Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 3 - Evidence - Meeting of December 5, 2007
OTTAWA, Wednesday, December 5, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-12, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005, met this day at 4:15 p.m. to give consideration to the bill; and to study on issues dealing with interprovincial barriers to trade, and the present state of the domestic and international financial system.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good afternoon, ladies and gentlemen and all of those present, including senators on the Standing Senate Committee on Banking, Trade and Commerce, and Canadians watching us on the webcast and on the CPAC network, which I gather will carry this meeting subsequently, if not live.
My name is Senator Angus, and I am chair of the Standing Senate Committee on Banking, Trade and Commerce. My distinguished deputy chair from Montreal, Quebec, is Senator Goldstein. Also present are Senator Meighen from Ontario, Senator Tkachuk and Senator Gustafson from Saskatchewan, Senator Eyton from Toronto, Senator Harb from Ottawa, Senator Moore from Halifax, Senator Ringuette from New Brunswick, Senator Biron from Quebec and my good friend, Senator Massicotte, from Manitoba and Quebec. Is that a fair description?
[Translation]
I am very happy today to again welcome the Minister of Finance of Canada, the Honourable James M. Flaherty. It is always very important to us to have him appear before the Standing Senate Committee on Banking, Trade and Commerce.
[English]
Mr. Minister, you have kindly accepted our invitation to come today and discuss with us a subject that we started studying in the first session of the Thirty-ninth Parliament. We studied the subject in the format of a round table on internal trade barriers in Canada, and how they impede productivity in the nation and leave Canada in a less than ideal competitive circumstance vis-à-vis its trading partners.
You were kind enough to come as one of our final witnesses on this subject. We were hoping to wind up that particular topic before the holidays, but the committee, in session, has agreed that it is so important — and given what was said about it by the Governor General in the Speech from the Throne — that we are going on the road to hear what folks have to say at both ends of the country, in the West and in Nova Scotia. It will be important to have your insights.
The minister has also agreed to highlight one of the big issues on internal barriers, namely our lack of a national — either a single or common — securities regulator. I believe, minister, that you have agreed to talk to us about the current turbulent state of both the domestic and international markets, which has given rise to some concerns, particularly the situation in the U.S. We know you have had talks with your counterparts, not only south of the border but in the Group of Seven, G7, and I believe the Group of 20, G20.
In any event, thank you for coming. I understand that we have one hour as you need to go by 5:15 p.m. I believe you have an opening statement, so over to you, sir. Hopefully, you will take questions from the honourable senators afterwards.
[Translation]
Hon. James M. Flaherty, P.C., M.P., Minister of Finance: Mr. Chair, I am very happy to have this opportunity to meet with the committee to discuss Canada's economy, our success, our unlimited potential and the challenges ahead of us, including the need to strengthen our economic union.
[English]
We live in a global economy, as you know. There is fierce competition and growing uncertainty in the global economy. We need to be bold and innovative to stay ahead of the curve.
I will talk a bit about the economy overall and then about the issues relating to barriers to trade within Canada, as well as a couple of other issues — including the asset-backed commercial paper challenges we have. I will not go on for long because I am sure these subjects will be raised in senators' questions.
The Chair: I apologize for interrupting, but it is particularly germane to us today — not only because, as we speak, the future Governor of the Bank of Canada is talking to the House of Commons committee on finance. Tomorrow morning, David Dodge, the incumbent Governor of the Bank of Canada will give our committee his thoughts on the current state of the economy in a macro way. I think it all fits nicely together and there is considerable interest in your appearance here today — not only by us, but generally.
Mr. Flaherty: Governor Dodge and I talk regularly, which is my duty and my pleasure. The governor-to-be and I do not talk as much anymore because he is preparing for his new role at the Bank of Canada. Of course, we talked when he was G7 deputy at the Department of Finance until his appointment as the new Governor of the Bank of Canada starting February 1.
By way of context, we have been the government for 22 months tomorrow. We are a minority government, as you know, and we have now completed two budgets. Each one has had two detailed budget implementation bills.
We have also completed two fall economic statements, both of which were substantive and changed tax laws in Canada substantially, not always with unanimous support. This level of achievement is remarkable for a minority government. In fact, I am told that not since the minority governments of Pearson in the 1960s has so much been done so quickly. That achievement includes legislative success in terms of not only bringing in notices of ways and means but bringing in bills and having them pass. The elements of both budgets have become law and, additionally, the budget of the October 30 Economic Statement is on the way to becoming law.
We have been doing a couple of important things. The first is long-term, broad-based tax deductions, particularly in the corporate-side business tax reductions for Canadians. These tax reductions were in the October 30 Economic Statement.
Second, we are paying off large amounts of public debt. From time to time, I hear people say how we are running large surpluses and therefore we should spend this money. I heard that view in the House this afternoon. It reflects inaccurate thinking. We are running operating surpluses but we are running a massive public debt that was accumulated in the 1970s, 1980s and early 1990s. Many Canadians forget that, until that period of time, it was de rigueur in Canada not to run deficits. In my view, as a product of that baby-boom generation, it would be entirely improper and unfair for us to pass on those debts to the next generation. We have accumulated those debts in our time and had the benefit of spending money that was not raised but rather borrowed in our time.
I take seriously the reduction of public debt. We have now reduced the public debt by in excess of $1,500 for every man, woman and child in Canada. That reduction was done in less than two years.
The spending side is always a challenge because there are many spending pressures. We have done two things, in my view. One of them is that we focused our spending so we are not trying to be all things to all people. Our military was in a state of disrepair. Their equipment was outdated, and so we are rebuilding it. That rebuilding is not inexpensive, and is long term in terms of the some of the equipment requirements such as acquiring planes and ships, et cetera.
The other aspect is ensuring that we directly support families in Canada. We are doing so through the Universal Child Care Benefit of $100 per month for children under the age of six. There are other initiatives like the physical fitness tax credit for children.
On the other side of spending — controlling the rate of growth and spending — the President of the Treasury Board and I have worked together to devise an expenditure management system that is now operational. We are reviewing every program and initiative in the Government of Canada. This so-called ``A Base'' that is looked at rarely is now being reviewed. It will take us four years to look at every program, but we have had long meetings this fall. We have another meeting tonight, and another one tomorrow morning looking at individual programs.
We are asking each department to look at their lowest-priority 5 per cent of spending. This exercise is not a cutting one but a reallocation one. We received advice from the private sector — from chief executive officers who volunteered their advice. We took their advice on how to proceed, and how to use outside experts to give advice in government. That exercise is well underway, and it is not talked about much but it is a significant change in the way government is conducted. It will result in our ability to control the rate of growth and spending. As you know, we are committed to keeping the rate of growth and spending to within the rate of growth of the economy of nominal gross domestic product, on average, over the budget cycle.
Another matter is restoring of fiscal balance in the federation. This ask can be a difficult one. However, I am pleased that most of the provinces are comfortable now with the principle-based predictable funding formula we have in place for fiscal balance in Canada. I continually hear from my provincial colleagues that predictability is important. It allows provinces to plan ahead and know what they can expect.
[Translation]
Our economy is on a solid footing.
[English]
We are in the second-longest period of economic expansion in Canadian history. The only longer period was right after the Second World War. Our budget is more than balanced. We are paying off record amounts of debt. Business investment is expanding for the twelfth year in a row. The unemployment rate is the lowest in 30 years. More Canadian men and women are working than before in the history of our country and there is more labour mobility within Canada than we have ever had since such things were measured. There have been 655,000 new jobs in the past 22 months. Employment and economic growth is up in every province and in every region. The federal government is in surplus. The governments of all the provinces and territories are in surplus. The only exception is P.E.I.
[Translation]
Although Canada clearly has a solid financial footing, we must still keep in mind the challenges we face, global tensions and the national difficulties that vary from one region and sector to another.
[English]
Some of the challenges involve the volatility of the Canadian dollar, which has been of concern not only with respect to absolute numbers but with respect to the pace of the depreciation of the U.S. dollar vis-à-vis our currency. That depreciation and volatility has been remarkable this year. We are concerned about the uneven effect it has had on some sectors of the economy, including the auto sector, agriculture, tourism and forestry.
We are seeing a significant, continuing decline in the U.S. housing market and witnessing the negative economic effects of that. We are seeing countries around the world trying to cope with the ongoing credit market turbulence in an attempt to maintain well-functioning capital markets and mitigate the impact on their economies. That challenge continues. It should be recognized that we are not out of the woods on the issue of credit market turbulence. I am sure the governor will speak more about that tomorrow.
We have the issue of competition, particularly from China, Brazil and India. We have the demographic challenge; we are now at the top of the hill and coming down. We will have worker shortages going forward in Canada, fewer people available and an aging population. We are experiencing a shortage of skilled workers in many parts of Canada already, and we have an aging infrastructure challenge, as well as increased gridlock in major urban areas.
We have an economic plan called Advantage Canada, which we published in October, 2006. I commend it to Canadians as a reference if they wonder where the government is going and why in fiscal and tax policy, infrastructure and other areas. The Advantage Canada plan, on the website of the Department of Finance, sets out where we are going in the medium- and long-term in terms of economic planning.
On the fiscal side, we want to eliminate Canada's total net debt by 2021, in less than a generation. We will continue to reduce taxes. We want to establish the lowest tax rate and new business investment among the industrialized nations by 2012. As a result of the October 30 announcement, we will have the lowest corporate tax rate in the G7, out of the major industrialized countries. That is 15 per cent nationally. Alberta is at 10 per cent, and that will permit us to brand Canada as a 25-per-cent corporate tax jurisdiction. I am optimistic that other provinces will emulate Alberta in that way and move their corporate tax rates to the 10-per-cent level. I hope the provinces make it by 2012 so that we can have that favourable brand for our country.
There are other advantages: the Infrastructure Advantage to build modern, world-class infrastructure that promotes economic growth, a clean environment and international competitiveness; the Knowledge Advantage to create the best educated, most skilled and most flexible workforce in the world; and an Entrepreneurial Advantage to reduce unnecessary regulation and red tape by 20 per cent and increase competition in the Canadian marketplace.
[Translation]
On the budget side, we are reducing the national debt by more than $37 billion, which is $1,570 for every man, woman and child in Canada
[English]
On the tax side, we are lowering taxes for everyone. The $60 billion in reductions outlined on October 30, added to what we have done before, brings us to just under $200 billion in personal and corporate tax reductions over this and the next five years.
I mentioned the corporate tax reductions. You are familiar, of course, with the reduction in the consumption tax and the GST, which will be a full two percentage points as of January 1, 2008, less than 30 days from now.
On the infrastructure side, and there is much talk about this issue in various parts of Canada, we have created the largest infrastructure program at the federal level since the Second World War. This initiative is historic, and we have done two things. Not only have we created the fund, which is $33 billion for which my colleague Lawrence Cannon is the minister responsible, and it is called the Building Canada Fund, some of which has already been spent this year. We are also creating a public private partnerships office at the federal level through the Department of Finance. That office is well on its way to reality, and it was funded at $1.26 billion in the budget in this fiscal year. That funding is important because that is the opportunity to leverage that $33 billion in cooperation with the provinces and the municipalities and the private sector and pension plans to produce more than $100 billion of infrastructure in Canada over the course of the next seven years. This program is unprecedented since the Second World War in Canada. I urge our provincial and municipal partners in the federation to engage with the Government of Canada in the allocation and employment of these funds to create the needed infrastructure in Canada.
On the subject of interprovincial trade barriers, which I said I would talk about and which is important, it is fair to say, and certainly what I hear in my travels in Canada, that Canadians expect trade barriers will be eliminated within Canada. They are surprised to hear that we have more barriers to trade between our provincial jurisdictions in Canada than the sovereign nations of the Economic Union have among themselves in Europe. These barriers damage our economy and disrupt, I would say, the Canadian economic federation.
We have a great example in the West. British Columbia and Alberta entered into what is formally called the Trade Investment and Labour Mobility Agreement, TIMLA. I was in Edmonton on Monday this week speaking to the Chamber of Commerce, and was proud to tell them how well we thought of their agreement and how other provinces should be encouraged in sign on.
The agreement has an enforcement mechanism. This achievement is remarkable. I have been a provincial Minister of Finance. I have gone to a meeting of the Agreement on Internal Trade and heard provinces found guilty of breaches of their obligations inter se, and have seen that the penalties were unimportant and that it was time for everyone to go for dinner. This system is ineffective. The TILMA system is effective because it has strong enforcement powers.
Alberta and British Columbia have now created between them the second largest free trade zone in Canada. Only Ontario is larger. As the Canada West Foundation said in its 2006 annual report, ``The booming economies, the blossoming populations, and the increased economic integration brought on by TIMLA have given the West the economic strength to cement its prominence on the national agenda.''
Alberta and B.C. have lifted the bar and set a new standard there, and I encourage all provinces to break down their interprovincial trade barriers, allowing us to sharpen our competitive edge in the world.
On the common securities regulator, I say two things right away. What is proposed is not a federal regulator but a common one. The regulation would be done by the 14 jurisdictions of Canada — the 10 provinces, the three territories and the Government of Canada. The model was based on one created by the Purdy Crawford committee. We are moving forward on our discussions on this subject. We view regulation as essential, to have the proper flow of capital within our country, and access by Canadians to opportunities. We also advocated at a meeting of the G7, mutual recognition of securities regulators or free trade in securities, and Canada's presentation was met positively by our colleagues in the G7. At the request of the G7, Canada is now drafting up a proposal that will be discussed at the next meeting of the G7 finance ministers on that subject. In addition, Australia, New Zealand and other nations with whose finance ministers I have spoken find the idea of mutual recognition of securities regulators to be advantageous for them, and they would like to further that cause, as would the United States.
There is much we can accomplish, but we need to sort out our house at home here. If we are to move forward with international mutual recognition of security regulators, we need to come together and have a common securities regulator system here in Canada. We would make the regulation of our markets more responsible and accountable by creating a decision-making body that would coordinate the views of all jurisdictions promptly and fairly. This proposal does not mean an Ontario-oriented or Toronto-oriented regulatory body. This possibility is always a concern in some parts of Canada. What we have now, and I say this to my provincial colleagues, I will say it again next week when the finance ministers gather in Ottawa again and I will say it right now to you, is an Ontario-dominated securities regulatory system in Canada. About 85 per cent of the regulation now is by the Ontario Securities Commission regulated by the Legislative Assembly of Ontario. Those in favour of Ontario domination should permit the current system to remain. Those who want distributed powers with respect to securities regulation should support a common securities regulator in Canada.
Protection of investors and enforcement is something I will mention. Nick Le Pan's report on the RCMP Integrated Market Enforcement Team, IMET, was released on Monday this week. Many of you probably saw the front page story in the Toronto Star on Saturday about the enforcement record of the Ontario Securities Commission. Another report was given to the provincial and federal ministers of justice at their last meeting in Winnipeg on that same subject. This issue is a matter of concern for the image of Canada as being able to enforce and effectively regulate our own securities within the country. Frankly, the reports are unanimous that we are not doing well, and some reports are of the view that this situation is an international embarrassment for Canada.
I will move on, then, to a couple of other comments. I do not think the subject of harmonization of provincial sales taxes and GST is on your agenda, so if you do not want me to talk about it, I will not.
The Chair: Quickly.
[Translation]
Mr. Flaherty: Harmonization of sales tax is an area where we could greatly improve the competitiveness of the business tax. The provinces that have a value-added tax structure — Quebec, Nova Scotia, New Brunswick and Newfoundland and Labrador — have a much lower rate of tax on investments by businesses than the provinces that have a retail sales tax.
[English]
This issue is important with respect to the level of taxation on businesses in those jurisdictions in Canada that do not have a harmonized PST/GST, and that includes Ontario, of course. Provincial sales taxes harm business competitiveness because they apply to business inputs, which increase production costs and deter investment. A recent analysis by the C.D. Howe Institute indicates that experience in the three harmonized Atlantic provinces has been positive. Annual investment in machinery and equipment in these provinces rose 12 per cent above historic trend levels in the years following 1997 sales tax reform. Tax harmonization would generate a reduction in Canada's marginal effective tax rate metre of about seven points.
As was stated earlier this year, our government is willing to work with the five provinces that still have provincial sales taxes to help facilitate the transition to provincial value-added taxes harmonized with the GST.
I will leave that subject and move to the subject of financial markets. As you know, in or about August, the U.S. subprime housing market underwent developments that triggered other concerns. A wide array of financial markets are affected by concerns about liquidity and the creditworthiness of counterparties. These concerns persist. This situation has important implications for capital markets and for economies around the world. Canada has not been, and will not be, immune to these developments. Our economic fundamentals are sound, our financial system is strong and our financial institutions are well capitalized and well regulated, so we are in a good position in Canada. However, that does not mean that these challenges need not be watched carefully, and we are not immune to some of the consequences.
On the asset-backed commercial paper, the Montreal table is still in session, with a goal of the fourteenth of this month for completing their work. Purdy Crawford is serving valiantly there again on behalf of our country.
When matters became serious in August, the federal Department of Finance, the Canada Deposit Insurance Corporation and the Bank of Canada worked hard and promptly to ensure that the banks worked together with the government agencies. Their goal was to ensure that matters remained orderly and that the Montreal accord table was set up with a view to preserving collectively value in that non-bank-backed, asset-backed commercial paper that was on the table at Montreal.
I have gone on for some time. Is there anything else I need to say before having the opportunity to listen to honourable senators? There is nothing else I absolutely need to say. I think I have outlined our strengths and challenges and the concerns we presently have.
The Chair: Thank you, Mr. Minister. I am operating on the basis that you must go at 5:15, but I hope you have a little latitude, because senators are anxious to question you and some of them are also under time constraints.
Senator Harb: Thank you very much, minister, for your presentation. Let us first talk about interprovincial trade. A number of witnesses who appeared before the committee indicated there are problems, while others said there is no problem. We had unanimity from the witnesses in that the agreement on trade, although it has a dispute settlement mechanism as part of it, has two problems. First, it is toothless, in a sense, because they cannot take measures to enforce a decision that is made.
Second, if something is not included in the agreement, and therefore excluded, everyone collectively must agree on it. One might ask: Why was that not done? As Liberals, we were involved in developing part of the agreement. However, I am wondering why not the opposite approach; everything is included unless it is excluded?
Mr. Flaherty: I wish I knew the reasons why many things were done or not done in the past. I do not know. I have the unusual perspective of someone who has served as a provincial Minister of Finance and now federal Minister of Finance, and this system is ineffective.
Senator Harb: My second question deals with the hedge fund issue and the liquidity that you mentioned. Living now in a global economy, we have a lot of migration in terms of hedge funds, as well as transactions that are taking place. To what extent are you or your department involved in trying to bring about some sort of international discussion about these issues in a serious manner? I know one of the mandates of the G7 is to look at those issues, but I think they have gone beyond only the G7. We have read about developing countries and least-developed countries, and banks being affected across the board. Do you think now would be a good time to focus on this issue, perhaps through the Organisation for Economic Co-operation and Development, for example, to have an international forum to talk about this matter?
Mr. Flaherty: The issue of hedge funds has been discussed at some length at the G7 Finance Ministers Meeting in Potsdam, which I think was in May this year, and again at the G20 in Cape Town two and a half weeks ago with finance ministers and central bankers. As you know, Chancellor Merkel of Germany has expressed her views publicly about the desirability of regulation of hedge funds. There is some degree of regulation.
The other school of thought is that one wants to stay away from a highly regulatory environment, because that has been tried in Sarbanes-Oxley and so on, arguably without a great deal of success, and that hedge fund investors are supposed to be sophisticated, not unsophisticated, investors, so that they can take care of their own risks.
There has been no resolution of that debate between those points of view. The debate continues. There is also concern — and we have had these discussions at both the G7 and the G20, and at the International Monetary Fund and World Bank, among Finance Ministers — about the role of sovereign wealth funds and other large pools of capital that are active globally, and their role in the world. It will not surprise you to hear that those countries that have significant sovereign wealth funds are not in favour of any sort of interference, and those who do not are worried that perhaps there should be some interference.
Those are both areas where large pools of capital are active. Some of the hedge funds, we know, because it has been made public, have substantial investments from state-controlled enterprises.
Senator Harb: To set up a national common securities regulator, what will prevent the government from setting one up and saying: Well, for those provinces that want to be part of it, they are welcome; for those who do not, fine, but that is what we are setting up and we are proceeding notwithstanding.
Mr. Flaherty: We prefer a consensus model, senator.
Senator Meighen: Welcome, Mr. Minister. Can you give me some concrete ammunition with respect to internal trade barriers? Those of us who sat on this committee have heard evidence, as Senator Harb alluded to, such that we would think people came from two different worlds.
On the one hand, for example, I look at evidence given to us by the Saskatchewan Federation of Labour and the National Union of Public and General Employees, who in essence say: What is all the fuss about? According to the Saskatchewan Federation of Labour, one tenth of 1 per cent of gross domestic product is affected by internal trade barriers, and only in a few areas. You have said that labour mobility is greater than it ever has been and that the economic situation in all provinces and all regions appears to be a lot better than it was before. Those who do not share your view say: What is the big deal?
Can you help me on that? What is the big deal?
Mr. Flaherty: The big deal is that we could have a stronger economy and more economic growth. I could name a couple of provinces where we have made progress but that would be unfair.
Senator Ringuette: Minister, I will ask my questions in the same order in which you made your remarks.
On the one hand, you started with issues about budget spending in regard to military equipment. On the other hand, you did not mention that you were cutting our soldiers' salaries and income. Also, you mentioned a grave difficulty in regard to the forestry manufacturing jobs that we are losing left, right and centre. We have been losing those jobs for the last 16 months and yet, in your budget, there is no reference to this situation.
We were looking specifically into two items today, one in regard to the interprovincial trade barriers. On this issue, I have listened carefully to the people coming forth with their different points of view from one end of the spectrum to the other. Looking objectively at the B.C. and Alberta agreement to remove those interprovincial trade barriers, I think that initiative is a good one. However, a major federal initiative gave the incentive to these two provinces to do that, which is the Asia-Pacific Gateway. Millions and millions of dollars from the federal government have been divested into the Asia-Pacific Gateway for Vancouver, thus opening the door.
In the last 12 months, an initiative has been put forth on an Atlantic gateway. This initiative would provide some incentive for the Atlantic provinces to remove trade barriers within the Atlantic region. Is it your government's intention to put forth an incentive of that kind in the Atlantic provinces as your federal arm, helping to remove those barriers? Will you say to these provinces, we will help you build an Atlantic gateway, and surely you recognize that for it to be operative at its maximum, you should start talks about removing interprovincial barriers?
Mr. Flaherty: Thank you, senator. Is this word, ``incentives,'' not a wonderful one? It covers a lot of measures, does it not?
For example, we had incentives in the budget this year for provinces that still have capital taxes to rid themselves of them. Three of the provinces took the initiative, based on the incentive — Ontario, Quebec and Manitoba — so this is a good thing. As you know, we have abolished capital taxes federally, which are taxes on capital, whether or not there is any profit. This tax needs to be eliminated as quickly as possible if we are trying to help business in this country.
Incentives can help. However, on the gateways, we are not talking about incentives; we are talking about infrastructure money — part of that $33 billion I mentioned earlier over seven years. We will go ahead and invest in the Atlantic gateway. Again, it is a regional gateway, not for one part of Atlantic Canada only.
Similarly, the Asia-Pacific Gateway is not only about Vancouver or British Columbia. It is also about Alberta, Saskatchewan and Manitoba. It is about the whole country, but it is about trade moving in the West toward Asia, and incoming trade — not only at the Port of Vancouver, but at Prince Rupert and the new concept of a port in northern Alberta, as a value-added place.
These gateway ideas encompass not only the East and West, but central Canada — the important Quebec-Ontario corridor leading to Niagara and Windsor-Detroit. We call them ``gateways,'' but they really are ``trade ways'' — ways in which our country can increase its participation efficiently in global trade.
Senator Ringuette: I take it that your answer is yes, you will invest part of the infrastructure money in the Atlantic gateway. Is that correct?
Mr. Flaherty: Absolutely.
Senator Ringuette: Can I ask how much?
Mr. Flaherty: You can ask but I would not have an answer. You will have to ask my colleague, Lawrence Cannon, for that kind of information. I would not guess.
Senator Ringuette: I have a small question in regard to the common regulator versus the single regulator and your example of the CPP. It is not the best example because Quebec manages its own CPP in comparison to the rest of the provinces. I hope that would not be the scenario when we talk about a regulator, either single or common.
Senator Moore: One thing I did not know about before today is a sovereign wealth fund. Can you give me an example of one? Is it something controlled by a nation or is it a pool of private money?
Mr. Flaherty: The discussion is an interesting one because some would say internationally that the Canada Pension Plan is a sovereign wealth fund. It is at pains to say no, they are not because they are at arm's length from the government in terms of their governance.
Senator Moore: Are they funds controlled by a state?
Serge Dupont, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: That is exactly right. The minister has it right. We have seen them in some of the oil exporting countries. We see them in China, obviously, and in Russia as well.
Senator Moore: Saudi Arabia?
Mr. Dupont: Saudi Arabia, I think, and others — Kuwait, Dubai, China and Russia.
Senator Moore: Alberta?
Mr. Flaherty: The Alberta Heritage Savings Trust Fund — some would classify it as a sovereign wealth fund.
Senator Moore: I will follow up on what Senator Meighen was asking. We have heard different figures with regard to the productivity that would be enjoyed by Canada with the removal of the interprovincial barriers. Do you create modelling of this sort of thing?
Denis Gauthier, Assistant Deputy Minister, Economic Development and Corporate Finance, Department of Finance Canada: No modelling as such is done in the department but many studies have been done. The numbers you have heard — between one quarter to three quarters of 1 per cent — are in the ballpark of GDP.
Senator Moore: Do you sit down yourselves and look at the numbers of trade and what it could be? Do you crunch any numbers on that?
Mr. Gauthier: Some number crunching has been done in the past, but estimating what trade could be is not a daily activity.
Senator Moore: You are advocating it; you must have some basis for saying, if we do this, X will result. How do you support your initiative if you do not have some idea of the numbers?
Mr. Flaherty: All the studies point in the same direction.
Mr. Gauthier: Yes, those things do not change much in terms of the calculation.
Senator Moore: You say they all point in that direction, but we have heard evidence from witnesses that it is not worth discussing; it is minimal, something like 1 per cent.
Mr. Flaherty: Do you mean 1 per cent of GDP?
Senator Moore: No, one-tenth of 1 per cent of GDP was the evidence from the Saskatchewan Federation of Labour. The Canadian Centre for Policy Alternatives was equally dismissive. Others have said it could be an enhancement of as much as $5 billion a year. Have you looked at that estimate?
Mr. Gauthier: There are recent estimates at Industry Canada —
The Chair: Excuse me, sir; I omitted earlier to mention that two senior officials from the Department of Finance are with the minister: Serge Dupont, Assistant Deputy Minister, Financial Sector Policy Branch; and Denis Gauthier, Assistant Deputy Minister, Economic Development and Corporate Finance. Mr. Gauthier is responding to Senator Moore.
Mr. Gauthier: Recent estimates from Industry Canada and elsewhere in the government indicate the cost of barriers to be around a quarter of 1 per cent of GDP.
Senator Moore: What would that be in dollars?
Mr. Gauthier: That figure would be roughly $3 billion.
Mr. Flaherty: There were those who said the North American Free Trade Agreement would have no economic benefits as well. One must evaluate the source of analysis.
Senator Moore: I know, and I thought of that when the witnesses gave their evidence. It was so extreme compared to other testimony we have heard.
You mentioned something in your remarks about restoring fiscal balance. With regard to the Canada Social Transfer, particularly the education funding aspect, we had Michael Baker, Nova Scotia Minister of Finance, before us and he indicated that this year my province of Nova Scotia receives $28 million less than it received last year. I think the budget provides for our province to receive, this year, $6.4 million over what it received in the old formula, and Alberta receives $344 million. Therefore, over 10 years we will receive an extra $64 million and Alberta will receive $3.44 billion.
I look at those figures and am prompted to ask: How do we compete? How do we keep our best students, educators, administrators and researchers? I think this situation is waiting to explode. There must be some type of equity or balance in the system. We all cannot go to Alberta for post-secondary education. I understand the same thing will happen with regard to health funding starting April 1, 2014, when the current agreement expires. Is that not so? I think that change is in the legislation. Are you looking at addressing those inequities and, if you are, what are you thinking of doing?
Mr. Flaherty: I do not have all my fiscal balance numbers with me. I know this: Nova Scotia will be better off this fiscal year than it would have been under the old agreement. There is no question about that. I have lived through this issue and discussed it with the Province of Nova Scotia. I have had discussions with my friend, Michael Baker, the Minister of Finance in that province; with Angus MacIsaac, the current acting Minister of Finance; and with the Premier of Nova Scotia. We had hours-long discussions about this subject. We went the extra step of providing the amendments to the agreements that we put in the fall budget bill, which is progressing now through the House of Commons and will be with you shortly. This step was taken to assuage any concerns in Nova Scotia that they would not always have the best of the old accord or the new equalization payment. That is guaranteed.
Senator Moore: I am not speaking of the accord. That issue is a whole different one. I am talking about the funding under the Canada Social Transfer for post-secondary education in my province. I have had discussions with Michael Baker, whom I know, and he is upset about this transfer. He knows the numbers because I worked with him on this file. The numbers are in the budget. It is your budget. How will we address that inequity in the system?
Mr. Flaherty: I am happy to get the numbers for you. The inequity you describe is not an inequity — it is the reality of having moved to per capita funding. Surely, we are beyond the point where we would say to provinces that they should not receive equal per capita funding for post-secondary education.
Senator Moore: Surely, we are not beyond the point of inequitable federalism. This is not about balance-sheet or spread-sheet federalism. This is about sharing and equity.
Mr. Flaherty: It is about students and students are individuals.
Senator Moore: When students are educated in my province, Ontario receives the money.
Mr. Flaherty: Per capita means per student. It does not mean per province.
Senator Moore: I know what it means.
Mr. Flaherty: I do not think you would want to deny students per capita funding in this country.
The Chair: Senator Moore, the subject is dear to your heart and all of our hearts, but it is not on the agenda we have come to discuss.
Senator Moore: We have talked about everything else.
The Chair: Other senators would like to ask questions. Three senators wish to speak. First will be Senator Biron who has had his hand up for a long time, then Senator Tkachuk and then Senator Goldstein is our clean-up batter at the end. Do you think you can handle that, Mr. Minister?
Mr. Flaherty: Sure.
Senator Biron: Are the sophisticated investors that deal with hedge funds much more competent than the ones who created the subprime loan?
[Translation]
Are these hedge funds sufficiently monitored and regulated, or do you believe that the market forces that control them are enough? As well, like sub-prime loans, do hedge funds present some risk to the economic stability of Canada and the rest of the world?
[English]
Mr. Flaherty: Perhaps there is more than one question there. I need to say first that the regulation of hedge funds in Canada presently is done by the provincial securities regulators, not by the Government of Canada. That may be another reason why we ought to advance this idea of a common securities regulator in Canada. They deal with their definitions of what a sophisticated investor is. Are hedge funds monitored or regulated closely enough? You spoke about the hedge funds and then the asset-backed commercial paper as well. It is not for me to pass judgment on the performance of common securities regulators. I can say that when the trouble started in August, people in Canada and abroad did not look to the provincial securities regulators. They looked to the Government of Canada, the Department of Finance, the Canada Deposit Insurance Corporation and the Bank of Canada to get us out of this situation and to deal with it. Again, that expectation suggests to me our need to be cooperative in our approach to common securities regulation in Canada.
Senator Tkachuk: The 2007 federal budget talked about progress and skilled labour, mobility of skilled labour and a regulatory harmonization. Then in the Speech from the Throne, it was said: ``. . . Canada still has a long way to go to establish free trade among our provinces.'' In that Speech from the Throne, the federal government talked about the trade and commerce power to make the economic union work better.
I thought that comment was an interesting one because it has been a long time since we have talked about the trade and commerce power. I wonder if perhaps you could engage us a bit about how we might use the trade and commerce power to make the economic union work better.
Mr. Flaherty: I do not want to go into a constitutional debate. As I said earlier, senator, I think it is fair to say that when Canada was created, the trade and commerce power, like the banking power, is some indication that the Fathers of Confederation were of the view that some national economic functions needed the attention of the federal government in Canada. When we come to the free movement of goods and services in the country and the movement of capital in the country, as with banking, it seems to me there is a compelling argument, and many people make it to me across the country, that the national government must have a role.
Senator Tkachuk: I agree. Senator Harb and I were at a Chamber of Commerce function last week in Winnipeg where they talked about interprovincial trade and harmonization of regulatory powers. There is a tremendous amount of frustration in the wrangling amongst all the provinces on many of these issues, with the truckers and with the agricultural groups that were there as well. I always thought that the federal trade and commerce power was a neglected power and that perhaps one with a sharper pencil might use it from time to time to ensure that the interests of the citizens were looked after. I think it is important that the federal government use the power from time to time.
Mr. Flaherty: Thank you.
The Chair: Is that a question?
Senator Tkachuk: He can comment if he wishes, or think about that.
Mr. Flaherty: I have been edified. I am content.
The Chair: Before we wrap up our study on interprovincial barriers, it was suggested that we bring in one or two constitutional experts to talk about that particular trade and commerce power. Do you think it is a constructive approach, or would we encounter only puffery?
Mr. Flaherty: One always worries about constitutional debate in Canada, but the issue is important enough that, frankly, canvassing all parts of the issue is helpful to the people of Canada.
Senator Goldstein: Thank you, Mr. Minister, for coming, and thank you, Mr. Gauthier and Mr. Dupont for edifying us. I have a specific question dealing with principal protected notes. Regulations were issued last month and published in the Canada Gazette with respect to these notes and how they would be dealt with henceforth. I understand you received commentary from various interested parties with respect to those notes, which, as you know, reflect effectively an investment in hedge philosophy, if not hedge funds. Are you willing to share with us at some future time the comments that you receive in connection with the regulations? I ask the question because the regulations fall short of what would otherwise have been the case with respect to a security issue in Canada in that they do not require the same level of detail as, for instance, an issue governed by a prospectus. The regulations are less than that. Can you share with us what you receive in that perspective?
Mr. Flaherty: Are you asking in the future or now?
Senator Goldstein: No, in the future. You cannot do it right now.
Mr. Flaherty: It is a matter of consultation, and yes, we can do that, subject to privacy concerns, of course, yes.
Senator Goldstein: Thank you.
The Chair: Mr. Minister, I want to exercise a bit of chairman prerogative. We have been given to understand that perhaps the effect of the declining U.S. dollar on Canada is more severe than in the case of perhaps other nations and that we must fight hard to adjust to that declining dollar. Can you comment briefly on that? Does that matter concern you, sir?
Mr. Flaherty: It does, and we have raised that matter in international fora. The depreciation of the U.S. currency has been borne to the extent of about one-third by our Canadian currency, and we have 33 million people; and another third borne by the European Union, and they have 10 times or so the population of this country. We have disproportionately borne that burden. It is a credit to Canadian businesses that they have shown the degree of resilience they have, despite this rapid depreciation of the U.S. currency. This disproportionate share is because, on a trade-weighted basis, so much of our trade is with the United States.
The Chair: Are we 16 per cent in the trade-weighted numbers? How does that work?
Mr. Dupont: I do not know what 16 per cent you refer to. Since January 2007, the Canadian dollar has appreciated roughly 15 per cent relative to the U.S. dollar. The minister has spoken to the proportion of the adjustment, if you wish, related to the U.S. dollar that Canada has had to bear compared to other nations being in the range of one-third on a trade weighted basis.
The Chair: It is significant.
Mr. Flaherty: I made this point at the central banking meeting of the G20 finance ministers in Cape Town two and half weeks ago, sitting beside our colleagues from China. We sit alphabetically, Argentina, Canada, China, so we are close.
The Chair: Do you think their currency is over-valued?
Mr. Flaherty: No, our currency and other currencies like the South African rand, the Brazilian currency, the Australian dollar and the New Zealand kiwi are, in a sense, being sideswiped by this battle between the United States and China, particularly China and other Asian currencies, but particularly China's relatively inflexibility. These are not matters that we do not raise. We raise them in the fora directly, and we hope they will be more flexible. I will not go further than that.
The Chair: Mr. Minister, we appreciate your visit. We wish we could have you for another hour. The session has been an excellent one.
As I said earlier, this is the Standing Senate Committee on Banking, Trade and Commerce. We are here to study Bill C-12, An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005.
Bill C-12 is a reprint, a reincarnation of Bill C-62 from the First Session of the Thirty-ninth Parliament, and we are back now to give sober second thought to this list of amendments, which hopefully will improve and render chapter 47 usable by the stakeholders.
Gentlemen, we are pleased that you are here representing the Canadian Association of Insolvency and Restructuring Professionals, CAIRP. We have Kevin Brennan, Vice-Chair of CAIRP and Senior Vice-President with Ernst & Young Inc; and Claude Gilbert, Past Chair of CAIRP and Senior Vice-President of PricewaterhouseCoopers Inc.
I understand you will both speak. Welcome to the committee.
Kevin Brennan, Vice-Chair (CAIRP), Senior Vice-President, Ernst & Young Inc., Canadian Association of Insolvency and Restructuring Professionals: Good afternoon, honourable senators. I am pleased to appear before your committee on behalf of the Canadian Association of Insolvency and Restructuring Professionals, CAIRP, to testify on the federal insolvency legislation. I am vice-chair of CAIRP, and with me today is Claude Gilbert, our immediate past chair.
CAIRP is the national not-for-profit organization that represents insolvency and restructuring professionals. Our 884 general members are identified by the certification mark CIRP, which stands for chartered insolvency and restructuring professional. It is earned through a combination of study, work experience and licensing as a trustee in bankruptcy.
[Translation]
Claude Gilbert, Past Chair (CAIRP), Senior Vice-President, PricewaterhouseCoopers Inc., Canadian Association of Insolvency and Restructuring Professionals (CAIRP): For the past six years, our Association has collaborated intensively on insolvency reform, from participating on the Personal Insolvency Task Force to our various submissions to this Committee prior to the November 2003 release of your report, Debtors and Creditors Sharing the Burden.
When Bill C-55 was introduced, our Association made submissions on the provisions dealing with insolvency, both personal and commercial, to the Standing House of Commons Committee on Industry. In addition, a number of CAIRP members sat on a variety of working groups that reviewed the bill jointly with the Insolvency Institute of Canada, and met with members of your committee from all parties.
Subsequently, CAIRP appointed members to advise officials at Industry Canada and Human Resources and Social Development during the drafting of Bill C-62 (now renumbered C-12), the amending legislation designed to correct technical weaknesses in Chapter 47. We hope that our members' expertise proved useful.
We have recently made submissions to your Committee on various aspects of personal and commercial insolvency. Today Kevin Brennan and I are going to focus on the submission dealing with commercial insolvency.
Our members are independent and are the professionals who will ultimately be responsible for applying the federal insolvency legislation. This means that we as their representatives are well placed to recommend reform measures that would benefit debtors, creditors and the general public alike. We are extremely interested in seeing the insolvency reform process through to a successful completion as soon as possible. The bill before you today emphasizes the primary intention of insolvency procedures, which is to maximize what creditors are able to recover while protecting insofar as possible the affected business and its employees.
Among other things, the bill aims to increase the protection for wage earners with regard to unpaid salary and pension amounts. And it would enhance Canada's economic competitiveness.
CAIRP recognizes the importance of these provisions and is convinced that Bill C-12 would improve the fairness and efficiency of our country's insolvency process. We thank all parties wholeheartedly for the support that has brought the Bill to this stage.
[English]
The Chair: Before you start again, Mr. Brennan, I wanted to underline the fact — something I believe the witnesses are aware of — that we are blessed here at this committee with having an in-house expert who, in another life, advised the committee when it did its study. Senator Goldstein is known to the industry and to the stakeholders, and so it is helpful to us.
You were talking about the professionals who ultimately are responsible for the administration of this legislation. When you talk about the professionals, are you talking about the trustees in bankruptcy as a group?
Mr. Gilbert: Yes, about 90 per cent of the trustees in Canada are members of our association. We also have other members, but most trustees are our members.
The Chair: That is helpful. I had the benefit of input from Senator Goldstein, which is how I knew that, but I thought it important to bring up that point, because the trustees are basically the arbiters.
Mr. Brennan: We endorse the legislation. However, we believe certain aspects would benefit from further consideration, as is outlined in our submission. In addition, we believe certain amendments should remain subject to a heightened scrutiny by Industry Canada and all insolvency professionals. It is important to identify any need for interim or future amendments, should some of the current legislative amendments prove ineffective or counterproductive.
With this in mind, we believe further enhancements to the legislation should focus on the following: It should promote, where possible, the post-engagement contribution of normal cost pension plan payments, where possible, by insolvency administrators on behalf of the former employees of the insolvent debtor retained by the insolvency administrator to fulfill its mandate.
To accomplish that objective, enhanced protection of insolvency practitioners from successor employer obligations is required. The legislation should promote the success rate of restructuring by eliminating needless uncertainty as to the nature and status of Crown claims, including the inconsistencies that arise between the Bankruptcy and Insolvency Act, BIA, and the Companies' Creditors Arrangement Act, CCAA. The legislation should permit creditor companies to continue the two-way supply of goods and services with the insolvent debtor companies after the onset of proceedings. To permit this supply, it should eliminate the creditor's abilities to exercise setoff of pre-filing claims against post-filing obligations. Such claims could unduly impact the cash flow of the insolvent debtor and the ability to restructure successfully.
The legislation should promote the long-term success of a restructured enterprise by permitting the compromise of claims that may be identifiable but have not crystallized or cannot be quantified before the compromise or arrangement is sanctioned by the court, and the legislation should encourage or, at least not discourage, qualified individuals in joining boards of distressed companies to lead them through the many challenges ahead. The legislation can accomplish this goal by eliminating or mitigating their exposure to obligations of liabilities in the event that the company fails, despite their best efforts and intent.
[Translation]
Mr. Gilbert: We also strongly recommend another improvement, which, although it did not appear in our written submission, is similar in nature to the recommendations there. It involves renaming the Bankruptcy and Insolvency Act. We think it should be called the Canadian Insolvency and Reorganization Act. This new title would correspond better to Canada's reoriented policy, which now encourages businesses and taxpayers to restructure and recover rather than opt for bankruptcy.
CAIRP believes firmly that bankruptcy should remain the last resort. The title of an act should accurately represent its intention. If the BIA were renamed the Canadian Insolvency and Reorganization Act, businesses and taxpayers in financial difficulty might be more inclined to seek help before bankruptcy became their only option. In addition, the new title would correspond better to our members' activities as trustees and administrators of proposals, interim receivers, and private or court-appointed receivers.
[English]
Mr. Brennan: Thank you for your attention to our formal presentation. My colleague and I will be pleased now to answer your questions.
The Chair: The presentation was excellent. You have done it, I thought, in a neat way, bilingually and crisply. When I saw the main brief, I was a little nervous.
This is a big day for us at the Banking Committee. We completed a long study about the need for reform, tied in with study that was done amongst the stakeholders. We then went through this dance that everyone knows started with Bill C-55, which ended up in not a nice place, namely, unenacted, after going through the Parliament.
You are the first witnesses to come before us, and we have this large bill before us. If I understood you well, you said that you endorse this legislation, but you have a whole lot of other amendments that are needed.
Before we commence our questioning, are you asking us to report this bill back with amendments, or are you saying it is good, you are glad it is finally here, you want it to go ahead, but we should keep in mind that these things would help make it even better?
Mr. Brennan: That is correct. We want this bill passed, and if it is passed without amendment, to us, it is far better than not being passed at all. This bill definitely improves the fairness, efficiency and effectiveness of the Canadian insolvency process. It balances better the rights of debtors and creditors, and we would like to see it passed.
The Chair: We will proceed to questioning.
[Translation]
Senator Biron: You mentioned that the new French title should be ``la Loi sur l'insolvabilité et la réorganisation du Canada'' instead of ``la Loi canadienne sur l'insolvabilité et la réorganisation.'' When you talk about the reorganization of Canada, I think that the Parti Québécois would be happy to be part of that.
Mr. Gilbert: That is a very good point. I had not noticed that, because we prepared the English first, then we played a bit with the French version. In fact, the French title could be ``la Loi canadienne sur l'insolvabilité et la réorganisation.'' That would sound better than ``sur la réorganisation du Canada.''
[English]
Senator Harb: Was your organization involved in the consultation with the government when the government brought the bill or the idea of the bill forward? If so, why did the government not take into consideration your recommendations? One would say, chair, with your permission, it would be extremely helpful if we had the bureaucrats sitting here while the association makes their comment on each one of the amendments they want. At least, we could get a reaction to the proposed amendments, so we could compare notes and see the heads butting at each other all at once. At least we would be able to have a better conclusion.
[Translation]
Mr. Gilbert: I chaired the board at that time. I have not been the chair since August, but I can answer with regard to that period. For six years we held consultations and advised people. Two of our members sat on the committee that advised the Industry Canada officials about drafting the bill we are talking about today. The points we are raising are technical points, things that Bills C-47 and C-12 did not address. They are more omissions than corrections. They are things we would like to see improved for the sake of the fairness and effectiveness of the insolvency system in Canada.
A bill evolves over time, depending on perspectives across the country. Some bills come out of new case law or problems that arise, and there may be points that were inadvertently omitted, points that are more technical but still important, except for one point that we are raising to correct a new provision in the bill.
[English]
The Chair: I think, Senator Harb, so the record will show, because you made an interesting point, officials from the departments of labour and industry, who appeared last week before the committee, are sitting here in the room. Their ears are good and I know they are taking this on board.
Senator Harb: Very well.
The committee was told that we better hurry and pass this legislation because there are so many important things that need to be taken care of, and to a large extent, this is the second time we find ourselves in the pressure cooker. We all know that we will have a legislative review at some point soon, but I do not know when.
Senator Goldstein: It is in five years.
Senator Harb: It is five years from now. Should the hammer come down and the committee have a choice to make, namely, whether to put our foot down and say we want those amendments to go through now, and risk the bill sitting on the sidelines until we receive the response of the government? On the other side, should the committee take note of your recommendations and suggestions, pass them on to the government and serve notice to the government that the next time this legislation comes back we want to ensure you have taken all those points into consideration?
Which of the two choices would you recommend?
Mr. Brennan: We recommend that the bill be passed without amendment if it would otherwise not come into force for whatever reason. The suggestions we make, although Mr. Gilbert indicated they are largely technical, are important. They can be dealt with in a separate round of amendments either five years from now, or preferably in some much shorter period of time, through another amending bill that could be introduced through the House and brought forward.
We think this bill is a good one. We think it enhances many things, and that it is timely given the state of the economy as well. Reading in The Globe and Mail this morning about the global credit crunch and the issues around U.S. demand for Canadian products, a lot of things justify bringing this bill in now and putting it in place before things turn worse. There are many good things about this bill and we do not want them missed.
The Chair: Senator Harb, you may not have been present when we had our hearing with the officials. I think you had to leave for part of it but they made the point that given that this bill is framework legislation — with all the important elements — that they will conduct an ongoing review of necessary amendments. They will not wait for the five-year period to elapse.
If you check the transcript, I think you will find the record will show a willingness to come in at a relatively early date with other amendments that we may not be able to complete this time. The minister even said he was open to that approach. There were two officials — the Minister of Labour was here and the Parliamentary Secretary to the Industry Minister was here — and they led us to believe that if we required a ministerial letter or if we were to put observations with our report about this need, they would be well received.
[Translation]
Senator Massicotte: Mr. Gilbert, you talked about changing the title of the bill to emphasize reorganization and recovery after a bankruptcy. But the proposed amendments require that the court consider whether an existing creditor could potentially be prejudiced.
Mr. Gilbert, could you clarify? At what point should the system favour reorganization over liquidation? Where it prejudices a secured creditor, should the judge favour recovery?
Mr. Gilbert: Those issues are decided in court, according to the judges' opinion, which evolves over time. The judges' job is to strike a balance between the interests of businesses and creditors.
In my opinion, the system is working well. Depending on the circumstances, the bill sometimes favours debtors and sometimes creditors. Depending on the economic cycles, we sometimes feel as though creditors or businesses are favoured too much.
Once again, in our opinion, the system is working well at present, especially in the wake of the amendments made in 1992 and the ones introduced by Bill C-47, including the possibility of obtaining interim financing to save businesses. It is important to encourage businesses provided there is no abuse. The law strikes a good balance on this point.
We believe that the Industry Canada officials did a good job, both with Bill C-47 and with Bill C-12. We have a very good bill that balances the interests of the various parties when it comes to insolvency.
Senator Massicotte: In 2003, experts often noted that it was easier in the United States than in Canada for a debtor in financial difficulty to recover. Economic experts have also indicated that it is important to the Canadian economy to allow reorganization rather than systematic liquidation.
Do the amended bill and the proposed bill address that gap in our system?
Mr. Gilbert: A number of the concepts presented here are similar to the American system. If our system is not competitive, large businesses will try to reorganize in the United States.
A number of measures in the system bring it closer to the American system. However, in the United States, when the system favours one side too much, there are often abuses. I did not talk about the abuses that occur in some reorganizations in the United States. The measures in this bill bring our system closer to the American system than before.
Senator Massicotte: In 2003, we had a big debate in this committee about what to do with union contracts. I see that your report also mentions these contracts. You seem a bit disappointed that the bill does not give the court the authority to split or renegotiate union contracts.
We had recommended that the court be given this power, subject to three or four criteria. Clearly, that might be the main amendment you would recommend?
Mr. Gilbert: The submission we made on Bill C-55 addressed three important issues, including the renewal of collective agreements. We felt that the amendments made by Bill C-55 did not go far enough and that what was proposed would not work in practice.
We are not here to make laws. Some people's opinions run contrary to our own, and we will have to live with that. The bill contained provisions regarding an arbitration mechanism. We recommend that Industry Canada monitor what happens in upcoming insolvency cases so that it can make adjustments during an upcoming review or sooner if necessary.
We have serious reservations about the formula presented in Bill C-55. It does not take anything away from the current process and forces people to negotiate. However, nothing happens if they do not negotiate. Consequently, we do not know what will happen. That is why the rulings that are handed down after Bill C-12 is adopted will have to be monitored.
[English]
Mr. Brennan: If I may add one point in response to Senator Massicotte, I think a reorganization of a company can be beyond a normal reorganization, which is through one of the proposal processes, whether it is a CCAA or a Division I proposal. Reorganization of a company can also be done through a court-mandated receivership process where the enterprise is otherwise sold as a going concern. We think the bill does a good job of promoting that process as well.
One key driver of empowering insolvency practitioners to participate in the process of restructuring an organization lies in the successor employer obligation protections they are afforded otherwise. We think that the drafting of Bill C- 12 does a good job of that, except for the provisions as related to contributions to a pension plan. We think that insolvency practitioners will be more adept now at taking on the role and trying to reorganize outside of some of the wonky ways it has been done in the past — through liquidating, CCAAs or other ways. We think the bill does the job necessary to promote that.
Senator Massicotte: Your response made me think of something. Obviously, the bill introduces super priorities — in other words, new creditors coming in and ranking ahead of even guaranteed security holders. Will that provision affect financing for a new company, where bankers could say, I have an additional risk I did not have before and I do not want to bear that risk? We want to help companies reorganize but we do not want to impede new companies from obtaining financing and growing. Will that provision affect their financing potential?
Mr. Brennan: In many instances, I think the cost is factored in already although typically, in a proceeding where an insolvency practitioner goes in, one of the first things they do is pay the employees because insolvency practitioners need their support in any event on a go-forward basis. For the most part, that cost is factored in.
Senator Moore: The first bullet on page five of your speaking notes regarding recommendations that could be included in the legislation or subsequent legislation is:
It should permit creditor companies to continue the two-way supply of goods and services with insolvent debtor company after the onset of the proceeding. To permit this, it should eliminate the creditor's ability to exercise set off of pre-filing claims against post-filing obligations. Such claims could unduly affect the cash flow of insolvent debtor. . . .
Does this recommendation mean that if I supply and continue to supply a product to an insolvent company — before the pre-filing and filing for restructuring — that I cannot continue to do so? Today, can I not continue to?
Mr. Brennan: It applies to certain circumstances where companies are both the supplier and customer. An example would be, a company supplied raw materials to a manufacturing company for conversion to a finished product, then bought that finished product. Therefore, they were both the supplier and customer. Those obligations that arise post- filing may be able to be set off against the outstanding debts due that company prior to the commencement of the proceeding.
Senator Moore: So it occurs when the company is both a customer and a supplier.
Mr. Brennan: It is a complex area of law and it can be unanticipated.
Senator Moore: At the bottom of the page:
The legislation should encourage, or at least not discourage, qualified individuals in joining Boards of distressed companies to lead them through the many challenges ahead. It can do this by eliminating or mitigating their exposure to obligations and liabilities in the event that the company fails despite their best efforts and intent.
I was surprised by this. In other words, someone who commits to be a director of the insolvent company is personally liable for the obligations of that insolvent company if the restructuring fails.
Mr. Brennan: Certain of the obligations the individual can be liable for, yes.
Senator Moore: What obligations are they? Are these obligations entered into by the company itself?
Mr. Brennan: It primarily refers to things such as salaries, wages and vacation pay.
Senator Moore: I said so last week and I still think it is a big risk. I agree: If they are looking to bring in good minds around the table, if they think this company is worth saving and they want to bring in people to help put it in place, I would think this provision would be a discouraging item.
Mr. Brennan: We would like to see a due diligence defence provided.
Senator Moore: There should be something so that they can obtain the use of those talents. They did not put the company into insolvency; they are trying to clean it up and make it available for resale.
Senator Massicotte: When I read your presentation, I probably agree that and the directors should receive better coverage. However, the existing act protects the directors relative to future liabilities relative to bankruptcy. I gather you are happy with that coverage. What you propose in your letters is to amend the Bankruptcy Act relative to the debt retroactive to the date of bankruptcy. I probably agree, but it is a back doorway of changing of the Companies' Creditors Arrangement Act, and I do not think that is the purpose of this act. It is a really a bankruptcy act, and it is neat but I think we see where you are coming from.
Mr. Brennan: We do not see it in terms of court-ordered charge on the assets for the pre-filing obligations. It is a clarification of general due diligence defence, or maybe a specific due diligence defence of some nature for liabilities that exist, pre-bankruptcy. When someone is in the zone of bankruptcy and trying to attract specific talent to help address a problem, it would be difficult to attract someone with experience and qualifications to assist them to lead that company that has now become rudderless, to prevent a filing or prevent the failure of the enterprise.
Senator Massicotte: I am not certain it belongs in this act.
Senator Goldstein: Would it be fair to say that the directors who come on board for purposes of helping to re- organize an enterprise should have the obligation to make sure that certain limited types of liabilities are paid? I am talking predominantly about employees' salaries going forward and deductions at source. If the company is unable to pay its salaries and deductions at source, then there is not much of a prospect for its reorganization. Your suggestion to insulate directors who come on board is not totally necessary. I raise that point for your consideration. I do not think it is appropriate to discuss it or debate it, but we should bear in mind that consideration.
Senator Moore: Do I hear the suggestion that new board members will therefore be responsible for the salaries and some benefits even though, in spite of their best efforts, the company has not been able to generate them? Senator Goldstein, are you saying that in their application to the court they will demonstrate that it can or cannot? If they say it can and it cannot in the end, are they responsible?
Senator Goldstein: For the most part, the question is academic. We do not have time to go into it but, in practice, when the courts entertain an application for reorganization predominantly under the Companies' Creditors Arrangement Act, they insulate directors and the board from liabilities that are incurred henceforth. That insulation applies unless the directors act in bad faith. I am not sure it is an acute problem. It is there, but not acutely there.
Senator Tkachuk: Since we have your association here, perhaps I may be permitted a more philosophical question about this whole matter. We talk about restructuring, but companies go broke because of bad management, a poor economy, increased competition or their products become irrelevant — regardless, something bad happens.
Would it be more efficient not to have all this restructuring stuff? Industries grow around keeping something alive that, perhaps, should be dead. Would it be more efficient to have the company go broke, sell off the assets and start again? The new company has none of the old problems. They have new management, new people and new board members. Why put new board members on an old company that is going broke? It does not make sense to me. In the United States, airline companies go broke then receive the benefits of all the restructuring laws, competing against other airline companies. They rise again and go broke again. In other words, the fundamental reason for what is happening is not addressed. Are we making too much of this restructuring?
Mr. Gilbert: There are two philosophies on this subject. Certain people feel that companies in difficulty should be allowed to go bankrupt and other companies will pick up assets and redeploy them in the system more efficiently. The philosophy has been to let the market forces play out. Some companies are restructured but others are not.
In the airline and telecommunications fields, companies often restructure and lower their costs, thereby forcing other companies to restructure. It happens all the time in various industries where one company restructures with the benefit of the court and then competes unduly with other companies that have not benefited from restructuring their debt. The goal is to reach a balancing act at the end of the process, which is the issue here.
Senator Tkachuk: Is there evidence that restructured companies have long term health compared to companies that are sold off after the bankruptcy leaving someone else to operate in their place? Is there comparative evidence to show that all the effort makes economic sense or has economic value?
Mr. Gilbert: There are no independent studies on the subject. I have read the articles and papers for both sides. I think that maybe we could look at this issue in the next revision, but both philosophies are alive and well. Some people argue that companies should be allowed to go bankrupt and others say we should save them because we save the jobs and in most cases, creditors recover more in restructuring than in bankruptcy.
Senator Tkachuk: I hear that. However, assets are assets. Either they have the assets in a bankrupt company or the assets are sold to another company. Therefore, jobs are created in the new company.
Mr. Gilbert: When a company ceases operations and is liquidated, it loses value because a worth is attached to a ``going concern'' business. When the company goes bankrupt, that value is lost. To redeploy the assets takes time and impacts many financial or social issues in the interim.
Senator Ringuette: You have not talked about the personal bankruptcy situation in the act. In regards to your association, how much personal bankruptcy do you handle in comparison to commercial bankruptcy?
Mr. Gilbert: We handle approximately 100,000 personal bankruptcies per year compared to about 8,000 business insolvencies per year.
Senator Ringuette: Then, what is the process in a personal bankruptcy?
Mr. Gilbert: Our association will appear again in February before this committee to address personal insolvency matters. The paper presented today deals with commercial insolvency only. They are two different issues and we are commercial practitioners. Therefore, we may not be the best qualified people to answer your questions.
Senator Ringuette: Then I will have to wait until February for the words of the experts. Thank you.
Senator Goldstein: Thank you, gentlemen, for coming and submitting your ideas and your papers. I am encouraged to hear you say that you prefer that the bill be passed as is rather than running the risk of spending another number of years without the bill. However, we are in a position to call on both departments and both ministers who are involved, to continue the amending process immediately after the bills are passed with input from the usual stakeholders including yourselves. The input of CAIRP has been invaluable in bringing the legislation to where it now is and we thank you for your efforts in this connection.
Have you prepared or do you intend to prepare a program of member education for all the insolvency and restructuring trustees in Canada, to permit them to become familiar with the new dispositions so they may apply them in their practice without delay?
Mr. Brennan: The short answer is yes.
The Chair: Gentlemen, thank you very much. Your presentations were clear and your suggestions for further improvements to the legislation are helpful.
The committee adjourned.