senator Stewart: I conclude from the wording of clause 18 that the bill does not appropriate money.
Mr. Jewett: Yes, it does.
Senator Stewart: In what clause?
Mr. Jewett: Part XI, the last clause of the bill, clause 94.
Mr. Dodge: Page 58, senator.
Senator Stewart: Therefore, this was introduced in the other place with a royal recommendation.
Following up on a question Senator Tkachuk was asking about money for research, particularly medical research, we were told that there has been something of a decline in the amount of money being transferred for that particular purpose. We were told that the money was not being transferred specifically for research infrastructure. Is there anything in the Established Program Financing Act that prohibits the use of money originating from a federal source or sources being used for the construction in a province of, let us say, medical research infrastructure?
Mr. Dodge: Absolutely not. That money is transferred to the provinces. Indeed, under the old EPF or under the CHST, as it now is, the province has absolute discretion over how that money is used.
Senator Stewart: Although there was no specific money for research infrastructure, there was money going to the provincial authorities, some of which they could have used for that purpose.
Mr. Dodge: Absolutely.
Senator Stewart: How is the foundation to deal with eligible recipients? Let us say we are dealing with an eligible recipient within Nova Scotia. Does the foundation transfer the grant directly to Dalhousie University, for example, or does it transfer it to the provincial government in the province of Nova Scotia which in turn transfers it to the university?
Mr. Dodge: Directly to the institution, senator.
Senator Stewart: And this is consistent with the provisions of the Constitution Act relative to education.
Mr. Dodge: It is.
As you will recall, prior to 1977 we had the EPF. We used to have a capital grants program which was instituted right after the Second World War and operated until the mid-1970s. As well, we had grants in support of university operations. We had a cost-sharing arrangement. That cost-sharing arrangement was not the most efficient in that it encouraged the use of 50-cent dollars in ways that were not necessarily the most effective, and so we moved to the EPF system. At that point, we did away with the capital grants. However, we have had a long history in the federal government of capital grants to the institutions.
Senator Stewart: I and, I think, Senator Tkachuk before me were talking about money for medical research infrastructure. Is there anything in the bill which indicates or mandates what part is to go for medical research as against other research infrastructure?
Mr. Dodge: No, there is not, senator. Indeed, we drafted this bill in a way that that onus is on the foundation.
Senator Stewart: Given the fact that I am sure some research was done to ascertain the need for the program, do you have any figure in mind that would be predictive? Is it likely, given what you know, that a quarter of the money will go to support medical research infrastructure or is it a half? Do we have any idea? Is it blind insofar as that is concerned?
Mr. Dodge: That is correct. The foundation should be sensitive to the regional needs of the country. We have allowed, for any particular investment, the foundation to take up to 50 per cent of it, in large part, to try to ensure that those institutions that have less access to private grants will have access to a reasonable share of research facilities. This is a merit-based operation.
Mr. Campbell: On behalf of the government, I would add that we would prefer to refer to it as "agnostic" rather than "blind."
Senator Stewart: In some circles, that might not be regarded as a great improvement in language.
The directors will be of great importance. I am looking at the transfer into this statute from the Canada Business Corporations Act, in clause 8, where we are told that subsection 105(1) of that act will apply in the case of qualifications of the directors. What are the required qualifications of directors?
Ms Mary Ellen Cavett, Counsel, General Legal Services, Department of Finance: Senator, subsection 105(1) of the Canada Business Corporations Act sets out the qualifications of a director, and it states that persons are disqualified from being a director of a corporation if they are less than 18 years of age; if they are of unsound mind and have been so found by a court in Canada or elsewhere; if they are a person who is not an individual -- in other words, a corporation -- or if a person has the status of a bankrupt. Anyone who falls into any of these categories is disqualified from being a director.
Senator Stewart: We have eliminated certain persons from being eligible. Aside from that, what other criteria would operate in the selection of the directors? Is there any other guidance for the Governor in Council?
Ms Cavett: Clause 11 at page 7 states:
The appointment of directors shall be made
(a) to ensure, as far as possible, that at all times approximately one half of the directors will be representative of persons engaged in research and one half representative of the business community or non-profit organizations; and
(b) having regard to the desirability of having directors drawn from various regions of Canada.
Senator Stewart: I remember seeing something in the bill relative to citizenship and residency in Canada. I am looking at clause 11. I gather that a director must be a resident of Canada.
Ms Cavett: Subclause 9(2) at page 5 does specify some additional criteria for the appointment of directors. It states that the directors who will be appointed by members -- in other words, the directors who are not appointed by the government -- must be resident in Canada. That provision is in the Canada Business Corporations Act.
Senator Stewart: There will be a certain amount of co-opting.
Ms Cavett: I am afraid I do not follow you, senator.
Senator Stewart: You say "the directors who are appointed by the members," so that is co-option.
Mr. Jewett: I do not think so. The structure of this, senator, is that the members are necessary to form the corporation, and they go on from there. It is a necessary appointing process in these circumstances when we are setting up an arm's-length corporation.
Ms Cavett: In a for-profit corporation, the shareholders of that corporation appoint the directors. Similarly, in a not-for-profit corporation, the members are, in effect, the shareholders, and one of their responsibilities is to appoint the directors.
Senator Stewart: How many of the directors could be persons who are not residents of Canada?
Ms Cavett: In the way the legislation is drafted, each director must be a resident of Canada.
Senator Stewart: What confused me is that it says "six persons who are resident in Canada." Then I read over here, "ceases to be a resident of Canada." I am wondering if the bill is not repetitious.
Ms Cavett: Out of an abundance of caution, we wanted to make it quite clear that one of the disqualifications obviously was ceasing to be a resident.
Senator Tkachuk: Are there regional quotas?
Ms Cavett: No.
Senator Tkachuk: Will that be taken into account?
Mr. Jewett: As was just read, the appointment of directors shall be made having regard to the desirability of having directors drawn from the various regions of Canada. It is a general direction.
Senator Tkachuk: How many directors would that be?
Ms Cavett: There will be a total of 15 directors.
Senator Tkachuk: That means one from the Prairies, one from B.C., one from the Maritimes, and the rest from Ontario and Quebec, Toronto specifically.
Ms Cavett: It would be up to the members to determine from what regions directors should be appointed. The members are required to meet this legislative provision, so the members, in selecting the eight non-governmentally appointed directors, would be required to ensure that the directors were appointed having regard to the various regions of Canada.
Senator Stewart: As an example of pedantry, Mr. Chairman, look at clause 13(2). "Upon this Act receiving royal assent..." You do not give royal assent to an act; you give royal assent to a bill. I do not want lawyers in other countries sniffing at our draftsmanship.
The Chairman: Just to finish off on the board of directors, am I correct in saying that no announcements have been made with respect to the makeup of the board? I believe I am correct on that.
Mr. Dodge: Not quite, because the government has indicated its intent that Dr. Evans, who has been acting as the guiding hand to try to get things going --
The Chairman: Dr. John Evans, the former president of the University of Toronto?
Mr. Dodge: That is right. It would be the intent of the government to appoint Dr. Evans as chairman. He has so agreed.
Senator Tkachuk: Does he get paid?
Mr. Dodge: Yes.
Senator Tkachuk: How much?
Ms Park: He has declined to be paid.
Mr. Dodge: Directors are paid.
Senator Tkachuk: What are they paid?
Ms Park: There is a provision in the legislation which will allow directors to be paid if they wish to be paid, and that would be set through regulation.
Senator Tkachuk: So they can set their own rate?
Ms Park: No, we would have to do it through regulation. They cannot set their own rate. In the case of Dr. Evans, he has decided for his own reasons that he does not wish to receive remuneration.
Senator Tkachuk: He is a great Canadian.
The Chairman: If there are no other questions on Bill C-93, could I have a motion to dispense with a clause-by-clause examination?
Senator Kelleher: I so move.
The Chairman: Could I have a motion to report the bill back unamended?
Senator Kelleher: I so move.
The Chairman: Is the motion adopted?
Hon. Senators: Agreed.
Thank you very much, Mr. Dodge, Mr. Campbell, and colleagues.
Honourable senators, we will move now to Bill C-37. This bill is to implement an agreement of tax treaties with the Russian Federation, South Africa, Tanzania, India and the Ukraine. We have dealt with similar bills in the past.
Mr. Dodge, TransCanada Pipelines has been canvassing the committee rather ardently. Perhaps someone in their opening remarks could explain that corporation's specific interest in the bill. I have a general understanding, but I would like to understand it in detail.
Senator Kelleher: It is a pipeline project.
The Chairman: I know it is a pipeline project and I am delighted that a Canadian company is doing it, but I am not clear on the direct benefits for Canada.
Mr. Dodge: I will hit the highlights and then I will ask Mr. Déry to deal with the specific question you have raised, Mr. Chairman.
The five treaties contained in Bill C-37, like our 57 existing treaties, are aimed at preventing two major problems, as you know, which are double taxation and tax evasion. The treaties naturally vary from country to country, but all are patterned on the Model Double Taxation Convention of the OECD. Broadly speaking, they reduce the levels of withholding tax on various types of income with a view to encouraging investment and providing relief from double taxation through a variety of exemptions and credits.
Mr. Chairman, it is not worthwhile to go through all the details, but what we are really trying to do in these treaties, as in all others, is to provide generally that dividends may be taxed in the source countries at varying minimum rates. In the case of inter-company dividends, the rate is often reduced if the company receiving the dividends holds certain equity interest in the company paying the dividend.
A second major thrust is to ensure that companies are unable to lower their taxes merely by establishing branches in Canada or in other countries. To accomplish this, branch tax rates have been set parallel to the rates for inter-company dividends. They also set up various tax rates on interest payments by a resident of one country to a resident of another and, most important, address the taxation of royalty payments and pensions.
These treaties should not result in any revenue loss for Canada. Indeed, Canada will benefit not only from the lower withholding tax rates and other concessions by our co-signatories but also from the stimulus that these treaties will give to trade and investment.
I will ask Mr. Déry to address your particular question, Mr. Chairman.
Mr. Jean-Marc Déry, Chief, Tax Treaties, Tax Legislation Division, Department of Finance: The Songo Songo project in Tanzania was raised by TransCanada Pipelines. The with Tanzania was signed in late 1995. In TCPL's bid for the project in Tanzania, they knew that negotiations had been going on for a number of months, not years, and they took that into account in their bidding. They realize that the treaty will be in force only from January 1 of the year after the treaty has been ratified. We are now in 1997 and time is running out. For the provisions to apply in 1998, the treaty must be ratified sometime in 1997, which does not leave much time for ratification to occur.
The two main benefits to TransCanada Pipelines will be, first, a reduction of the withholding tax on dividends that it will receive eventually from Tanzania and, second, once a treaty is in force, those dividends will be patriated tax-free in Canada.
The Chairman: We do one of these bills about every 18 months. We are always told how it takes months, if not years, to negotiate these treaties. Since they all are based, as Mr. Dodge said, on a common and simple set of principles, the OECD rules, what is the problem? Is this just the general speed with which international negotiations are carried on? If that is the answer, I am glad I have never been on the external affairs side of the government. Or is it something that is genuinely complicated?
Mr. Déry: It varies from one negotiation to another. One of the standard problems in all the countries I have visited is the lack of people available to work on these negotiations. Most of them are involved in 20 or 30 negotiations at one time.
The Chairman: You make it sound as though these negotiations are very complicated. There is a basic set of OECD principles, as Mr. Dodge points out. The principles are basically the same everywhere. What makes it so complicated?
Mr. Déry: There is a number of complicating factors. Canada bases its model on the OECD model, as do most countries around the world. However, we also adapt it to suit our own Canadian tax system. These departures from the OECD have to be explained, and we have to convince the treaty partners that those changes are good for them as well as for us.
Some countries have departures in other areas. Sometimes a country will insist on rates lower than Canada is prepared to give or they insist on rates that are so high that there is no point in having a treaty. Some countries will insist on far-reaching taxpayer provisions where we will have to give a tax credit for taxes which have not been paid. There is a number of factors.
Some of the negotiations we conclude in one week. We try to do that more and more. After the negotiations, there is the translation into at least French and English and, very often, into a third language. From my experience, the third-language translation will take more than a year. There are all kinds of reasons for the delays, and delays exist in all countries around the world.
Senator Kelleher: I will be brief in light of the fact that I already spoke in the chamber this afternoon in favour of the bill. It behooves me not to be too critical at this point. I just thought I would set at ease the mind of the deputy minister.
Having said that, there is one little detail I would like to bring to the attention of the committee. It brings us back to the favoured theme this morning -- the lack of urgency with which the government has treated this bill. I practise law in this area and I know that these bills are quite beneficial to Canada and to our companies which do business abroad. Related bills were passed by the Russian Federation in October 1995, by South Africa in November 1995, by Tanzania in December 1995, by India in January 1996, and by the Ukraine in March 1996.
This comes back to what we said earlier this morning -- and I may sound a bit like a broken record. Surely, given the importance of these agreements to Canadian businesses abroad, could we not be a bit more responsive and bring these forward more rapidly than we have done? It appears that we have been somewhat dilatory here. Is that an unfair remark?
Mr. Déry: Senator, the dates to which you refer are the dates on which each of the individual treaties were signed. Canada signed the Russian treaty in September 1995. With regard to the implementing legislation process, it is true that some countries, India for example, was in the position to notify Canada. It was signed in January 1996. At the end of February, they notified us that they had completed all the procedures.
Bill C-37 was introduced in the House in May 1996, which is pretty good, I think.
Senator Kelleher: That is only a year.
Mr. Déry: That is pretty good for the introduction. I can only speak for the department. The legislation for all the treaties was drafted between the end of September 1995 and March 1996. It was introduced in May 1996.
Let me conclude by saying that these types of treaties are important. At the same time, there is other important legislation in the House. My own view is that these treaties should move faster; but that is a decision for those scheduling the legislation.
Mr. Campbell: Mr. Chairman, I have moved back up to the table to repeat what I said during this morning's session in regard to another bill.
The sad reality is that we compete for house time with a great many other priorities of the government. We have some 30 per cent or 40 per cent of all legislation before the House at any given time, but sometimes things take longer because of other priorities that come up from time to time. Therein lies the explanation.
I apologize for that. Obviously, we would like to see these things move along.
The Chairman: We fully appreciate that it is not a departmental issue. The next time we get to this stage we will have the Government House Leader testify. He is clearly the manager of house business.
Senator Stewart: The plea is that the problem is the time allotted in the House of Commons. Roughly, how many days did the house invest in this bill?
Mr. Campbell: I believe it was one day in the House.
The Chairman: I do know that in the House of Commons Finance Committee it was about 10 or 12 minutes. We have exceeded their limit by about 500 per cent.
Mr. Campbell: Mr. Chairman, the questions during those 12 minutes at the House of Commons Finance Committee were pretty good. I do not mean to challenge your colleagues here, but we are on Question No. 1 nine minutes into this session.
Senator Stewart: Are all of the countries with whom we have these agreements members of the OECD?
Mr. Dodge: No. The Fiscal Affairs Committee of the OECD is basically the world body that works out a model. That model is followed in our negotiations and, indeed, throughout the world in tax negotiations.
I should say that APEC is interested in that; perhaps there ought to be a competitive model. However, this is the one that has served for many, many years.
Senator Stewart: The reason I ask is that reference was made to the OECD earlier. It occurred to me that, perhaps, some of the slowness originated in the fact that some of the countries were not members of the OECD so that, in a sense, they were dealing with fairly new ground.
Mr. Dodge: That can be the case. For example, soon we will be entering into negotiations with Chile. This will be Chile's first taxation agreement. In fact, Chile has chosen Canada because we have a good record of being able to deal with these things, and they wanted to deal with us first.
Senator Stewart: Do we have an agreement with the People's Republic of China?
Mr. Déry: Yes, we do.
Senator Stewart: What about Indonesia?
Mr. Déry: Yes, we do.
Senator Stewart: When the agreements are in place and operative, has our experience always been good?
Mr. Déry: I would say no. This is more a question for Revenue Canada than for the Department of Finance to answer. There have been some difficulties of interpretation with some countries.
Senator Stewart: Could you be a little more specific? What kinds of problems are lurking behind the difficulties of interpretation?
Mr. Déry: I believe the most common one is the question as to whether a treaty partner has the right to levy a tax on technical fees, for example. There is a tendency for a number of countries in Asia to interpret OECD language differently from what was intended by the OECD. That is the most typical example.
Through the OECD and APEC, more and more, we have meetings at the OECD with non-member countries. These are the questions we try to discuss. We try to explain to them what the right interpretation should be. If they want to reflect on what they are doing in practice, we say that the wording is not the correct wording. Then we can discuss on a bilateral basis whether we are prepared to have a treaty with wording that clearly allows them to tax those fees, for example, and at what rate.
Senator Stewart: As you know, Mr. Chairman, the Standing Senate Committee on Foreign Affairs is examining our relations with certain Asian countries. One of the concerns of the committee relates to the facilities of all kinds, financial and otherwise, concerning financial investments and so on. That is really the point behind my question.
Are the difficulties to which you refer sufficiently great to impede Canadian investment? Is this a worrisome consideration for direct Canadian investment in some of these countries?
Mr. Dodge: Senator, I have just come back from three weeks in Asia where I talked to a lot of our people. Tax issues were obviously one of the things about which I spoke.
I would say that the general worry that our people who operate in these countries have is the lack of transparency in the way business is done, whether it involves banking laws or tax laws. It is just not very clear exactly what the rules are at the end of the day. There does seem to be a number of arbitrary decisions taken along the way.
Obviously, the situation is improving. It varies tremendously across the different countries.
That lack of transparency and the lack of a legal framework against which business can be done, and a certain arbitrariness in decision making, are the most difficult things for our business people to deal with. The situation is getting better, whether it be in the tax treaty area which, as Dr. Déry said, we are trying to improve through APEC, or in the area of financial legislation, where we are making a major effort to achieve more transparency. Indeed, a number of countries that have not been very transparent historically are starting to see the benefits of transparency. Even the Japanese are starting to open up on that.
I do not think the tax treaty issue is, per se, high on the list, but it is the sort of issue, along with the arbitrariness of imposing special levies, with which we have difficulty. The problems are probably the greatest in the financial and general commercial law areas.
Senator Kenny: How many tax treaties do we have in effect currently?
Mr. Déry: Fifty-seven.
Senator Kenny: How many do you have in the queue right now that you would like to have negotiated?
Mr. Déry: I have 34 on my list, but some are renegotiations.
Senator Kenny: You say you have 34 in the queue. Believe it or not, way back when, I actually worked on tax policy and tax treaties. At that time, there was a summer student, myself and one person who supervised me periodically. How many folks do you have working there now?
Mr. Déry: I am the only one doing it full-time.
Senator Kenny: No summer student?
Mr. Déry: No.
Senator Kenny: My impression was that other countries interested in trade had fairly substantial PYs associated with their tax treaty groups. At that time, we were getting ready to negotiate a treaty with the United States. I was led to believe that they had 40 or 50 people working on tax treaties. Am I in the ballpark?
Mr. Déry: There are two sides to that. There is the policy side, the Department of Finance, and the Revenue side. In Canada, I am the only one working full-time on the policy side, but there are three or four people involved at Revenue. The situation is similar in the U.S. If you are talking about the actual negotiators in Treasury, I do not think there would be 40, probably less than ten, but then there would be many more on the IRS side.
Senator Kenny: If these are beneficial for us, if it makes sense to have them because they assist Canadian trade, and if we have 34 in the queue, why are we not allocating more resources to them and why are we not proceeding with them more expeditiously?
Mr. Dodge: You make a good case for my ADM of tax policy, who is always telling me that he needs more resources.
Senator Kenny: What do you always tell him?
Mr. Dodge: No.
Mr. Jewett: "Get in the queue."
Mr. Dodge: In an area such as this, you can always use more resources. The amount of time it takes to finalize a treaty will generally depend on the amount of resources you have.
Mr. Déry serves not just to negotiate the treaties. As I said, Chile will be coming here to negotiate their very first treaty, so we also serve a bit as teachers.
Yes, it would be nice to have more resources, senator, but, as a total department, we are operating on a smaller operating budget today than we were 15 years ago. We try to do our best.
Senator Kenny: When you do a cost-benefit analysis, you find it is not worth the extra resources?
Mr. Dodge: If you did a cost-benefit analysis on it, you would probably fine no area in the department that should get more resources. However, it is especially important that the Department of Finance operate with as low overhead costs as possible, because we are examined under a microscope by everyone in the country.
Senator Kenny: When you renegotiate the treaties, do you have a rolling model with which you work? Do you have in your mind a model that you want to see your next 10 tax treaties resemble? Are you working toward that?
Mr. Déry: It is not a model as such. The main reasons for the renegotiation of most of the important treaties are the 1992 budget announcement on the reduction of the withholding tax on intercompany dividends and the 1993 announcement on the exemption for certain royalties. These are the two main elements.
Since we have entered into the renegotiation, we have also looked at each provision, to modernize the language if we can and to correct some problems of application that have been found in this revision. We target more than one or two articles. If we can do it, we do it. With other countries, we go through the whole text even though we realize there are only two or three articles which are really relevant, and we agree to go with a protocol that will simplify life for everyone.
Senator Kenny: In the five we are studying here, are there any anomalies the committee should focus on in particular?
Mr. Déry: Anomalies?
Senator Kenny: Are there any parts of these treaties where, three or five years from now, we would say we wished we had discussed them more in committee?
Mr. Déry: I doubt it. Not all of them reflect everything we would like to have. With Tanzania, we would like to have lower rates on all dividend interest and royalties, but they are not prepared to agree to that at this time. Eventually we will have to renegotiate the treaty, not because the issue has not been raised but because of their position for the time being.
Senator Perrault: Mr. Chairman, my question is not directly relevant to Bill C-37, but it relates to the moneys made by companies in various parts of the world. A major issue on the west coast -- you may be aware of it -- is the claim by Asiatics who say that the Departments of Finance and National Revenue are unfairly attempting to ascertain which of their profits were made abroad. They regard this as a preliminary step toward unfair taxation of these assets which are supposed to have been established abroad. You may know something of the subject.
A number of them, most of them from the Asian community, have come to members of all of the political parties and said, "This is unfair, and we are pulling our money out of Canada." A number have done so. What about the tax treaties with respect to their countries of origin, if, in fact, they exist?
Mr. Dodge: Senator, we had a bit of a discussion on this issue this morning. I was telling the chairman that I have had two recent visits to Vancouver, and one to Hong Kong, largely to deal with this particular issue.
Our problem here is partially one of perception. There is a perception in the country that some people may be evading Canadian tax by parking money outside the country. In many cases, this may be done inadvertently. We all fill in our tax forms by taking our boxes of T-5s, T-4s and T-3s and shipping them off to our accountant or by sitting down with our tax calculator and doing them. Of course, you do not get those sorts of return on foreign assets, so it is very easy, inadvertently, not to report.
One of the advantages of asset reporting is that it jogs your mind and makes you remember that you do own those assets and have received some income which you should report.
The second aspect is that there are some people who quite intentionally place their assets outside the country -- not immigrants who come in, but people who have lived in Canada for a very long time -- to try to evade Canadian tax. The asset reporting is intended to give Revenue Canada a bit of a handle to try to encourage much better compliance.
As we are a relatively small country, we cannot afford to have a lot of people abroad sniffing around. The Americans do that, but they are a country 10 times our size and can afford to have people do that. We cannot afford to do that. This is our way of trying to encourage compliance by Canadians with our tax laws.
A number of people have come to Canada and have left significant assets abroad. They have come from backgrounds where, rightly or wrongly, they are very suspicious of tax authorities and from countries where tax morality is not at the level that it is in this country.
Senator Perrault: Some of these nations have a history of secrecy with respect to these matters, do they not?
Mr. Dodge: I think it is fair to say that if you and I had lived through some of the experiences these people have gone through, perhaps we would feel the same way. For example, a number of the residents of Hong Kong came out of Shanghai with nothing in their pockets and had to re-establish themselves. The residents of Taiwan also went through an awful experience. A number of residents from other countries have gone through a bad experience with governments. It is understandable that they can be somewhat suspicious. In particular, their relatives back home can be pretty suspicious.
Senator Perrault: Are any modifications being considered?
Mr. Dodge: We have made a number of modifications to try to smooth the implementation. We delayed the date of implementation and tried to reduce the burden of the reporting requirements. However, we have a duty to the taxpayers of this country that honestly and willingly report their income and pay large amounts of tax every year. We have a duty to ensure that they can rely on the fact that we, as the authorities, are collecting the appropriate tax from all members of the community.
We are trying to work with the immigrant community -- in particular, with those people from Taiwan and Hong Kong, where the biggest problems have arisen -- to try to ensure that they have full information. One of the things that was particularly bothersome was that they thought they would have to report if they had an apartment, or whatever.
Senator Perrault: That is right. There are all sorts of horror stories there.
Mr. Dodge: In fact, they do not. The reporting that must be done is only on income-producing assets. We are working quite hard. I spent a day in Hong Kong working on this issue to ensure that the tax advisors there understand fully what we are doing. I spent time in Vancouver working on it also. Our people have spent a lot of time working on this.
Senator Perrault: We want to achieve both a reasonable and a fair compromise in the public interest; we do not want people to lose confidence in investing in Canada. If there have been any press releases or details released on the steps that have been taken, I would be delighted to have them.
Mr. Campbell: There is a press release which sets out the steps of a relieving nature that have been taken.
Earlier today, Senator Austin tabled with the committee a letter I wrote to him outlining the position of the government on this matter. I would only add two comments to that letter.
First, as Mr. Dodge mentioned this morning, people who come to Canada from abroad currently benefit from being able to maintain an immigrant trust for a period of five years.
Second, the government has been concerned with the prospect of two similarly placed persons who are Canadian residents and, therefore, taxable on their worldwide income, being in a different position if we were to say to people who have come to this country recently, "You do not have to be concerned about this. It is only for people who have been here for a longer period of time." If that were the case, then we would be in an untenable position.
The Chairman: It might be useful, particularly to the British Columbia senators of all parties, to have the information. Senator St. Germain, who is not here but who is a member of the committee, has the same questions.
Senator Stewart: I want to take advantage of the presence of these witnesses to ask a question which is somewhat germane to the bill now before us, although not entirely germane.
We hear about international corporations and worldwide corporations. I have heard suggestions, not necessarily from authoritative sources, that some of these worldwide corporations are rather like long balloons or sausages and that, by squeezing in one part, the content or the material can be moved around. This can be done, and is being done, so that no government is in a position to apply its tax laws effectively to the income of such corporations.
Is that a myth or is that a problem?
Mr. Dodge: Taxation of income from capital, whether or not it is within a multinational corporation, is probably the most difficult taxation issue we have internationally because there is a great incentive to move capital around and organize one's affairs so that the income arises in a low-tax jurisdiction. We have plenty of low-tax jurisdictions.
This is an issue which is extraordinarily difficult to deal with internationally because it requires a cartel of the tax authorities. Since there are approximately 19 authorities around the world, a cartel of that magnitude is notoriously unstable. Even within the OECD, we do have some countries, notably Ireland, Luxembourg and the Netherlands, which have opted to become low-tax, easy-avoidance jurisdictions to attract industries through tax competition.
It is an extraordinarily difficult issue. Up until quite recently, there has been very little willingness by the major countries to try to come to grips with it. For instance, the United States is big enough and has enough muscle that they have always felt that they would be better off by dealing with the problem on their own. The remainder -- namely, the Germans, the French, ourselves, the British and the Japanese -- could never really agree on how we should go about it.
I think this situation is changing a bit. Certainly, the Germans have found that they are in quite serious difficulties vis-à-vis Luxembourg, which is the tax haven of preference for the Germans; and because their own companies are doing exactly what you have described. All of a sudden, we find that the Germans, who have historically been very reluctant to talk about this issue, are quite interested.
The French have always been somewhat interested, but the level of tax morality in France has not been the highest. The Japanese are now quite interested because they are seeing their own firms with so many operations elsewhere.
There may be some opportunity to improve things, but it is terribly difficult. It is very hard to have a cartel when so many authorities are involved.
The Chairman: Senators, seeing no further questions, can I have a motion to dispense with clause by clause examination?
Senator Kenny: I so move.
The Chairman: Is it agreed, honourable senators?
Hon. Senators: Agreed.
The Chairman: Can I have a motion to report the bill to the Senate without amendment?
Senator Kenny: I so move.
The Chairman: Is it agreed, honourable senators?
Hon. Senators: Agreed.
The committee adjourned.