Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 9 - Evidence - Meeting of February 28, 2008
OTTAWA, Thursday, February 28, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:50 a.m. to examine the present state of the domestic and international financial system. Subject: Bankruptcy and Insolvency
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: We are here to continue our study of bankruptcy and insolvency legislation and related matters.
My name is David Angus. I am the chairman of the Standing Senate Committee on Banking, Trade and Commerce. To my right is Senator David Tkachuk, from Saskatchewan; Senator Trevor Eyton, from Ontario; and Senator Don Oliver, from Nova Scotia. Senator Oliver, you are filling in today for Senator Meighen. You are a seasoned hand at the Banking Committee, and we are always pleased when you can join us. To my left is Senator Wilfred Moore, from Nova Scotia, and Senator Pierrette Ringuette, from New Brunswick.
Today, we have two groups of witnesses. Our first witness is Mr. Jamie Golombek, from the Investment Funds Institute of Canada, IFIC. Welcome to you and all the people viewing us on the CPAC network and on the webcast, which appears on http/senate-senat.ca/webcast-e.asp.
I will not go into great detail about the background of this very complicated ensemble of legislation. Let me say that, yesterday, witnesses from the Canadian Bar Association simply confirmed concerns that members of the committee have that the legislation embodied in Bill C-55 and Bill C-12 — two bills that went through this committee without detailed study at the time, always on the condition that we would complete the current study — are not in effect. There is confusion amongst the stakeholders as to what provisions are and are not in effect.
I have been provided a fairly detailed letter signed by Ministers Blackburn and Prentice as to what the process is and when certain provisions will come into effect. The bottom line is that it is still not clear, and we are hopeful we can resolve this big problem soon. I want to make it clear to all that this committee is concerned and will be working with the officials to get clarity.
Obviously, one of the problems was that the wage-earner protection package was intermeddled with the bankruptcy and insolvency framework legislation. There is bureaucratic machinery to be put in place, including regulations and other structures, before these provisions can be implemented into law. This is causing great confusion, and we are getting many calls. I direct all of my colleagues' attention to this, especially in light of the strong statements made yesterday by our witness from the Canadian Bar Association.
Today, we also have representatives of the Canada Revenue Agency, CRA. They will be relevant in the matter of student loans and other issues that arise from this legislation. We heard testimony yesterday about collection agencies harassing students, so we will be all ears. Honourable senators will have an opportunity to question the individuals from the CRA on a variety of issues.
Without further adieu, we will start the hearing with you, Mr. Golombek.
Jamie Golombek, Chair, Taxation Working Group, The Investment Funds Institute of Canada: I want to thank you all for allowing me to appear before this esteemed committee this morning on behalf of the Investment Funds Institute of Canada, IFIC. I will briefly give you a bit of background about myself and about IFIC.
As mentioned, my name is Jamie Golombek. You may recognize my name from the weekly tax column that appears Saturdays in the National Post, but in my real job, I am the vice-president of tax and estate planning with AIM Trimark Investments in Toronto. AIM Trimark is a mutual fund manager. We manage about $42 billion of investments on behalf of Canadians. AIM Trimark is a member of IFIC, and I am here not as a representative of AIM Trimark per se but rather in my volunteer capacity as the chair of IFIC's taxation working group, a position that I have personally held since June of 2000, having been with the group itself since 1997.
IFIC was established in 1962 and is a national association of the Canadian investment funds industry. Membership includes mutual fund managers and distributors and affiliates from legal, accounting and other professions. IFIC continuously pursues alliances and relationships with key stakeholder groups to facilitate the creation of best practices and harmonized public policy framework for all retail pooled investment products. IFIC also proactively addresses regulatory issues that will lead to a fair and equitable regulatory structure for mutual funds and similar products.
Approximately 50 fund manager companies in Canada are members of IFIC and about 100 dealer distributors. It is a robust, competitive industry, represented by banks, independent fund companies, such as ourselves, AIM Trimark, and insurance companies. It is estimated that the mutual fund industry employs about 90,000 Canadians.
Who invests in mutual funds? Mutual funds have become a cornerstone of financial planning for many Canadians, with about one in three investors owning a mutual fund. About 30.5 per cent of total household financial assets are invested in mutual funds, including inside of Registered Retirement Savings Plans, RRSPs, and Registered Education Savings Plans, RESPs. There are currently over U.S.$20 trillion of mutual fund assets around the world, with about $700 billion here in Canada spread over 50 million unitholder accounts with an average account size of about $12,800.
The most recent data suggests about 57 per cent of mutual fund assets, or about $385 billion of mutual fund assets, are invested in registered plans. That is what brings us here today, both our appreciation for what has been accomplished so far in the realm of RRSP and Registered Retirement Income Fund, RRIF, protection upon bankruptcy, as well as to address some of the concerns being expressed by some that may further delay the coming into force of the most recently passed Bill C-12.
It is exclusively on this issue of RRSP and RRIF protection that I will appear before you today. We have neither examined in any great detail nor do we make any representations at all on any other provision contained within this comprehensive bill.
IFIC's involvement goes back to June 2005 when Bill C-55, the precursor to Bill C-12, was introduced into the House of Commons. That bill proposed protecting RRSPs and RRIFs from the claims of creditors, subject to various conditions: originally, a limit on the amount to be protected, a locking-in mechanism and a look-back rule. Other than some concerns about these conditions, which I will discuss shortly, IFIC was delighted with the new legislation. It would finally allow small-business owners and professional, such as doctors and dentists, access to a form of bankruptcy protection otherwise broadly unavailable to Canadians outside of insurance products.
Bill C-55 was seen by our industry as a major legislative step forward in that it would attempt to level the playing field across Canada for RRSPs and RRIFs upon bankruptcy. It would put them on a nearly-equal footing with both insurance-based RRSPs and RRIFs, as well as employer-sponsored registered pension plans.
We believe there is good policy behind a blanket exemption for RRSPs and RRIFs upon bankruptcy. Protecting RRSPs from seizure is consistent with the public policy objective of helping Canadians save for retirement, evidenced by the tax assistance provided to such saving vehicles inherent in our tax system. This is especially important to employees who cannot participate in an employer-sponsored pension plan and also for the self-employed, whether they are business owners or other professionals.
As I mentioned, the original bill, Bill C-55, contained a number of conditions in which IFIC expressed some serious concern. The first condition was that the seizure exemption would only apply if an individual locks in his or her RRSP and thereby subjects it to some type of maximum withdrawal based on age. The second condition was a proposed cap on the exempted amount, which would be tied to a bankrupt person's age and the maximum RRSP contribution limit in the year of bankruptcy. This was presumably intended to allow older Canadians to protect more of their savings than younger people.
Again, IFIC had concerns with both of these conditions, and we addressed those in our original submission to this committee, dated February 2, 2006.
Unlike Mr. Robert Klotz, who represented the Canadian Bar Association — whose testimony I was able to watch yesterday via the excellent webcast facility — we felt strongly that a locking-in requirement was unnecessary. Insurance-based RRSPs and RRIFs have no such requirement. It will create a huge administrative burden on our members and may ultimately result in higher administration costs that may be passed on to investors.
We also did not see a need for a cap on the maximum amount within RRSPs and RRIFs that is afforded protection from creditors. Just as registered pension plans and insurance products have no cap, there should be no limit afforded to the protection of retirement savings for Canadians. We were delighted that both of these conditions were removed from the new Bill C-12, which was passed last December.
However, the reason we are even here today is because we understand there seems to be a push, primarily by creditors — if I may say that — to have a longer look-back period and to reintroduce a locking-in requirement.
For example, in an article entitled ``Debtor protections for RRSPs still months off'' published in last month's Investment Executive, concern was expressed that the 12-month clawback period is `` too limited and gives no discretion to the trustee or the courts in situations in which people appear to be using the RRSP as a way of hiding money from creditors. `So it really almost encourages debtors to make large contributions and then wait out the 12 months until their bankruptcy.'''
With all due respect, we disagree. The RRSP contribution limits, calculated as 18 per cent of the prior year's earned income, up to a maximum currently of $20,000, restrict how much an individual can contribute. In fact, anyone who contributes beyond their limit is subject to a penalty tax of 1 per cent per month on the amount over-contributed. That is certainly a high price to pay for RRSP creditor protection.
On the locking-in issue, the article also stated the following:
. . . . the legislation does not require that RRSPs be locked in until retirement, so that there is nothing to stop someone cashing in an RRSP as soon as he or she is discharged from bankruptcy. . . . in this respect, people with RRSPs will have an advantage over those with locked-in corporate pension plans, so that the federal government's attempt to level the playing field may have tilted it in another direction.
With all due respected, IFIC disagrees and opposes any locking-in requirement. This protectionist concept of locking in basically stems, in our opinion, from the belief that the state knows better than you. In other words, ``We cannot trust you to look after your own money.'' This concept is archaic and is slowly being phased out in Canada.
For example, take this week's federal budget where the current government proposed a new provision that would allow individuals, who are at least 55 years of age, who have funds in a federal Life Income Fund, LIF, to unlock 50 per cent of their funds and transfer them into a regular RRSP or RRIF. Moreover, in Saskatchewan, it is now possible for an employee who departs from an employer's registered pension plan to ultimately transfer 100 per cent of his or her commuted value to a Saskatchewan-preferred RRIF, which imposes no locking-in requirements whatsoever.
This year, Ontario joined other provinces to allow Ontarians to unlock 25 per cent of their provincial locked-in funds. This parallels a move in other provinces, such as Alberta and Manitoba, that also now allows a one-time 50 per cent unlocking.
In fact, just last week, the CD Howe Institute issued a report on fiscal policy entitled Steering Through Turbulence: The Shadow Federal Budget for 2008. It recommended creating even greater flexibility for RRSP holders. In the report, the institute states:
Employees who change jobs and leave deferred pension plans often are able, under federal or provincial legislation, to transfer the present value of their benefits to a ``locked-in retirement account'' or similar plan. Limits on access to benefits under these plans no longer suit the needs of workers requiring flexibility and mobility in their financial and career planning. The federal government will therefore remove legislated restrictions on withdrawals, remove requirements for creating locked-in accounts, and encourage provinces to make similar changes, so that workers face similar rules across provinces.
In conclusion, IFIC encourages this committee to recommend to the minister that the current provision dealing with the RRSP and RRIF exemption upon bankruptcy be put into force at the earliest possible opportunity. This will allow Canadians who have saved diligently throughout their lives to be able to maintain their most important asset — their RRSP or RRIF — such that they ultimately minimize the burden to the state upon their retirement and be afforded the opportunity to retire with dignity after emerging from a bankruptcy.
They can already do this with pension plans or even insurance-based products, and with regular RRSPs and RRIFs in some provinces, such as Saskatchewan and Prince Edward Island, which have their own unique registered retirement savings plan rules. It is time that all Canadians were treated equally. Thank you and I welcome the committee's questions.
The Chair: Thank you very much, Mr. Golombek. That was a very clear and unabashed presentation. We very much appreciate your candour.
Before going to questions, I wanted to introduce two other senators who have arrived: Senator Jaffer, from Vancouver, and Senator Massicotte, from Quebec.
I understand you do not agree with Mr. Klotz's testimony yesterday on this subject. If I understand correctly, you do agree with the changes that have been put into the bills that were in the combined Bill C-12 and Bill C-55 legislation. You are just asking for implementation as soon as possible, is that correct?
Mr. Golombek: As it stands, yes.
Senator Ringuette: In the last few weeks, we have heard a great deal of testimony in regard to the creation of a mechanism that would look into a national pension guaranteed fund similar to what Ontario has done.
Has your organization looked into this issue? If yes, what are your comments in that regard? If no, is it your intention to look into it?
Mr. Golombek: In the 10 years that I have been on that working group, we have not looked at that issue. However, now that you raise it today, I can put that on the agenda. We have a meeting next Tuesday morning. It is something that might be worth looking at. Thank you for bringing that to our attention.
Senator Ringuette: I would welcome your organization's comments on this. We have received comments on at least three different occasions now. Professor Janis Sarra, from the University of British Columbia, mentioned it yesterday. She has undertaken an extensive study on this issue.
Senator Moore: Could you explain what the locking-in concept means and the fiscal impact for individuals?
Mr. Golombek: The current locking-in mechanism exists on two levels, either a provincial or a federal level. It has to do with an employee, who is generally part of a defined benefit plan at their workplace, who decides to leave that employer. Upon leaving the employer, of course, the employees cannot take that pension with them. They have two choices.
The first choice is to elect to take a pension upon retirement. Of course, that pension in some cases might be quite low if they leave an employer at an early age, such as in their 20s or 30s, before years of contributing to this plan. Therefore, they may get a very small pension.
The other alternative is to take a commuted value. This is, essentially, an actuarial calculation estimating the value today that that pension would provide under the pension plan of a pension taken upon their retirement age.
Senator Moore: As if you had stayed until 65?
Mr. Golombek: Yes, it is as if you had stayed until normal retirement age of the plan.
The commuted value is a calculation done by actuaries. The rule states that if people want to take the commuted value that is fine. However, they cannot take it and spend it. It is to be transferred into a locked-in vehicle because it is to be saved for retirement. These vehicles differ among the provinces whether it is a Locked-in Retirement Account, LIRA, or a Locked-in Retirement Income Fund, LRIF.
Senator Moore: Does an RRSP qualify as one of those plans?
Mr. Golombek: An RRSP is essentially the same thing, but it has to be a locked-in version of an RRSP. An RRSP is a tax legislative concept, whereas locking in is a pension legislative concept. The two overlay each other. They are both RRSPs, but one has this overriding provincial or federal statutory instrument that imposes restrictions. It is these restrictions, I believe, that get at your question.
Both minimum and maximum amounts are different in every province. It is a source of confusion for our industry. We have a full-time person at our company dealing only with these locked-in rules because they differ across each jurisdiction. There is a maximum amount an individual is allowed to access every single year for their life from the locked-in plan.
I mentioned earlier in my comments, provinces are moving away from this. They are realizing, for reasons of mobility and others cited by the C.D. Howe Institute, we should be giving people the freedom to deal with their retirement assets in the way they want rather than the way the state wants.
Senator Moore: Do all locked-in plans that are available set amounts per year after retirement? Does it kick in any time prior to age 65?
Mr. Golombek: You are correct. However, it depends on the age. It is generally 55 years in many provinces. There may be an earlier age if it came from a pension plan that had an early retirement age. It varies across the board based on the pension plan and the provincial or federal legislation.
Senator Moore: If someone needed the money for a family medical emergency or some other thing, can they access it?
Mr. Golombek: It depends on the province and, until this Tuesday, it was not possible under federal LIFs. On February 26, the current government, in the federal budget, proposed two emergency situations in which one could access the funds. There is the small balance rule: For a federal program, as long as a person is at least age 55, I believe they can now unlock $22,450.
The Chair: Is that in one shot?
Mr. Golombek: Yes; as long as the balance is $22,450 or less, the entire amount can be unlocked.
Senator Moore: Is it taxable at the personal rate when it is taken out?
Mr. Golombek: Yes, or it can be transferred into a regular RRSP and taken out over time. The bottom line is that it is being unlocked.
Another change was recommended in the budget in addition to the one-time federal unlocking rule I discussed earlier. In the case of financial hardship — someone with a burden of medical expenses, disability expenses or a low income — a person would also be able to unlock about $22,450 at any age. Those were changes proposed in this week's budget and mirrors rules in many of the provinces that also have the small balance rule or the financial hardship rule.
Senator Moore: This is complicated.
The Chair: It applies to your Senate pension.
Senator Moore: You mentioned Saskatchewan has a much better plan than most provinces.
Mr. Golombek: That is right. Saskatchewan has given complete access when it is transferred to a Prescribed Retirement Income Fund, PRIF.
Senator Moore: Therefore, citizens can do what they deem necessary with their funds.
Mr. Golombek: Yes, that is correct. Some people were opposed. However, it was welcomed tremendously by our industry and by many financial advisers in Saskatchewan, where we travel and meet regularly with these people
Senator Moore: Has the Saskatchewan plan led to an increase in investing or saving through these plans?
Mr. Golombek: I do not have statistics on that. I do not know.
The Chair: I want to ask Senator Tkachuk from Saskatchewan for his comments.
Senator Tkachuk: I am on Mr. Golombek's side. He did a heck of a job making the case. Thank you.
The Chair: Is it your association, IFIC, of which Mr. Hockin was the chair?
Mr. Golombek: He was the past CEO of that. Now the CEO is Joanne De Laurentiis. Mr. Hockin was the past chair of our institute.
The Chair: Have you made representations on Bill C-12, about the provisions to which you referred, or Bill C-12 and Bill C-55 combined, to finance or to the government?
Mr. Golombek: We have only made representations to this committee. We submitted two letters, albeit quite short, that I believe you have on file as well. Those were the only representations we made. The legislative process was unusual. Most of the work seemed to be done by this committee. Therefore, we have worked exclusively with this committee.
The Chair: In respect to the provisions that you applaud, unlike Mr. Klotz, they are not actually in effect, are they?
Mr. Golombek: No, absolutely not. We thought that as soon as it receives Royal Assent, it is law. I am told it is law, yet is not enforced until it is proclaimed. It is very confusing to the average non-lawyer type such as me.
It took four hours of emails and phone calls with the department, the minister and his staff to walk us through the technical issues. While Bill C-12 is now law and is in force, it amends another bill that was never in force and, therefore, technically, this part of Bill C-12 is not in force.
The Chair: With which department did you have these discussions?
Mr. Golombek: They were with Industry Canada.
The Chair: Were there also discussions with the Minister of Industry?
Mr. Golombek: They were not with him directly, but his office.
The Chair: Was this the current minister?
Mr. Golombek: That is right. This happened on December 17. We found out about this over the weekend through a series of emails. Monday morning and Tuesday, we spent the whole day speaking to various law firms. No one could figure it out over a day or so. I saved that email from the Minister of Industry's office so that when anyone questions why the bill is not in force, I simply flip them a copy. I tell them that that is the logic, and if they can follow it, then they are the hero.
The Chair: Were you given any date as to when it would become law?
Mr. Golombek: No, I was not. The official word in the email, or from someone else, is that it will be 6 to 12 months from December 17. I do not know where that time frame actually comes from, but that is certainly the word on the street.
The Chair: Senator Moore, you were not here yesterday so just to let you know, this is a big issue that this committee needs to be seized of, and we are seized of it.
Senator Moore: Why will be 6 to 12 months? Were you given a reason?
Mr. Golombek: That was the expected date that it would take to either develop regulations or to have all the hearings or to listen to witnesses. I do not know why because there is no official explanation. Certainly, the word on the street is that it will take 6 to 12 months before we see it come into force, which is unfortunate.
Senator Oliver: Do the two letters that you have tabled with the committee include a copy of the email that you received from the minister's office?
Mr. Golombek: They do not include the email, but I can make it available to the committee.
Senator Oliver: That would be useful.
The Chair: Would you please deposit the email with the clerk of the committee?
Mr. Golombek: Yes, I will.
The Chair: I might say, Senator Moore, especially because you are on the steering committee, a technical issue has been troubling me: combining the workers' compensation plan into this framework legislation. It was sort of cobbled onto it, yet it is a whole new regime that requires infrastructure and regulations. I pass that on in response to your question about why it will take so long. I have a letter signed by the ministers. I have asked the clerk to make copies of it and distribute them to members of the committee.
We need to work with the department because I believe the officials are having difficulty with this, and we need to come to a conclusion as quickly as possible. We are receiving a variety of calls — and not just from the people at the IFIC. It is an unsatisfactory situation for everybody, so we need to get to the bottom of it to determine whether we can accelerate the process.
Are there any other questions for the witness?
Hearing none, I thank you, Mr. Golombek. It is not every witness who appears and says that they agree with the law and just want it to come into force. We are always grateful for input from the IFIC.
We are especially privileged to have before us officials from the Canada Revenue Agency. I welcome Tony Manconi, Guy Proulx and Michael Snaauw. I believe you are aware that we have heard from a number of witnesses over the past six weeks. However, one witness in particular said that, in reference to the privileged claims that fisc has in cases of bankruptcy in terms of the ranking or in cases of original bankruptcies when proposals are made, as a matter of course, the tax department always votes against and rejects the proposals even though there might be merit in the proposals, and they might be good for people in general, including the government.
We want to hear your side of the story. We realize there is no magic and no clear-cut answers to these difficult issues of people having to seek the protection of these laws, which bear a certain stigma. We know that you would not want to aggravate the stigma or the situation.
Also, other issues arose in an ancillary way in terms of student loans. I do not know when student loans are considered in default but your department is involved in the administration or collection thereof. We have been told about stories of collection-agency-type draconian measures being implemented against students in default. It did not sound particularly civilized. We are interested in hearing more on this issue, if we may.
[Translation]
Mr. Proulx will begin by speaking on behalf of his department.
[English]
Guy Proulx, Assistant Commissioner, Taxpayer Services and Debt Management Branch, Canada Revenue Agency: Let me start by thanking the committee for inviting us to provide information and context to issues raised during recent committee meetings. With me today is Tony Manconi, Director General of Non-Tax Collections Directorate, which is responsible for student loans collections. Also with me is Michael Snaauw, Director, Accounts Receivable Division of Revenue Collections Operations Directorate, which is responsible for tax collections.
[Translation]
The Taxpayer Services and Debt Management Branch's accounts receivable and returns compliance program activities ensure compliance with tax laws for filing, withholding, and payment requirements, including amounts collected or held in trust on behalf of the Government of Canada and the provinces, Territories and first nations.
The accounts receivable function is responsible for the timely collection of overdue accounts for all taxes, levies, duties and other amounts, and assures effective tax debt management.
This function also encompasses the collection of non-tax debts for other departments regarding Canadian Pension Plan and Employment Insurance benefit overpayments, as well as the collection of defaulted student loans.
Tax debts and non-tax accounts receivable of federal departments and provincial governments for whom the CRA performs a collection function on their behalf, unlike private sector debts, do not originate with clients we have voluntarily picked or to whom we have extended credits or a loan.
This important difference significantly affects the agency's ability to limit risks. The agency's exposure to this risk becomes increasingly evident in our role as an involuntary creditor in insolvency proceedings.
[English]
From CRA's perspective, the intent of the insolvency legislation is to give honest but unfortunate debtors overburdened with debt an opportunity to obtain relief from such debt, to reorganize their financial affairs and to get a fresh start in society. This perspective drives both policies and pursuit of legislative amendments to support this intent. Overall, CRA's approach to insolvency involves obtaining the best possible return for the Crown, as is the goal with any other creditor. We also want to preserve the integrity of the tax system and other government programs by accepting proposals from honest but unfortunate debtors, while challenging insolvencies where tax debtors utilize the Bankruptcy and Insolvency Act as a fiscal planning tool.
Canada Revenue Agency strives to accomplish this through expeditious processing of insolvencies involving tax and non-tax debts of honest but unfortunate debtors; and consistent recovery and review efforts that include analysis of all aspects of an insolvent debtor's situation, and any other relevant factors uncovered during the investigation or analysis, to make a decision that supports the rehabilitative intent of the Bankruptcy and Insolvency Act. This intent reflects compliance with the applicable statutes and offers the best possible return for the Crown, which in many cases supports acceptance of a proposal that offers a lower level of recovery.
We kept our presentation brief so that senators have an opportunity to ask questions.
[Translation]
We would be pleased to answer in both official languages any questions you may have.
The Chair: Thank you very much, Mr. Proulx. That was very clear and concise.
[English]
We appreciate the brevity of your presentation and your availability to answer questions.
[Translation]
Senator Massicotte: Thank you, Mr. Chair. We are here today to better understand how the system works. I would like to talk about student loans. We have heard from several witnesses.
In short, our understanding is that, in theory, the system should work in a fair and just manner for students who have a hard time repaying their debts. There is a program which allows students to put off repaying their debts for five years, subject to approval.
However, we were told that in reality the system does not work well because to obtain the forgiveness of his or her debts, a student must make payments on time. What do you think about this?
Mr. Proulx: Let me put your question in its proper context. Two departments are involved in the management of the student loan program. One department establishes the policies, manages the programs and grants the loans. But when loans are not paid back or in default, those cases are referred to us and then transferred to private collection agencies to recover the money. So one department looks after certain issues, while the CRA is responsible for collection.
The Chair: What is the first department?
Mr. Proulx: The Department of Human Resources and Social Development Canada.
Senator Massicotte: That is a bad start. It is already very complicated. But go ahead.
Mr. Proulx: No, it is just that it involves the management of several programs. We do not look after cases where students repay their loans. That is basically what I wanted to point out. The majority of student loans are repaid and under control. But we at CRA deal with cases involving students who default on their loan repayments and which were previously administered by the other department.
Tony Manconi, Director General, Non-Tax Collections, Canada Revenue Agency: All student loan repayment support programs are administered by the Department of Human Resources and Social Development Canada. If, however, a student defaults on a loan, we are responsible for collecting the money. To answer the question about debt reduction, unfortunately that is the responsibility of Human Resources and Social Development Canada. That department develops the student loan policies and manages those programs.
When we get a file, those options are not available to us.
Senator Massicotte: What does that mean? If a student defaults on his loan repayments, and if he is in financial difficulty, what happens? What does this person do?
Mr. Manconi: If he does not have the ability to pay?
Senator Massicotte: Yes.
Mr. Manconi: We discuss how that person could repay the loan at some point in the future. It is possible to suspend any government action for a period of six months. In that time, the person can try to find work. Otherwise, we begin discussions again once the six months are over.
Senator Massicotte: You said earlier that you are governed by the guidelines of another department.
Mr. Manconi: We are responsible for applying the collection guidelines. We can suspend collection activities if a person does not have the ability to pay. We always base our actions on whether a person can pay or not. That is the basis for collection.
Senator Massicotte: If the person is able to demonstrate that he cannot pay, do you have complete authority to postpone repayment? Is this a matter of personal judgment by CRA officials?
Mr. Manconi: Yes.
Senator Massicotte: We heard yesterday that you do not even have the right to consider a delay if one has already been granted, that is, if payments are not up to date. You do not even have the right to consider delaying the payments. Is that right?
Mr. Manconi: After the client has ended his studies, in that period of time, he can work with the Department of Human Resources and Social Development Canada to determine whether he can in fact repay his loan.
After a student has finished his studies, he can assess his repayment ability with HRSDC. A repayment plan is established. But if the student cannot repay his loan, he has the option to put the accumulated interest on hold for a period which can vary between 6 and 30 months. The student also has the possibility to reduce the amount of the debt by up to 50 per cent, up to a total of $26,000. In the first five years, a student who does not have the ability to pay can choose from several options.
Senator Massicotte: And if the student cannot pay, are these options available at all times?
Mr. Manconi: Yes.
Senator Massicotte: Even after the person has defaulted on the loan or if payments have been interrupted?
Mr. Manconi: No, the options are only available until a person has defaulted on the loan. Afterwards, the agency is responsible for collecting the money. As well, there is also the possibility to suspend collection for a certain period of time.
Senator Massicotte: So there are several options; it is fairly flexible. But you say that until the moment of default, all these options are available. But if I understand correctly, on the day of the default — I am assuming the person did not know the rules, because most students repay their loans — if the person did not pay because he lost his job, for instance, his options would disappear at that time?
Mr. Manconi: Unfortunately, those are the student loan program policies. There are no other measures available to help. But we are flexible with the student.
Senator Massicotte: Do you hand the file over to a collection agency or does your office attempt to recover the funds?
Mr. Manconi: We initiate the collection, but if there are any problems, we have the option of using a collection agency to finish the collection process.
Senator Massicotte: If the person is unaware of things and defaults, then the agency forces him to pay up. And if that person is unemployed and cannot declare bankruptcy, then what happens? There must be a number of students in this position. I think it is cruel and unfair.
Mr. Manconi: That is one of our great challenges, but unfortunately those are the policies.
Senator Massicotte: Could you not recommend a change to this internal policy?
Mr. Manconi: Every year we submit suggestions to change the rules, but the responsibility lies with HRSDC.
Senator Massicotte: You recommended that this rule be changed in order to make it more equitable?
Mr. Manconi: Yes, more than once.
Mr. Proulx: The program is designed to provide the student with various remedies that are available for the first five years, and he should avail himself of these options. In signing a student loan application, he is taking part in a program, which means that there is a contract between the student and the program administrators. As long as the student is not in default, he is entitled to various remedies. However, as soon as he defaults, we are advised and that is when we begin the recovery process because no submissions have been made by the student. That is between the program and the student.
[English]
Senator Jaffer: Yesterday, and at other times, we heard that it is the vulnerable student or the marginal student that does not know about the five years or does not opt for the five years. They then get caught and are in front of you.
In addition to that, how does the student know they can come and discuss their situation with you? I am sure you write letters. Letters from you are not fun. How do you make yourself accessible to students?
Mr. Manconi: As I had mentioned, all these management programs are available to the student prior to default. For us, we do not talk about that or advertise that. However, on behalf of our colleagues at Human Resources and Social Development Canada, HRSDC, they do now invest a large amount of money, time and resources to help and educate the students up front. They start with the universities and colleges. There is advertisement with pamphlets and so on. They have service providers now who administer the programs at the front end. They have numerous measures to ensure students are aware of these options available to them.
We know from various reports that the default rates are actually decreasing over the last couple of years because of the measures in place.
Senator Jaffer: Do you know by how much?
Mr. Manconi: As per the Actuarial Report that came out last year, we have gone from a 35 per cent default rate down to about 10 per cent to 12 per cent. They have been hard at work to reduce that default rate; that is their mandate. I have seen more incentives and proactive activities that they have asked the service providers to do to reduce that default rate even further.
Senator Tkachuk: I like Senator Massicotte's line of questioning, so I do not want to interfere. What is your definition of default?
Mr. Manconi: Someone who is not able to repay within the first 270 days following the period of study.
Senator Tkachuk: Do you mean not one single payment?
Mr. Manconi: That is correct.
Senator Tkachuk: Is it considered default immediately after the 270 days?
Mr. Manconi: It becomes a subjective call on the part of the service provider, if people refuse to pay or if they have the ability to pay but do not want to. Someone who cannot pay does not necessarily become defaulted. That is where the service provider works with the person and provides information up front about different debt measures.
Senator Tkachuk: Does someone classify him or her as a default? In other words, does someone from your office say that he or she is in default?
Mr. Manconi: All the proactive work is done at the service provider level. They have tried to keep that student in repayment. Once they have exhausted all of their tools, then they will send the account over to us for collection.
[Translation]
Senator Massicotte: You have stated that many cases are unfair. I understand that there is a regulatory structure, that the student does have rights and that if he fails to act, then he must bear the consequences. There are many people who, unfortunately, are not blessed with common sense. However, after hearing you, I would say that your responsibilities are too limited. If I understand correctly, you have recommended that more flexibility be built into the system, but the other department rejected your recommendations. Is that what happened?
Mr. Manconi: It is not a matter of rejecting our recommendations. We have made a number of recommendations, but the program has many priorities. They are working on designing tools that will help us to help the students.
Senator Massicotte: How long ago were those recommendations made? Was it a week ago, or 10 years ago?
Mr. Proulx: It is done on a regular basis. Previously, the collection was handled through the Department of Human Resources and Social Development. People talk to one another. What we said was that once an account is in default, the student was able to avail himself of some of the mechanisms that were provided for a five-year term, before the default status was even triggered. Once default has been established by someone other than our agency, the account is referred to us for collection. It is because the student was unable to pay. The collection methods are determined by the fact that the student cannot pay. If the student has the means to pay, then all is well. If that is not the case, we have the option of assessing his file and putting things on hold until the account can be cleared. But the money is still owed. At that point, it becomes a matter of managing one's debt. It is still an outstanding government loan.
Senator Massicotte: I am sure that you people are all very fair, but your reputation can nevertheless be somewhat intimidating. It might be hard for some students. I would strongly recommend that you try once again to make your recommendations so that the policy might become more flexible, which would help you in your case assessment.
Mr. Proulx: Our role is to collect on the accounts.
Senator Massicotte: I understand.
Mr. Proulx: If it is possible to collect, even if it means monthly payments, then we will make the necessary arrangements, we will sit down with these people and evaluate their capacity to pay. If it is possible for them to pay, then that is what will be expected of them. Most of the time, these people are working, they have obligations, and a certain lifestyle. But we do analyze their capacity for repayment.
If they are able to do it, then we expect them to acknowledge that they have received this money, and expect that they take the necessary steps to pay it back. If they cannot pay, then the debt can be written off, or the account can be placed on hold. There is also the Insolvency Act that can be triggered, depending on the legislative framework within which we are operating.
[English]
Senator Ringuette: Thank you. I guess we have a better understanding of the mechanism now.
With regard to student loan default cases that are referred to CRA, how many of them would be prior to the five- year period? Let us take a given year: Take the fiscal year of 2006-07.
Mr. Manconi: How many accounts do we have in bankruptcy?
Senator Ringuette: No; how many accounts have been referred to you by HRSDC for collection prior to the five- year period?
Mr. Manconi: I do not have that figure with me, but we can provide it to you.
Senator Ringuette: How many would be in accordance after the five-year period?
Mr. Manconi: We can obtain that information for you.
Senator Ringuette: That is important for our understanding of this default-calling process for student loans.
What is your interest rate on defaults?
Mr. Manconi: The interest rates are set by the program. It is the Bank of Canada rate plus two-and-a-half per cent.
The Chair: The Canadian Revenue Agency does not set the rate?
Mr. Manconi: No, that is done by the program.
The Chair: It is done by the terms of the loan in the first place.
Mr. Manconi: That is correct.
Senator Ringuette: We were told by the people administering this program that they were charging two different rates: a fixed rate or a flexible rate.
What do you charge? Do you have to follow what HRSDC tells you to use as an interest rate?
Mr. Manconi: That is correct. The interest rate is established at the moment students finish their schooling. They set up a loan consolidation and, at that time, students choose which interest rate they would like. That is, again, set by the program every year. When they come into default, we get the amount of debt and the interest rate established at the time of consolidation. We carry forward with the original loan documents that students sign.
Senator Ringuette: Let us use the fiscal year 2006-07. How many default loans in total would have been referred to you?
Mr. Manconi: On average, we receive approximately 25,000 to 30,000 defaulted student loans.
The Chair: Is that per year?
Mr. Manconi: Yes, that is correct.
Senator Ringuette: How many of those loans do you administer directly through your agency, not through a contracted-out collection agency?
Mr. Manconi: We deal with all the accounts that come to us.
Senator Ringuette: I understand that you have to deal with them, but how many would you refer to a private collection agency?
Mr. Manconi: That is difficult to answer. All of our accounts first go through our internal collectors. Then at some point in the collection process, they are referred to collection agencies. Today, I do not have numbers for the amount of accounts that go from internal collectors to private collection agencies.
Senator Ringuette: Will you provide that to our clerk along with the previous answers to my questions?
Mr. Manconi: Yes, I will provide those answers.
Senator Ringuette: I suppose you are not able to tell me how many you would have referred to a private agency in a given year.
Mr. Manconi: Could you please repeat the question?
Senator Ringuette: In that given year, how many would you have referred to a private collection agency?
Mr. Manconi: Those are the numbers we will obtain for you.
Senator Ringuette: What is the success rate for that given year from the private industry and from your own internal collection group?
How do you choose the private industry?
Mr. Manconi: The selection of private collection agencies goes through a process of national standing offer, managed by the Public Works and Government Services Canada, PWGSC. They have a whole selection process. Once established, we are then able to do call-ups against that standing offer.
Senator Ringuette: Who establishes the policy that will be used by those private agencies?
Mr. Manconi: Do you mean policies for collection?
Senator Ringuette: Yes.
Mr. Manconi: There are certain specific requirements within the standing offer that PWGSC lays out. Further to that, each department that does a call-up against that standing offer establishes their own set of directives. We ourselves have our own set of directives that are specific to the collection of student loans.
Senator Ringuette: Can we have a copy of those?
Mr. Manconi: Certainly.
Senator Ringuette: I have heard numerous times, and have received numerous complaints, about private collection agencies that are being used. These are complaints of harassment, and not by letter; it is all done by telephone. They harass students that are already in an uneasy situation.
Have you received those complaints? Are you aware of those complaints? What are you doing about them?
Mr. Manconi: We are definitely aware of the complaints; we do receive them. We have a 1-800 number for clients to call. We also have a 1-800 line for members of Parliament to call us if the person has chosen to speak to a constituent and that constituent wishes to contact us; they can call us directly. We also have a writing unit that receives these letters and provides responses through a ministerial process.
We have been very proactive with complaints against private collection agencies. To provide you a brief description, we have a performance measurement grid that measures the performance of the collection agency every six months; it is not restricted to collection but also covers adherence to our directives; all the ``dos and don'ts,'' as well as complaints. For every complaint that we receive and validate as a true complaint, the agency actually has points deducted. At the end of the six months, those penalties are used to calculate the market share or percentage of accounts they will receive for the following six months. Every point they lose costs them approximately $5 million in benefits and commission. That is a big deterrent.
Many collection agencies have ombudsman and their own complaints line connected directly to us. We have gone from receiving hundreds of complaint to only one complaint per 1,000 accounts. Therefore, we have drastically reduced the number of complaints, and continuously monitor and reduce the number of complaints they are allowed to have.
Senator Ringuette: You said these private agencies lose $5 million in revenue for a six-month period for one point.
Mr. Manconi: It would be a long period of time. That is the impact to their company should they have these complaints.
Senator Ringuette: How much on this given year, 2006-07, would we pay in fees and commissions to those agencies for this specific student loan collection program?
Mr. Manconi: Last year, we paid, I believe, $14 million in commissions to all the private collection agencies.
Senator Ringuette: You paid $14 million in commission. How much do you collect?
Mr. Manconi: The total collected in student loans is approximately $200 million per year.
Senator Ringuette: How much would they have collected?
Mr. Manconi: Private collection agencies collect approximately $70 million per year.
Senator Ringuette: That is a hefty commission. How does that compare to your in-house operation?
Mr. Manconi: We collect approximately the same amount, but they have a larger portfolio of accounts because they have been collecting these amounts for a longer period of time than our internal collectors.
Senator Ringuette: What do you mean? Could you explain that?
Mr. Manconi: We have only started using internal collectors on our default of student loans for the last three or four years. The private collection agencies have been used for a longer period of time, so they have a larger inventory from which to collect.
Senator Ringuette: How long do they keep that inventory? How long can they keep harassing these students?
Mr. Manconi: They keep collecting from the students until the debt is paid.
Senator Massicotte: Alternatively, until the student dies.
Mr. Manconi: They will collect until the account is settled.
Senator Ringuette: Further to that, what type of continuous dialogue exists between your responsibility, the continuing responsibility of those students and your knowledge of their income tax returns and so forth? What dialogue occurs? What is the flow of information?
Mr. Proulx: The information contained in a tax return is for fiscal administration. We do not share the information on a tax return with non-tax collectors or private collection agencies. If students have a defaulted student loan, they would have ongoing dialogue through their statements of account. Every time they pay or do not pay, transactions are reported to them. That is done through the HRSDC accounting system. We all work off one system where all the accounts are located. There is no crossover because of section 241, the confidentiality provision of the Income Tax Act. We do not mix the tax content with the non-tax content.
Senator Ringuette: You do not share the information that you receive from income tax returns filed by students in a default situation with either your in-house collectors or with your private agency collectors.
Mr. Proulx: We can intercept income tax refunds, and so can private collection agencies if they are unsuccessful with collecting. We declare our unsuccessful attempts at collection and intercept any tax return refund going to the person. That is the Refund Set-Off Program.
Senator Ringuette: Who administers that?
Mr. Proulx: We do; CRA does that.
Senator Ringuette: When your agency is used to intercept the tax refund of a defaulting student, is that amount included in the $17 million total collections of the private agencies, thereby triggering a commission for the amount?
Mr. Proulx: No, they are paid commission on the amounts that they collect. We do not pay commissions on the amounts that we collect in CRA by in-house collectors or by the Refund Set-Off Program. Someone needs to have a tax refund issued before we can intercept it. We apply the amount to a tax debt before it is applied to a non-tax debt. There are many government programs participating in this Refund Set-Off Program. Provinces are also doing it, but I forget how many stakeholders are involved; it might be as many as 70.
Michael Snaauw, Director, Accounts Receivable Division — Acting Director General for Revenue Collections Operations, Canada Revenue Agency: The total is more than 90 stakeholders.
Mr. Proulx: Over 90 stakeholders in government circles participate in the Refund Set-Off Program, which is basically Crown debts being paid off by Crown refunds. The student loan portfolio is part of that Refund Set-Off Program.
Senator Ringuette: How many private agencies are we talking about across the country?
Mr. Manconi: We have 10 active agencies and 2 on standby.
Senator Ringuette: I look forward to receiving the information that I have requested. We might have more questions for you.
Mr. Proulx: Private collection agencies in all collection activities across Canada are governed by provincial regulations. The agencies that we use are also used by other private sector organizations to do other types of work.
Senator Ringuette: Are they using the same policies?
Mr. Proulx: They have the power of persuasion because they cannot do a garnishee and cannot call people too early in the morning or too late at night. Certain rules govern all collection activities in Canada, and many of them are provincial.
These collection agencies carry out the work of trying to collect.
[Translation]
Senator Ringuette: Francophones in New Brunswick have a saying: Words fly away, but what is written remains. According to what I have heard, these private collection agencies are quite skilled at making words fly away.
[English]
The Chair: Do the provincial guidelines or regulations over private collection agencies include a provision for them to hire lawyers? When you refer a collection to a private agency, which is subject to the regulations, are they allowed to hire counsel without coming back to you? We have heard that at times, they hire aggressive small law firms, sometimes one-person law firms, who have their own collection methods that sound rather draconian. I am not suggesting they are illegal, but they fall within the broad strokes of the complaints that students are being harassed. Is there some control over that? Do they have to check back with your department first?
Mr. Manconi: In respect of defaulted student loans, we have our own lawyers from the Department of Justice Canada. Private collection agencies do much of the initial contact, letter-writing and negotiation of repayment arrangements. Anything to do with bankruptcy proceedings or other legal proceedings is done through counsel from the Department of Justice Canada.
Senator Ringuette: Mr. Chair, you referred to any type of subcontracting to these entities.
The Chair: When CRA refers a case to a collection agency, it is understood that if litigation becomes necessary, the case comes back to the department.
Senator Moore: Does your legal counsel take action and obtain a judgment against the student debtor, and would that judgment then sit on his or her record for 20 years? Could such a judgment be renewed? Do you do that?
Mr. Proulx: Yes, we do that.
Senator Moore: When do you do that?
Mr. Proulx: When the private collection agencies cannot collect an account from the individual, the account is referred back to us for a review. We sit down with our legal services people and, although we might not do it in every case, we file a judgment against the relevant debtor. The case then goes before the court. We have to go to court the same as in any other judgment against debtors in private sector dealings. After we file a judgment, the student has a judgment to repay the student loan.
Senator Moore: He then has a judgment sitting on his record for the next 20 years. Collection agencies and credit rating agencies all monitor court records. That judgment can sit there for years limiting the student's ability to acquire credit for anything. Is that right?
Mr. Proulx: Yes, there are consequences to having a judgment filed.
Senator Moore: I know there are consequences.
In response to an earlier question, you spoke about CRA's involvement and the involvement of HRSDC. You only get involved when the student has defaulted. Is that correct?
Mr. Manconi: Yes, that is correct.
Senator Moore: In advance of that, you mentioned programs and so on. Do these collection agencies encourage a student to go to HRSDC and pursue possible repayment plans or some relief? How does a student know?
You are talking about a legal process here and about a youth who probably does not know the ins and outs of the legal world nor has the resources, of course, to hire counsel. They are at the mercy of the government agencies. How does a youth know what he or she can do to help themselves, to get some relief or to stave off this possible judgment? They probably do not even know the impact of that judgement when it happens. Therefore, they attempt to buy a used car and are told, ``You do not have any credit. You cannot do that.''
Mr. Proulx: The assistance is provided by a service provider. If the student, once he or she is back into the workforce, starts repaying, the service provider handles that. Students have their five-year window of opportunity. That includes the program people at HRSDC, who have to take action within those five years if there is hardship or anything similar.
By the time it comes to us, we are at the tail end of that process. Somebody has given up on the student after trying to collect and make arrangements, and nothing has happened. Therefore, they are into collection status and default status. That is when we pick it up.
If there are any educational awareness measures, they would be done before we do our part. By the time it gets to us, those avenues and opportunities have been exhausted, not taken or ignored. I suspect, based on what Mr. Manconi said, the agencies and the department — and I believe you have heard Ms. Rosaline Frith here — describe what is available to students. I read her testimony.
It is the same as any other creditor: If one ignores one's obligations, at some point in time, something else happens. It escalates normally. First, there is awareness, then the opportunity to settle those affairs, to come forward and work it out. We are their collectors. We are the back-end process.
Senator Moore: Once a judgment is on record, the judgment has interest ongoing. Is that the same with your judgments?
Mr. Manconi: These are provincial judgments that come out, and they follow provincial rules.
Just to clarify, we would only get a judgment against a debtor who we foresee as having an ability to pay but is not being cooperative. We would not get judgments against anyone and cause even more financial damage to the debtor. We would only pursue judgments against someone who has the capacity to pay but is not being cooperative or does not want to pay.
Senator Tkachuk: I just want to clear up a couple of points. On the question of default of a student loan, we had some discussions in past testimony: A person already in default loses his or her options. I wanted to pursue that just so that we have it clear in testimony.
You had said students reach default after a certain time period. Is that after they start employment or when they leave graduation?
Mr. Manconi: After they finish school.
Senator Tkachuk: If they miss that date, are they automatically in default? What I got from you earlier was that someone has to declare them in default.
Mr. Manconi: That is correct. The service provider uses 270 days as a guide. Within that period of time, if they are not able to establish repayment arrangements or the debtors continue to neglect the repayments, then they would send those accounts to us as a form of a default.
However, if it is determined that those students have issues in repaying during those 270 days, they are not automatically sent to us. They can keep the account as long as they wish. However, they will decide that, at a certain point, students have decided that they no longer want to pay.
Senator Tkachuk: Therefore, those options are not lost automatically.
Mr. Manconi: No, definitely not.
Senator Tkachuk: A student has a chance to find a way to make another arrangement.
Mr. Manconi: That is correct. That is what is helping lower these defaults. The service providers are being much more proactive in trying to keep the student in good standing, ensuring the student knows all the tools available to him or her.
The Chair: There are certain buzz words used in the government, and one of them appears to be ``service provider.'' Some of us are wondering who a service provider is.
Mr. Manconi: A service provider is an organization that has been hired by HRSDC in order to help them administer student loans. They have offices across Canada where students can make their applications for their student loans. The service provider processes the documents, issues and sends cheques to students and then provides all the information and tutoring while students are attending school on repayment of the student loan.
Basically, they replace the role the bank used to have prior to 2000.
The Chair: They are an arm of HRSDC, are they not?
Mr. Manconi: Yes, that is correct. They are private firms. They help do all the repayment arrangements, loan consolidations and debt management measures after the student finishes school.
Senator Tkachuk: I am sure you read the testimony of Hoyes, Michalos & Associates Inc. on proposals. There were two issues: First, proposals are rejected on a normal basis by CRA; second, field offices have no flexibility to agree or to negotiate. It all has to go upstairs, which increases the time and paperwork, et cetera.
I would like you to comment on the rejection that they claim happens when they make proposals for creditors and the field office autonomy. I am sure other senators will have questions on that.
Mr. Proulx: We are happy to answer that question. We were actually expecting it. We do thousands of proposals every year. I mentioned in my opening remarks that we are often an involuntary creditor in many of these cases. There are reasons why people owe tax dollars. Sometimes they do not pay their quarterly instalments and issues of that nature.
We look at every case, the same as every other debtor. We look at all the circumstances that led to us being an involuntary creditor. We do not grant a credit line up front. We do not pull people's credit. They will be a taxpayer next year with us. If they have not filed their tax return for years and are not a good taxpayer, we bring all these factors into play.
If the reason their lifestyle is too high is because they have not paid their taxes, we will take that into consideration. There are many case-by-case examinations of all the circumstances that led to us being an involuntary creditor.
If we find that, similar to everybody else, this is a set of unforeseen circumstances with no tax planning behind it, we will usually grant all these proposals. We normally start with wanting to maximize what we get, just as any other creditor, and we will work down from there.
We do not have a policy of rejecting proposals. We use proposals the same as any other creditor managing a situation, wherein we assess whether it is in our best interest to accept or reject each proposal. There are circumstances where it may be in our best interests to reject a proposal.
On that note, I will give it to Mr. Snaauw, who is the director of all these processes and policies associated with how we handle proposals.
The Chair: Before Mr. Snaauw starts, I wanted to refer to another buzz phrase, if you will, that appeared in the testimony of Mr. Proulx: ``honest but unfortunate debtors overburdened with debt.'' It was repeated five times. That is a circumstance, no doubt. I wanted to make that point because you now used another term that gets my attention, ``tax planning.''
Mr. Snaauw: The most important point to make about proposals is that the understanding that may have been conveyed previously does not match our understanding of our policies. We do accept many proposals for less than 100 cents on the dollar across the country. These decisions are made on a case-by-case basis. We have policy guidelines. The guidelines support the position that Mr. Proulx laid out.
We would consider taking less than 100 cents on the dollar if the situation before us is tax debtors with debts owing to other creditors perhaps due to matters outside their control; their funds are limited and their opportunities for repayment are limited. We would not consider taking less than 100 cents on the dollar where there is evidence of deliberate planning or lack of compliance with tax statutes leading up to this situation and we foresee this happening again.
Our concern is and always has been those egregious situations where we have individuals who are fairly well off, should know better and have taken deliberate steps to use the insolvency statute to avoid paying tax debts — and perhaps to the benefit of other creditors or not. However, they may have a history of non-compliance with us, and we foresee that continuing in the future. Therefore, even if we may get a few more dollars by accepting the proposal, it would send the wrong message, both to the tax debtor in question and to other tax debtors who watch us continuously to see if we are administrating our acts fairly.
Senator Tkachuk: When you say ``accept proposals,'' are you talking about proposals you would receive from a taxpayer directly or from an accountant or lawyer on behalf of a taxpayer? Are you talking about proposals from people trying to stave off bankruptcy or reorganize their debts to avoid bankruptcy?
Mr. Snaauw: My comments were related specifically to proposals made under the Bankruptcy and Insolvency Act.
Senator Tkachuk: To be clear, are you saying that the testimony we received from Hoyes, Michalos & Associates Inc. about your field offices is that they can make decisions or they cannot?
Mr. Snaauw: They can make decisions. They have that authority.
Senator Tkachuk: It is up to them. They can claim 100 per cent or simply reject it.
Mr. Snaauw: It is important to remember that we have thousands of cases across the country. Many trustees and thousands of collectors work day to day. Sometimes misapprehensions and mistaken impressions are formed.
To correct these, we have, in the not-too-distant past, had an ongoing relationship with the Canadian Association of Insolvency & Restructuring Professionals. We meet with them regularly. A couple of years ago, they inquired about our policy in this regard, and we clarified that it was not always 100 cents on the dollar. That was merely a starting point, and we would have to look at the facts of every case.
We contributed an article to their publication, Rebuilding Success, in 2007, which also highlighted this policy position. We meet with them regularly to discuss other issues. We always have an interesting relationship with trustees and solve many administrative headaches by meeting regularly.
Perhaps to speak to your point as well, Mr. Chair, before we reach those situations with tax debtors, we sit down with them and work out their ability to pay their tax debts. The proposal usually comes in while we are in the middle of a collections process. We do entertain repayment arrangements. We look at ability to pay based on income and expense information provided to us. Generally speaking, the proposals work in a similar manner in that we look at the facts of the case and determine if the person is acting in good faith and if this truly is an opportunity for rehabilitation.
The Chair: Senator Tkachuk's line of questioning was the main reason we invited you today; to follow up on these field officers. I believe he was trying to get you to tell us what degree of discretion they have. Do they have quite a bit? When do they have to check with head office?
Mr. Snaauw: Our policies are structured on the concept of a large decentralized organization. We delegate much authority to our field offices to make the case-by-case decisions. Our policy is that they make the decision and consult us if they feel there are additional policy issues involved or a level of complexity on which they need advice.
We have more than 40 field offices. Several measures have been undertaken to group activities, et cetera. We rely on the officers on the ground, with management oversight at the local level where needed to assure the appropriateness of decisions.
Sometimes, trustees and creditors disagree on decisions. Where a trustee feels the collector is not making the best decision, that trustee has the ability to contact local management in our offices to deal with issues as they arise. We are always working with them to try to speed that up.
The Chair: Your testimony, and for the purposes of our report, is that there is no hard and fast rule that you vote against proposals. Your flexibility and the standards you apply have been made public and enshrined in articles that you have written for their own publications.
Mr. Snaauw: Absolutely.
Senator Massicotte: To ensure I understand what was said, does it refer to student loans only or all credit positions?
Mr. Snaauw: It refers to all of the proposals under the Banking and Insolvency Act on the tax administration side for taxation issues.
Senator Massicotte: Does that include student loans?
Mr. Manconi: We follow the same guidelines as well.
Senator Massicotte: I want to ensure I understand this correctly. Senator Tkachuk talked about this in regard to student loans.
It appears you have significant flexibility to deal with a creditor in accepting partial payment or forgiving the loan. You have total discretion. However, you do not have discretion when default has commenced to go back and allow the same options that students had initially, for example, a deferral. There is not the same flexibility. It is a completely different set of rules. Am I correct in saying that?
Mr. Manconi: That is correct. The options available to students prior to default do not follow them once they have defaulted. In those cases, we have the other means that we try to apply.
Senator Massicotte: It is the same as any other normal creditor trying to collect. You do not have the same provisions and flexibility. It is a completely different set of rules.
The Chair: There are also different interest rates.
Senator Massicotte: Yes, different interest rates for students.
Senator Moore: Senator Tkachuk triggered a thought here. When we were hearing from the insolvency firm, they mentioned a situation whereby they had a proposal submitted on behalf of a client who was in financial difficulty. The proposal was to pay back $40,000 in tax. The proposal was denied, and the result was that the Crown received $20,000, which is not in keeping with your best policy return for the Crown, as you mentioned today.
I am not sure if the field officer was in agreement with that proposal, but I believe they said it was turned down by Ottawa.
The Chair: Good for you, Senator Moore. That was one of reasons we invited these gentlemen. I am sure they are aware of this testimony. I am glad you asked that question.
Mr. Snaauw: It is difficult sometimes dealing with examples that do not have all the information around them, and it would be beneficial to have all the facts surrounding that case.
As we said in the opening comments, although, in the end, we try to get the best recovery for the Crown and for the rest of the tax-paying population, there are situations where we are driven by another imperative, and that is the overall compliance issue and the impact it will have on the tax-paying public in general.
I am thinking more of the egregious situations I referred to earlier that are spelled out in case law explicitly, where it might be more cost effective for the agency to gain less on that case because the compliance impact overall, we believe, will be meaningful.
There are times when we will not accept a proposal perhaps, even though it seems to allow for a better rate of return at that moment.
Senator Moore: What is the thinking behind not doing that?
Mr. Snaauw: First, if it is a particular case with perhaps a certain profile, it is possible the way it will be perceived will lead to broader non-compliance, which is important. The level playing field is something we have to promote.
Second, this person will be with us the year after that and forever if it is an individual. It could be that to accept the proposal might promote a certain type of behaviour that will lead to future non-compliance on the part of that taxpayer. If we sense and understand through an evaluation of the fact pattern on that case — perhaps prior non- compliance and incidences of insolvency — that this proposal is simply a way to move CRA out of the arena for now but will not change their behaviour and lead to rehabilitation, then we may vote down a proposal because we cannot, in good conscience, agree with it.
Senator Moore: I found that an interesting situation. You can check the testimony given, if you want to pursue it.
I want to go back to the student loan matter. The chair asked you — for the benefit of us and people watching this hearing — for the definition of a service provider. I believe Mr. Manconi said that the HRSDC office administers the loan, but then you said that it is a private arm. Is the person, who administering the loan for the student, a staff person at HRSDC, or is it a private company working out of the HRSDC office?
Mr. Manconi: A service provider is a private firm that is being hired under contract by HRSDC.
The Chair: However, not in their office.
Senator Moore: I did not know that. That is different.
When we talked about going to judgment, you said that you only move on those who you perceive to have the ability to pay.
Who makes that assessment? Do you do that or does the service provider do that and give you a report? Do you sit down with the student?
Mr. Manconi: If we wish to take legal action, as Mr. Proulx mentioned, CRA and Department of Justice representatives will assess the case. It is not the private collection agency or the service provider that makes those decisions. We will make that internally. We will assess a client's financial background, ability to pay and any assets he or she may have. From there, we will decide to proceed with legal action, if required.
Senator Moore: In the course of the assessment process, do you meet with the student?
Mr. Manconi: The Department of Justice team has a legal services unit that contacts the student in order to forewarn them that this is the route we plan to take and give them options prior to proceeding with legal action in order to establish repayment arrangements as per the ability to pay.
Senator Moore: As Senator Massicotte asked, the arrangements for repayment that are available to a student do not include the arrangements available prior to default. Is that correct?
Mr. Manconi: Measures to reduce the debt, such as interest relief or debt reduction, are not available to the student after default. That is available to the student at any time during the course of his or her loan in order to establish a payment arrangement. We always consider the client's ability to pay when establishing a payment arrangement, whether the account is with an internal collector, the private collection agency or with legal services.
Senator Moore: Senator Biron was advocating strongly for the protection of registered education plan funds from bankruptcy proceedings. How do you feel about that? If a grandparent has put aside money for a grandchild's education and the grandparent comes under hard times, that money should be left there and protected so that the grandchild will have the benefit or opportunity. What are your thoughts on that?
Mr. Proulx: Are you talking about a specific fund?
Senator Moore: Registered education funds, the RESP.
Mr. Proulx: What are our views about the accessibility of that fund in repaying student loan debts?
Senator Moore: I want your opinion on whether or not a bankrupt's RESP set aside for a child or grandchild should be touched.
Mr. Proulx: We operate within the confines of the law. If those funds are not frozen or vested — whatever the terminology the previous witness used — when that circumstance arises, we look at the ability to pay, which includes assets, value of outstanding debts, et cetera, the same as any other creditor would do. Basically, we work out the best arrangements possible, if it is an issue.
However, if the funds are there, there is a debt owing and those funds are within reach, we will surely consider using that amount of money as an asset, the same as any other asset, to retire the value of the outstanding debts we have under our control.
[Translation]
Senator Massicotte: Even after they are in default, would it not be a good idea to send the students a 30-day notice of default with an option to pay back the loan, along with information on available alternatives, rather than resort to a daily reprimand?
Mr. Manconi: All of that is done before the default.
Senator Massicotte: Yes, I understand that, but why not get them a grace period?
Mr. Manconi: The service provider advises the student by mail, before graduation, that all of his debts should be consolidated. Once the file has been examined, the provider sends another letter. There can be up to five notices sent.
Senator Massicotte: Before he defaults?
Mr. Manconi: During the first six months when repayment of the debt is due. Once the student graduates, he has six months to consolidate all of his debts.
Senator Massicotte: So, technically, he has not yet defaulted.
Mr. Manconi: Not yet.
Senator Massicotte: He receives a number of letters advising him of the deadlines.
Mr. Manconi: Yes. After six months, the debt is consolidated and they begin to work out the arrangement for the repayment of the loan. If from time to time, the client neglects to make a payment, the service provider gets in touch with him and sends him a letter outlining the situation. We discuss what can be done to get the client back on board, and repaying the loan. If the client notifies the provider about financial problems, then the provider must exempt him from paying interest for a period of six months. After that, if he still has problems, the provider must offer to reduce the debt. There is a great deal of communication that goes on between the provider and the client.
Senator Massicotte: All of these steps are automatic, standardized and pre-approved by your agency?
Mr. Manconi: By the department.
Senator Massicotte: They always use the same type of letter, and the same procedures. There are rules that are followed. Would it be possible for us to have a copy of these letters?
Mr. Proulx: We will have to check with our colleagues.
Senator Massicotte: They would be anonymous, of course.
Mr. Proulx: They are not our letters, they come from a provider.
Senator Massicotte: I would like to see what tone is used in these letters and understand the level of communication, if that is possible.
Mr. Proulx: We can ask our colleagues from the other department, because they are not our letters.
Senator Massicotte: We believe in your powers of persuasion.
Senator Biron: If someone who defaults had an education savings plan, part of the money that was invested came from the Government of Canada. You must then try to recover the grant portion of the plan. The problem for the student is that he did not choose his benefactor. However, it would be in the government's interest to recover this amount, since a higher education level among its citizenry means greater benefits for the country. It will also benefit the student who cannot stay in school because his benefactor has gone bankrupt. The student did not choose his benefactor, nor is he responsible for that person's bankruptcy. Would it therefore not be better to prohibit the seizure of funds from the plan once the money has been invested and as long as the student is still benefiting?
Mr. Snaauw: That is a good question. It relates to tax policy, which is the purview of the Department of Finance. It is not something that we can address.
Mr. Proulx: It is a matter of deciding if it would be in the public interest to shelter these accounts from creditors when the situation arises. As my colleague has said, it is a policy matter. As far as we are concerned, as managers of the public purse, if the funds are available, then there is a debt owed to the government. If we can access these funds, then so can the private sector. When these situations arise, we are not always the only creditors. If the money is available to us, then it is available to everyone. If we cannot access the funds, then, no one else should be able to either. The matter then becomes the recovery of a debt from an investment made in the education system. As public servants, we are not expected to weigh the benefit of one policy over another. We operate according to a legislative framework. Our aim is to recover the money that is owed to the government. We collect taxes and money owed that is past due. Our mandate is to maximize debt recovery. That is a very good question, but we do not have an answer, because that is not our responsibility.
[English]
Senator Ringuette: Can you clarify, when you refer to HRSDC service providers, are you talking about the financial institutions that the student used to acquire the loan?
Mr. Manconi: No, I am not.
Senator Ringuette: The program officer appeared before our committee, and as far as I can recollect — maybe my memory is in default — we were never told they were using an outside agency to manage this program. Who are you talking about when you refer to the service provider at HRSDC?
Mr. Manconi: The service provider is a private firm that is hired by HRSDC to administer the student loans.
The Chair: Is it a number of private firms?
Mr. Manconi: It is just one firm.
The Chair: Do you know who it is? That was the question. Is it a bank?
Mr. Manconi: No, it is a private firm. I am sorry; I do not recall the name.
The Chair: We will find out.
Senator Ringuette: We definitely need to find this out.
Mr. Proulx: There are three players in the program. Students make their applications to the private service provider.
Senator Ringuette: They are financial institutions.
Mr. Proulx: No, they are not the financial institutions. They are a service provider. They get the loan application form. Perhaps in the old days, when banks were providing the loans, it was a different matter. Now it is a government loan program.
I believe this agency does admissions as well. I forget. To register for university, students have to fill out these forms.
The Chair: Is it the same organization?
Mr. Proulx: I am not sure. No, it is not. Let us not go there.
In terms of financial assistance, students fill all their requirements with this one agency, and that agency deals with HRSDC. They are the ones who disburse the money for the students and have a contractual relationship with the people that manage the student loan program. There is a front end — how the money goes out to the students — and then there are the policy issues around the program itself with HRSDC.
If and when people get into default, after having the opportunity to avoid the default, they come over to us for collections. Therefore, there are three major players in this. Once they come into default with us, we try to collect. If we cannot do so through easy ways, we use the private collection agencies.
Senator Massicotte: You said ``easy ways.'' If it does not work, you go to someone else. Do the other guys not use easy ways?
Mr. Proulx: Because of the private collection agency commissions, we do not want to spend government money when we could resolve these issues at the front end at a lower cost. However, after that, we do use private collection agencies. They give it back to us, and we decide whether that ability to pay is there and whether we want to use the judgments and the other legislative ability or tools at our disposal to collect.
Senator Ringuette: My first question dealt with the service provider. We were just informed about who is under contract with HRSDC. We might need to bring back the officials to obtain more information because, at the outset, we were not informed about this service provider. Is this organization involved in default matters? How deeply are they involved in the five-year situation? What manner of discretion do they have before CRA becomes involved in these issues?
My second question is in reference to the discretion of your field officers to whom you referred in response to Senator Massicotte's question.
What level of discretion do your 12 private collection agencies have? Does it equate that of your in-house officers?
Mr. Proulx: The private collection agencies have nothing to do with bankruptcy and insolvency situations.
Senator Ringuette: I am not referring only to bankruptcy and insolvency situations. I am asking about the discretion with respect to accepting a method of payment, reducing an interest rate or accepting a reduced payment, et cetera. What is their level of discretion?
Mr. Manconi: All of that is laid out in our directives. You will be able to see that when you obtain a copy.
Their discretion is formatted by us. The interest rate is fixed from the onset of establishing the debt, and they cannot do anything in terms of the liability of the debt. They have discretion in terms of the repayment amount, but we provide a certain schedule. Depending on the amount of debt, we have a certain range of acceptable payment that we would expect. Those ranges are industry standards, such as those used by credit card companies, that depend on the amount owed.
It is always in line with the client's ability to pay. If they cannot pay a certain amount, then the onus is on them to indicate, through a review of income and expenses, that they only have so much disposable income to pay back their debt. From there, the collector is able to negotiate a repayment arrangement without causing financial hardship to the debtor.
Senator Ringuette: Am I correct in assuming that the directives issued by you to these private collection agencies would be exactly the same as the directives that you would give to your in-house field officers?
Mr. Manconi: They have a similar directive.
Senator Ringuette: Do they have the same flexibility?
Mr. Manconi: Yes, they do.
Senator Eyton: I am an observer of trend lines. I would like you to comment on two or three trends. First, is the CRA encountering more consumer proposals and, if so, what is the rate of increase in terms of numbers?
Mr. Snaauw: There has been a certain increase in consumer proposals. It is entirely possible that after the coming into force of this legislation they may well increase. I could not give you the exact quantum.
Senator Eyton: Could you estimate the percentage without absolute numbers? Would it be 5 per cent or 10 per cent?
Mr. Snaauw: I am afraid I could not estimate that percentage. We normally rely on the Office of the Superintendent of Financial Institutions, OSFI, for that information.
Senator Eyton: Has managing that increase been a problem for you? Do you have the staff and systems in place?
Mr. Snaauw: We feel comfortable with it. We have been focusing a fair bit of attention on our entire insolvency portfolio over the last few years, and we have focused more effort on our systems. We feel comfortable that we can manage this. It will be an interesting transition through the implementation of the new legislation. If our work remains connected to the Canadian Association of Insolvency & Restructuring Professionals, we will manage.
Senator Eyton: You expect, however, that there will be meaningful increase in the number of proposals that you will deal with under the new legislation.
Mr. Snaauw: We believe so, but time will tell.
Senator Eyton: You feel that it is not a management problem and that you will be able to deal with that effectively.
Mr. Snaauw: Yes, we do. In essence, the amount of personal insolvency has been increasing. There have been regional disparities, as far as I can see, from the statistics from OSFI. The economic surges in some parts of the country affect that, of course. Overall, our management envelope encompasses both proposals and bankruptcy situations, so we can shift from one to the other to the extent needed.
Senator Eyton: From the agency's point of view, are the numbers you claim under these proposals tending to be larger or smaller?
Mr. Snaauw: I do not have any information on that.
Mr. Proulx: If I may add, the cases we get under insolvency would be in our inventory as debts owing. Insolvency is one way for the creditor to manage their debt situation. We would either get the case into an insolvency situation or, if they are not insolvent, we would have a tax collection case to resolve.
When the situation becomes unbearable, and we might be the only creditor, those are cases of concern to us because that person will come to us by design. Where we are a creditor, the same as in any other proceeding, we would have to collect on our own. This is the taxpayer or the debtor initiating the insolvency proceeding. We simply move it from one part of our workload to another specific part of our workload where we can dedicate more attention and ensure that we have the expertise to deal with the volumes of associated work.
Until 1992, tax debts would survive. However, that has since changed over the years. Proposals are a big part of insolvency proceedings and are an important part of our workloads.
Senator Eyton: What is your rate of recovery, taking that whole package you have described? What is your rate of recovery generally? Has that been increasing or decreasing in recent years?
Mr. Proulx: On insolvency only?
Senator Eyton: On everything.
Mr. Snaauw: Unfortunately, we do not have specific statistics for insolvency files. Our information systems simply are not gathering the information in ways that allow us to draw conclusions on recoveries for insolvencies as opposed to the general collections inventory. For the general collections inventory, on average, our recoveries per file have increased. That was noted by the Auditor General a couple years ago.
Senator Eyton: Where would you be in percentage recovery?
Mr. Snaauw: Do you mean in terms of incremental increase?
Senator Eyton: Just on recovery.
Mr. Snaauw: On collection files, per se?
Senator Eyton: Yes.
Mr. Snaauw: I would have to go back and get the actual figures. We look at percentage recovery versus percentage written off.
Senator Eyton: I want to know about the overall claim.
Mr. Snaauw: I understand your question, but under the Income Tax Act and the Excise Tax Act and so on, we cannot extinguish a tax debt outside the insolvency legislation. The debt remains. As we collect money, other factors come into play.
Our recovery rate on the files we resolve is 100 per cent. That is a fact. We have many files in progress and many files that we simply cannot work with anymore. We have had to write off the latter files because they were uncollectible.
Mr. Proulx: The statistics that come to mind are that of the overall revenues that our agency collects — which are in the billions of dollars — we write off less than 1 per cent. That includes insolvency, death, insolvent corporations, people leaving the country and many other circumstances. The write-off regulations allow us to track that.
We would know how much we write off for insolvencies and bankruptcies, but not necessarily the rate of return in every one of these cases. We would have to see what the original claim was versus what we realized. We do not write off the amount we do collect. It is embedded into the overall statistics of our agency, but it is not specifically tracked and segregated in our statistical systems.
Senator Eyton: I am not sure I got the answer, but thank you.
Senator Massicotte: You said that on proposals that work, you collect 100 per cent. Is that what you meant to say? You said that for those successfully collected, it is 100 per cent. Does that mean those proposals are successful and you collect 100 per cent?
Mr. Snaauw: When I mentioned the 100 per cent, I was not speaking about proposals but rather about collections in general. We can measure our results on all collection cases, whether they deal with insolvency or not; the vast bulk of our cases do not deal with insolvency. Where we have production and where we have recovery, a full resolution means that we have collected all the money that was outstanding. We have many cases in progress at all times. Our relationships with taxpayers continue for a long time.
Senator Jaffer: I understand that the service provider processes the loan outside HRSDC and looks after the whole process of the loan. Is it correct that if the loan goes bad, you have a number of private agencies that look at collections, including yourself?
Mr. Manconi: Once the student is not able to make payments with the service provider and has exhausted all possible program management initiatives, the account comes to CRA. We assign it to our internal collectors and, when required, we use the services of private collection agencies and the Department of Justice.
Senator Jaffer: All legal actions are started by you, not by any outside party?
Mr. Manconi: That is correct.
Senator Jaffer: You have said one thing to us, and the trustees have said something else. Perhaps it is that area where there are issues. Perhaps you would want to speak to the trustees. They were very credible and you are very credible, so there is a problem of communication. We are left with two different versions.
What do you mean by the person has been rehabilitated?
Mr. Manconi: That is a program-related subject as well. It is when someone wants to go back to school following default. The program lays out certain requirements for that student in terms of their debt and how they manage it. They must put their debt into good standing. They must meet certain requirements and then they are able to go back to school and possibly obtain loans, should they require them. That is a program-related process that they have.
Senator Jaffer: Does that go back to HRSDC?
Mr. Manconi: Yes, it does.
The Chair: Mr. Proulx, you are the assistant commissioner of the Taxpayer Services and Debt Management Branch. That intrigues me. First, who is the commissioner?
Mr. Proulx: Bill Baker is the commissioner.
The Chair: Would I be correct in inferring from the title of your function that this is a user-friendly part of CRA where taxpayers can ask questions and get help?
Mr. Proulx: The title tries to describe what is under my authority within our agency. I am responsible for the services part, which is not the actual design of the website, but the forms you can download from the website. I am responsible for the counters in all our offices and the telephone call centres that are also available. We are a big part of the front end of the agency as well as the debt management activity.
The taxpayer services are about the tax packages you all got in the mail, the PIN numbers you need to file and any questions you may have about trying to meet your tax obligations, whether you are an individual, a company, a GST registrant, an employer, a corporation or anything else. You call us to get the information you need to comply. We create the guides and take care of all these other aspects, as well as deal with non-filers and handle the debts owed to the Crown that we have under the authority of CRA.
The Chair: Gentlemen, you have been very helpful and very candid with us. We appreciate that.
Colleagues, I have asked our clerk to contact HRSDC and have them identify and arrange to have brought before us the so-called service provider on the loans to explain their functions.
I understand, gentlemen, that you will send us some supplementary information and that will you remain available in the event that we have any follow-up questions.
Thank you very much.
The committee adjourned.