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Proceedings of the Standing Senate Committee on
National Finance

Issue 2 - Evidence - Meeting of June 19, 2006


OTTAWA, Monday, June 19, 2006

The Standing Senate Committee on National Finance, to which was referred Bill C-13, to implement certain provisions of the budget tabled in Parliament on May 2, 2006, met this day at 6:02 p.m. to give consideration to the bill.

Senator Joseph A. Day (Chairman) in the chair.

[English]

The Chairman: Honourable senators, this is our first meeting to deal with Bill C-13, the budget implementation bill. We have a full house of senators with us this evening to hear from the Minister of Finance, the Honourable James Flaherty, who represents the Ontario riding of Whitby—Oshawa.

I understand, Mr. Minister, that you may have a few introductory remarks. As is our custom, I am sure honourable senators may have a few questions to ask specifically with respect to your remarks and possibly outside of those remarks. The floor is yours.

[Translation]

The Hon. James Michael Flaherty, P.C., M.P., Minister of Finance: Thank you for this opportunity to appear before this committee to discuss this year's Budget Implementation Bill. I will keep my remarks brief so as to allow ample time for questions.

[English]

We have made it clear that Canada's new government is delivering on the commitments it made to Canadians. Indeed, the very first piece of legislation that we introduced was the federal accountability bill. Canadians need to be able to trust their government and know their tax dollars are being well spent. The accountability bill, in our view, will accomplish that.

With the budget implementation bill, Bill C-13, we are not just meeting, we are exceeding our commitment to Canadians to reduce taxes and provide support for child care. The budget is balanced and our spending is focused.

We accomplished more in the budget, quite frankly, than I thought we would be able to when we started the process of crafting the budget in February. We accomplished a great deal thanks to the strength of the Department of Finance and our clear vision by the time the budget was delivered on May 2.

We promised in the election campaign that we would reduce the GST, and we have done that. Canadians will have more money in their pockets starting July 1. That applies, of course, to all Canadians, not just Canadians who pay income tax. About one third of Canadians do not pay income tax and therefore do not benefit from income tax reductions. The GST reduction is a benefit for everyone who purchases in Canada.

For individuals, the tax reductions mean paying approximately $20 billion less in tax over the next two years. These are very large tax reductions — more tax relief than the last four federal budgets combined. In fact, the tax measures in this budget will remove 655,000 people from the federal income tax rolls. I say that to those who like to say once in awhile that we did not help persons of lower income in the budget. Not only did we reduce their taxes; we removed them from the tax rolls to the tune of 655,000 people.

One of our priorities was to reduce the GST from 7 per cent to 6 per cent and that was our promise to Canadians. We have kept that promise. This is a real tax cut for all Canadians, as I have said, whether they pay income tax or not. We also promised to reduce the GST by a further percentage point during the course of our mandate, leaving more money in the pockets of hard-working Canadians. In our view, we are headed in the right direction with the GST cut.

We went beyond our campaign commitments in terms of tax reductions. Indeed, in every way the Government of Canada takes money from Canadians, this government will take less of it as a result of the budget. It delivers significant personal income tax relief for Canadians. Effective July 1, the lowest personal income tax rate will be reduced from the currently legislated rate of 16 per cent to 15.5 per cent. As well, this bill will increase the basic personal amount, the amount that an individual can earn without paying federal income tax, so that it grows each year and remains above currently legislated levels for 2005, 2006 and 2007.

We also introduced a new Canada employment credit which is a tax credit on employment income of up to $500, effective July 1, 2006, designed to help working Canadians. It will give people a break on what it costs to work, recognizing expenses for such things as home computers, uniforms and supplies. The eligible amount will double to $1,000 as of January 1, 2007.

Senators, I am sure you have heard from time to time, as I have heard as a legislator also, the concerns people have who are employed that sometimes feel they do not get the tax benefits that self-employed people do in terms of deductions, and this Canada employment credit will help redress that concern.

We have much to celebrate this Canada Day. That is not the end of the story, of course. We have dealt with the general corporate income tax rate, reducing that from 21 per cent to 19 per cent by January 1, 2010; eliminating the corporate surtax for all corporations in 2008; eliminating the federal capital tax retroactive to January 1, 2006, which is two years ahead of schedule; supporting the growth of small business by increasing the amount of small business income eligible for the 12 per cent tax rate to $400,000 from $300,000 as of January 1, 2007. We will also reduce the 12 per cent rate that applies to qualifying small business income to 11.5 per cent in 2008 and 11 per cent in 2009 as support for small business in Canada.

I am proud to say that the reaction to the budget was quite positive. For example, Catherine Swift, President and Chief Executive Officer of the Canadian Federation of Independent Business told the National Post, ``We did have high expectations, but the budget has actually exceeded those expectations.'' I spoke at the annual meeting of the Canadian Federation of Independent Business recently, and they gave me a nice plaque. They graded the budget and gave it some good marks, albeit with one F. If you can figure out what the F was, then you have been talking to the Federation of Independent Business.

The tax measures in this bill go beyond what we committed to in the past campaign. An example is the tax provisions with respect to persons with disabilities. In Canada, a technical study was undertaken with respect to tax measures that could be taken to assist persons with disabilities. We have now put into practice all of the recommendations, and we have gone beyond the recommendations of the committee. We have increased the maximum annual child disability benefit effective July 1. We are also extending this benefit so that more families will be able to take advantage of it. It had been restricted to lower income persons. Quite frankly, families with children who have severe disabilities in Canada need this kind of support, so we would extend that benefit by this bill.

Bill C-13 increases the maximum amount of the refundable medical expense supplement for the 2000 taxation year. This supplement improves work incentives for Canadians with disabilities by helping to offset the cost of coverage for medical and disability related expenses under social assistance when recipients move into the labour force.

The last step with respect to persons with disabilities that we took in the budget was to announce the government's plan to appoint a small group of people to look at a very important issue for families with children who have disabilities: Once the parents are gone, what happens to the financial security of the child with severe disabilities, who by then often will be an adult? Various suggestions have been made over time about what can be done in the tax system to assist in that way. I will appoint a few people to look at that, earning the grand sum of a dollar a day plus expenses, and to report back by November. We hope that we can address that issue in the next budget, assuming we are still the government.

With regard to charities, as senators likely know, we will move forward with a change in the law, assuming the bill passes, that has been talked about for a long time, particularly by a fellow named Don Johnson. Many of you have met with him. That change eliminates the capital gains tax on the donation of publicly traded securities to public charities. I am amazed by the response to this proposal already in Canada. In Toronto, one single gift was $50 million. In Vancouver, the gifts exceed $10 million so far. This morning in Halifax, I was told about several million-dollar donations, and in Montreal it is the same thing. This is a tremendous response by Canadians to an opportunity to take advantage, for the benefit of public charities in Canada, of a change in the tax laws with respect to capital gains. I am thrilled by the degree of the response to date. I am told by many that the response will be much greater than was anticipated in the budget, which is great for Canadian charities. Not only is it a good idea in terms of tax policy, but also it has the people who are making the donations directing where they want their beneficence to flow rather than government directing it.

The other aspect with respect to charities, which has been talked about less, was the encouragement to Canadians to donate ecologically sensitive land to conservation charities. The bill proposes to exempt such donations from capital gains tax effective immediately, assuming the bill passes.

There are some other tax credits. The children's fitness tax credit was in response to concerns about children's inactivity and obesity in Canada. The pension income credit would give seniors a long-awaited break in that regard. These initiatives will be introduced in legislation as soon as possible and will help improve the quality of life for Canadians, both young and old.

We also went ahead with the well-publicized commitment in support of child care. Whether the answer is regulated child care, a parent at home, a grandparent or a trusted neighbour, we are committed to supporting all Canadian parents in their choices. The measures contained in this bill invest almost $4 billion over two years for the universal child care benefit. Effective July 1, all families will be provided with $100 per month or $1,200 per year for each child under six. It is important to mention that the benefit will not affect federal income-tested benefits such as the GST credit. This benefit will support child care choices by families.

Our new government is also committed to creating new child care spaces, and the budget allocates $250 million per year beginning in 2007 to create real child care spaces as part of Canada's universal child care plan. We are working with governments, businesses, community organizations and non-profit organizations to develop a plan that works to create these spaces.

Senators, the measures in Bill C-13 will help make Canada an even better place to live.

I welcome questions from members of the committee, and government officials are here today to also answer any questions you may have about the bill. I thank you for the opportunity to appear before the committee.

The Chairman: Mr. Minister, we thank you for your opening remarks and your attendance here today.

Senator Angus: Mr. Minister, I think this is your first time before a Senate committee, and we are delighted to have you here. My colleagues and I congratulate you on your appointment to this important portfolio and on this excellent budget you put to the Canadian people in early May.

You talked about what a great Canada Day it will be this year, and we were all reminded of it as we drove along Wellington Street this afternoon. In the unlikely event that this bill does not pass by July 1, what would be the consequence in terms of these $100 cheques that would be going out to every family in the normal course on July 1?

Mr. Flaherty: Other than disappointment by many, I will have to ask the officials.

What would happen then? What would we do, wait? Yes, we would wait.

Senator Angus: In other words, the cheques would not go out, as I understand.

For many years, the Standing Senate Committee on Banking, Trade and Commerce has been recommending tax changes designed to encourage charitable donations by Canadian businesses and the owners of ecologically sensitive lands. We are delighted to see progress in that regard. However, in the unfortunate event that this committee sees fit to hold this bill back, would these charitable gifts not take place or not derive the benefits that were intended?

Mr. Flaherty: That is right. It would cause delay. The officials can correct me if I am mistaken, but I believe that tax change is designed to be effective on budget day, which was May 2.

Senator Angus: In any event or subject to this bill going through?

Mr. Flaherty: No, subject to the bill. We do seek passage of the bill. I doubt that it will pass as easily as it did at third reading in the House of Commons.

Senator Angus: Do not be too sure. We know these people pretty well, minister. I think you should have a positive approach.

I have a question of a more substantive nature in the technical sense. It relates to the provisions dealing with mortgage insurance, government-backed mortgages and the concept of ``doubling.'' There seems to be quite a lot of publicity surrounding that subject. We have a number of witnesses coming from organizations like Genworth, which are, along with the CMHC, if not the only players in this field, certainly leaders in the field. Can you tell us what was behind this initiative?

Mr. Flaherty: It is opening up more competition in that area of mortgages. Quite frankly, our view is that more competition is healthy in that area. I would not put it any higher or lower than that in terms of the rationale for the policy initiative. We think it will create more liquidity in the market and will create more competition, which hopefully will be beneficial to consumers of mortgages.

Senator Angus: Is that because of introducing the guarantee? There are two elements to this measure, as I see it. One element, of course, is doubling the amounts that would be qualifying for the guarantee, and the other element is the guarantee itself being opened up to more than CMHC and Genworth.

Mr. Flaherty: It is an expansion of the guarantee by the Government of Canada.

Senator Angus: Was that in response to a big demand that came forward from various financial institutions or was this right out of left field, if I can use that expression?

Mr. Flaherty: I am not known to come out of left field.

If you are asking me if there was a great lobbying push with respect to this matter, my answer is no, not with me particularly. It was more a question of a public policy initiative that would create more competition in the field.

Senator Eggleton: Mr. Minister, in your opening remarks you mentioned a number of claims that you also stated in the budget, and you noted the positive comments that were made by Catherine Swift. I have another set of comments here that were put together by Dale Orr of Global Insight, who is a noted commentator on economics, fiscal matters and budgets and who, by the way, says that he is no friend of the Liberals. Mr. Orr says that when it comes to your claims, a reality check is truly in order. He goes on to talk about the value of the tax cuts, $20 billion in tax relief that he thinks is really closer to half that when you take all things into consideration. He particularly takes issue with the notion that the income tax at the lowest marginal rate is being reduced when in fact it is being increased. It all depends on how you calculate it. If you take it on the legislative base and the way it is now, then you can make the claim that you have, but he says — and I think a lot of other people have been saying as well — that you have to look at what currently is in effect. What currently is in effect relates back to a ways and means motion. On that particular basis, the tax rate is going up for the lowest marginal rate, and the same is true for the basic personal amount.

Mr. Orr says that even when you take the credits into effect — some of which are not in this bill but I take it are coming later, things like transit — there really is not much difference in terms of personal income tax and there is no great advantage.

I think a number of economists, including Milton Friedman, agree with the following position, which comes from a tax lawyer by the name of David Douglas Robertson. He wrote a paper called Don't Tax Me When I Earn It, Tax Me When I Spend It. He said:

Cutting the lowest marginal personal tax rate by 1 per cent and increasing the basic personal amount by $500 is worth about $320 annually to most individual Canadians. In order for an individual to obtain the same tax savings through a 1 per cent reduction in the GST, an individual would have to spend at least $32,000 annually on goods and services that are subject to GST.

There are a number things that are not subject to GST, such as renter or mortgage payments, groceries, prescription drugs, health care, tuition, child care, personal care services, insurance loan payments, personal savings and investments. With regard to the $32,000, unless low-income people are about to go out and buy a Mercedes or something, they will obviously not get the same advantage of this tax reduction on the GST as they would on an income tax reduction.

I have one more series of quotes. This comes from the Minister of Finance of the Province of Ontario in October 2001. Mr. Flaherty said:

You could reduce the retail sales tax, which is another way of making goods more affordable. But you can do it another way: you can put money right back into people's pockets directly by saying, ``Here's a reduction on your personal income tax. Spend it as you see fit.''

Mr. Flaherty went on to say:

The member opposite again raises the question of reducing the sales tax. I must say that with respect to tax cuts, I agree with Paul Martin. With respect to reducing the GST federally and the RST provincially, I also agree with the federal minister, and we've talked about this. All you get is a short-term hit, quite frankly. You accelerate spending. You pull it ahead by a month or two. It has no long-term positive gain for the economy.

Mr. Minister, why did you not take all this advice, including your own, and reduce income tax instead of going the route of the 1 per cent sales tax reduction?

Mr. Flaherty: When I was on the CBC Radio program The House one morning, they played that quote to me out of the blue.

That was in Question Period, and the issue at the time was that General Motors and some of the other car companies had temporary programs to reduce the borrowing costs of their cars because there was slowness in the auto sector. At that time, the question that had been asked of me was whether I thought that it was similarly a good idea to have a temporary reduction in sales tax. I did not think that it was a good idea. I did not then and I do not now. I do not believe in a temporary reduction of consumption taxes.

This is not a temporary reduction. This is a permanent reduction of 1 per cent, to be followed by another 1 per cent in the federal consumption tax, the GST, which will have a long-term beneficial effect for Canadians.

A temporary consumption tax reduction causes an advance in sales. There is no long-term benefit, and I said that in the Legislature of Ontario at the time.

Senator, you mentioned benefits for Canadians with the reduction of the GST. It will be a tremendous benefit, perhaps not for the few Canadians who can purchase Mercedes automobiles, but for the many Canadians who can purchase their first home, a condo or townhouse and actually get into the market. A 1 per cent GST reduction is substantial. We will continue the rebate on real property that costs $450,000 or less. These are remarkable benefits. I know that young people in the Greater Toronto Area interested in buying a house will find it quite beneficial. Some home builders know that this will benefit their industry. That is a real benefit for real people trying to improve their lives, for young people trying to get their first homes.

In terms of the comparison between the ways and means motion, which was not legislated, the comparisons I have made are from Budget 2005 to Budget 2006. As a legislator, I compare bills that actually become laws, so we are comparing apples to apples. Those tax reductions are exactly as I said they were from Budget 2005 to Budget 2006. Including the GST reduction, we are talking about a reduction over two years of almost $29 billion in terms of the taxes levied by the Government of Canada on the people of Canada. Those are substantial tax reductions and amount to more than those of the previous government's four budgets cumulatively.

Senator Eggleton: I beg to differ on a number of these comments. Mr. Orr points out that by taking 655,000 people off the tax rolls, you are adding 200,000 Canadians back on by the fact that the basic personal amount is higher than what is currently in effect. You said that it was not legislated, but if it is in effect, then people will anticipate it. Therefore, to low income people, it is a tax increase.

I will ask you about something relevant to Ontario. An agreement came about with the previous government and then Mr. Harper indicated that he would honour it. It concerns $7 billion over six years, even though $5 billion was likely the original amount. This is all relevant to immigrant settlement, services, labour market development and support for post-secondary education. There appears to be a dispute between you and the Province of Ontario about whether that agreement is being met. The Government of Ontario thinks that in this year there is a $300-million gap between what they say the deal is and what the budget states. They are concerned that the difference in tax credits, for example for an apprenticeship program, will be counted against that. They believe that the deal quite clearly was directly to the provincial treasury. Mr. Harper has indicated that every bit of that agreement will be honoured. The province claims that the spreadsheet you are working from appears to have that gap in the current year and about a $3- billion gap in the overall program. Could you tell us about that? Will the federal government honour the commitment with the provincial government?

Mr. Flaherty: We will and we have honoured it in Budget 2006. There are some process concerns expressed by the Government of Ontario about the manner in which money is flowing. I had discussed that quickly with the former Minister of Finance in that province but now there is a new one. I will meet later this week with the current Minister of Finance to compare numbers. There is no disagreement on substance, as far as I know. The agreement is fully funded, as Prime Minister Harper committed before the election, and is extended to six years. We made sure that there was full provision for funding of the Canada-Ontario agreement in the budget.

Not only that, senator, but I will add this: The Province of Ontario is receiving a $300-million surplus — extra money — for infrastructure that the other provinces are not receiving as a result of the Canada-Ontario agreement. More than $16 billion has been budgeted over four years in Budget 2006 for infrastructure improvements. On top of their per capita share of that, the Government of Ontario will receive an additional $300 million. I look forward to ironing out the process issues, but I do not see any substantive issues with respect to the funding of the Canada-Ontario agreement.

Senator Eggleton: All the money will go to the provincial treasury and none will go in the form of tax credits or in the form of future considerations under a fiscal imbalance formula that might be worked out.

Mr. Flaherty: No, I did not say that at all. You said that. I said the agreement is fully funded. I never heard it suggested that the agreement said that the billions of dollars would flow into the treasury of the Province of Ontario. It is for the benefit of the Province of Ontario, including labour market financing and other aspects, many of which are federal government programs flowing to Ontario, but not necessarily through the treasury of Ontario. I am sure you are familiar with that.

Senator Eggleton: It is my understanding that they anticipate it will simply because such things as the labour development agreement and the immigration agreement are all relevant to offsetting provincial costs. Now, you are saying that they will not necessarily go to the provincial treasurer.

Mr. Flaherty: The agreement is fully funded and will be fully audited by the Government of Canada. I cannot speak for the Government of Ontario. You would have to ask the provincial government how they understand the terms of the agreement.

Senator Eggleton: On the issue of fiscal prudence, last month a Global and Mail editorial expressed concern when it said that after years of successive surpluses, the Conservatives have taken the nation too close to the deficit brink. Would you comment on that? According to the previous government, there was to have been an economic prudence of $1 billion this year, and accelerating after that. Perhaps your view and the view of your government is that rather large surpluses were building up and you do not intend to see that in future. Economic prudence is relevant to having to deal with crises when they occur, such as an epidemic, a pandemic or BSE because they can turn the economy upside down rapidly. Fiscal prudence is particularly valuable. If you get too close to the bar, then you risk going into deficit, which I trust you would never want to do. I anticipate Canadians are of the view that we should not go back that route.

Mr. Flaherty: You are right, senator. I was the Minister of Finance for the Province of Ontario when economic growth was 1.5 per cent and we balanced the budget in Ontario despite healthcare costs growing at an average of 8 per cent over five years. This is not as great a challenge, I can assure you.

The legitimate criticism that Canadians had was that we had a government over successive years that in the name of so-called prudence, which surely is a misnomer, ran huge budget surpluses — so-called surprise budgets — year after year after year. It led to a loss of confidence by people in the transparency of the budgeting process of the Government of Canada. It also led to a behaviour whereby toward the end of the fiscal year, the government of the day would have a substantial surplus that was not budgeted and would use it largely to interfere in areas of provincial and territorial jurisdiction, without parliamentary authority to do so. That is a bad habit that hurt our economic federation and contributed to the grand image of a substantial fiscal imbalance in Canada. The federal government came up with large surprise surpluses, not for one year or two years, but year after year, while the provinces were struggling with healthcare costs increasing on average at 6 per cent to 8 per cent and drug costs increasing 15 per cent to 20 per cent. This was not good for our federation and we will not do it anymore under the misnomer ``prudence.'' We have budgeted a $3-billion surplus to reduce public debt. Looking forward, we have budgeted $1 billion for a pandemic, but not as a surplus.

We are trying to be more open, transparent and candid with the people of Canada. After all, we are stewards of their money. It is not our money; it is money that we take from them, and I believe that they are entitled to a more straightforward budgeting process.

Senator Eggleton: You think you have the situation covered, notwithstanding that some economists in Globe and Mail editorials are saying that you are becoming too close? You think that, regardless of all the big surpluses, you have enough real prudence to deal with these?

Mr. Flaherty: I could have played the game that the previous government played. Anyone can play that game. Call it ``prudence;'' call it ``cushion;'' call it ``surplus;'' call it ``play money;'' call it ``surprise.'' We could have put aside $5 billion, or whatever, for something like that. Is that the way taxpayers budget in their small- and medium-sized businesses in Canada? Is that the way people do their family budgets in Canada? I do not think so. The Government of Canada can at least emulate the good practices of the people who elect us.

Senator Eggleton: We do not want to go the way the previous Conservative government went.

Senator Murray: To follow up on the question of Senator Eggleton, are you not using the very vehicle that some of us denounced less than a year ago, Bill C-48, to shuffle surplus money into some projects?

Mr. Flaherty: Yes.

Senator Murray: Thank you.

I have got a couple of questions that are not related one to the other. I hope you will bear with me.

Is it part of your agenda to push for harmonization of the provincial sales taxes with the GST in those provinces where that has not been done?

Mr. Flaherty: As you know, there was a companion paper published with the budget focusing on the fiscal imbalance/fiscal balance issue.

Senator Murray: Say ``imbalance,'' Mr. Minister; it is all right.

Mr. Flaherty: ``Imbalance'' is what we acknowledge and ``balance'' is what we will achieve. I want to go from fiscal imbalance to fiscal balance. We are the first government to actually acknowledge a fiscal imbalance. The previous government did not. We will try to achieve fiscal balance. I like to be positive about these things.

In the paper, we mentioned potential harmonization of provincial sales taxes and federal taxes. Some provinces are looking at that. Whether it will come to pass, I do not know. We will just have to see. It is a potential occurrence.

Senator Murray: Will you push for it in negotiations on fiscal balance/imbalance?

Mr. Flaherty: I will not push for it. That is a decision for the provinces and territories to make. That is not a decision for the Government of Canada to make. Obviously, reducing the GST, as we have, may make harmonization more attractive to some of the provinces.

Senator Murray: I would be curious to know what the impact would be of harmonization on the treasuries of those provinces that have not yet harmonized. I presume that officials have that information somewhere and that it is available to us.

Serge Nadeau, Director General, Tax Policy Branch, Department of Finance Canada: It would probably be better for the provinces to answer this question. Unfortunately, it is very difficult for us to say how much Saskatchewan, for example, would be affected. It would be more appropriate for the provinces to answer.

Senator Murray: I suppose one could pay for an access to information request. I do not why you cannot give us that information, if you have it, and I think you probably do. I am sure the minister will have it in his back pocket when he meets the provinces to discuss these matters.

Let me go north to the Mackenzie Valley. I see that there is a proposal to create a Crown corporation having to do with mitigation of impacts of the Mackenzie Valley pipeline. There is a commitment to $500 million to the corporation for that purpose, which I think confirms a commitment made by your predecessors.

Is there more to the exposure of the federal government on that matter? Some time ago the Aboriginal Pipeline Group, which has one third of the action, was looking for a federal guarantee for the financing of their part of the pipeline. Whatever came of that? Did the government give them their guarantee? Is it still under negotiation?

Bob Hamilton, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance Canada: Those discussion are still ongoing.

Senator Murray: Is there anything else you can tell us about exposure of the federal government? I see that IOL has announced a pause because of the inflated construction costs in the North and elsewhere. At what stage are the negotiations with IOL?

Mr. Flaherty: The focus of the Government of Canada, through the Minister of Indian Affairs and Northern Development, has been negotiations with the Aboriginal groups. Jim Prentice has been focusing on that rather than on the other aspects of it. We view our job as to accomplish what we can in terms of getting the Aboriginal communities to accept the project so that it can go ahead.

Senator Murray: What you call the ``other aspects'' covers what the companies might be looking for by way of concessions and incentives from the federal government, and we are nowhere on that at the moment, are we? No commitment has been made, in any case?

Mr. Flaherty: There are no discussions that I am aware of.

Senator Murray: Still in the North, when will the federal government move forward on negotiations for a resource revenue sharing agreement with the Northwest Territories that have been dragging on for 20 years? Do you know anything about that issue?

Mr. Flaherty: I know about the subject. I am not aware of any schedule. I have met with the Minister of Finance for the Northwest Territories. In fact, I think I am speaking to him again tomorrow. The subject has been raised.

Senator Murray: It is a long time to wait. These negotiations have been going on for 20 years. There does not seem to be much sense of urgency on the part of the federal government.

Going back to the GST, have you thought about including the GST in the price of goods, with or without harmonization with the provinces?

Mr. Flaherty: No.

Senator Murray: You are not interested in that proposal?

Mr. Flaherty: No.

Senator Austin: Mr. Minister, this is my first opportunity to see you at a committee meeting. You have a very important job in this country.

The signature part of your budget of May 2 is the GST reduction policy — 1 per cent in your budget and 1 per cent to follow. I would like you to comment on that in light of a number of questions and criticisms as to whether this is the best macro tax policy for Canada. For example, on the GST, Bill Robson, Senior Vice-President of the C.D. Howe Institute, in an interview with CBC Newsworld, said:

From an economic point of view, it wouldn't be my first choice. If you want tax cuts that are going to promote work, going to promote saving, help us invest more and raise living standards in the future, the GST is not the tax you would go after.

He went on to say that the best tax strategy to achieve the purposes he outlined would be to cut personal income taxes.

Of course, Herb Grubel, an economist at Simon Fraser University, said:

Cutting the GST rather than business or personal income taxes may be good politics but it is definitely very bad economics.

Also appearing before the timing of your budget was a story in The Globe and Mail's Report on Business of Monday, April 24, attributed to officials of the Department of Finance as advising against the GST cut and in favour of income tax cuts as preferable from an economic policy point of view.

The Report on Business of The Globe and Mail on that date stated:

``Canada raises more of its revenue as a share of [gross domestic product] from personal and corporate income taxes than any other G7 country....Correspondingly, Canada raises relatively less tax revenue from consumption taxes, the tax that least damages productivity and standard of living.''

Later in the story. They again quote this report from officials of the Department of Finance:

...while Canada's ``personal and corporate income tax burdens are the highest among the G7 countries,'' the broader trend favours consumption taxes....''Of all OECD countries with a [value-added tax], Canada has the second-lowest rate.''

Then, finally, the Globe and Mail article states:

They consider consumption taxes, such as the GST, the least evil among taxes because they are the least damaging to economic growth.

The consensus is that other taxes, on personal or business income or corporate assets, are far more harmful in terms of dulling the incentive to work, save and invest.

That is a sample of a number of comments that appeared with respect to the signature policy of reducing the GST. I would like you to give us your view on why you chose the GST cut in the face of prevailing economic views and opinions on the efficacy of the GST versus personal income tax cuts.

Mr. Flaherty: I listened carefully to those quotes. They were quotes like, ``I would prefer to reduce personal or business income taxes,'' or ``It would not be my first choice to reduce the consumption tax.'' You will note that the economists do not say, ``Do not reduce the GST.'' What they say is, ``Do not do it by itself,'' and we did not. We reduced excise taxes, we reduced small-business taxes, and we reduced the capital tax and the surtax. We reduced income tax. More than 90 per cent of the tax reductions in the budget will go to individuals and families in Canada. I would be inclined to pay great heed to the economists when they say not to reduce the consumption tax by itself and that it ought to be part of a broader package of tax reform, which is what we brought forward in the May 2 budget.

Senator Austin: You can try to distinguish on the basis of conditionalities or political politeness, but in fact the strongest economic advice is to reduce these personal taxes and taxes on corporations, and to raise consumption taxes because of the way those taxes work through the economy. I will not make the arguments again, but I wonder whether the Globe and Mail report on April 24 was accurate in quoting finance department officials and the advice that they were giving you as Minister of Finance?

Mr. Flaherty: I got some of that advice certainly from the Department of Finance. I got some of that advice from some of the economists with whom I met. There was not uniformity of opinion, I can assure you. I do not think I have ever met that from economists. The dominant opinion among the economists with whom I met was that taxes should be reduced. That is the top line, and then we get into discussions about which taxes. Overall, the taxes in Canada are too high. They inhibit economic growth in this country, they inhibit entrepreneurial activity and we ought to reduce them. I accept that. We have reduced taxes dramatically in this budget, and I hope to do more as we go forward.

Senator Austin: I can see that we have more or less put ``-30-'' on this exchange so I would like to ask you a question on a different topic — that is, the changes in the economic environment that are taking place, particularly the signals being sent from central bankers such as Mr. Bernanke about the possible slowdown in the U.S. economy, which would be consequent on inflation taking charge. As you know, the U.S. Federal Reserve is concerned that their inflationary numbers are just a bit over their tolerance boundary, and we are expecting increased interest costs to try to stem inflation.

I am not going to ask you questions about monetary policy as such, which I know I would get the answer that that is the business of the Governor of the Bank of Canada. However, I did want to ask you, pursuing Senator Eggleton's point about a contingency reserve, whether you are taking into account at this time the possibility of economic slowdowns and therefore slowdowns in the revenues that the government may receive; and whether, if that trend line continues, you would consider an economic statement this fall that would update Canadians on where you think the economy stands?

Mr. Flaherty: We anticipate doing a fall update, which I believe has become the practice federally. Since I am new at this federally, I check with the officials. We will do that.

The trend line, senator, is actually good and is consistent with the budget assumptions. I appreciate what you are saying about some worrying signs. We had said some months ago that we were watching U.S. house prices carefully. We are seeing some softening there. Thus far, it looks like a softening as opposed to something more dramatic. I have had discussions about that on more than one occasion with Secretary Snow in the United States. He has talked to me about some of the steps taken by the U.S. banking system to restrict the size of equity borrowings on real estate in the United States.

Senator Austin: Even the nature of them, because in the U.S., as you well know, the practice is to defer the retirement of the principal to the very end and just sell a mortgage on its interest alone.

Mr. Flaherty: Yes. There are macro-economic issues with respect to which the G8 is concerned, as well as the IMF and the World Bank, and we hope that some concrete steps will have been taken by the time the G8 meets again in Singapore in September. At the last IMF meetings in Washington, we had quite serious discussions about the desirability of some of the Asian currencies showing flexibility.

Senator Austin: I wanted to ask you, minister, whether you are continuing the practice of being guided by a panel of private sector economists with respect to calculating the way in which the economy is evolving. Are you taking that advice as well as the advice of your officials?

Mr. Flaherty: Yes. I met with a group of private sector economists during the preparation of the budget and I would hope to do so as we go through the year.

Senator Austin: Will you continue that practice?

Mr. Flaherty: Yes, absolutely. They are quite forthcoming with their advice. They are not shy at all.

Senator Austin: You know what they say: Economists have to predict virtually every day in order to get it right somewhere along the way.

Senator Mitchell: Mr. Minister, in the response to Senator Eggleton's concern about fiscal prudence, I had the sense that you were quite dismissive. I could perhaps be more generous by saying you were quite sensitive, but I believe, in fact, dismissive would describe it.

I think it is absolutely reasonable that Canadians and certainly Senator Eggleton and this committee should be concerned about the level of fiscal prudence evident in this budget, first, for the reasons he has made, and second, there is a Mulroney legacy and many of the advisors in this government are from the Mulroney era. You had an experience in an Ontario government that had a dismal fiscal responsibility legacy. If I can say this, your government is enamoured of a Bush government renowned for many things, but certainly for its fiscal imprudence. I think dismissiveness is absolutely and fundamentally inappropriate.

I believe it was Churchill who said: Convince the public you are an early riser and you can sleep to noon every day. I get the sense that you are trying to convince the public you are an early riser for fiscal prudence, but my concern — coming from Alberta, which has been very good about fiscal prudence — is that you may well be sleeping till noon every day on this and I would like to be convinced otherwise.

It is interesting that you should make a virtue of not overestimating surpluses, whereas Alberta absolutely made a virtue of underestimating surpluses and taking the additional money and paying off the debt. They paid off their debt in 10 years. At $3 billion a year, you are going to pay off the debt — not that you will be in government that long, I expect — in 160 years. Could you give me an idea of how you came up with the $3-billion figure, what your philosophy is of paying down the debt, how significant you see that in relation to the fiscal and economic strength of this country, and why you are willing to wait 160 years to pay it off?

Mr. Flaherty: Senator, I do not need to use words. I can speak from my actions in life. When I was the Minister of Finance in Ontario, we made the largest single payment against the public debt in the history of the Province of Ontario since Confederation; $3.1 billion in one year at a time when economic growth was 1.5 per cent. I can stand on my track record about paying down public debt in large governments in Canada, the second largest government in Canada, the one in Ontario.

What is a balanced budget? Is a balanced budget when a government hides surpluses, when a government puts in the closet billions and billions of dollars that they know will likely be surplus at the end of the year? Is that prudence? I think it is something less than prudence. In fact, I think it is quite undesirable in a democracy that elected people, running the Government of Canada, would budget in a manner where they know or ought to know they are going to end up with very substantial so-called surprise surpluses.

Prudence, to me, is budgeting a surplus, as we have done this year, of $3 billion plus, and of being clear with the Canadian people. You will notice that we did not end up with zeros at the end of each column. We put in the figures that we think will actually be left based on the assumptions that we have done, the surplus that will be there. Is it more risky than hiding money in the closet? Sure, it is. It is open, it is transparent and the people of Canada can see it. It is based on the assumptions we made, and we think they are prudent assumptions based on the advice we have and the analysis of the department and so on.

I believe in balanced budgets. I do not believe in pretend surpluses that masquerade as prudence.

Senator Mitchell: You may be right about your balanced budget, but you may be wrong in two ways. You can certainly overestimate your surplus, which you may be doing in effect right now, or you may be underestimating it. I would like to make the point that the Liberals had a very clear contingency plan about what they would do with any surpluses. It was one third, one third, one third, and a lot of that went to paying off the debt. That is the part of my question that you have not answered. Why have you picked $3 billion, why not more, and how long is long enough to be living with this debt?

If you want to get into Ontario paying off $3.1 billion, you were part of a government that should have been paying it off eventually because you certainly had run up a huge debt through unprecedented deficits.

Mr. Flaherty: I do not know whose budget you are talking about. I can assure you, senator, that I have never heard anyone question whether the budget I did in Ontario was unbalanced.

Senator Mitchell: I am not saying ``you,'' but you were part of that government.

Give me an idea why it is $3 billion. How did you pick that figure? If interest rates go up a half a point, there goes your $3 billion. Interest rates are on that trajectory right now.

Mr. Flaherty: We have a pubic debt in Canada of about $499 billion.

Senator Mitchell: It is $488 billion in your book, I think.

Mr. Flaherty: It has accumulated over mostly recent years, since the 1970s, unfortunately, under governments of different political stripes.

Senator Mitchell: The bulk of it came under the Mulroney government.

Mr. Flaherty: We will not get into who started this, although I would like to.

Senator Mitchell: I would like to, too.

Mr. Flaherty: The planned payment of the debt is at least $3 billion a year. Obviously, if we could pay more we would. We will pay more if we get some economic growth that surprises us.

Senator Mitchell: If you underestimate the surpluses, you will be able to pay more?

Mr. Flaherty: Certainly. On a budget the size of the budget of the Government of Canada, you can have some swing that way. One would hope the swing would be positive, but I want to get away from the surprise surplus idea.

Senator Mitchell: You have used the positive term ``fiscal balance. Your Prime Minister continues to say ``fiscal imbalance.'' Your parliamentary secretary, Diane Ablonczy, and I are both from Alberta and would probably agree there is not one. You can make a strong case that there is not. First, could you tell me which model of fiscal imbalance you are using to conclude that there is? Second, are you going down the route of including 50 per cent or 100 per cent of energy revenues and/or will you extend from the five provincial standard to the 10 provincial standard? Third, if in fact you do conclude that there is a fiscal imbalance, you will have to spend more money to redress it. Where will you get that money? Will you cut programs or increase taxes? If you say you will get out of the way of provincial areas of expenditure and give them the tax room, you will still have to cut programs here, I would assume. Where are you going in that regard?

Mr. Flaherty: That is a lot. Let me be as succinct as I can.

First, we acknowledge that there is a fiscal imbalance. We feel that we should move to fiscal balance. We hope to take a major step in that regard next Tuesday when the finance ministers from across Canada meet. We put out the fiscal imbalance paper with the budget, which I think is a pretty good history of the aspects of the issue that need to be addressed in order to achieve fiscal balance in Canada. Those are the core responsibilities of the jurisdictions in respecting those core responsibilities.

Second, there is the issue of health care, which has largely been dealt with by the previous government in form of a health care agreement over 10 years. I acknowledge that. I am sure senators have noticed that we do not hear much these days about health care spending in Canada because of that fixed escalator, 6 per cent per year, built into the base on the 10-year health care agreement.

The other aspect that is important is infrastructure. We already budgeted more than $16 billion for infrastructure over the course of the next four years. We have to talk about that with our partners; how that money will flow and be used.

The other part, which is more challenging, is post-secondary education; the role of the federal government in research and the role of the provinces in post-secondary education. What should the funding arrangements be? I expect that this topic will be intensely discussed next week and thereafter. Those are the transfer issues.

The other issue, as you noted, is equalization. Despite what has been said by some people in government in Canada, equalization is a federal program. It is a constitutional program, as the senator knows. No province writes cheques to other provinces to create equalization. The Government of Canada collects revenues from taxpayers who are paying their taxes to the Government of Canada and is constitutionally obliged to address the issue of equalization to make sure we have reasonably comparable social services in all parts of the country. That ultimately is a decision of the Government of Canada and will be dealt with in the 2007 budget.

We hope a consensus will evolve on the equalization issue, but we will have to wait and see. We have the report from Mr. O'Brien's group and also the big city mayors. We will be receiving a report from the Federation of Canadian Municipalities. We will have lots of reports with which to deal and lots of recommendations on the equalization issue.

[Translation]

Senator Ringuette: I am one of those people who believe that a budget is much more than an election platform. When you become responsible for a government, you have to make sure you have fair proposals for urban and rural communities. Do you do economic impact studies on regions before moving forward with a budget? If not, why not?

[English]

Mr. Flaherty: Economic impact studies in the Department of Finance; are there such things?

Paul-Henri Lapointe, Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance Canada: We do a lot of studies on economic impact.

[Translation]

We generally look at the budget's overall impact on the regions. Sometimes measures are specific, but others are very general and have impacts on all the regions. No regions are targeted. Yes, we look at that when we prepare a budget. We don't have any studies on the regional impact of a specific measure. We look at the overall picture.

Senator Ringuette: That's what I thought. I could not imagine that our senior bureaucracy, with the quality of its staff, could not provide those kinds of studies. Since we have a regional responsibility, would it be possible for you to submit the economic impact studies that accompany the budget so that we in the Senate can conduct a much fuller analysis in order to provide you with comments accordingly?

Mr. Lapointe: I'm going to clarify what I mean by the regional impact of measures. We look at all budget measures as a whole. We do not conduct an in-depth analysis, for example, of the impact of infrastructure expenditures on the economic growth of one region. We look at measures as a whole and their impact on the various regions.

Senator Ringuette: As a senator from New Brunswick, I would very much appreciate getting those kinds of studies so that we can conduct an analysis in order to determine how that will translate back home and in the Maritimes. Thank you very much for those comments.

My next question concerns the government's responsibility for providing fair measures for all Canadians. I note, sir, that there are inconsistencies in your budget in a number of areas. This evening, I am going to cite the transportation file as an example. Some $900 million is allocated to assist public transit infrastructure in the urban communities. There's also $2 billion in tax credits for public transit users in the urban communities. However, there is absolutely nothing for Canadians living in rural communities and small towns that do not have access to public transit. There is nothing to ensure a degree of fairness.

We already have a situation where our young people are leaving rural communities for the urban communities. What I see in your budget is an incentive to increase that migration toward the urban communities. That is an injustice with regard to transportation. There's no funding for our regional airports. There is no additional funding for VIA Rail. Those are definitely two types of public transit that could assist our rural communities, but there is no funding in your budget. Both with regard to infrastructure and tax credits, you draw a pronounced distinction between Canadians citizens who live in urban areas and those living in rural areas. How can you correct that injustice?

[English]

Mr. Flaherty: To answer your question directly: through the sum of more than $16 billion over the next four years that is ear marked for infrastructure across Canada. The specific measures that you referenced do relate to urban areas in Canada, which have the unique needs of large urban transit systems that require new rolling stock and hence the $900 million grant. Also, we want to encourage people to get out of cars and use public transit, which was the motivation for the tax credit and is quite substantial at a cost $2 billion. Those are needs that relate to urban areas or urban suburban areas in Canada, not to rural areas in Canada, but rural areas in Canada have great needs with respect to roads and bridges. The minister responsible for transport and infrastructure, Lawrence Cannon, has already started his consultations with the provinces on their needs and issues, not just in urban areas but in all areas of the country.

[Translation]

Senator Ringuette: I understand that you want to conduct consultations. I am not telling you I am opposed to that; I am telling that there is an injustice in your budget with regard to public transit. There is no funding for regional airports or for VIA Rail to increase the services they could provide to our rural communities. If your excuse is that we have to reduce greenhouse gas emissions, I agree with you, but what are you doing for the rural regions? You have two areas, the regional airports and VIA Rail, two tools at your disposal to assist the rural communities. Neither of them has drawn your attention.

I can tell you more particularly about New Brunswick. To go to work, people have to buy a car, pay for gasoline, maintenance and, especially, appalling automotive insurance costs, which is not the case of public transit users in the urban areas. People in the rural areas also have to go to work, but they do not receive any tax credits under your budget.

[English]

Mr. Flaherty: The GST, as you know, is charged on top of everything, including when you buy gas, and that will be reduced by 1 per cent.

Senator Ringuette: They will have a GST tax credit on the urban transit user ticket as well. That is where I am going. We must have a balance, because there are also needs for urban workers. I want you to take that into consideration.

Mr. Flaherty: I will pass the message on to my colleague, the minister responsible, since he has very substantial resources to allocate over the next four years.

Senator Ringuette: Well, I hope he will allocate a lot of them to rural Canada and New Brunswick.

Senator Stratton: If we can go back to the GST for a moment, I would like to think there is a good fundamental reason for reducing it from 7 per cent to 6 per cent and then to 5 per cent. Having reduced it, it would take some government a lot of guts to increase it again, whereas it is particularly easy to raise personal taxes a little bit at a time. I am sure you would feel the wrath of the Canadian people if you had the temerity to raise the GST after reducing it. That is a good enough reason for me, at any rate.

Minister, I have a question to ask, if I may, since the GST has been bandied about in many ways. How does it help the poor? We talked about the person with the Mercedes and an individual buying a house. How would it help the people who do not have much?

Mr. Flaherty: People with lower incomes actually buy things. In fact, percentage-wise they use more of their income to buy things. As I said earlier, about a third of all Canadians do not pay income tax, so reducing income taxes, which we did in this budget, makes no difference to them. Reducing corporate taxes probably makes little or no difference to them, but reducing the GST will make a difference to them starting July 1 and every day after that. I agree with the politically astute suggestion by Senator Stratton that it would be challenging for a government to increase a consumption tax, because they cannot hide it.

Senator Stratton: Senator Ringuette was discussing help for rural Canada, and I would like to discuss the child benefit of $100 a month. Urban centres have child care centres, but farmers do not have access to child care centres. I look at this $100 a month as helping families to live in small rural areas. I feel that is a great benefit. Do you agree with that?

Mr. Flaherty: Certainly I would agree with that. I would even take it one step further into large metropolitan areas like the riding I represent, Whitby—Oshawa, where the two largest employers are Ontario Hydro through its two nuclear plants in the area and General Motors of Canada Limited, both of which employ shift workers. As it is now common for both partners to work outside the home, it is very common in the communities that I represent for people to be on split shifts, with one person at home when the other is not.

These people welcome choice in child care as opposed to this regimented, governmentally-organized 8:30 to 4:30 regime, and extra pay for overtime. That does not work very well for them. They need the choice.

Senator Ringuette: In regard to the example you made of your home community and the fact that you were also responsible for a business incentive to create child care spaces, in the businesses that you referred to, how many child care spaces did they create in their own business?

Mr. Flaherty: That is a good question. I cannot give you a specific answer. I do know they have made efforts in that regard, which is a good thing. We will encourage that through a tax credit.

Senator Ringuette: In Ontario, you already had a similar tax incentive in place, and that is true, it did not work. I am sorry.

Mr. Flaherty: My wife and I have three 15-year-old boys. My wife has been gainfully employed — thank goodness — for many years. We went through the daycare and child care challenge when our boys were babies, maybe even more intensely because there were three of them at once.

It is a difficult challenge for parents. One size does not fit all. You need some daycare spaces that are available during the daytime, but you also need alternatives for parents to choose from. One of the ways of doing that is through an allowance payment, which is what we are doing, and then the parents can exercise their own choice. There is no one solution to this.

Senator Ringuette: I do not think you have the solution at all.

Mr. Flaherty: I think providing choice is great. This is a difference between political philosophies. Some people actually think governments should do this, that the government knows better than parents and that government should set up some form of regimented system and parents will just have to fit into that system. Well, that is not a political philosophy I share, nor is it shared by my colleagues in my political party. We believe that parents are actually pretty good at raising children and, given the opportunity, will make good choices for their kids.

Senator Ringuette: I do believe there are major differences between daycare, child care, and baby bonuses.

Senator Cools: Minister, my questions are a little easier than the previous questions. However, I want to first caution you about what I would describe as sloppy, insufficient drafting. There is so much of it these days. Bills fly through the House of Commons, as did this one, and come before us, and there is not sufficient time to deal with them. I would like to leave with you the thought that most senators would like more time to deal with these large bills and questions.

Primarily, minister, I would urge you and entreat to you pay more attention to the actual drafting of these bills. I am looking at two pages, and I could itemize half a dozen terrible things that have been done in this drafting. If you need an example, my eye falls, for example, on clause 181, ``Coming into Force'':

This Part, other than sections 173 to 179, comes into force, or is deemed to have come into force, on July 1, 2006.

We should talk about deeming to come into force, but we can have that debate another day because I want to go to my substantive questions. I do, however, urge upon you, minister, that there are several ministers who pay insufficient attention to the actual textual concerns of the legislation. Sometimes the bill is just too large and too much is being compressed into one bill.

For example, minister, this bill should have been several bills. I note, for example, that Part 6 will become the universal child care benefit act and Part 12 will also become an act in itself. There is a body of parliamentary opinion, which I share, that says that when a minister does that, he should really be going for several acts, not one huge act. I do not like this process and just wanted to put those remarks on the record. When I look at provisions for a universal child care benefit act, I wonder why a separate act was needed? Perhaps you could respond to that issue.

I have worked most of my life supporting families. I support and laud any effort that assists families. In Canada, mothers and fathers with children are probably the most under-supported group, and I feel strongly about this.

Although I am sympathetic to what the government is trying to do with the universal child care benefit, I have some questions about it. Could you share with the committee what I would consider the conceptual framework as to why you went down this road? I understand the goals that you are trying to achieve. When the baby bonus was created several generations ago, we heard many derogatory remarks about it, but it became widely and wildly successful. Then, the conceptual and intellectual framework the government relied upon was placed before members for all to see, even down to the mere fact of choosing the mothers to be the recipients of the payments. Apparently that was determined after much study showed that mothers were more likely to spend the extra cash on items for the children — a birthday party, clothing, shoes, et cetera, whereas fathers would spend it on rent or a mortgage. Could you share with the committee how the government arrived at the amount of $100 per month? Why not $200 or $300? Could you tell the committee why the payment is in cash? Why did you not opt to use the tax system to pay the benefit? Could you tell the committee how it was determined who the recipient of the payment would be?

I support the phenomenon of giving support to families, but I would like to know more about it. The baby bonus program took off like wildfire, but many people have forgotten about it by the way they sleight it in today's community. It was probably one of the most successful programs ever in the history of government, but that is a story for another day.

Mr. Flaherty: My 90-year-old mother agrees with you. She had eight children and when I described the program to her, she said ``You mean the baby bonus.'' I can assure you that in our neighbourhood the money was not spent on beer or popcorn; it was spent on the kids. It went to families, which were often larger in those days so the amounts were more significant.

The amount of $100 is a matter of affordability and budgeting. That was the commitment made. Obviously, it is not indemnification for daycare spaces because it would not cover those costs, but it is a start in terms of helping parents to have choices with respect to their young children. It is nothing greater than that. I believe in pragmatism, and ideas without actions are useless in terms of governing. This is an action that follows on the idea that parents are best positioned to make choices for their children in their family circumstances — single parent, two parents, parents working shifts, living in rural Canada or urban Canada or having available daycare at their place of employment. There are many variables that parents deal with for their children in their home and communities much better than a government in Ottawa can do. Government can be of some assistance on a reliable monthly basis. I have no doubt that parents will use the money in the best interests of their children.

Senator Cools: I have no doubt about that. You refer to beer and popcorn — a distasteful expression that should be tossed into the garbage can and best forgotten.

Mr. Flaherty: I wish you would do that.

Senator Cools: Could you tell the committee why the amount is taxable?

Mr. Flaherty: As you know, senator, it is taxable in the income of the lower income earning person in a household with more than one income. There is no clawback related to it, which is important, and we believe in taxation in terms of income into the family.

Senator Cools: Why does the government need a separate bill for this when it could have been dealt with as an amendment.

Mr. Flaherty: I consulted with the officials, and it is my understanding that it is a budget tradition to put into one bill as many budget provisions as possible. There will be another bill in the fall.

Senator Cools: It is a tradition that many of us have problems with, these conglomerate bills.

Mr. Flaherty: I took note of your concern, senator.

Senator Cools: I want you to be aware, minister, that many people have problems with the conglomerate association of bills passed as one bill by one Royal Recommendation.

It is a sincere belief of mine that when it comes to assisting families, the more money put into their hands directly, the better off the family will be and so too the children.

Perhaps we could have a private conversation about it. The witnesses tomorrow will tell us more about the disadvantages of these so-called national child care systems. Your point is well taken and I thank you for your efforts, but watch the bills.

Senator Nancy Ruth: Mr. Minister, I will simply supply a bunch of ``becauses'' and ``maybes'' and end with a question about poverty, after which I will ask for your reflections.

As a minor philanthropist from Toronto, I am grateful for the removal of the capital gains tax, although I do not mind paying tax. A part of me sees it is a way for the rich to get a bit of a benefit, but I also feel that way about some of the lobbyists coming at government for this exemption being given to private foundations.

I have a self-interest in this, so it is difficult for me to speak to the matter. However, I have some real concern about the stimulation this is giving to the wealthy to dispense of their estates, in whatever form they might take. According to statistics from the Canadian Women's Foundation, less than 10 per cent of all philanthropic dollars in Canada, either corporate or foundation, goes to women and girls. I suspect there will be a lot of money for cultural institutions, hospitals and universities, which might, in some instances, benefit scholarship programs and poor people who are moving forward and would be part of that component. We would all approve of that as it would increase productivity, entrepreneurship, et cetera. However, there is a large segment of Canadians, mainly women and children, who will not benefit from this kind of philanthropic gift because they tend not to give to NGOs, whether international or domestic.

I am aware that it is not the government's job to influence, perhaps formally, those donors to be concerned about the poor in more specific ways. I also note that we do not do gender responsive budgeting in Canada. Given that dollars are now perhaps freed up as a result of hospitals getting more money in other ways for various parts of their work, I wonder if the poor would be served in a more specific way.

I do not actually know what the question is. I do not want you to come back and say, ``Look at what we are doing with the reduction of the sales tax or the $100 per family.'' It is not the middle class folk I am talking about; it is the other Canadians who always get left behind. Historically, there has been a role for governments to play in meeting their needs. These are comments asking about where you are in relation to these issues.

Mr. Flaherty: You mentioned gender responsive budgeting, senator. We do test every proposed budget idea or program for its varying effects on men and women in Canada. That appears in every briefing note I see. I do not know if that amounts to gender responsive budgeting. It is a step in that direction, to see if there are different effects as a result.

We did that, for example, with the apprenticeship benefit that is in the budget. It is a benefit to help apprentices with respect to tools, their training and to help those who employ apprentices. This is the beginning of my answer to you.

How do we address poverty? That is a big issue. I do not pretend to have all the answers. We do know that if persons have better work opportunities they do better. Skills training and apprenticeship matters a lot in that area, as well as strengthening our community colleges and universities.

I go back to what I said earlier about post-secondary education, which is a tremendous challenge for all levels of government across Canada. We want to make sure there is adequate accessibility to skills training, particularly in community colleges and apprenticeship programs, through the unions, and we want to ensure that there is adequate access to universities in Canada.

It is my own predilection to talk about education because of the difference it makes in people's lives. We can see it if they have the opportunity to advance their educations.

Senator Ruth: Many of the poor in Canada cannot access that benefit. My general assumption is that if any government could deal with poverty in this country, they would have already done so. It is hugely complex, and I do not know the answers.

If you have a disabled child and cannot manage, the result may be the break-up of a marriage and you are back to being a single mom dealing with this mentally or physically disabled child. In that scenario, access to training programs is like saying, ``What are you talking about?'' I spent some time worrying about that, and I do not have the answers either. It is a problem.

Senator Eggleton: I have a question about child care. Mr. Minister, you said a couple of times tonight that parents are in the best position to make a choice. I do not understand any correlation between the amount of money being given, $100 a month, subject to tax, and the costs parents absorb. For example, with respect to children under the age of six, which is the only category that will be funded, in Ontario it is over $500. For most provinces it is well over $400 or $500. Newfoundland is the lowest at $360. This is more than just daycare. We are talking about early childhood education, and yet there is no relationship between the money being allotted in this revised family allowance program and the real costs for parents. The majority of parents in this country are both working nowadays, struggling to make ends meet. This budget proposal is not going to help them sufficiently.

You say it is a step in the right direction, but there was an agreement by the previous government, one that all provinces signed, provinces of different political stripes. I think it is a real shame that the opportunity to create a national early learning and childhood program, not just daycare, is being abandoned.

I know you will say that your colleague Minister Finley announced that $250 million would be allocated for the creation of 25,000 child care spaces. I am under the impression that this will largely come through the private sector. A poll in The Globe and Mail said that 75 per cent of companies indicated they would not try to take advantage of the kind of thing similar to the program tried in Ontario.

You also said earlier that you were concerned about surpluses. Some of it was being spent by the previous government in running interference in provincial jurisdictions. However, here we have a case where even Minister Finley said quite clearly that child care falls under the jurisdiction of the provinces. Why not then give the $250 million annually to the provinces and let them deal with their responsibilities in this area?

Mr. Flaherty: We do not have very many child care spaces in this country, and we had a Liberal government in Ottawa for 13 years. We do not have much to show for it, quite frankly, nor do we have much to show for it in most of the provinces, with the exception of Quebec. Even in Quebec, only 30 per cent of those entitled have access to the system, which is usually subsidized and very expensive. Seventy per cent are excluded. That was the last set of figures I saw. This is not a record of success in this country.

Senator Eggleton: There was a study and an agreement.

Mr. Flaherty: There are many nice pieces of paper. After 13 years, at the end of the day, here is this, here is that, but it is not much to show parents, At least now they will get a cheque, I hope. In July it will be for $100 and a total of $1,200 over the course of the year. I meet parents with young children, and they are very grateful to the government for at least giving them something back from the taxes they pay to help raise their children.

You are right; it is not sufficient to pay for regulated daycare in most places in Canada, but it is a help to parents. I think it is a help that parents consider useful.

Senator Mitchell: When Auditor General Sheila Fraser was here, she and her staff officials established that the entire annual cost of the gun registry, with the one-time stuff out of the way, is $15 million a year. That includes registering automatic weapons, handguns and long guns. What do you anticipate saving in pure dollars by doing away with the long gun registry? It must be considerably less than $15 million annually because the infrastructure is there for these other things. What do you anticipate saving given that in the election you were talking about saving billions of dollars and putting it into something else?

Mr. Flaherty: This year we do not anticipate saving anything. This registry is the gift that keeps on giving, with very little in the way of results for Canadians. It will cost money to reduce the registry. I think the bill on that item was just introduced today.

Obviously, there will be savings over time. I cannot give you a figure on what the proposed savings are over time. This is a year of transition.

Senator Mitchell: Could you get me a figure?

Mr. Flaherty: I can tell you that this year it will cost money. It is a negative.

Senator Mitchell: You still have to run the registry for other things.

Mr. Flaherty: For ensuing years, I will get that for you. We do not have that figure at hand, but we can get it for you.

The Chairman: If you could send it to the clerk, Mr. Minister, it will be distributed to all committee members. That would be appreciated.

Thank you very much, Mr. Minister, and your officials for being here today. This has been your first visit with the Senate Standing Committee on National Finance. We appreciate the fact that you made yourself available for our study of this important bill. On behalf of the deputy chair, Senator Cools, and the members of the committee, I thank you sincerely for attending.

Senators, we now have with us Mr. Peter Vukanovich of Genworth Financial Canada and Mr. Andy Charles of AIG United Guaranty Canada.

Gentlemen, welcome to our committee. Committee members have asked you to be here today to deal with the issue of Bill C-13, Budget Implementation, part 9, clauses 192 to 198 dealing with mortgage insurance.

Andy Charles, President and Chief Executive Officer, AIG United Guaranty Canada: Honourable senators, I am pleased to have this opportunity to present our plan to introduce more choice in the mortgage default insurance market, the prudent regulatory process that we have been undertaking, and why we believe Canadians will benefit from the presence of more participants.

AIG United Guaranty Canada is a Canadian member company of one of the world's leading insurers. AIG has been active in Canada since the early 1960s and has offices around the world in over 130 countries and jurisdictions. Our company believes that increased competition in mortgage insurance will benefit consumers, financial institutions, capital markets and the Canadian economy overall. At the same time, it will make our government-backed insurance system safer by spreading risk among more players. In much the same way, prudent investors make sure all their savings are not tied to one vehicle.

Honourable senators, the current federal government agrees that more competition is beneficial for Canadians. The previous federal government also believed that more competition would be beneficial. This process started under the last government's direction and was included in the fall 2005 supplementary estimates.

Budget 2006 commits the government to make the technical changes necessary to allow the entry of more than one private competitor into the mortgage insurance market.

Honourable senators, I would like to provide a current overview of the marketplace. Today, Canada represents the second largest mortgage default insurance market in the world. Right now, there are just two companies offering mortgage insurance to consumers who put make less than a 25 per cent down payment. One is CMHC, a Crown corporation with an estimated 70 per cent market share that earned approximately $1 billion in after-tax profits in 2005, and the other is Genworth Financial, a private sector company with an estimated 30 per cent market share that earned an after-tax profit in excess of $200 million in 2005.

Honourable senators, the dollar amount for insured mortgages is approximately $50 billion annually, so it is an understatement to say there is a significant market opportunity.

I would like to point out that we are not the only company going through the proper regulatory processes. While I do not speak for them today, it is a matter of public record that at least two other companies have expressed interest in entering the market.

AIG United Guaranty Canada's goal is to provide Canadians coast to coast, urban and rural, with the same high- quality, innovative products we do in many other markets around the world. In countries that AIG United Guaranty has entered internationally, the benefits have included increased market competition, the introduction of new products and reduced mortgage credit risk for lenders.

AIG currently employs over 800 Canadians. Our new mortgage insurance business would create an estimated 80 new positions located across Canada. When we come, we come to stay, and we pride ourselves on being good corporate citizens.

Our intention is to build on our international reputation of product innovation. Our plan is not simply to match what already exists. We plan, however, to enhance existing mortgage insurance products to offer to a wider range of Canadian consumers, including self-employed Canadians, new Canadians and Canadians who may have had a credit blemish in their past that they have now clearly overcome.

Our experience tells us there is only one way to gain business against well-established existing participants, and that is to provide superior service and offer innovative products. We believe that is good for Canadians.

Honourable senators, this is a carefully regulated industry. We require the approval and ongoing regulatory oversight of the Office of the Superintendent of Financial Institutions, OSFI. Our application is currently before them, and they are thoroughly vetting us with a rigorous examination process.

OSFI ensures that we have adequate capitalization to serve the market through all parts of the economic cycle. Their requirements for upfront capitalization are stringent, and we have met them. We are also backed by our parent company, AIG, a company with over $800 billion in assets.

In addition to OSFI's continuing role, each province also regulates market conduct in our industry, reinforcing the fact there is substantial regulatory oversight. It will take time for us to penetrate the Canadian market, time during which OSFI, members of this committee and others can and will watch us carefully. Our company is committed to ethical behaviour, innovative service and open competition, and we welcome the scrutiny.

The current budget proposes two changes affecting our industry. The first enables additional private sector competition. The second change increases provisioning for the government guarantee to $200 billion from $100 billion.

As Budget 2006 states clearly, the provisioning change is due to the fact the mortgage market has grown substantially, not because another player has entered the market. In fact, adding other well-capitalized insurers lessens the government's risk.

As the budget states, the government is increasing its provision to ``keep pace with the increase in housing prices and the growth in the mortgage market.''

Finally, honourable senators, AIG United Guaranty Canada would like to point out that we are hardly alone in thinking this measure should proceed. I do not want to leave you with the impression that opinion on this issue is 50/ 50.

In addition to this government, the last government and officials in the Department of Finance, the list of those who support opening the market now includes the Canadian Home Builders' Association, the Canadian Institute of Mortgage Brokers and Lenders, the Canadian Real Estate Association, Royal Bank and Caisse Desjardins. Even CMHC, the other market participant, supported additional competition. We think this is an entirely reasonable approach to increase competition.

As mentioned previously, we do not shy away from appropriate federal and provincial regulators or from review by parliamentarians. As a new market participant eager to share innovative products with Canadians, we are convinced such scrutiny would only reflect well on our organization.

Honourable senators, I look forward to what I hope will be a long and positive relationship in the Canadian marketplace.

Peter Vukanovich, President and Chief Executive Officer, Genworth Financial Canada: Honourable senators, since 1995, Genworth Financial Canada has helped more than 700,000 Canadians achieve the dream of home ownership. We employ over 225 people in Canada. I want to thank the committee for inviting me here today to explain some of the issues that are in play.

The changes to the mortgage insurance industry contained in the budget bill are no small matter. In fact, they propose significant changes to both housing and finance policy. It is complex. It is a lot more than just letting more players into a marketplace. For over 50 years this marketplace has been played by two people. As Mr. Charles mentioned, it was CMHC and our company, which has evolved through a series of companies, Mortgage Insurance Company of Canada, GE Capital Mortgage Insurance and now Genworth Financial Canada.

First, I would like to tell you that we totally support added competition. It is what has got us to the marketplace we have today. In fact, I just gave a speech to the National Press Club a couple weeks ago. I said at that time that Canada's housing market is the most efficient, fair and competitive housing market in the world, and I believe that. We just want to ensure that the changes made to this marketplace are better for homebuyers.

The government's intent to increase competition and benefits for homebuyers is indeed commendable. However, we believe the legislation before you does not go far enough. It does not go far enough in ensuring that the government will achieve its objectives and, in fact, could put the excellent market we have in place in peril.

We have two key recommendations for your consideration today. The first is that market conduct rules be required to ensure that Canadian homebuyers, and I stress homebuyers, be the ones who actually benefit from this increased competition.

Second, the federal government needs to provide the same level of government guarantee to all mortgage insurance providers, including CMHC.

Without these two measures, I firmly believe this legislation will not achieve its intended goal of benefiting Canadian homebuyers, and perhaps hinder a booming housing market.

Before I explain our views, let me provide you with a little background. Last year, over half a million families achieved the dream of homeownership with the help of mortgage insurance. That is one out of every two purchases. It has not been higher in the last 50 years. However, many people do not realize that homebuyers who need mortgage insurance are required to pay the premiums, but they do not choose the mortgage insurer. The choice of the mortgage insurer is made by the lender, for example, a bank or a credit union.

Genworth operates mortgage insurance operations in 16 countries globally. In every case, it is the lender who decides who the mortgage insurer is. This reality that the homebuyer pays for mortgage insurance but does not exactly choose it is critically important for the government and this committee to understand.

I also want to emphasize that there is currently robust and healthy competition going on between our two players today, Genworth and CMHC. Many products have been introduced to the marketplace. As I mentioned earlier, last year, over half a million Canadian families enjoyed home ownership, a figure which has expanded from 300,000 three years ago. This is largely because both of us compete for every qualified homebuyer in every corner of Canada on the basis of a down payment made by the homebuyer. We do not discriminate against applicants with low incomes or those who live in rural locations. Genworth and CMHC do this by choice as we see ourselves as the custodians of a public benefit, that being the government guarantee. I will explain that in detail later in my presentation.

Our overall view is that the current system is working very well, if not to say extremely well. However, we also believe that it is a system at risk unless we put in place the two additional measures I mentioned earlier.

Let me come back to the safeguards. We put them forward because there is ample evidence from the experience of other countries, such as the United States, Australia and the United Kingdom, that have wide open competition. Before they did that they put safeguards in place to ensure that homebuyers benefit.

Let me provide an example of a negative outcome, one we call adverse selection or cherry-picking. That is where people would come into the marketplace and pick out the best risks. True competition that benefits homebuyers can only occur when providers compete for all qualified homebuyers. If new market entrants are allowed to enter a segment of the market and only compete for certain homebuyers in specific geographic areas or with certain credit criteria, that will disadvantage the other insurers. It is likely to disadvantage people in rural areas and those with weaker credit.

Evidence of this type of adverse selection was confirmed by Jeffrey Eisenach, an internationally prominent economist, who recently analyzed the effective changes proposed in the Canadian mortgage insurance marketplace. I would be pleased to offer that study to anyone on this committee who would like to see it. It demonstrates clearly that lower income Canadians will likely pay more for mortgage insurance unless the safeguards we are talking about are implemented.

Wide open competition without proper safeguards will also disadvantage homebuyers in another way. This is potentially through incentive arrangements between mortgage insurers and lenders that will no doubt occur if international experience is any indicator.

Without getting into the detail of how these arrangements work, let me say that last year in the United States mortgage insurers redirected over $750 million of consumer paid premiums back to lenders. It is a perfectly legal system, but at the same time it is difficult to see how homebuyers benefit in terms of lower prices. That is what one would expect from multiplayer competition.

To sum up our comments regarding the safeguards, I would like to say that without them, the government's objective of increased competition will be undermined and the existing public benefits of our mortgage insurance policy framework could be diminished.

Blake Cassels is one of Canada's leading competition experts and can attest that our existing federal and provincial legislation does not adequately protect homebuyers. They just did the review. They sent it to us, and I would be happy to share it with you. When you add that to the experience we have seen in other countries, it is clear to us that homebuyers can only benefit as long as proper market conduct rules are in place.

Our second recommendation relates to the government guarantee. All mortgage insurers have the same level of government guarantee, the one that CMHC currently enjoys; this would include any new market entrants. Currently, this backstop for CMHC is at 100 per cent and that is because they are a Crown corporation. Your government has extended it to 90 per cent for private sector players, and this has created an unlevel playing field for competition. Let me explain. Lenders are extremely price sensitive in the highly competitive mortgage world. Today's difference in guarantee between CMHC and the private sector creates a permanent price disadvantage of several hundred dollars per loan. This makes it difficult for lenders to choose their mortgage insurance provider based on products and services. Since this guarantees a public benefit for which we and any other entrant must act as a custodian, it is inequitable to have a two-tier market, where the private players are on one field and CMHC is on another. CHMC might tell you that the market is level, but you can ask any lender; there is a price disadvantage, one that should not be there.

Under the chairmanship of Senator Lowell Murray, in 1999 the Standing Senate Committee on Social Affairs, Science and Technology studied Bill C-66, and I would like to read a quick quote from the committee's report:

Your Committee heard evidence to the effect that the current disparity between the guarantees is a threat to the long-term viability of a competitive marketplace for mortgage insurance. Committee members have also been told, however, that the current arrangement between the Government of Canada and GE is being renegotiated, and that consideration is being given by the Minister of Finance to making the government guarantee for mortgage-related products equal to that provided to CMHC — 100 per cent.

Ladies and gentlemen, that was over seven years ago. We believe it is time, if we are to have new entrants, to have a level playing field for all players.

In conclusion, I want to repeat my earlier statement that we strongly believe that this committee should either recommend or have a study to show that market conduct rules are an important factor with regard to having a level playing field and ensuring that Canadian homebuyers get what they deserve, which is a continuation of the best housing market in the world.

Senator Stratton: Thank you for your presentations. They were quite interesting.

Of course, this government believes in competition. I guess that is why this proposal is before us today, to a large degree, although I believe it was also supported by the former government.

There are two concerns. One is that while we all think allowing further competition is good, it may lead to a race to the bottom in terms of prices and service. That is of concern, and I guess that is why there should be a level playing field.

The second concern is that if this is regulated by the Office of the Superintendent of Financial Institutions, would we not have sufficient confidence in OSFI to set the regulations to ensure that there would be no race to the bottom line?

Mr. Charles stated that his company wanted to get into innovative ways of offering mortgages to the self-employed, to new immigrants and to people who may have a tougher time getting a mortgage. In tough times, when they lose their jobs, where are you guys? Will you back off and walk away from that kind of thing? I need a response to that question because it is a legitimate one.

Perhaps you could both respond to my questions concerning OSFI, the race to the bottom line, and what happens in tough times.

Mr. Charles: OSFI would define themselves as a prudential regulator. They look at financial integrity and capitalization requirements, and they monitor how financially sound any new entrant into the marketplace is, as well as existing market participants.

We have worked with OSFI over the past 24 months. They have established a high threshold for upfront capitalization that we have been able to meet, and they will continue to do that as we grow the book.

Regarding your second question, I have heard the expression ``cherry-picking.'' It is difficult to even entertain something like that and it is certainly not part of our business plan. As a third player coming into an established market, we need to look at any opportunity to differentiate ourselves from the current two, well-established market participants. We would never entertain a me-too strategy. We need to demonstrate value and create a value proposition that is distinct and different.

With respect to your third point, I will interpret the question if I may, senator: What happens when times are bad? Will we cut and run? Are we only here for the good times? The organization that I represent, senator, has never left the country and will not leave this country.

Senator Stratton: If I may interrupt to clarify, the concern is that you would cut and run from those individuals who had problems, that you would create a higher risk and therefore load more on to the government guarantee. That becomes the question. The concern is not that you would cut and run and leave the country but that you would take on higher risk, thereby increasing the potential for forfeiture, which would place an additional burden on the federal government.

Mr. Charles: As we look at new market niches or expanding market niches, such as the self-employed, new Canadians or people who may have had a credit blemish in their past who have overcome that, nothing that I would be suggesting or my company would be demonstrating replaces due diligence by the lender and the insurer. You still have a lot of process involved before you say yes.

We think there is an opportunity. In the past, many lenders have not looked at those particular market segments. We think there is a way to compete effectively, but not recklessly, and we would still be carrying out that due diligence.

In terms of exposure to the government, the practical likelihood of AIG, an organization with $800 billion in assets, ever coming to the government for anything as it relates to a claim is not nil, but it is as close to nil as it possibly could be.

Senator Stratton: In the days when I used to go to banks to obtain housing mortgages, the banker would say to me, ``You can buy it through us or you can go out and get an insurance policy on your life,'' which was a lot cheaper than getting it through the bank at that time. I would expect it still is. Would these people have that same opportunity today, or are they precluded from doing that?

Mr. Charles: I believe what you may be referring to is creditor life insurance as opposed to mortgage default insurance.

Senator Stratton: Yes, I appreciate that. That is the differentiation.

Senator Angus: Welcome gentlemen. It is refreshing that you have slightly different interests.

Mr. Charles, if you have been negotiating with OSFI for two or three years on the terms of your entry, obviously this government provision in the budget bill is not what induced you to come here. Were you going to come anyway?

Mr. Charles: We first indicated an interest in coming to Canada in 2003. At that time we began doing our market research and due diligence to assess the Canadian market to see how we would approach it. In early 2004, we started working with the Department of Finance and meeting with OSFI to understand the process. Since that point it came to our attention that there was a technical requirement for the Minister of Finance to have the necessary authority to grant the government guarantee to a third insurer, a fourth insurer and a fifth insurer. Prior to that, it was restricted to only two players. I suggest that the policy has always been to facilitate competition. However, there was a technical requirement to give the Minister of Finance the legislative authority to grant it to a third, fourth and fifth player.

Senator Angus: I appreciate that. This bill is now making it available to all comers, as you say, if they want to come. Am I correct that you people would not be coming here if the guarantee were not available to you?

Mr. Charles: That is correct.

Senator Angus: Why did you come only in 2003 rather than earlier?

Mr. Charles: There was a perception that CMHC had a lock on the market. At one time, it had 90 per cent or 95 per cent market share. To give credit where it is due, when Genworth came into the market they introduced a lot of innovation and have achieved some success in the Canadian marketplace. We have seen that, and that has naturally enticed us to look at the Canadian marketplace. I want to reinforce the fact that Canada represents the second-largest mortgage default insurance market in the world and has continued to grow over the last 10 years.

Senator Angus: Is that on a pro rata basis or a proportionate basis?

Mr. Charles: A proportionate basis.

Senator Angus: Not in absolute dollars, surely?

Mr. Charles: In absolute dollars it is the second-largest mortgage default insurance market.

Senator Angus: The first is the U.S.?

Mr. Charles: Yes.

Senator Angus: Would the U.K. be third?

Mr. Charles: I would be speculating, but I would think the U.K. would be third or fourth.

Senator Angus: Do you know of any other new entrants about to come?

Mr. Charles: It is a matter of public record. As was indicated in the other place, I believe at least two other companies have initiated the process through OSFI.

Senator Angus: On the hope or belief that this law would come in?

Mr. Charles: On the belief that the policy of opening up competition would be carried forward.

Senator Angus: Mr. Vukanovich, I understand that you have enjoyed a preferred position. As in any other business, it is great to be the only one in the game, and it is better to have only two rather than three, four or five. I can appreciate that fact.

You have expressed concerns and said, ``If you are going to do it, at least do it this way rather than that way.'' It seems to me that one of your suggestions requires no amendment to this bill. You are really just asking for market guidelines from someone like OSFI to ensure that they do not mess up a good thing. You referred to that as market conduct rules. Am I correct that this would not require an amendment?

Mr. Vukanovich: I do not believe it requires an amendment at all. OSFI's role is to ensure that we have capital, and I put to you that this is not about having adequate capital.

Senator Angus: It could be the Department of Finance. You are asking for these market conduct rules to be laid down before this new provision would be implemented.

Mr. Vukanovich: Yes, sir.

Senator Angus: By someone.

Mr. Vukanovich: Yes, sir.

Senator Angus: You are asking this committee, when we report the bill, to say something along those lines.

Mr. Vukanovich: That is right.

Senator Angus: Would your second point require an amendment?

Mr. Vukanovich: I do not believe it would require an amendment to the bill. I believe it could be done by the Department of Finance in conjunction with the minister.

Senator Angus: Walk me through that again. Market conduct refers to rules of the game so that the orderly market that exists will not become fragmented. As you say, there is a lot of cherry-picking going on. However, I do not see how the government guarantee can be done without legislation.

Mr. Vukanovich: I believe that some of the changes in this bill will enable the minister and cabinet to extend a different percentage of government guarantee to private players.

Senator Angus: You mean that you are at 90 per cent, CMHC is at 100 per cent and perhaps AIG will only be given 20 per cent?

Mr. Vukanovich: I did not say that. I said that I am not looking for any difference among the players. I believe all the players should have the same level of guarantee because the lenders decide who they will choose. If CMHC is always the cheapest, they will naturally gravitate to CMHC. When the other entrants are in the marketplace, we should not be disadvantaged. We should all have the same level of government guarantee.

Senator Angus: Mr. Vukanovich is simply saying that they would not have chosen to have that in the bill, but if it is to remain, there are certain administrative actions that should be taken to make it fair. In other words, if we are going to have new competition, we want fair competition.

Senator Eggleton: What is your understanding of the reason for the current practice of a 100 per cent guarantee for CMHC and 90 per cent for you?

Mr. Vukanovich: That goes back to the early 1990s. The federal government at the time realized that it would be positive to have private sector competition for the CMHC. Without getting too technical, the Basel accord governs the amount of capital that banks have to hold. For a sovereign Crown corporation like CMHC, the bank holds zero capital. Any private sector player had to hold such a significantly higher amount of capital that no private sector company could compete. At the time, the private sector company was engaging in a little cherry-picking versus what CMHC was doing — and I stress ``was.'' When we came into the business as GE in 1995 and picked up the guarantee, we realized that that was not the proper way to do business in Canada and extended our insurance everywhere a lender lends — any city or situation, with a few exceptions. That 90 per cent guarantee was in place for the old company we took over. When we appeared before the Senate the last time, they acknowledged that, given that we were going everywhere, it should be the same for both.

Senator Eggleton: You would be happy if we recommended a level playing field for all the participants, including CMHC?

Mr. Vukanovich: Absolutely.

Senator Ringuette: I want to state for the record that from a legislative perspective it is truly unprecedented to have such a bill in a budget because it has nothing to do with the budget. I want to be clear that this is an abuse of executive power. I want to make my comments on the record. Understandably, this has nothing to do with your issue. However, the federal government guarantee to mortgage insurers, whether it be CMHC or AIG, means that for your particular situation the federal government guarantees 90 per cent of the mortgage loan. Therefore, what is your business here? I truly cannot understand. I am looking at this and wondering if the owner of this house is being played for dumb and dumber. I say that because, at the end of the day, a mortgage default is being paid, through you, 90 per cent by the federal government. That is what you have: 90 per cent is guaranteed by the federal government. That is what you say in your brief at page 3. Your second recommendation is that the federal government should afford all mortgage insurers the same level of guarantee that the CMHC enjoys. Of course, the CMHC guarantee is 100 per cent because it is the left and the right hand of government. It is a Crown corporation. You currently have a 90 per cent guarantee. What is your risk? You have no risk at all. If any Canadian would have their business venture guaranteed by the federal government at 90 per cent, we would have a lot of businesses, do you not think?

Mr. Vukanovich: I would like to clarify a bit of a misunderstanding probably propagated by the way we shortened our presentation. The 90 per cent guarantee only comes into account if I go bankrupt. The reason it is needed is because of the way lenders treat capital. Without the guarantee, I would not be able to, on my own, provide enough assurance versus CMHC on a price basis.

Remember, I mentioned these international rules. That is where the guarantee comes into play. I pay the government for the use of the guarantee.

Senator Ringuette: On what?

Mr. Vukanovich: Annually, on the basis of how much I have insured every year. The government is collecting a fee from our company. In addition, the government is very well protected in terms of the amount of exposure that is out there.

I have over $1 billion in capital to pay loans. I have to go through all that $1 billion before the government guarantee would ever be called.

Senator Ringuette: How much in terms of loans are you guaranteeing to the lenders?

Mr. Vukanovich: Currently, through the different levels of what we call ``loan to value,'' we have approximately $90 billion insured.

Senator Ringuette: The $1 billion guarantee, or asset, is maybe 1.2 per cent of your operation.

Mr. Vukanovich: When you look at CMHC, they currently have reserves of $3 billion, and they are backing up almost $300 billion of mortgages.

Senator Ringuette: Yes.

Mr. Vukanovich: It is a similar ratio. Actuarially, when you look at percentages of people defaulting and the amounts paid out on those claims, $1 billion is considered to be adequate. I am OSFI regulated and they believe that to be so as well.

Senator Ringuette: Depending on the economy and where your target customers are located. We all understand that. There is some self-credit out there, and I suppose that is what you are handling. If my recollection is right, CMHC has 6 per cent to guarantee a mortgage. I believe it is 6 per cent of the loan.

Mr. Vukanovich: Do you mean the price, or do you mean when a loan is required to be insured?

Senator Ringuette: When the loan is required to be insured.

Mr. Vukanovich: For anyone with less than a 25 per cent down payment, the bank is required to be insured. The bank then turns around and asks the consumer to reimburse them. That is the big issue I am trying to bring to the table here. If a lender is allowed — and currently there is no prohibition against it — to charge the consumer more than they are actually paying, then there is an opportunity to create a negative market situation.

Senator Ringuette: No, that was not my question. I guess I did not ask it properly. As far as I know, CMHC charges 6 per cent to guarantee a mortgage at the bank.

Mr. Vukanovich: There is a range of premiums. I want to make sure you understand that we are talking about residential properties only, for what is known as the ``up to four-unit market.'' The prices range, depending on down payment amounts. If you make a 5 per cent down payment, the current premium for that is 2.75 per cent of the mortgage amount. On $100,000 that would be $2,750. If you put 10 per cent down, the current price is 2 per cent. If you put 15 per cent down, the price goes down to 1.5 per cent. At 75 per cent loan to value, the current price is 1 per cent.

Senator Ringuette: What is your range of premiums?

One of the big issues that you are indicating is that you would like to see your industry bypass the lender market and be able to market directly to people seeking mortgages. Am I wrong in that assumption?

Mr. Charles: Our customer is primarily the lender. What we would be doing, senator, is providing comfort to a lender. Take a bank for example. A bank may have 1,200 branches across this country. Their expectation upon us would be to be able to provide mortgage insurance coverage wherever they are located.

Lenders are primarily our customers. When I spoke earlier about the different products we want to look at, in addition to being a full service provider, we would be providing comfort to lenders to perhaps look at different markets that they have not entertained in the past and do it in a prudent manner. We are not looking to bypass the lender.

Senator Peterson: The premiums are all fixed. They are the same. You do not bid on them. A portfolio would be the same. There is no competition on the price, or is there?

Mr. Vukanovich: There is because in the last three years prices have decreased twice right across the spectrum; once in 2003 and again last year.

When there are two or three players, it is very difficult to maintain a difference. The market is very elastic in economic terms. If my price was higher, no one would use me. If my price was lower, everybody would use me. There is a natural gravitation toward a similar price.

Senator Peterson: If the lending institution is your customer, you can go to them with a proposal and say: I would like this portfolio, or I will do $200 million worth of business with you at X per cent.

Mr. Vukanovich: The way it is currently done is loan by loan. Every application comes in and is reviewed on its own merits. That person's credit rating, property and background are analyzed to the best of our ability and that of the banks, and we make a decision. Most people are granted insurance.

Mr. Charles: Senator, you asked about pricing variances. I believe that as you have more market entrants, you will see more variance in the prices charged.

Senator Peterson: OSFI will get very concerned. You can price yourself out of business, too?

Mr. Charles: OSFI measures and assesses the financial integrity and financial ability of the organization. Market conduct, which was mentioned earlier, is also regulated by the provinces.

Senator Peterson: On the $50 billion in contracts, what is the default rate? Is it very high?

Mr. Vukanovich: It varies. In today's environment it is quite low. Back in the early 1980s when unemployment and interest rates were high, particularly in Southern Ontario, the default rate was quite high.

The Chairman: What is high and low?

Mr. Vukanovich: Low would be three out of 1,000; high would be 15 out of 1,000.

Senator Peterson: Is there any concern that the banks will try and get in on this action? They are doing the lending.

Mr. Vukanovich: Currently, the Bank Act requires banks to be insured for anyone with less than a 25 per cent down payment. You may know that last week a white paper was tabled, which will probably come before this committee. It recommended that the 25 per cent be adjusted to 20 per cent, a 5 per cent reduction.

It is a relatively small percentage of the market. At the same time, I think it reflects the relatively positive economic times that we have in the housing market.

Senator Peterson: They just tag this premium onto the mortgage and it becomes a bigger mortgage, right?

Mr. Vukanovich: Right.

Senator Cools: Mr. Vukanovich, in your remarks you referred to a study by Mr. Jeffrey Eisenach. Perhaps you could provide it to our clerk so he can circulate it.

Mr. Vukanovich: I would be happy to.

Senator Cools: You also talked about Blake Cassels.

Mr. Vukanovich: They are a leading competition expert.

Senator Cools: The real reason for my intervention is Bill C-13; however, the issues that you raised are contained in the Main Estimates. To the extent that they have provoked so much discussion and interest from the committee, Mr. Chairman, perhaps we could organize another meeting and invite these witnesses back. Perhaps we could also have the CMHC, the Office of the Superintendent of Financial Institutions and Blake Cassels come and talk to us about this issue.

What you have done for us, gentlemen, is to open our minds to the understanding that the problem is far deeper and wider than meets the eye. For the intents, this bill is pretty much a done deal, but I have interests in what you are saying.

The Chairman: I am not so sure I would go along with my honourable deputy chair in saying that the bill is pretty much a done deal.

Senator Eggleton: There are many amendments to consider.

The Chairman: We do have a meeting scheduled for tomorrow.

Gentlemen, we appreciate you appearing before the committee today.

I do agree with Senator Cools in relation to provoking some thought, not with respect to the specific issue in this bill so much as the industry generally. We are quite interested in hearing what you have to say. If it turns out that we do have a fuller study on this in the future, we would be pleased if you would agree to come back and discuss this matter further.

Senator Eggleton: May I make a suggestion? Can we get the comments by the Department of Finance on the two matters that Mr. Vukanovich has outlined, the market conduct rules and the level playing field proposition in the context of this bill, at this time?

The Chairman: We will ask the clerk to work with the sponsor of this bill to see if we can receive information in that regard.

Senator Eggleton: You are suggesting this is a line we could take. Let us get the comments of the Department of Finance. I do not know why they would not have considered this already. They may already think this is reasonable.

Senator Cools: The minister was here earlier.

The Chairman: Senators, I would like to remind you that our next meeting is at 9 a.m. tomorrow morning.

The committee adjourned.


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