Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 16 - Evidence - Meeting of September 29, 2005
OTTAWA, Thursday, September 29, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:55 a.m. to examine and report on consumer issues arising in the financial services sector and on the present state of the domestic and international financial system.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Welcome. Today's meeting will be broadcast on CPAC and will be on the web, through both of which we are developing a growing audience loyalty. The committee endeavours to provide oversight to the economy as a whole, for which one of the key issues is to ensure that consumer issues and protection are part of the economy.
We are delighted to welcome a new person on the consumer horizon, Mr. David Agnew from Ombudsman for Banking Services and Investments. Mr. Agnew, I ask that you present your views in respect of your new responsibilities.
David Agnew, Ombudsman and CEO, Ombudsman for Banking Services and Investments: It is an honour to be here before this committee. I have distributed both written remarks as well as an annual report as reference material. I will try to keep my opening remarks brief. I have been on the job for only two months so I hope that I am able to contribute something to this important study on consumer protection.
[Translation]
Allow me to introduce my colleague Brigitte Boutin, Deputy Ombudsman with OBSI for the past eight years and an experienced investigator in banking services.
[English]
As per the Chairman's request, I will keep it brief and the numbers are available in the annual report. The most useful thing, having read previous testimony, would be to reflect on some of the issues. I know that the committee will soon be ready to prepare its recommendations for a report. I will speak to one issue raised more than once in testimony before, and in submissions to, the committee: the independence of the Office of the Ombudsman for Banking Services and Investments. My Chair, Peggy-Anne Brown, and my predecessor appeared before the committee last spring. As she said then, we have a board of directors comprised of seven independent directors and three representing industry. More than providing a ratio of numbers and devoting mathematics to the presentation, I invite you to look at our governance structure and our rules that build in important protections for the independence of the office. I have been through the harrowing process of my first board meeting, annual meeting and budget process. The independent directors are in charge of my operation and I am in charge of my operation.
The Chairman: Mr. Agnew, you do not look too bruised or bloodied.
Mr. Agnew: It is that brief honeymoon.
Senator Angus: Did you mean independent directors from the banking industry?
Mr. Agnew: One represents the banks, one represents the members of the Investment Dealers Association of Canada and one represents jointly the members of the Mutual Fund Dealers Association of Canada and the Investment Funds Institute of Canada, IFIC.
Another issue that ran through the presentations and questions was the confusion resulting from the fragmented jurisdiction referred to as “the vast thicket out there.” I want to use that important point, which cannot be ignored, to underline and underscore an important fact about the position of Ombudsman for Banking Services and Investments. We provide one of the few spans between the federal and provincial governments in terms of jurisdiction. We work seamlessly with members that are regulated both provincially and federally.
This committee is absolutely right to focus on this issue. From a consumer point of view, there is a dizzying array of agencies where consumers might seek assistance. I agree that is a fundamental issue facing consumers with problems in working their way through the system. As any consumer of financial services knows, there is no one simple answer. We are not confronting a simple set of services or an unimportant set of products and services that we all need. Financial services are becoming more complex because of many factors.
I would look at the advance of technology and at innovation and product development. I am aware that the committee's hearings will focus at a later date on one of those new products. This trend of shifting more responsibility onto the consumer is not only in financial services but also throughout society. We are expected to use bank machines, for example. More and more people have defined “contribution” as opposed to defining “benefit pension plans,” and they are expected to manage their pension resources when they retire. Obviously, that would be with the help of an advisor in most cases but that responsibility was handled by the employer at one time. That is one trend that we have observed.
We can make our processes clearer, and I firmly believe that. Certainly, we can do more to ensure that consumers are aware of the complaints and dispute resolution system, and I stress the word “system,” and that they are directed seamlessly to the right place.
I read in some of testimony heard by the committee what I would call “a confusion of roles.” With that background, I can understand why but it is important to say that it can be unhelpful. Allow me to clarify what our offices and I do. We attempt to resolve client and customer disputes in the banking and investment worlds using fairness as our standard. We try to be an alternative to the judicial system. That does not ultimately affect a person's right, if they are not satisfied with our resolution, to explore the judicial system as an alternative if they remain unsatisfied.
Let me put it in the negative so that we are clear: We are not a regulator, policy-maker, market-conduct authority or advocate. You have had all those groups before you on this hearing. We work with all of them but we have a separate function and a different way of dealing with our clients and, on the firm side, the financial service providers.
We are the classic ombudsman model. We work informally, we work confidentially with both sides and we work through recommendations. I honestly believe, after two months on the job, that our process is the best way for the kind of complaints that we deal with to be handled. It is faster, cheaper and certainly less stressful than the alternatives that are available.
Having said that, part of the frustration that people experience when they have problems with their financial service providers stems from not being aware that there are processes that help them. They sometimes are introduced to them bit by bit rather than understanding that there is a whole process, including what I would call, an appeals level to us. We are not an advocate but I unapologetically advocate for better and more awareness of that system, including our own greater awareness of the dispute resolution services for all consumers.
[Translation]
Brigitte Boutin, Deputy Ombudsman, Ombudsman for Banking Services and Investments: Mr. Chairman, as well, you explored the issue of documentation and plain language with some of your witnesses and we can only echo the call for plain language and accessible information for consumers.
Again, we cannot over-simplify the issue and have to understand that for every clause in a legal document, there is a lawsuit somewhere that probably caused it to be written.
From a consumer protection perspective, we run into this problem every day in our work, and it is a source of many issues across all the industries we deal with.
We appreciate this is a topic that crosses boundaries, but all players in the field of financial services could do more to make sure consumers understand their rights — and responsibilities — through the use of clear, straightforward and accessible language in account documentation and product information.
[English]
Mr. Agnew: My predecessor before you in the chair last March talked about the ways we were trying to improve our services, including faster resolution times because that is crucial to all consumers. Happily, I have come in when we are through the backlog of complaints that arose when we took on hundreds of investment firms in the expansion of our mandate. We are making progress in implementing the recommendations that we had from an internal study, which would help our process.
I look forward to your questions.
Senator Angus: Thank you both for coming here today. We are pleased to have you as the clean-up hitters for the study that we are about to conclude and report on.
In your case, Mr. Agnew, you are fresh to the job. We welcome a fresh approach. Could you briefly tell us your background and why we think, and why you think, that you are the right guy for this position?
Mr. Agnew: I will leave it to others to judge whether I am the right guy for this position. I have done a lot of things.
I started out my career as a reporter. I worked on Parliament Hill for awhile. I worked at Queen's Park for several years for Mr. Rae. I was his chief of staff, campaign director and secretary of cabinet in the Ontario government.
After a year at the University of Toronto, I went to the credit union system in Ontario. I was with the Credit Union Central of Ontario for three years. I was with a strategic consulting firm for three years, looking at the impact of technology on business and organizational strategy. Most recently, I spent three years as the president and CEO of UNICEF Canada and have now joined this organization.
If I tried to draw a thread through some of those things, it has always been an interest for me to assist people and help people help themselves. I think our office is an ideal candidate to do both those things.
Senator Angus: That is excellent. You stressed, I believe, the independence of the Office of the Ombudsman for Banking Services and Investments. I assume that means independent from government and from banks and investment firms. How are you financed?
Mr. Agnew: We are financed by the industry. It is a levy on all our members. It is a complex formula but essentially it is by the industry.
Senator Angus: I just wanted to have that on the record. If I understand well, your office and your organization was established basically by the banking industry in response to a clear need for a consumer watchdog organization.
Having said that, you are not established by statute. We have asked all our witnesses that are set up by government — Bill C-38 or other legislation or pursuant thereto — is the statute sufficient to enable you to do your job: do you have the tools necessary to be effective in carrying out your functions? In this case, do you have great flexibility? Do you have the tools, within the structure put together by the banking industry, to create your office?
Mr. Agnew: Yes, I think we do. Obviously, we — and I say “we” broadly — have made a choice that we would go down the route of the ombudsman to solve complaints, as opposed to the strict regulatory or legislative route. As I have said, going the legal route is always an option for people. We are careful in our process not to interfere with their rights to do that.
However, again, in that kind of classic ombudsman function, the bylaws — for instance, of the Investment Dealers Association of Canada — compel their members as a regulatory agency to cooperate with us in our investigation. Of course, at the end of the day, the recommendation is a recommendation — as it is in any classic ombudsman model in government and everywhere else. It is not the regulatory order.
We had a conference last week of my international counterparts — the United Kingdom, Australia, South Africa, New Zealand and so on. It is interesting because we all do this — what if we did this or that? How about if we cherry- pick from here or there? The difficulty is that you cannot; you have to take the whole ball of wax.
If, for instance, we had the authority to order, we know what would happen. All sides would start “lawyering up” — no disrespect to the lawyers. My United Kingdom counterpart is called an ombudsman but he is, in a sense, connected to the regulatory system because he has the right to rule and establish orders. He also has a much bigger budget for judicial review.
The Chairman: Just pause there. I think it is clear under the United Kingdom system that there is a regulated and regulatory power that you do not have. When I say “regulatory,” I mean by regulation or statute.
Mr. Agnew: By statute.
The Chairman: I think you are right, Senator Moore, it is statutory. On the other hand, this is not statutory. This is by concurrence of the financial sector itself. Therefore, your power to deal with any punitive measures beyond recommendations is limited.
Mr. Agnew: If you go back — and some around the table perhaps would have a keener sense of the history than I would — to the formation of when we expanded from the banks to investments, more than just the industry was at the table. Government was too, both federal and provincial, to talk about the right way of moving this whole model forward. That was the start of the Centre for the Financial Services OmbudsNetwork and so on. In fact, tools are available, if that was the choice we made. However, this is the choice we have made. Part of what the model does is push responsibility back on the financial institutions.
That is something that came up at our international conference. We are not unique, but we certainly have the best system in the world of internal company complaint resolution and complaint handling systems. It is something that many countries look at jealously because it means that when it comes to us, it has been through a process internally as opposed to coming straight off the street, as it were. In the vast majority of cases — the numbers are truly astounding as to what is solved before it comes to us — the best place is there.
Senator Angus: I am pleased to hear that. You have answered the question. If I put it in a more colloquial way, I would have said that after three weeks in office, you came with an understanding of what the job was. You did not throw up your hands and say, “Oh, my God. I am supposed to do A, but, because of B, my hands are tied.” You did not have that feeling?
Mr. Agnew: No.
Senator Angus: You do not have a wish list of things to change your terms of reference?
Mr. Agnew: Not my terms of reference: All organizations have a duty to constantly improve their services. I am happy to say that my predecessor, the board before my time, has placed a big focus on that. We are in the process of implementing some of the recommendations that came out from an exhaustive internal study of our own procedures and processes. We can do things better. I freely admit that. However, I ultimately believe that this is the best model for handling the kind of complaints that we do.
[Translation]
Ms. Boutin: As a field worker for nearly nine years now, I investigate each complaint and I have never experienced any interference or felt any pressure from banks or other member firms. We really do have free rein in terms of our investigative actions.
Senator Angus: We are happy to hear that.
[English]
The Chairman: To be fair, if you have any comments to make in terms of what additional powers you should have under this self-regulating model, we would appreciate that. You have had an opportunity to come in fresh and take a look at what your powers are. It is a little unfair to ask you what more you need, but we have asked all the self- regulatory agencies to give us their view as to what additional powers or resources they might want to have to deal with fundamental problems.
The advantage you have is that you are coming at it fresh. You do not have a vested interest in the existing model. We would welcome an aide-mémoire to that effect as we complete our deliberations here. We are trying to find out as best we can what does and does not work here, both from a statutory and self-regulation model. If you have any ideas, give them to us concisely and we will take them into consideration.
[Translation]
Senator Hervieux-Payette: Does your organization also cover all of the foreign banks operating in Canada?
[English]
Mr. Agnew: Yes, it does.
[Translation]
Senator Hervieux-Payette: No doubt you are aware that Quebec-based Norbourg Asset Management Inc. is under investigation. I do not wish to get into the legal details of this case, but the RCMP and the Autorité des marchés financiers are investigating this firm's dealings. The Office of the Superintendent of Financial Institutions will probably be getting involved as well. This company managed the pension fund of a number of Quebec physicians. We are talking here about people who are not necessarily experts in financial matters. This firm's auditors were required to follow strict rules. Norbourg released an annual report and produced audited financial statements and still, large sums of money cannot be accounted for. What would you do if a Norbourg client contacted you for help? I would imagine that all of this firm's clients are desperate and have lost virtually all of their savings. They must all be knocking on your door. These clients seem to have no idea of when or how they will get restitution. They placed their trust in these institutions but ultimately, there appears to be no way out of this mess. Many Quebeckers are facing personal bankruptcy. How can they be expected to trust our institutions, including the OBSI?
[English]
Mr. Agnew: Yes, you picked a complex one, but that is appropriate because people are finding themselves invested in complex products, whether it is Norberg or some of the hedge fund issues that have come up.
Our mandate does not extend to looking at matters that are before the courts. We will not stumble into that kind of thing because that adds an additional layer of confusion; nor are we a place for class action as well. We handle complaints from individuals about maladministration or problems that people are having with their accounts.
For instance, in the Portus case, we have let people know that until we know that there is financial damage to them, it is impossible for us to get involved. For people it is a nervous time, but until the investigations have run their course, we do not even know to what extent people need to be compensated for their losses.
That is ultimately what we do. In this litigious age, we do not do harm or damages. We compensate people for their losses. Until we know there are losses in some of these cases, we honestly cannot act.
When people come to us, it is a matter of communication and ensuring that you are not sending them off to so many places. Regulators, enforcement officials and all of us are getting better, but we could do a better job of making sure people know where to go for an answer. Sometimes it is not the answer they want, but at least they know where the authority is. We are not the authority on those things, but we know where to send people to get the news and the communication they deserve.
[Translation]
Senator Hervieux-Payette: So then, a person who would like to settle out of court with the brokerage firm under the OBSI's authority cannot call on your services to help resolve a problem with his or her broker. Is that what you are saying?
Ms. Boutin: If that person has gone to court?
Senator Hervieux-Payette: No, I am not talking about laying charges. This person bought shares on the advice of his or her broker who works for a brokerage firm that is associated with a particular bank. The client has nothing to do with Norbourg shares. She trusted her broker. She invested substantial savings and ultimately decided to settle matters with the brokerage firm which assumes responsibility for the transaction because it sold the product in the first place.
How can the situation between the client and the brokerage firm be mediated if today, the client no longer has enough income to survive?
[English]
Mr. Agnew: About half our files on the investment side are exactly that issue of suitability. That stems often from an issue around the documentation of the account, Know Your Client, KYC, forms, and so on. On our investment side, a large part of our work is exactly that issue: “I trusted my broker, I didn't understand.” These are the stories we hear. I can assure you right at this moment investigators are looking at those issues, talking to the client, talking to the investment adviser and trying to reconstruct the story.
If you look at the history of our organization, the files and so on, you will see many cases where those areas were the nub of the issue. I am happy to express some frustration that we are at the end of the parade in cleaning up these issues. You are absolutely right; people are confronted sometimes with choices and products that are too complex for them to understand. Much of this is best not solved by the rear process, but at the front-end process of consumer education, of the kind of information that is shared with the consumer, not just education. There is a responsibility for all of us — there has to be — for making ourselves aware, making choices and saying no when we do not understand, or saying we do not understand when we do not understand.
At the same time, there is also an obligation. Ms. Boutin talked about it before. We cannot oversimplify the complex, but we need to be plain and concise. It is getting better, but it is not there yet. One issue around hedge funds is: Who really does understand those products? Not only do the clients sometimes not understand them, but sometimes the people who are selling them do not understand. That is a big problem and that is something we will deal with.
Senator Moore: Mr. Agnew, with regard to the independence of your office, you mentioned that your board of directors is now comprised of seven independents and three representing industry, so a total of 10. Where do those seven independents come from and who appoints them?
Mr. Agnew: The nominating committee of the board appoints them. They are self-generating, as it were. Again, I am not the historian, but in the last while, for instance, we have welcomed David Crombie to the board, who is new. Before that, Gisèle Côté-Harper would have been the last one a couple of years ago. As they retire or move on, they have a nominations process.
Senator Moore: The three from industry, are they from the banks, investment dealers, or where are they from?
Mr. Agnew: One is from a bank; one is a member of the Investment Dealer's Association of Canada and one represents the mutual fund dealers and IFIC. Those three main industry groups comprise our membership.
The Chairman: On this point, Mr. Agnew, I looked at the statement you gave us, the 2004 annual report. In your report, the composition of the board was eight independent members and six members from the industry. Will that change this year?
Mr. Agnew: Yes, as of September 19 the board changed.
The Chairman: That is interesting: that was after they presented their briefs to us. Is that change as a result of our concerns, or is this something that grew spontaneously from the mind of the banking industry? We are interested in reform, however it happens.
Mr. Agnew: Genesis is a mysterious thing. If you look at the history of the organization, there has been a constant change in that ratio, which has been more and more independent to industry.
The Chairman: Mr. Agnew, this committee welcomes the change, the reform and the response to some of our concerns. You can thank them on our behalf.
The Chairman: Senator Moore, thank you for bringing that to our attention.
Senator Moore: On the bottom of the second page of your comments, with regard to the case load, what would be the average number of cases that you would handle in a year, and what would be the percentage breakdown of complaints dealing with bank matters and complaints dealing with investment matters?
Mr. Agnew: In response to the last question, the breakdown is about 50/50. It has been only three years for the bulk of investments. We had some investments through the banks, but the bulk of the investment files came in within the last three years when we more consciously changed our mandate. Last year we had, I believe, 334 cases that we took on as investigated.
Looking at some numbers for this year, we will probably hit about that number this time. The ratio of 50/50 is staying about the same in terms of investment and banking services.
We have changed the way that we record phone calls that come in because we get many inquiry calls as well as complaint calls. We are just shy of 2,000 a quarter, so probably about 7,500 phone calls a year. Increasingly, as in everywhere else in the world, people are contacting us more and more by e-mail.
Senator Moore: With respect to public access, what is the physical address of your office? Do you have an 800 number and what is your website? Can you put that on record here?
Mr. Agnew: Our web side is www.obsi.ca. Not many people walk into our office. We are at 20 Toronto Street, in Toronto.
Senator Moore: Do you have an 800 number that you can put on record? How do people reach you?
Ms. Boutin: The toll-free number is 1-888-451-4519. We have a toll-free fax number which is 1-888-422-2865. We also have a toll-free number in Montreal, which is 1-888-848-8815. The toll-free fax number is 1-800-939-8803. I have a good memory, I think.
Senator Moore: I want to get that information on record so the public can know how to contact you.
The Chairman: Our next questioner is Senator Goldstein. I wish to make a special comment about Senator Goldstein. He was sworn in yesterday to the Senate. Immediately after he was sworn in, he is attending a committee. That is prompt and efficient service. We are delighted to have him here. To those people in this great country of ours who want to become a senator, one way to become a senator is to become a counsellor and adviser to this committee. Senator Goldstein is one of Canada's outstanding experts in bankruptcy. We will call on his expertise as we deal with the legislation that he advised us on some time ago in our study.
We are delighted that he is here today. I am sure that he will make a huge contribution not only to this committee as and when he attends it, but also to the Senate at large. We await with great interest his first question.
Senator Angus: Before Senator Goldstein begins, Mr. Chairman, to show him it is not as easy as all that, I have a small supplementary to Senator Moore's question to Madam Boutin.
[Translation]
You mentioned a telephone number in Montreal. Do you also have an office in Montreal?
Ms. Boutin: Not a formal office. We have a mailing address, but we do meet with clients at our offices on McGill College Street in Montreal.
Senator Angus: But you work in Toronto?
Ms. Boutin: No, I work in Montreal.
Senator Angus: Fine, because we do not want to lose our best people to Toronto.
Ms. Boutin: I am based in Montreal.
Senator Angus: I see.
[English]
Senator Goldstein: That was generous, chair. Thank you for your comments. I appreciate that.
For the record, I want to indicate that the firm from which I resigned as a partner shortly before I had the honour of being named to the Senate represents the receiver and creditors with respect to some of the matters that were mentioned today. I want that information on the record lest anyone be concerned about a conflict of interest. I am no longer a partner in that firm, having resigned because of my nomination to the Senate.
I was pleased to hear the testimony today and I look forward to reading your report, which appears to indicate how active you have been. I understand that your interventions in respect of specific complaints by specific people are voluntary. A person who feels aggrieved comes to you and asks you to intervene in connection with a matter that you consider to be within your terms of reference. In so doing, does that person have to renounce to the possibility of going to court if he or she does not obtain satisfaction? Supplemental to that, do corporations have access to you, aside from individuals. For example, does a small, family investment company have access to your services?
Mr. Agnew: It is an honour to be the subject of your first question, senator. I wonder whether witnesses could aspire to become senators.
The Chairman: Mr. Agnew, by all means: If Bob Rae, former Premier of the Province of Ontario, had taken a different position in life he might be a senator as well.
Senator Goldstein: I do not think Senator Angus heard you say that.
The Chairman: He understands us full well and better than most.
Mr. Agnew: In response briefly, you do not renounce your right to seek a legal solution. We ask only that you and the financial institution sign a piece of paper such that our proceedings, letters and investigation are not part of that proceeding so that we are able to preserve the confidential, informal and non-legal approach. Our limit for compensation is $350,000 and our mandate is individuals and small businesses.
In response to your second question, I would say instinctively no, unless it was a small business operation, although we would have to look at it first.
[Translation]
Senator Plamondon: I would like to welcome Deputy Ombudsman Boutin whom I have met on several previous occasions.
The problem I have with the ombudsman system is that people will not go so far as to file a complaint with the OBSI over hours of operation or over their inability to secure a small loan because a bank does not provide that service.
Another problem is that clients cannot easily cash cheques because of a bank's hours of operation. We are seeing more and more Money Marts and payday advance operations spring up. They claim to fill a need in the market. Some credit union representatives have told us that they are prepared to extend their hours to compensate for the banks' hours of operations. The issue is not merely hours of operation, but access to basic services.
I wonder why we should leave this up to the market. What recommendations can you make to the banks to get them to extend their hours of operations, to agree more willingly to cash cheques, even if these are not federal government cheques?
We saw in the newspapers that Alberta would have problems with the $400 cheques because not everybody will be able to cash a cheque that is not a federal government cheque.
I heard that there is no charge in Quebec for cashing a government cheque, unless it is a cheque issued by another province.
To my mind, the basic services banks are supposed to provide to their clients are being abandoned. Do you intend to carry out your mandate in a more pro-active manner? Do you plan to recommend to the financial institutions that you represent or that finance your activities that they should provide services to all Canadians?
[English]
The Chairman: I will add a comment on a personal experience from the last 10 days. I received a cheque for $98 that was a refund from the government. I took the cheque to one of my banks and was told that I could not cash it. Rather, I had to deposit the cheque to my account and then withdraw the money from that account. In the preamble to the question, the honourable senator from Quebec was not correct. I was told by my bank that they no longer deal with such cheques and that they must be deposited and then receipted. Rather than take the cheque, stamp it and give me $98, I had to deposit the cheque to my account and prepare a withdrawal slip so that I could have the cash. Instead of one transaction, there were two or three transactions. I was told that this is the only way under the banking system in which the branch of the bank is able to keep a paper trail. This practice raises a question. I also discovered from a couple of pensioners that when they received cheques from their husbands, from whom they were separated, they wanted to deposit the cheques to their respective accounts but were not allowed to do so. It is my opinion that something has gone wrong with the bank clearance system for cheques.
Senator Angus: This practice is why the whole industry of payday loans has grown.
The Chairman: I raise this practice as a problem. Senator Plamondon has touched upon it from a Quebec perspective and I now add to it from an Ontario perspective. As Senator Angus mentioned, we now have the whole spectre of a $5- billion industry emerging because people cannot clear cheques. I assumed somehow that the banking system was clearing cheques in a central area and that there was still a paper trail, which is not as effective as a digital transfer. This practice leaves people who do not have access to computers at a disadvantage. I was shocked when I discovered that, although I thought I was knowledgeable about what was going on in the financial sector. Could you respond to that?
Senator Plamondon: Mr. Chair, you should find out whether you are paying fees for such a withdrawal.
The Chairman: I will check when I receive my statement at the end of the month.
Senator Goldstein: In connection with both those questions, if I may, in particular with Senator Plamondon's question and the two observations you heard, some people in Canada are unable to open bank accounts. For example, banks will not allow those who have been in bankruptcy to open accounts if the bankruptcy has not been discharged or, if it has been discharged, banks will not allow those who, for a variety of reasons, have no credit availability. If these people cannot open accounts, how can they cash government cheques they receive?
Senator Plamondon: They go to a payday loan place that takes 20 per cent.
The Chairman: Mr. Agnew, perhaps you might respond to this with the short answer now if you have an answer to all these questions in respect of the chequing system. However, we would like to have an opinion in writing on this matter before we complete our report. This issue is of great concern to a number of senators: that there is such an inadequacy or insufficiency in the cheque-clearing system.
Mr. Agnew: I too have learned a lot, sometimes to my surprise, about the inner workings, rules and regulations attendant to the cheque-clearing system and the recourse available to banks and consumers.
This problem is primarily the kind of meat that the Financial Consumer Agency of Canada, FCAC, deals with because, at the broader level, we are talking about a market conduct issue and a regulatory issue about what the banks are and are not required to do. That is not in our territory. We deal with individual complaints and we are happy to look at an individual complaint around an issue.
On the issue the senator raised appropriately about feeding back to the bank's advice, that is an important part of our role because we see a street level view of the system. We do not operate at the high policy or regulatory level. We see what it means for individuals when they try to grapple with those rules and regulations — and sometimes the documentation and practices. We are in constant contact on some of these issues with the FCAC because the agency is able to enforce some of the issues around the cheque-clearing system that we are not able to enforce. What we are able to do, depending on the circumstances, is pursue an individual's claim.
The Chairman: We may take another hour or so with the other officials to deal with this issue because it is something we have probed and something that is of concern to us. I am looking at the clock and senators still have questions. I think you have opened up a door that we want to close here and we may call other witnesses to get additional evidence on this.
[Translation]
Senator Plamondon: When you receive a complaint of this nature, do you agree to investigate it or do you forward it to the AIF?
You maintain that you do not investigate such matters and that they are the responsibility of the AIF. Do you deal with complaints of this nature in your report?
Ms. Boutin: We do not investigate this particular type of complaint. We refer it to another agency because we feel that it falls outside our mandate.
[English]
Senator Moore: What is your fiscal year? Is it the calendar year or is it March 31?
Mr. Agnew: It is October 31.
The Chairman: The Government of Canada now has one-stop shopping called Service Canada. One concern we have is one-stop shopping. We have heard evidence that you are moving toward that. How far are you advanced to one-stop shopping so we do not break the pillars but have one stop, one number and then that reference service refers the complainant to the particular pillar that can solve the problem before it comes to you?
Mr. Agnew: It is a work in progress but we are getting closer. By early in the new year, both the centre as well as the Canadian Life and Health Insurance OmbudService will move in next door. We will share facilities.
It is an important issue. I will give you an example of the kinds of things we are trying to do. We had a complaint the other day, a consumer who had issues with both segregated funds, which are from the insurance industry, and mutual funds, which fall into our mandate. We approached the ombudsman service for the life and health insurance and suggested we do this together. That way, she sees a seamless investigation, the company receives a seamless investigation and we can move this thing quicker, rather than saying, deal with that and then deal with us.
The Chairman: We hope we can move on that quickly because it has obsessed us throughout the study.
Again, we apologize for the brevity of our questions. You can see that there is a healthy appetite among senators to continue this probing analysis. We may well call other witnesses one more time before we complete our study because this chequing issue is of major concern to us.
Mr. Agnew: At any time, and if I can be of any assistance, please do not hesitate.
The Chairman: I appreciate it and welcome you to your new job. You have emerged bruised but not bloody.
We will now welcome our next panel as we return to our study of income trusts and flow-through corporations, and the impact they have on the domestic and international financial system. I apologize for the timeframe. I hope you can collapse your presentation so we can spend more time on questions and answers.
We are about to commence our study of flow-through corporations and the problem with respect to income trusts as it relates to the tax system generally. This study is in relation to the minister's statement of September, his follow-up statement later in the month and his consultation paper. We are here to take a snapshot in the consultation process of the questions that the government has raised with respect to the effectiveness, transparency and fairness of the tax system as it applies to these new entities.
We are delighted to have Jack Mintz, president and CEO of the C.D. Howe Institute. We have been told that Michael Brooks of the Real Property Association of Canada has been tied up in a plane and cannot be here; is that correct?
Chris Conway, Manager, Government Relations, Real Property Association of Canada, as an individual: That is correct. His flight was delayed this morning due to the inclement weather.
The Chairman: We are delighted you have been able to make it. We thank both you and Mr. Mintz for coming on such short notice. We anxiously await your testimony. This issue is of great concern not only to the government, but to members of this committee and also to the corporate and investment communities, as well as to investors across the country. Please let us have the benefit of your views on what appears to be a contentious issue.
Jack Mintz, President and Chief Executive Officer, C.D. Howe Institute, as an individual: Thank you very much; it is a pleasure to come before this committee. It is one of my favourite ones to appear before, given the excellence of the discussion that usually happens here. I will be brief to give as much time as possible for people to ask questions. Some of you probably know some of the things I have already written related to this topic, so I will give a few comments that I think are important at this stage.
Three proposals have been made to deal with income trusts and other flow-through entities. The first is to deny an interest deduction and reclassify the amount as a dividend distribution.
The second is to tax flow-through entities as corporations. They cannot be taxed as corporations because they are not corporations, but one could try to tax them on a similar basis, except perhaps for family and personal trusts.
The third is to improve the integration of corporate and personal income taxes on dividends so that investors will be indifferent between ownership of corporate shares that could have high dividend yields, and income trusts or limited partnership units. The existing system of shareholder taxation is non-neutral. It favours flow-through entities over corporate status. The system taxes dividends more than capital gains. For large corporations, corporate and personal taxes on dividends is greater than taxes paid on interest, rents, royalties and other deductible charges paid by corporations as income to investors. In my view, the best way to address non-neutralities in the tax system is to fix the non-neutralities and not create new ones to fix the old ones.
Let me say a few words about efficiency in capital markets, since I am sure you have had many witnesses talk about that.
The Chairman: Take your time on this issue, please, because we have not heard a lot of evidence about this.
Mr. Mintz: With respect to economic efficiency, which economists like to think about, we talk about it in terms of having the best allocation of resources to achieve maximal gains in GDP or whatever relevant measure one wants to use in terms of how well people do in their standard of living.
With respect to efficiency, capital markets and income trusts, three issues come up. The first one is the integration of corporate and personal taxes. The primary reason that many income trusts have developed is that dividends have been taxed more than other sources of income, and income trust has been a do-it-yourself type of mechanism in markets to lower the cost of capital firms. This significant efficiency gain to the economy is because we have seen a new form of financing that allows businesses to expand their capital investments. That is a positive gain to the Canadian economy, and one should not forget that in terms of evaluation of this issue.
The second efficiency issue arises with respect to choice of business organization. If the tax system is not neutral and favours one type of business organization over another, then people might undertake a type of business organization for tax reasons when that business structure is not what they wanted in the first place. That practice can be an efficiency loss to markets to the extent that people are distorted in their best economic choices in order to take advantage of certain provisions in the tax system.
The third efficiency issue arises with competitiveness of different types of firms. Some companies can put assets more easily into income trusts; others cannot. They might be competing in the same market. This situation gives rise to whether some businesses have a tax advantage when competing with other businesses, and that creates an inefficiency as well in markets.
The big question is whether income trusts create more efficiency or less efficiency. I have described a positive gain with respect to lower costs of capital, and some economic efficiency losses are associated with the latter two. I have to disappoint you in that no one has done that kind of study to see whether one is bigger than the other.
The Chairman: We are not disappointed. Yesterday, we heard the advocates of the income-trust school of thought suggest they will do a productivity study. We welcome that because, as you know, we have done a productivity study ourselves, and we are woefully concerned about the lack of productivity or productivity gains in the country. This analysis is crucial.
Mr. Mintz: The analysis is crucial, and no one has done it. Some work has been done in the United States about choice of business organizations, which one can handle as part of an overall evaluation. Let me tell you that the solution to the problem does not require that kind of detailed, quantitative work, because the best way of maximizing efficiency in the economy is to redesign the tax system to ensure that it is neutral between different types of business organizations.
The first solution, which denies interest deduction, would be a way of saying, “We will kill income trusts, at least those that depend on that.” This solution is difficult to do in a technical way, because it will not affect limited partnerships and it is not clear how you deny the interest deduction in all types of trust structures. Even if you did, the solution does not address the non-neutrality arising from the lack of proper integration of corporate and personal taxes and the discriminatory taxation of dividends that currently exists in the system. I would dismiss that as a proper solution to the issue.
The solution of saying we should tax trusts as corporations and limited partnerships, corporations or something similar again has difficult technical issues, but the solution also does not address the integration issue. Income trusts developed in the first place because of the discriminatory taxation of dividends. In these days of corporate governance, one has to raise the question about whether dividends should be so highly taxed.
The best solution, in my view, to maximize efficiency and productivity in the economy is to improve the integration of corporate and personal taxes. This solution could be achieved by lowering general corporate income tax rates to the small business level, as one approach — in other words, have a 20-per-cent corporate income tax rate in Canada. By the way, that is not out of line with a number of other countries in the world. Therefore, the dividend tax credit would offset roughly the corporate rate because the current dividend tax credit is based on the small business tax rate.
The other approach is to raise the dividend tax credit on public corporate shares and for high tax corporate income and private corporations to match corporate taxes paid, which would achieve full integration. In this way, people will be indifferent between the corporate form of organization, income trusts and partnerships. It will not matter. The tax system will not drive decisions with respect to organization.
The approach also requires what I would call a refundable dividend tax credit — in other words, a tax credit that is paid to investors, including owners of tax exempt entities, which includes pensions and RSP accounts. The refundable dividend tax credit in a sense ensures that pension plans themselves would also be indifferent between the corporate structure and income trust structures as well.
Not only would this approach deal with the income trust issue, but it would also deal with other problems in the system with respect to integration of corporate and personal taxes. For example, it would bring dividend taxes down to the capital gains tax rate. Right now, many corporations strip out income to shareholders in the form of capital gains rather than dividends, and that creates distortions in the market. The approach will also bring equivalency between dividends and other forms of income paid to employees of the organization or people that receive rents, royalties or whatever. In other words, the approach achieves much greater efficiency in capital markets through the system.
In my view, there is only one way to go, and that is to address the whole issue of shareholder taxation. This approach benefits government in that it will not penalize existing trusts. It would also take away the tax incentive that currently operates to create trusts in order to undo the discriminatory taxation of dividends. The one issue with this approach, and this is something I will evaluate in the future, is the revenue costs associated with this type of move. That issue must be carefully evaluated to understand its implications. I will work on it over the next month or two.
The Chairman: This question is key. You heard the evidence yesterday. I do not mean to get ahead of our deputy chairman, as I am sure he would raise this issue, but we were told there was a disproportionate impact on revenue loss, in the order of $300 million.
Mr. Mintz: I have already published a paper on the costs of the income trust. If you include provincial taxes, which is important, my numbers are similar to those of the Department of Finance right now. That revenue cost is not the one I am talking about. The question is, what are the revenue costs of these kinds of changes? The issue is not just an income trust issue; it is trying to get more efficiency in capital markets.
The Chairman: Do you have any sense of the magnitude of that?
Mr. Mintz: One estimate we have done at the institute with respect to taxable accounts is increasing the dividend tax credit to make it roughly parallel with capital gains, which would also deal with the income trust issue. It would cost in the order of $1 billion a year. That figure does not take into account dynamic effects and some other things. It is just a static measure of the costs.
I believe you may be interested in this comment, Senator Angus, having read this morning what you said.
The latest decision by the Department of Finance to forgo advance rulings for trusts has created considerable uncertainty in the business community. It could result in holding up investments for a lengthy time, or lead to a rush for new trusts before the changes take place, with investors assuming that the government will provide relief for existing trusts.
The department has now short-circuited its consultation process. Even waiting six months for the February budget, which will not likely pass before the next election — although that will depend upon when the next election is — creates harm to financial markets as investors and businesses are not sure what rules may come to roost. Their greatest fear is retroactivity in which new rules will affect existing business trusts, which would arise with the first two solutions mentioned above: denying interest deduction and taxing trusts as corporations. That fear is now a cloud over financial markets that must be resolved soon.
The Chairman: I am sure Senator Angus was delighted to hear you make that final comment.
Mr. Brooks has now arrived. We should hear from him before we proceed, and then we can question all the witnesses.
Mr. Brooks, welcome. I understand you were delayed in the rain. Please keep your presentation short so that we can get to questions and answers.
Michael Brooks, Executive Director, Real Property Association of Canada: The Real Property Association of Canada was formerly called the Canadian Institute of Public and Private Real Estate Companies, CIPPREC. We changed our name in March of this year. We represent most of the public real estate companies listed on the Toronto Stock Exchange, including real estate investment trusts, REITs. We also have as members real estate corporations, pension funds, life companies, banks and large private owners. We see ourselves as both a property markets lobby group and a capital markets group in real estate.
My colleague, Chris Conway, is our director of government regulations.
I want to make 10 points about real estate investment trusts. I am sure that you have heard many of the general arguments, and I am sure that you will hear more from my colleagues with income trusts generally, so I would like to restrict my comments to real estate investment trusts.
Real estate investment trusts have existed in Canada since about 1994. A deliberate amendment was made to the Income Tax Act to allow former real estate mutual funds to convert. You all remember how bad the recession was in the early 1990s. The problem with real estate mutual funds was that there was no liquidity, no one on the buy side, so they could not fund redemptions from mutual fund holders.
We have enjoyed a good relationship with the Department of Finance since that time. The department has given us two specific amendments over the years; one to allow short selling of trust units and corporate shares, and the second to allow executives' unit options to have the same treatment as share purchase options.
REITs have been specifically enabled in Canada since 1994. REITs have existed in the U.S. since 1960. They had their forty-fifth birthday this year. Their market is 15 to 20 times bigger than the Canadian REIT market, which is about $22 billion today. REITs are becoming a global phenomenon. Many Asian countries and most European countries now have REITs. The most recent is Spain. Italy is also recent. Germany and the United Kingdom are in the process of considering REIT legislation and are both favourably disposed to REITs. Throughout the world, REITs are a common and growing phenomenon for investors.
Canada's REITs are competitive with United States REITs. It is important to have cross-border synergy in our capital markets. We do not want their real estate companies being stronger than our real estate companies. It is important to maintain parity with the United States and their legislative structure.
We are a small and maturing segment. We have not experienced the explosive growth that the business trusts have recently, for example. If anything, we are flattening out. We have had one initial public offering, IPO, in the last year, that being Sunrise REIT. While our REITs continue to grow modestly and do well, we do not see ourselves continuing double-digit growth with one, two or more IPOs a year. We are a small and maturing segment.
REITs own passive investments. REITs own income-producing real estate. Their businesses are renting out space. It could be for a day, in the case of a hotel; it could be for a month, in the case of a nursing home, six months or a year. It could be five or ten years in the case of office space.
In relation to that, one can own income-producing real estate personally. You do not need a corporate vehicle to own real estate. Technically, Michael Brooks could own First Canadian Place. Indeed, many investors do own personally. Many German investors who have come to Canada in past years own real estate personally, on title as a co- tenant. In fact, there are many titles today with German names on them that people own directly. It is a passive investment; you do not need a corporation to own it.
REITs allow a greater amount of capital and institutional investment to flow into real estate. We have a strong and stable capitalized public real estate market now with real estate investment trusts. A lot of money flows into hotels, nursing homes, new office buildings, new industrial parks and new multi-family developments. The amount of money that is available to maintain and enhance the existing stock is terrific. It is much better than we had 15 or 20 years ago.
“REITs allow small investors to own big ticket real estate on the same basis as wealthy investors.” I borrowed this quote from the National Association of Real Estate Investment Trusts, NAREIT, the United States trade association for REITs. In the United States, they have a flow-through corporate vehicle, whereas we do not have that here. That is why they say they should be allowed flow-through corporate status in the United States although no one else in the United States has flow-through corporate treatment. They reason that it allows small investors to own big ticket real estate on the same basis as a wealthy person who can do tax structuring and hire lawyers and accountants and so on.
I am sure you have heard a lot about yield. REITs in Canada have generated yields ranging from 6 per cent to 12 per cent over the 10-plus years that they have existed here. There have been no REIT failures to date, although Legacy Hotels REIT, which owns most of the downtown hotels in major cities in Canada, including Chateau Laurier, Chateau Frontenac, Royal York Hotel and others of that quality, were forced to suspend distributions during the SARS crisis, but they have since resumed distribution. There is a stable and dependable yield from this vehicle.
With regard to security, particularly after the dotcom crash in 2001, we saw a resurgence of interest in bricks and mortar as people turned away from dotcoms. The investment community typically views real estate as a safe investment option with long life and the ability to produce income. With REITs, small investors receive professional management, dependability and stable distributions.
On the liquidity of REITs, which ties back to the first point about them having a former life at mutual fund trusts, REIT units trade on major stock exchanges and offer investors liquidity they cannot get if they own it personally. While Michael Brooks could personally own First Canadian Place, if I had to put it on the market at a time when the market was not as hot as it is now, it might take a while to sell. However, REIT units trade every day. I can have a direct investment in real estate, but I can sell it in a few minutes if I need to, which makes it liquid.
With regard to the white paper that the Department of Finance has circulated, our preferred solution is to lower the dividend tax regime so it is more competitive to the capital gains rate. We have members who pay dividends. First Capital Realty is a corporate real estate company that pays a dividend of over 5 per cent. Brookfield, a well-known large company with assets in New York City, pays a dividend. It is our view that all vehicles should be competitive, and we think the best way to achieve that would be to lower the dividend tax rate.
Senator Angus: The chair said that I would be glad to hear the last comment of Mr. Mintz. It is important to know that we are all glad to hear that comment because the purpose of these hearings is to deal with our concern about uncertainty and instability as a result of the sensitivity of the capital markets to unexpected announcements by government, for example.
In this regard, I want to make it clear that I have no personal interests at all. This is a collective interest. In conformity with our conflict of interest code, I wish to remind colleagues and everyone else listening that I have previously declared that I have reasonable grounds to believe that I might have an indirect interest in these particular hearings through my partnership at Stikeman Elliott LLP. All of this has been duly filed. It is our obligation, Senator Goldstein. Under the new code, a specific procedure has been prescribed. With respect to your earlier comment, if you like, I am on the Senate committee. It is a bit of a green field for us all at the moment, but we do have the forms here.
Having said that, I would like to thank all of you for being here. Notwithstanding the weather, you made it, Mr. Brooks. That is great. I thought you were clear and succinct. Your colleague, Mr. Conway, was here yesterday, so I know you were well briefed.
Mr. Mintz, I would like to focus on something my father used to say to me, and it was simple. He said, “David, never make a business decision purely for tax reasons.” As I listened to you, I had the sense you were telling us that; is that correct?
Mr. Mintz: Some people make decisions based on tax reasons, and taxes can matter at the margin in terms of what people do. In fact, we do it in our daily lives. If the government puts a high tax on wine, for example, and taxes it a lot more than beer, it will drive some people to drink more beer relative to wine. It is not an unusual thing, and economists study what taxes do to decisions all the time.
In the case of income trusts — I will declare my conflict of interest, which is that I am on three corporate boards — I have seen deals largely driven because of tax reasons and not necessarily because it was the business structure we wanted.
On the other hand, let me emphasize that in a number of situations of income trusts, the structure is fine. It works well for the business. In fact, the real estate investment trusts that have developed in many countries and in Canada over the years was a reaction to giving smaller investors an opportunity to invest in these things. It is the same thing with royalty trusts.
It is not all bad in that sense. Sometimes they are good business structures to have, and those should be appreciated. There are other cases where people have put assets into structures, weighing the economic costs of having that particular structure with the tax efficiency gains of doing it. They do it if they feel the latter is bigger than the former.
Senator Angus: It is elementary and does not necessarily have to do with the current issue of the moratorium on advance ruling, but it does have to do with the issue that the government is clearly and correctly concerned with having an appropriate structure for our business organizations.
I believe you said that without a level playing field within the tax system and an integration of the personal- corporate regimes, there is a danger that decisions will be made purely for tax reasons when good business sense would have preferred another decision.
Having said that, you went through the various options out there. I am sure that all the stakeholders will make their submissions during the period between now and December 31. Let us hope our political masters will come up with a good solution.
On reducing the dividend tax and, therefore, the tax credit, I understand that in the U.S. the tax on dividends is 15 per cent and in Canada it is 31 per cent.
Mr. Mintz: Yes, it is 31 or 32 per cent. You have to average it across the provinces, though.
Senator Angus: The tax on dividends is more than double in Canada.
Mr. Mintz: You have to be careful. We have a lower corporate income tax rate than the United States, but the combined corporate and personal tax on dividends, assuming the corporation pays tax fully — the corporate income tax rate is now almost 35 per cent in Canada — is about 56 per cent on dividends for the high-income shareholders. That is when you put the two together.
When you look at interest and royalties, if an individual receives them, the average top rate in Canada for those other things is 46 per cent. There is about a 10-point difference. Any time you have those kinds of major differences in the system, people will try to figure out ways of avoiding paying dividends and paying something else that will be taxed at a lower rate. Regarding the income trust distributions, to the extent that they are a return on capital, much of the distributions are interest, and that is taxed at 46 per cent because people will receive the distributions through a trust. They have to identify what are dividends and capital gains. The interest, which is a part of that, will be taxed at 46 per cent.
Senator Angus: The compounding issue and, therefore, the problem, is that it is most attractive when it is interest and income as such to be invested in by income-tax-exempt institutions such as pension funds and RRSPs. That is one of our concerns because whether it is $9 billion or $2 billion, or whatever the meltdown is, it is a tremendous amount of disappeared money in a short period of time. We want to make sure that this is realized. We noticed another moratorium announced by the government on its previously declared intention to reduce corporate taxes. Do you have any comment on that, sir?
Mr. Mintz: You can imagine my comment on that.
Senator Angus: I would like to hear it. All the people in CPAC-land are sitting on the edge of their chairs.
Mr. Mintz: I think many people have heard me many times on the corporate tax reductions.
As you know, we put out our tax competitiveness report in the C.D. Howe Institute last week.
Senator Angus: You unleashed the tiger.
Mr. Mintz: We had done something original, which was to rank 36 countries in terms of what we call the “effective tax rate on capital.” The rate takes into account corporate income taxes, capital taxes, sales taxes and capital inputs for Canada. It also compares it to other countries that have taxes and charges that are related to capital investments.
Canada does not look good from an international framework. We have the second highest effective tax rate on capital. The only country higher is China, and that is because China has a value-added tax on machinery. They negotiate it with some investors, so that might drop China way down if the Chinese authorities give relief.
However, we have a high tax on capital investments, and we look uncompetitive relative to the world.
Those corporate rate reductions are not only important for productivity and capital investment but would also help vis-à-vis the income trust issue. Bringing the corporate income tax rate down gives a little less incentive and a little less of a gap associated with dividends relative to other sources of income.
The Chairman: We are talking about one line, and that is our competitiveness with respect to our tax structure with the group that you presented.
However, have you done a corollary of the foreign direct investment, FDI, analysis by the World Bank? In other words, have you analyzed what happens if there is a dislocation between one economy as opposed to another based on tax or other purposes, and it is not just tax because many other issues are in play? Taking that alone, have you done a correlation between that and the FDI to see what is the relationship of FDI?
It is my understanding, although this is anecdotal, that the foreign directed investment over the last few years in Canada has had a dramatic increase for many reasons so that we are not suffering dramatically as a result. We both agree that we should be more productive and more competitive but there is the other matter of FDI. Where are we on that?
Mr. Mintz: We did not rank competitiveness that would include many factors. I agree with you that one wants to look at a number of areas such as the size of the market, infrastructure, education, et cetera. Last year, we put out a paper on foreign direct investment. I have to correct you on your data on foreign direct investment. Canada had a shoot-up of foreign direct investment in the latter part of the 1990s but so did every other country, if you look at the numbers. In fact, our share of worldwide foreign direct investment declined during that period, even though we had increased foreign direct investment at that point. That investment has been declining since 2001 and not increasing. It is quite the opposite.
Senator Angus: Anecdotes are not always accurate.
Mr. Mintz: This information is derived from data.
The Chairman: What is the relationship between the two? Is there a direct relationship?
Mr. Mintz: That goes to my second comment. A huge number of good economic studies have looked at how foreign direct investment is influenced by various factors. There are important factors to be considered. One, without question, is the size of the market, which Canada does not have but China and the U.S. have. That is an important factor in explaining foreign direct investment. As well, political stability is important. Canada has had that and it has been important, but many other countries in the industrialized world also benefit from political stability so Canada does not have a particular advantage there. Education is another factor that shows up as important at times. The tax also ends up being important in affecting foreign direct investment. An outstanding study was done a couple of years ago by two Dutch economists using a new technique called “meta-analysis,” in which many different studies are combined using the factors to determine the overall impact of taxes on foreign direct investment, for example, which was the focus of this study. They found that if you have a reduction of 1 percentage point in the effective tax rates on capital, which in Canada is 39 per cent, that would cause foreign direct investment to rise by 3.3 per cent, which is a great impact. This result is the kind that can be realized from looking at many studies available in the literature, and that is significant.
The Chairman: We will look precisely at that question when we do our study on the interprovincial barriers. Canadians do not realize that we do not have a domestic marketplace. It shrinks because of its fragmentation and inefficiencies.
[Translation]
Senator Hervieux-Payette: I speak French because some of the people tuning in are French-speaking. Quebecers and Francophones across Canada follow the proceedings of the Standing Senate Committee on Banking, Trade and Commerce with great interest.
I want to come back to the comments made yesterday by the witnesses. Mention was made of productivity. I asked a question about the history of income trusts. Income trusts first came onto the scene in the 1980s when interest rates were hovering at 10 per cent or higher. In the case of major investment projects, interest rates clearly had an impact on costs and especially on long-term investments, whether in the field of real estate, energy infrastructures such as dams, and so forth.
Today, things are different. Interest rates are below 3 per cent. Income trusts continue to serve as an investment vehicle. One of the witnesses yesterday said he used this asset acquisition strategy. Talks today centre mainly on traditional business conversion. No major investments are being made. Businesses legally incorporated under Canadian law are being converted into trusts.
When that happens, productivity stagnates. No new entity is created. A shareholder merely becomes a trust unit holder. The only thing that changes is the taxation component.
Two possible suggestions were put forward to resolve this dilemma: the one you proposed, namely that the tax structure either be rendered neutral, or in the case of conversions that do not generate any productivity or create new jobs, that directives continue to be issued to income trust.
For example, with respect to the innovation tax credit, a determination is made as to who is eligible for this type of ownership and investment and for a lower rate of taxation.
You say that this will cost in the order of $1 billion or thereabouts. However, we must not lose sight of the reason why taxes are collected in the first place. Tax dollars pay for public services, for equalization, for health care, a chronically underfunded sector, and for post-secondary education.
There are two schools of thought where taxation is concerned. Proponents of the U.S. way of thinking believe that fewer taxes make for the best solution. We saw how this theory failed in New Orleans where a lack of infrastructure posed a problem. We must not simplify things either.
Should our first step not be to determine the purpose of income trusts, why this vehicle was authorized and why we have neglected to study the issue for nearly 20 years?
No one at the finance department appeared concerned. Officials there were confident that this vehicle helped the economy by generating investments. All business people in other sectors, such as Telecom, now want to use this vehicle strictly as a means of reducing taxes for investors.
Summing up, to my way of thinking, our role as members of a parliamentary committee is to determine which approach best serves Canadians.
Does the solution lie in collecting less money from corporations and treating corporations and trusts equally? Or, should we determine what purpose this vehicle really serves and advise eligible individuals that they must satisfy very specific criteria? At the very least, the situation has to be clarified.
Should we aim for a neutral tax? Everyone seems to think that this is the best solution, but I think we need to be realistic. Earlier, you talked about lowering the corporate tax rate. I am realistic in that this will not happen overnight. Right now, the Canadian government needs these tax dollars to fund all of its programs, such as the child care program which carries a price tag of several billion dollars. I do not think the government is ready to give up this tax revenue.
What then is the ideal formula to prevent any erosion of productivity associated with this tax structure?
[English]
Mr. Mintz: Thank you for your question, senator. I will try to deal with four aspects of it. I hope that I am able to explain some things that will pick up on your comments. When a company shifts from corporate to income structure, the argument is that it is merely a change in name and perhaps a different structure but it does not create jobs or efficiency. I would disagree with that statement.
Senator Hervieux-Payette: Would it create more jobs?
Mr. Mintz: Many businesses, by putting some assets into an income trust, have been able to extract value from those assets. That money has been used to initially reduce debt in the company, which gives the company better cash flow and less risk of bankruptcy. The businesses reduce their cost of capital in that way. They have also used the money for investments in other things. We have to remember that when the stock market collapsed in Canada after 2001 it was hard to do initial public offerings of the corporate structure. That was not driven by the tax system. That was driven by what was going on in the economy at that time. The one thing that saved Canadian businesses was income trust offerings. We must remember that there are some positive gains associated with that. It goes back to my comment that income trusts are a way of undoing the unintegrated part of the corporate tax system. It has been an opportunity provided for businesses. That has led to a lower cost of capital, and more investment and jobs as a result. That is my first comment.
The Chairman: Do you have any direct studies of that, or is it anecdotal?
Mr. Mintz: There are many studies on impact of taxes on investments.
The Chairman: The senator has asked a focused question. She asks when we move from business A corporate to business A income trust, are there studies based on that sector and that economy as to whether there are more jobs and more reinvestment? We have heard the argument that there is reduced capital, but we have not heard the argument about more reinvestment and jobs compared to those corporations that stay in the same sector. That would be a balanced study.
Mr. Mintz: I agree. One would have to put the data on that particular sector. There is the concept of the cost of capital in economic studies and its impact on investment. If I wanted to do an estimate of how much investment is affected by reductions in the cost of capital that has been facilitated by the income trust designation, then I would be able to give you an answer based on those economic studies. There is a huge number of them. If you take the average calculation that people would normally use for this sort of thing, I can give you that number. I would suggest it is a fairly significant number.
However, I do not know the result. I would have to go through the mechanics of the calculations.
The Chairman: That is our point. This committee is statistics-driven. We hear anecdotal stories, including my own, but we believe more in the statistics we have in front of us. It would be useful if you could draw our attention to those studies as they might clarify the situation for us.
Mr. Mintz: It is something that could be done. My main point is that you cannot with confidence say it has no impact on jobs either. You cannot make that statement or come to that conclusion.
The Chairman: We agree.
Mr. Mintz: I can say with more confidence it has some impact, but I cannot give you the exact number. I can estimate that, though. I know how to do it.
The second point I want to make is the $1 billion cost on reducing the dividend tax to the capital gains tax rate, which has an impact not just on income trusts but on other aspects of capital market efficiency as well. I emphasize that was a static measure. In other words, it takes the amount of dividends and makes a calculation. To do a proper evaluation of that, one must look at more dynamic effects and see what that means. The $1 billion estimate is an overestimate: it may be lower than that, but that is something I plan to work on, to get a better evaluation of that.
My third point is whether there should be some criteria to allow companies to shift between the two. In a sense, we have done that in the income tax over the years where we took an attitude that, when it came to passive income, basically royalty income and real estate investment income, those types of things would be permitted. The first trusts created in Canada were in the 1980s for royalty trusts. The 1994 changes allowed for the expansion of real estate investment trusts from closed and to open-end funds. That was because we took an attitude on the passive income side to do that.
Would I apply criteria today? I do not know how you would apply criteria. I am not sure that is an appropriate way of even looking at the issue. It goes back to my point that I think governments should look at taxing people in a fair and efficient manner and not creating differences amongst different types of organizations or different types of activities, because that undermines productivity in itself. You are much better off having a tax system with an even tax burden on different activities rather than influencing one over the other.
The fourth point is on corporate income tax rate reductions. There I will recite recent literature in economics, including a paper of my own with Michael Smart at the University of Toronto that appeared last year in an academic journal, Journal of Public Economics. We did work on Canada and provincial tax competition with respect to corporate rate reductions.
We found that a one percentage point reduction in the corporate income tax rates for large companies — not small ones — leads to about a 3-per-cent increase in the corporate income tax base due to what is called, income shifting. When you lower the corporate income tax rate in Canada — I am not talking about the effective rate but just the statutory rate — businesses will shift income into Canada because through transfer pricing it might make sense, or through financial transactions that will put less debt into Canada.
I have done some estimates. If you drop the corporate income tax rate today from 36 per cent to 30 per cent, it will cost very little government revenue at all, because of the income shifting that goes on. Ireland dropped its corporate income tax rate from 40 per cent to 12.5 per cent today, as a percentage of GDP, and it now collects far more corporate income tax revenue than it did 20 years ago. Everyone knows that part of that has been multinationals that have shifted their income and profits into Ireland and away from other countries. It is a gain to Ireland in that Ireland has been able to maintain its revenues. It is a cost to other countries because of what Ireland has done. One reason I say corporate rate reductions make a lot of sense in Canada is because they would help lower the effective tax rate on capital but the revenue cost associated with them, given our high rate of corporate income tax relative to the rest of the world — right now it is at 35 per cent and the average OECD rate is at 30 per cent. Reductions in the tax rate will not cost a lot of money because you will get more money profit shifted into Canada.
The Chairman: I have allowed leeway on the questions because they have been informative, but mother time is now on our back. I hope that the questions will be precise and the answers short. If there are further follow-ups, you can send the information to us in writing, if you do not have an ample opportunity to answer the questions appropriately.
Senator Oliver: Mr. Mintz, my question is for you. You are probably one of the most experienced and respected experts in taxation in Canada. To do the work you do, you probably from time to time have to come here to Ottawa to deal with senior officials of the big and powerful Department of Finance.
Mr. Mintz: I worked there twice actually.
Senator Oliver: Can you help this committee by giving us some indication as to why there is this tremendous reluctance on the part of the department to look at something like a reduction of the dividend tax, or to look at the double taxation between corporate and personal tax? Why is the department reluctant to look at that? Can you help this committee with your response, based upon your frequent visits to the department?
Mr. Mintz: I will be brief. Over the years, we have moved to better integration in a number of respects compared to where we were once many years ago. I would say the officials understand the importance of integration of corporate and personal taxes in Canada.
Senator Oliver: They will not do it.
Mr. Mintz: There are revenue issues and other things involved. I cannot question their motivation.
Given what has been happening today in financial markets, this is a great opportunity to address some significant problems. I hope the government will do it in the right way, which is to try to remove these non-neutralities currently existing in the structure.
[Translation]
Senator Plamondon: I am concerned about the proliferation of income trusts, specifically because of something you said.
You stated that when the markets crashed, had there not been any income trusts, businesses would have been in trouble. Do you feel the economy is hanging by a thread today and in fact needs income trusts?
Are you concerned that we might be headed for another market crash, when you see people entrenched in their positions and depending on income trusts to the extent that they are today? I would appreciate hearing your views on the economy.
[English]
Mr. Mintz: First, my comment involved the stock market. There were very few income trust offerings in the latter part of the 1990s because the stock market was doing well, but there was a spate in the 1994-95 period.
If you go back to the committee I chaired, the Technical Committee on Business Taxation, we have a section in the report that discussed income trusts in 1997. The report suggested the government study this and take action on it. We gave some possible solutions but we could not come to agreement at that time. However, we feel it was an issue to deal with at that time irrespective of the way the economy was going at that point. It had more to do with balance in the tax system.
In today's world, given the way that the U.S. is going with respect to its trade deficits, there is a significant risk that we could slip into a decline worldwide. The United States, to correct for its trade deficit, will have to increase its savings and reduce its consumption of goods and services. The only way to avoid a decline in world economic growth, or potentially world economic recession, is for other parts of the world, Europe and Asia, to take up the slack through increased consumption and less savings.
This is a real challenge. I do not think Europe will be there to do that and I am not sure Asia will be there either. We need to be cognizant of the future. Canada is doing relatively well in terms of its economy. Growth has been good — not as good as other countries such as China and Ireland, but we have had relatively good growth. However, some things on the horizon could affect growth.
I would not let this issue on income trusts drive that issue entirely. We need to address the whole question of the extent to which we tax capital relative to consumption in this country, which is a whole set of other issues for taxation.
The Chairman: That is an important question. The prescience of people is interesting in retrospect, but the market conditions vary so we have to look at them in the context of our time.
Senator Goldstein: Thank you for your overview of REITs.
I have a number of concerns but I have just one question. I have heard and read that some people are anxious to impose a withholding tax on income trust revenues that are sent abroad. Could you comment on what effect that kind of approach would have with respect to both FDI and a variety of other economic matters that it will affect — or I think you would say that it will affect?
The Chairman: Senator Goldstein, you should never lead the witness.
Mr. Mintz: To me, the withholding tax on interest — non-arm's length interest and arm's length interest — is a big issue with relatively low fiscal cost; we should deal with that. I think it would have big benefits not only to foreign direct investment coming into Canada but also Canadian corporations investing abroad. I do not have the time to go into details, but that is the primary withholding tax issue to me.
With income trusts, there is an issue with respect to non-resident ownership of income trusts that were able to avoid withholding any tax whatsoever on the income in Canada. If it was, let us say, an American investor, they would still pay tax to the U.S. government; but because they were not paying any Canadian taxes, if we put withholding tax on that income that was coming through mutual fund trust capital gains and mutual fund trusts that non-residents receive, that would be appropriate. The main effect would be that the U.S. government would get less revenue and we would get a fairer share of the revenue. The big question is how high that rate will be. The idea of having a 35 per cent rate is way out of line; 15 per cent certainly might make sense.
The Chairman: Our staff pointed out to me for the purposes of the record that yesterday we were told there was a 15- per-cent withholding tax.
Mr. Mintz: Yes, there is. That is what I think the final agreement was. There was a discussion about whether to have 35 per cent.
Senator Angus: Mr. Brooks, you have come a long way and it would not be right that you were not asked a question. We have heard a lot about this sudden meltdown of the market on income trusts as a result of the unexpected announcement on the moratorium. What was your experience with the REITs in this area?
Mr. Brooks: We went down the same as the market; but in speaking with my colleagues who are up next in front of you in the plane this morning, we are back to 75 per cent to 80 per cent of where we were from a week or 10 days ago.
Senator Angus: You anticipated I was going to ask Mr. Russell the same question as the others. When a gentleman from finance said there was a substantial recovery, you agree with that.
Mr. Brooks: Yes, that is true.
Senator Angus: As much as 75 per cent?
Mr. Brooks: Yes, it was a good buying opportunity.
The Chairman: I want to thank these witnesses. I regret we have not had a more adequate opportunity to explore some of the issues you have both raised. Mr. Mintz, we have some differences of viewpoint and we would like to have an opportunity to exchange those at a more appropriate time in the future.
The good news is that the market is settling down as it should as we try to deal with this issue in a more appropriate framework of careful thought and analysis. I hope our committee has helped the public discourse with that this morning. Certainly, the three of you have.
Our next witness represents the Investment Dealers Association of Canada: Ian Russell, Senior Vice-President, Industry Relations and Representation. We also have two individuals: Oscar Belaiche, who is the Vice-President and Portfolio Manager of Goodman and Company Investment Counsel of Dynamic Mutual Funds, and James Alexander McIntyre, Vice-President and Senior Portfolio Manager of Sentry Select Capital Corp.
Some of you have given us briefs. Please sum up your comments in five minutes to allow time for more questions. We are familiar with the ground now. If you can add something we have not heard, that would be useful. We would like to hear your take on the current public process that the Government of Canada has undertaken in this regard.
Ian C.W. Russell, Senior Vice-President, Industry Relations and Representation, Investment Dealers Association of Canada: I am pleased to be here this morning to speak to you on the income trust debate. We are in the process of preparing detailed comments in response to the consultation paper. My comments this morning reflect our preliminary comments on the subject.
We have seen dramatic growth in the income trust market, as was alluded to in the testimony previously, with market capitalization growing by over $100 billion in a four-year period ending December 2000. The market capitalization today stands at $170 billion. That figure is a combination of REITs, oil and gas royalty trusts and business trusts.
We have made note in my testimony of some of the benefits of the trust structure. I refer you to a study that the Investment Dealers Association of Canada, IDA, commissioned by Paul Halpern, a professor at the University of Toronto Capital Markets Institute, a year ago. That paper demonstrates conclusively that the trust structure has a place in our marketplace.
In terms of the impacts of the government's announcement, we saw an immediate impact on the trust sector and all the trusts within it losing share values ranging from 2 per cent to 10 per cent. Friday, September 23, was really the nadir of the market. The market capitalization dropped 5 per cent. That was at its worst. There is some debate here, but if you believe that 25 per cent of those trusts are held in RRSPs, individual Canadians took a hit of about $1 billion to $1.5 billion at the bottom. There has been a recovery. It is still down approximately 2.5 per cent. It has made half the gain back.
In assessing what was responsible, if you read the consultation report, it was neutral and well-balanced in terms of the analysis that went into it, but then it laid out a policy prescription at the end which, in my view, was an aggressive, heavy-handed approach to the market. The report talked about integration, which is a positive step, particularly for the taxable investor, but then it turned to a number of different types of interventionist approaches. The original one was investment restrictions, but subsequent ones were taxing the trust directly and limiting interest deductibility for trusts. It was that information that really shocked the market.
The central point in addressing the problem, at least for the taxable investor, is to achieve neutrality between the trust structure and the corporate structure for the taxable investor. Then you do what Mr. Mintz indicated, which is that corporate decisions are then made on economic and financial grounds, and not driven by any tax distortions in the system. We have estimated, again, very much on the back of the envelope, that if you reduced the dividend tax rate from its current level of 30 per cent to about 15 per cent and, at the same time, you move to a federal corporate tax rate of 19 per cent from 22 per cent, which is the intention of the government all along, that would bring you closer. That would get you neutrality in the context of trust. A taxable investor would be indifferent in the structure. We estimate that static analysis would be about $2 billion.
The other thing we would point out is that when the U.S. reduced its dividend tax rate in 2003 from an effective rate of 38.5 per cent to 15 per cent, the two subsequent years following the tax reduction resulted in substantial increases in dividends paid by corporations. They increased their pay-out ratios and paid more dividends. I have to confirm this number, but my sense is that the tax on dividends actually increased because the dividend payout offset the reduction in the dividend tax. The costs of moving to neutrality for the taxable investor are probably mitigated by the dynamic effect.
One must deal with a separate issue with the tax exempt investor or tax deferred investor. The concerns that have been highlighted by the Minister of Finance are correct ones. First, what is the impact on economic efficiency as a consequence of the tax investor participating in the capital markets with the kind of tax differences that are there? Second, what are the tax losses? Later, I would like to talk to the question of tax efficiency and pick up on the argument that went on between Senator Angus and Mr. Mintz, because it is not just an issue of cost of capital. The dimension of the demand side of the marketplace also must be brought to bear.
In terms of measuring tax losses, it strikes me that it is all over the map between work done for the Canadian Association of Investment Funds, which showed, for the tax exempt investors, an actual net tax gain — this is, the present value of future taxes paid by beneficiaries — of $278 million, and the consultation paper really gives no value for the deferred taxes.
I think more work needs to be done on that subject, and more work needs to be done on measuring the economic efficiency arguments before one intrudes into the capital markets with rather aggressive measures.
Oscar Belaiche, Vice-President and Portfolio Manager, Goodman & Company Investment Counsel, Dynamic Mutual Funds, as an individual: Together, Mr. McIntyre and I represent Canadians who have invested over $7 billion in income trusts through our respective funds. We believe we bring the buy-side perspective to your hearings, and we are here to represent the millions of Canadian investors — we believe up to 80 per cent of the income trust market is held by individuals either through direct ownership or through funds such as ours — who have placed their trust and confidence in the income trust market, not to mention their capital.
What has happened recently has cast a shadow over the inclusions of income trusts into the TSX composite index with a delay in the transition process a possibility. I would like to give you a history of how this has evolved.
The right structure at the right time: Since 2000, the trust market has increased from $20 billion to a current market capitalization of approximately $170 billion. The capital markets have been dominated by the demand for income due to a shift in demographics and a need for investments that generate a yield, particularly in light of alternative investments such as a five-year GIC at 2.6 per cent today. In addition, a series of corporate scandals in the United States and Canada created an environment where investors demanded greater integrity in the capital markets.
As a result, there was a huge appeal for income trusts, which placed cash earnings in the hands of investors. This practice instils higher discipline in management, brings transparency to cash reporting and reduces reinvestment risk. As Canadians move toward and into retirement, and this is a key point, as a significant portion of the population moves towards retirement and will need income to replace wages and salaries, they have to create investment income, particularly those without pensions in Canada.
Income trusts help Canadians meet these goals and reduce the potential social burden on the government for retirees with insufficient income. We are not sure the government calculated the second derivative benefits of the income streams to investors that are either reinvested, creating further taxable income, capital gains potential, and GST and PST revenues to the government, or saved, creating interest income.
Debates on the economic benefits of trusts notwithstanding, the structures offered mature businesses a viable way to raise capital to improve operations, make creative acquisitions and consolidate industry sectors, and a way to hit the mainstream. Far from a small market niche, today income trusts have become a highly popular investment choice that received further validation when Standard and Poor's, S&P, announced inclusion of trusts in the S&P/TSX Composite Index, which would represent 8 to 10 per cent of the index. Initially, a concern for institutional investors, the limited liability issue, also began to see resolution with many provinces adopting legislation. Ottawa is playing catch up; however, timing is an issue. It is key to note the tax issues the government is considering are complex, and resolution takes time. The government will need to weigh carefully its options and how to proceed. Prime Minister Martin indicated he would call an election approximately one month after the scheduled February release of the final report of the Gomery inquiry. The timing of any changes becomes an important factor for consideration. We do not anticipate any immediate action will be taken by the government until the consultation process is completed on December 31 of this year.
Mr. Belaiche: I think the disruption in the capital markets is more severe than one anticipates. It is not about the drop in the market a week ago of 5 per cent and a potential recovery of 2.5 per cent. Confidence has been shaken in the markets. A number of issues in the markets will probably be pulled as we speak. Investor confidence has been shaken as a result of the actions.
There is a significant amount of uncertainty in the marketplace. The $300 million impact in the funds, in our opinion, is insignificant relative to potential capital gains tax losses that have taken place. We ourselves have over 100,000 investors in our largest fund that lost approximately $150 million in market value last week, and some people did sell. It is not about theoretical gains or losses. There are people who sold last week in that situation and others may have been more fortunate and bought, but people panicked and had concerns as a result of the actions that have taken place. As well, Standard and Poor's has announced a consultative process and it is possible they may defer trust inclusion in the index because of the uncertainty created. That precludes capital from flowing into the income trust market as we move forward.
We do not believe the government will take action prior to the election. We think that the government has put itself in a bit of a box where they will not be able to move on the tax position given the timing that has been put in front of us. We await direction from the government as to how they will proceed. It appears they are trying to put this on the side. We think a political hot potato has been created and no one will want to deal with this. It will become an election platform potentially moving into the election. We prefer this be dealt with in a positive manner by increasing the dividend tax credit, reducing dividend taxes and reducing corporate taxes rather than attacking the trust structure in which so many Canadians have put their faith. In the meantime, uncertainty has created volatility, which has created market risks that were not there previously.
James Alexander McIntyre, Vice-President and Senior Portfolio Manager, Sentry Select Capital Corporation: If you have an opportunity to listen to the people from Ontario Teachers Federation, they will brief you on a material problem facing Canadians: We are aging and we have inadequate capital. They are underfunded by $18 to $19 billion at a rational return assumption. Put this in the context of the typical working class Canadian who has no pension plan. For a poverty line income, they need savings in excess of $200,000 and for a comfortable income, $35,000 a year. I am sure you would find that less than comfortable, but $35,000 a year requires savings of half a million dollars. It is beyond the means at today's interest rates. My background is managing money for a vast population of individual Canadians who depend on us to deliver to them a reasonable long term rate of return to ensure their retirement can be modestly comfortable. The trust structure has enabled us to do that. It has taken investments in mature businesses and freed capital that current tax policy traps in those businesses that have an inability to reallocate that capital effectively. They do not need a new plant, a new building or to buy new machinery, yet the depreciation and the earnings are trapped by inequities in the tax code. This structure enables the money to be recirculated productively in the broad economy.
When Bell Canada bought Teleglobe, it did not create a job or put down a centimetre of fibre optics. It transferred retained earnings and savings of the Canadian population from shareholder A to shareholder B. When the final butcher's bill is in, the cost is somewhere in the order of $10 billion. It was not a productivity-enhancing investment.
A trust is about efficiency and productivity. If you want a good study as to the contribution of trusts to the long term viability of Canada, look to the oil patch. We are buying back assets formerly owned by U.S. integrates. The jobs are being built in Calgary. We are developing technologies for enhanced recovery of mature oil fields. We are driving profits out of what was previously an unprofitable business.
In the early 1990s, the oil patch had an average return on capital in the 4 per cent or 5 per cent area. We are pushing it up.
The Chairman: Thank you. This is a profoundly important item. A year ago, we announced a study on demographics to address this issue in a substantive way. We are delighted that the Prime Minister, in his vision statement some weeks ago, mentioned demographics as an issue. We take some credit for this mention because we put it on the agenda. Hopefully you will be able to watch our hearings in the days and weeks ahead, so we will have a deeper opportunity to look at the impact of demographics on income and income equalization, which is your issue.
Senator Angus: You have all, in your submissions, expressed concern. From the IDA's point of view, from you dynamic disciples of “Sonny” Gordon, and others, what is your principle concern about what has happened in the last two weeks with respect to these investment vehicles?
Mr. Russell: My principle concern is that policy might move too quickly. We could end up introducing, perhaps, rather draconian measures that could kill the trust market, without taking adequate time to fully understand what we are doing, particularly, the economic efficiency argument I raised, and without a clear measurement of what the tax loss is to government.
Mr. Belaiche: The concern I have is numerous advisors have spoken to me about their retail clients.
Senator Angus: Individuals?
Mr. Belaiche: Yes, individual Canadians who are moving into retirement or into their retirement years. They have limited capital, and they need to generate an income stream. They have been using income trusts as a component of generating that income stream.
Now the fear and uncertainty that has been created is causing concern amongst our clients, the Canadian investors that make up so much of the market. That is a significant concern.
We are starting to see a backlash. Notwithstanding comments made by the government that there is no constituency, many clients that are buying our funds are not people 20 or 30 years old, but people in their fifties, sixties and seventies. They need an income stream to sustain themselves and have been relying on income trusts to provide that sustenance.
Mr. McIntyre: My principle concern is the equity model. As the population ages, an equity model that stresses accumulation in corporate hands at the expense of the business owner is not a suitable model. There reaches a point in time when you have to flow through the income from the business to the owner of the business so owners can support themselves in their non-wage earning years.
The Chairman: On that point, Mr. McIntyre, you are concerned about productivity in the economic models in terms of increasing incomes for all Canadians, retired and otherwise?
Mr. McIntyre: Absolutely. We have found in this model that a lower cost of capital has enabled companies to buy assets effectively. They are disciplined in capital allocation. They are disciplined in ensuring a maximized return on existing assets, and use new investment creatively.
The oil patch is a fascinating study. ARC is state-of-the-art in its technique as an income trust.
The Chairman: We listened carefully to Marcel Coutu yesterday, but remember that there was a differential between what the real estate trusts and the other trusts are in terms of flow to his investors. He was giving 2 per cent as opposed to 8 per cent because he is retaining it in order to reinvest.
Mr. McIntyre: There is a large capital requirement on the build-out of Canadian Oilsands. I have owned Canadian Oil Sands Trust since 1996.
The Chairman: You have done well.
Mr. McIntyre: We were the lead order on the IPO at my prior employer. It makes sense.
The Chairman: Thank you very much, gentlemen.
Senator Angus: This comment might encapsulate it.
There was a piece that one of you filed with us this morning in the Financial Post by a Mr. Philip Brown in which he says:
The irony in all of this focus on income trust is that they are an innovative Canadian solution to a Canadian problem: how to successfully operate, grow and finance mid-market companies that would otherwise have a difficult time finding financing for themselves. In fact, income trusts are the most innovative and successful financial product in Canadian financial history.
Do you agree with that?
Mr. McIntyre: Absolutely.
Mr. Russell: If I could add one bit of evidence to that, after the tech market collapse, the IPO market died completely in 2001 in both Canada and the United States. In 2002 and 2003, the IPO market was dead in the U.S. In Canada, because of the income trust phenomena, we saw small companies that were able to go public through the income trust vehicle, and we had a vibrant IPO market in 2002-03 that would not have happened without this instrument.
The Chairman: For another day we will look at what happens with the redeployment away from hi-tech companies that are capital-intensive with no cash flow, and what impact that would have on high-tech research, innovation, and so on.
It is important, and I want to thank you all, but it is important for the Canadian public who is watching us to have a balanced and nuanced understanding of this complex question. There are no simple answers here because the factors at play are not simple.
I am delighted that the market is settling down because I think there was an exaggeration in the marketplace. Our responsibility, and hopefully your responsibility, is to have a more nuanced and balanced discussion about how to go forward to make our economy more productive and more beneficial to investors, as well as to stakeholders and all aspects.
Thank you for your contribution. This will conclude these hearings.
The committee adjourned.