Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - Meeting of March 31, 2009
OTTAWA, Tuesday, March 31, 2009
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine the following elements contained in Bill C-10, the Budget Implementation Act, 2009: Parts 1-6, Parts 8-10 and Parts 13-15, and in particular those dealing with Employment Insurance (topic: Employment Insurance); and to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2010.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Good Tuesday morning. This is the last day of March 2009.
[Translation]
This morning, we will be continuing our study of the Budget Implementation Act, formerly Bill C-10. At the same time, we are studying the Estimates for 2009-2010.
[English]
Our focus this morning is on a number of parts of what was known as Bill C-10, which have thus far we have not addressed in our hearings. Specifically, our focus is on Parts 1 to 3, Divisions 1 and 6 of Part 5, Part 6 and Part 8. We have many resource government officials here to help us. As we have in the past, we will call upon different departmental officials with respect to different portions of the bill to help explain to us just what is in that portion of the bill.
Honourable senators will know that the government, the Prime Minister and his cabinet, is asking for parliamentary approval of both the House of Commons and the Senate to spend certain sums of money. That request is being made is through two avenues: One is the supply cycle and supply bills and the other is through Bill C-10, which is sometimes referred to as the Budget Implementation Act.
We will ask our witnesses and the government officials to explain to us if the provision in Bill C-10 — which is our primary focus today — appears in the budget for 2009 or whether it has its genesis somewhere else. We are trying to understand the provision. There may be some questions after the witnesses have finished, but we are being asked to vote on these matters, and we would like to understand as clearly as possible what the terms are that appear in the bill.
I will introduce our first group of officials. Mr. Gérard Lalonde is back with us again. Welcome back, Mr. Lalonde. Mr. Lalonde is the Director, Tax Legislation Division of the Department of Finance Canada. He will help us with the first part of the bill. Then we will move to some questions, if there are any; it may be that you will explain this so clearly that there are not any questions, Mr. Lalonde. However, if there are some, we will try to deal with your section first and then move on from there.
Let us start with Part 1, Amendments In Respect of Income Tax.
Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you very much for having me back. It is always a pleasure to speak before this committee.
Honourable senators, I am here to talk about Part 1 of the bill, which is the income tax measures; it is the amendments to the Income Tax Act to implement measures included in the 2009 federal budget. I will also talk about a number of other measures previously announced by the government and referred to in the Budget 2009. Some of these measures will be measures first announced in the 2009 budget and other measures will be ones that were announced previously but that have been given renewed authority by the budget documents.
Before this bill was tabled, I did a parliamentary briefing for parliamentarians on Part 1 and my colleagues did the same thing for Parts 2 and 3. I believe some of the senators were there. Therefore, you will know that I could easily speak for enough time to take up all of the time allotted to me and leave no time for questions.
Instead, I propose to cut it short in terms of what Part 1 has in it and leave some time for questions. The short answer is that all of the measures, except for the Working Income Tax Benefit for which the government is engaged in federal-provincial consultations, the First-Time Home Buyers' Tax Credit and the Home Renovation Tax Credit, are in this bill; so all of the income tax measures, except for those three, you will find in this bill.
You will also find a number of other measures dealing with things such as functional currency reporting for multinational corporations; rules allowing SIFTs, which are essentially income tax trusts to convert into corporations — or convert back into corporations, as many started as corporations and transmogrified into trusts and are now changing back — rules to facilitate the conversion of those entities into corporations; as well as a whole laundry list of previously-announced measures.
I can go into more detail, but if that is enough of an introduction to move into the questions you would like to pose, I would suggest doing so.
The Chair: Thank you. Are there any portions of Part 1 that are larger in terms of the revenue that will be required in order to achieve the initiative than others; are there two or three, for example, that really jump out as being major items?
Mr. Lalonde: The adjustments to the personal income tax brackets and tax rates are the big items. If you look into the budget documents, you will see that at the beginning of the supplementary information at the back of the documents.
The Chair: What are we looking at?
Mr. Lalonde: This is the budget document: Canada's Economic Action Plan, Budget 2009. You will see Table A5.1 on page 306 in the English version; it is in the supplement information in Annex 5. Several tables are in there, but the opening table sets out the cost of various measures to the government. You will see that the personal amounts and income tax brackets, in 2009-10, account for $1.8 billion, and that increases up to $2.3 billion by 2013-14.
By far, that is the largest combination of measures in the 2009 budget. Other provisions, such as the Home Renovation Tax Credit, HRTC, have a fairly significant cost in 2009-10 — $2.5 billion for the HRTC. However, it is for one year only, whereas the changes to the personal amounts are ongoing.
The Chair: You are referring to the budget document, but we are not being asked to vote on the budget document. We are being asked to vote on Bill C-10, and its provisions are amendments to the Income Tax Act that reflect the wording in the budget; is that correct?
Mr. Lalonde: That is correct. Bill C-10 implements the measures that were proposed in the budget; and among those measures, these are the big items. They are also the big items in Part 1 of Bill C-10.
The Chair: Yes. In your remarks, if you are able to refer us to Bill C-10 — because this is the law that we are being asked to amend — that would be helpful to us. You can tell us what that is trying to achieve.
Mr. Lalonde: Okay.
The Chair: Thank you. I will see if we can elicit some of the points that you are making and clarify them.
Senator Callbeck: With respect to the Home Renovation Tax Credit, I thought that was for two years.
Mr. Lalonde: No. It runs for a one-year period; it starts for renovations as of the day after budget day and continues for one year.
Senator Callbeck: The legislation for that will not be coming until the fall, is that right?
Mr. Lalonde: The legislation for that would be in a second budget implementation act. As to when that would happen, that is beyond me. As Mr. Menzies indicated the last time he was here, it is above his pay level, so it is certainly above mine.
Senator Callbeck: Therefore, it is a short window if it is only for one year.
Mr. Lalonde: That is correct. That is part of the stimulus rationale for that measure.
Senator Callbeck: I have spoken to some people who would like to take advantage of that, but they do not want to until the legislation gets through and they know it will actually happen.
Mr. Lalonde: They certainly are entitled to take that view. The Canada Revenue Agency, CRA, has given details on its website of how the program would work. The government of the day is committed to implement this particular measure. As with most budget measures, however, it is being administered by the Canada Revenue Agency.
Of course, the administration by the CRA does not take too much effort right now, other than putting out some information as to how it would work. This would show up for the first time on income tax returns for the 2009 taxation year, which are not due until April 30, 2010.
Senator Callbeck: Has the government given any thought to extending that for another year? Once that gets through, people will have a very short window to take advantage of it.
Mr. Lalonde: The theory behind the Home Renovation Tax Credit is to give a quick start to stimulus measures. Part of the stimulus measure is to get people working on, among other things, home renovations. Extending it out over a couple of years would work counter to that policy.
Senator Callbeck: How will the tax changes in Bill C-10 affect the different income levels? As we know, income disparity was fairly constant in Canada, but it has been rising a lot since 1995. Between 1995 and 2006, there has been a change of 30 per cent in the difference between the top and bottom 20 per cent. Between the 60 per cent in the middle and the top 20 per cent, there is a difference of 34 per cent. In other words, the incomes of the top 20 per cent of people in Canada have been rising significantly.
What is the combined effect of these tax measures you are bringing in on the various income levels in Canada? No doubt, the department has analyzed this.
Mr. Lalonde: Yes. Is the specific question what is the incidence across various levels?
Senator Callbeck: Yes. Will the top 20 per cent benefit more than the middle 60 per cent?
Mr. Lalonde: I have been asked to connect what I am talking about with the items in Bill C-10. Therefore, I will talk about the changes to the personal income tax brackets and the personal income tax rates in Bill C-10. The tables that reflect those changes are in the budget document. They are in the same part, shortly after the table that I spoke about earlier. They talk about personal income tax savings for typical individuals and families in 2009. They have tables set out for families, individuals, one-earner couples with children, et cetera — there is a whole list of them.
Generally speaking, at the very low end of the scale, below $10,000 of income, not much change occurs because the basic personal amount already renders those people non-taxable. It was $9,600 before the budget, and it is $10,320 now. If you were non-taxable before, you will stay non-taxable now.
For families with children, that can change a little bit because you get increases in the Child Tax Credit. As you go up into the lower and middle ranges, the measures in the budget that do have impact are the increase in the basic personal amount, which affects everyone. However, for low-income people, it will wipe out their taxes completely up to $10,320.
As you move into the middle-income ranges, the increases in the ranges of the two lowest tax brackets affects them. Again, to the extent you go through that tax bracket, you will get the same benefit as anyone else. If you continue into the next tax bracket, if it has been increased, you will get the benefit there as well.
As you go into the top tax bracket, which is 29 per cent, it was not changed. The measures in this budget all impact levels of income below that at which the top tax bracket kicks in, which is somewhere around $124,000.
Senator Callbeck: That is not talking about all the measures.
Mr. Lalonde: That is talking about the big-ticket items. Other measures in the budget reduce the tax burden on seniors and on families with children. In terms of an overall figure, if you are not a senior, then the overall figure does not mean anything to you. As well, if you are not a family with children, the overall figure does not mean anything to you. What means something to you is the impact on families and individuals with your profile.
Senator Callbeck: I am talking about the combined effect of the various initiatives. Has the government analyzed that? If so, is that available to the committee?
Mr. Lalonde: The government would have estimated the cost of each of these measures, but I am not sure if I can understand the combined effect. Are you speaking of total personal income tax reductions across the board?
Senator Callbeck: I am trying to figure out whether this budget, with all the tax initiatives, will be more beneficial for that top 20 per cent of people than the 60 per cent that are in the middle.
Mr. Lalonde: It cannot be, if you look at what the changes are. There are no changes to the top tax bracket. All the changes are made to the bottom and the middle tax brackets and the basic personal amount. All of those changes would have affected the people in those ranges.
Senator Callbeck: I am trying to get at the total picture.
I was also wondering about the stimulus effect. A chart on page 240 of Canada's Economic Action Plan illustrates how dollars spent in the stimulus will boost the GDP. I believe you said that by the end of 2010 it should be increased by 2.5 per cent and that we will add 265,000 jobs. When you look at the different expenditures and tax multipliers, certainly the one that gets the highest is the measures for low-income households.
Does the government have figures that analyze all the proposals and their effects on these stimuli? For example, to increase the withdrawal limit to $25,000 rather than $20,000 from the Home Buyers' Plan, what is the stimulus effect of that proposal as compared to putting that money into social housing?
Mr. Lalonde: I do not know the answer to that offhand. I am a tax lawyer, not an economist. I pretend I am an economist from time to time, but I am not. I would point out that the measures for low-income households would also include the measures for social housing, non-tax measures. It is a mixed bag here in terms of determining the impact on the GDP.
I do not know for certain whether any particular measure — for example, the one you gave, the increase in the amount that you can withdraw from a Registered Retirement Savings Plan, RRSP — would have been taken into account in this particular measure as something targeted to a low-income household. It is probably unlikely that a low- income household would have sufficient funds in their RRSP to take advantage of that. It is possible, but I do not know if that particular measure has been split out and allocated to the bag of measures that gave rise to these figures.
Senator Nancy Ruth: You have itemized some of those personal income taxes, but can you just spell them out a bit more? My staff received a notice this week telling them that their payroll withholdings would change, effective April 1. Can you tell us what that means to the ordinary working person?
Mr. Lalonde: The measures that cause changes to the payroll deductions are included in Bill C-10. They are the measures that increase the basic personal amount to $10,320 and also increase the personal income tax brackets; the first personal income tax bracket being increased to end at $40,726 up from $37,885 in 2008 and the second bracket to top out at $81,452 up from $75,769.
Those changes taken in aggregate will cause an increase in the upper boundaries at which the lower tax rates will apply and, hence, a reduction in the amount of your tax. For example, if you were to take an individual — and again, I am referring to these tables in the budget documents — who earned $60,000 a year, they would see their taxes go down by $166 a year, and that is comprised of the basic personal amount and the changes to the first and second tax brackets, as I have mentioned. As a result of that, the payroll deduction tables that estimate how much tax you will pay for the whole year must be adjusted so that over the course of the year $166 less will be withdrawn from your paycheque and withheld on account of taxes.
Senator Nancy Ruth: Something to make all the staff celebrate, just a little bit, anyhow.
Mr. Lalonde: Celebrate a little bit; that is probably a pretty good assumption.
Senator Nancy Ruth: Us too. The budget doubled the tax relief provided for the Working Income Tax Benefit, WITB. Could you illustrate for us the means by which WITB encourages low-income Canadians to find and keep their jobs?
Mr. Lalonde: The WITB is a measure that was introduced a couple of years ago to essentially help people get over what is referred to as the welfare wall. The issue is that as someone who is on social assistance begins to work in the workforce, they see not only taxation of their income, because they are taxed on it just like the rest of us, but they also see a number of their benefits under the social programs disappear. The combination of those two can result in a marginal effect on them that can eat up much of what they have managed to earn through employment, but we do encourage these people to seek and take and retain their employment.
As you start earning income and you are in your low levels, the WITB gives you an additional income tax credit, tops up part or all of that tax, and it tops out in the middle $20,000 range and gradually decreases off so that as you go from social assistance to the workforce it eases you into the marginal income tax brackets.
Senator Nancy Ruth: Please clarify something for me: For someone on WITB earning $22,000 a year, what is the amount of tax they would have had to pay before this budget? We have doubled the amount they can — I was about to say deduct or save.
Mr. Lalonde: Deduct from tax, or save; it is about the same.
Senator Nancy Ruth: However, the effect is that they probably would not have to pay tax at that level of earnings.
Mr. Lalonde: At a $25,000 income level, the basic personal exemption now is a little over $10,000, so they would have to pay tax on about $15,000. The federal-provincial tax rate is in the range of a little over 20 per cent, which would cause them to pay $3,000 of tax. The WITB will make about $400 of that disappear, and now $800 of that will disappear as proposed in this budget.
Senator Nancy Ruth: Therefore, it used to be $400, and now it is $800.
Mr. Lalonde: Yes.
Senator Nancy Ruth: That is great. Thank you.
I wanted to ask a question about estate management. Allowing an estate to deduct the Registered Retirement Income Fund, RRIF, and RRSP losses for the deceased is a new measure. Can you explain the policy reason for this?
Mr. Lalonde: In most cases, when a person dies and has a balance in their RRSP, the value of the RRSP at the time of death is included in the income of the deceased person, and then eventually the assets in the RRSP are distributed to beneficiaries. Rollovers exist where the RRSP is transferred to a surviving spouse and so on, but this measure is particularly important where that is not the case, but actually the amounts are distributed.
In those circumstances, and in good markets, by and large everything was fine because the value of the assets in the RRSP would remain the same or grow, on average. Consequently, you did not have many issues showing up.
The problem is that recently markets have gone the other way. In some cases, when people have died, they have had an amount included in their income, say $100,000-balance in the RRSP, included in their income. When monies are eventually distributed to the beneficiaries, that basket of assets might only be worth $80,000. The result of that is that they get taxed on this $20,000 that did not actually appear. This measure allows the estate to readjust that $100,000 number back down to $80,000 so that we tax what is ultimately distributed from the estate, not an amount greater than what is distributed from the estate.
Senator Nancy Ruth: That is amazing. Thank you very much.
Senator Di Nino: Is that a permanent change or only for a period of time?
Mr. Lalonde: It is a permanent change.
The Chair: It is helpful to have that clarification because many changes have one- or two-year limitations.
Honourable senators, I have quite a list here, and we have a number of government officials. I suggest that we ask Mr. Nowak to help us with respect to Part 2 because some of the questions may spill over into Part 2 and Part 3. Tell us what is contained in Part 2 and Part 3.
Mr. Lalonde, please stay because a good number of other questions could involve you, plus the other two officials. We will deal with Parts 1, 2 and 3 with our questions, following presentations by Mr. Nowak on Part 2, Amendments in Respect of Sales and Excise Taxes; and Mr. Halley on Part 3, Amendments to the Customs Tariff.
Rainer Nowak, Senior Chief, General Operations and Border Issues, Tax Policy Branch, Department of Finance Canada: The amendments in Part 2 deal with the Excise Act, 2001, which is an act that imposes excise duties on alcohol and tobacco, and the Excise Tax Act, which imposes GST and excise taxes on such things as fuel, predominantly fuel.
The amendments deal with the sharing of information with other government entities with respect to the business number. The business number is just fundamentally the identification number that CRA uses. When it registers a business number for the GST or for the corporate income tax, it is a common identifier. What the amendments propose to do for those two pieces of legislation is to allow CRA to share limited tombstone-type data with respect to the business number with other levels of government. In particular, the focus here is on municipal-type governments and agencies. The intent is to increase the efficiency of program administration between the federal, provincial and municipal levels of government.
That, in a quick overview, is what those amendments do.
The Chair: Does it do anything with respect to harmonization of goods and services tax and provincial sales tax?
Mr. Nowak: Nothing at all, no.
The Chair: We heard a recent announcement in that regard. That is helpful. Was that provision referred to in Budget 2009?
Mr. Nowak: I believe so.
Mr. Lalonde: Yes; it was referred to in the budget. It is one of the measures from a previous budget that is being refreshed and finished off.
The Chair: Mr. Halley, can you help us with respect to Part 3, Amendments to the Customs Tariff?
Patrick Halley, Chief, Tariffs and Market Access, International Trade Policy Division, International Trade and Finance, Department of Finance Canada: Part 3, the Amendments to the Customs Tariff, can be grouped into three categories. I will give a brief overview of each of those categories.
First, Budget 2009 eliminates tariffs on a range of imported machinery and equipment to Canadian industry to lower their costs and to enhance competitiveness. These tariffs on those machinery and equipment items varied from 2.5 per cent to 11 per cent, and they applied to over 200 machinery equipment items that are used in various sectors, such as food processing, forestry and power generation. This measure will provide over $440 million in savings to Canadian industry over the next five years. It follows from a response to a recommendation by the House of Commons Standing Committee on International Trade, where the government indicated it was reviewing tariff policy with a view to the enhanced competitiveness of the Canadian industry. Extensive consultation with a broad range of manufacturers lead to those changes, including consultation through Canada Gazette notice that was published in late August 2008. This measure is effective for all affected imported machinery and equipment that has come into the country since January 28, 2009.
The Chair: Senator Di Nino would like to know if that is for two years.
Mr. Halley: That is permanent.
Senator Di Nino: Thank you for asking my question.
Mr. Halley: The second set of changes is related to clause 215 of the bill, where technical corrections are made to the duty-free and tax-free treatment of temporarily imported cargo containers with a view to facilitate the movement of goods within Canada. Those changes remove conditions related to the foreign control and ownership of those containers and also rectify the size of the containers that are covered by these provisions. These changes are also effective as of January 28, 2009.
The budget announced that consultation will take place with a view to potentially further liberalizing the use of temporarily imported containers in Canada. In that regard, a notice was published in the February 7 edition of the Canada Gazette seeking the views of stakeholders on two proposed changes that were part of a report by the Standing Senate Committee on Transport and Communications. That consultation period is close to the end.
Those changes on which consultation are ongoing are twofold. First, there is the possibility of increasing, from 30 to 365 days, the amount of time that a temporarily imported container can remain in Canada free of duties and the GST and harmonized sales tax, HST, that would otherwise be applicable; and, second, removing the restriction that during this period the temporarily imported container can only be used in the transportation of goods in Canada if that transportation is incidental to the international movement of the goods themselves.
[Translation]
The third and last category deals with amendments to the Customs tariffs in order to implement the results of negotiations under GATT article 28 that seek to restore the balance in Canada's concessions to the World Trade Organization as they pertain to milk protein concentrate. This follows the announcement, made in February 2007, that Canada would negotiate with its main trading partners with a view to bringing some milk protein concentrates under the supply management system.
So a tariff quota was established with a customs duty rate of 270 per cent outside the quota and a rate of 0 per cent inside the quota. There is also a rate reduction in the quota of another dairy product as a result of those discussions. These amendments came into effect on September 8, 2008 under a ways and means notice tabled in the House of Commons in June 2008. This concludes the overview of Part 3. If you have questions, I will be happy to answer them.
The Chair: Thank you very much. We will now move to questions. I give the floor to Senator Mitchell, from Alberta.
[English]
Senator Mitchell: I want to follow up, Mr. Halley, on your first point, namely, tax concessions to industry on equipment. You mentioned three or four sectors; you did not mention the oil sector or the oil sands sector. Would these concessions apply to their equipment as well?
Mr. Halley: I think some products that are covered would be used in the oil and gas sector.
Senator Mitchell: How was it that those products were chosen? Are they all imported products or just some?
Mr. Halley: They are all imported products. The department works with a broad range of manufacturers to identify a preliminary list of products that would be of interest to industry. Further to that, a list was published in the Canada Gazette for official consultations. It is on the basis of that list that the one in Bill C-10 and the budget has been developed.
Senator Mitchell: Could you send a copy of that list to our clerk?
Mr. Halley: Yes, I can.
Senator Mitchell: Mr. Lalonde, there are two tax reductions, personal, and the tax reduction that will be affected because you are raising the exempt business income for small businesses by $100,000. I expect from an earlier answer that you perhaps cannot give us this information. However, do you have any indication of how that money will be spent by people and these business entities in a way that would stimulate the economy?
It seems to me that, in this type of economy, when people have very little confidence in the future of their jobs among other things, they would not be inclined to spend any tax concession they are given, yet that has been construed, nonetheless, as a stimulative factor in the budget.
Mr. Lalonde: Individuals and businesses who enjoy tax savings as a result of what is in the budget, of course, can do whatever they wish with the tax savings that they receive. If some individuals choose to consume, then that is stimulative. Some will choose to do so simply because they do not have the option of not consuming. Others will have the option to save and, in the case of businesses, the same is true: They would have the option of keeping the money and retained earnings and passing it on to the shareholders. Eventually, the money will wind up with the shareholders, if it is not retained in the corporation.
As you have also pointed out, incentives are in the bill to encourage businesses to invest in manufacturing, processing or property. There is an accelerated capital cost allowance, CCA, rate for that. They may invest in computer equipment to update their systems, and an incentive is in there for that. Therefore, various incentives are in the system to spend your money in certain ways, but it is up to the individuals and the businesses as to how they will spend them.
More money in the economy has a stimulus effect, regardless of where it is. Where you spend it is important. If, for example, the individual spends it for home renovations, then that will provide a double stimulus effect in that it will put more income in their pockets because they will be eligible for the tax credit. Also, they will have hired people to do the renovations or bought goods and supplies to do that.
Senator Mitchell: Of course, the $166 reduction is about $14 a month. I doubt that people will even be aware of the difference. It is similar to the GST reduction: You are just not aware of the difference. The other issue is that the money for building a deck or anything outside is not really good for a year; there are only about four months in Canada when you can actually build a deck.
However, my next question is about WITB. The example you used was very clear, the $10,000, the $15,000 and, ultimately, the reduction of $800 in tax, an increase of $400 over the original $400. In the end, will that give someone a net increase in this transitional period, or will that be less than what they would have been taking home, as it were, before the transitional period, as they transition to work?
Mr. Lalonde: They will take home more, absolutely. I cannot resist; I have to respond to your point about the $166 perhaps not being enough to notice. The fact of the matter is that, overall, it is a big-ticket item; it is $2 billion of tax reductions. That is not insignificant in a time such as this when the government is looking at an economic downturn. In terms of the deck, you are correct. I do not do much building on my own deck in the middle of winter. However, you can always refinish the basement or remodel the kitchen, and it does not matter if it is in the winter or not.
Senator Mitchell: My next question is about the $5,000 special tax-free investment fund. If I am not mistaken, I think only about 12 per cent or 20 per cent of Canadians actually have RRSPs. Of those, I doubt the majority of them would have ``maxed out'' their RRSPs. How many people will actually take advantage of this $5,000 tax-free fund? You certainly would not go there until you had maxed out your RRSP.
Mr. Lalonde: Oddly enough, some people would. There are, for example, situations where someone, when they retire, will have a tax rate equal to or perhaps even greater than they had during their working career. It is not often that that happens, but it can happen.
It can also have an effect on reducing other benefits. One school of thought says that you are better off having a tax- paid savings plan, which is essentially what the tax-free savings plan is.
Senator Mitchell: It is not entirely.
Mr. Lalonde: It is tax paid when you put it in. You do not get a deduction for the contribution; the earnings are tax free and are withdrawn tax free as opposed to the RRSP, which is the other way around.
There are certain circumstances, although limited, where people might choose not to max out their RRSPs but instead max out their Tax-Free Savings Account, TFSA. Of course, some people would prefer to max out both, and they will open them up, as well.
[Translation]
Senator Ringuette: Good morning, Mr. Lalonde. It is always a pleasure to see you, even though we have our differences at times. A point of clarification.
[English]
With respect to the Home Renovation Tax Credit, I understand that it is in the stimulus budget plan but not in Bill C-10.
Mr. Lalonde: That is correct.
Senator Ringuette: When the Senate was asked to look at Bill C-10 with respect to the stimulus plan, this important plan was not included in Bill C-10.
Mr. Lalonde: Yes, you are correct; it is not in Bill C-10.
Senator Ringuette: Can you tell me why the government is paying a large amount of money to advertise this program that was not even in the budget bill? I would venture to say that it has spent millions of dollars on television, radio, brochures and all sorts of different advertisements.
Why is that? Are the regulations not ready? Do you not have anyone to administer it, or is it because you might have other excuses for it not being in the budget bill?
Mr. Lalonde: Can I explain why the government has gone out with an advertising campaign on this? That, I suppose, would be a question better directed to the political level than to me.
Why is this important measure not in Bill C-10?
It is common for budgets to be implemented in one, two or, on unusual occasions, sometimes even more budget implementation acts. For those measures that have to be passed and put in place very quickly because, for example, the government has to issue cheques to make it happen, the government needs to have authority to issue those cheques. Therefore, those tend to get drafted very quickly and put into a bill for introduction to the house. An example of that would be an increase in the Child Tax Benefit, where it is not a question of collecting less tax but a matter of paying out cheques.
Those are things that generally only go straight into a first budget implementation act, BIA1. We also try to put in, as well, other items that are fairly easy to do legislatively and can get done in the time frame. An example of that will be the important changes to the basic personal exemption and the tax rates. It has a big-dollar ticket attached to it but is relatively easy to draft.
In the case of new programs, it is not always that easy to draft. Issues come out of the woodwork that would surprise you. It would be a shame to have the legislation in place and passed and then find out later on that there are lacunas in the legislation.
An example might be with the Working Income Tax Benefit — co-ops would be a good example. You do not own your housing unit, you own a share in the co-op. How do you renovate a share? Well, you cannot renovate a share, you can renovate your unit. We have to adjust the income tax system to pick up unusual situations like that.
Another example might be, again with the co-op, you have fixed up the situation in the legislation where the guy who has the share that gives him the right to occupy the co-op unit puts in a new set of kitchen cabinets. That is fine, but what if the co-op then replaces the roof? Is it only the units directly under the roof that should share the expense of replacing the roof, or should it be allocated among all the co-op users? Obviously, it is the units right underneath that will get the leak.
My point is that these types of issues do come out. We take them into consideration post-budget in terms of drafting, and then these measures are introduced in a second budget implementation act.
Senator Ringuette: Mr. Lalonde, you have not answered my question. In January, a major announcement was made about the Home Renovation Tax Credit. In the subsequent week, advertising was done all over the country on a program that, first, you are telling me today is not in the budget bill and, second, for which you do not seem to have regulations ready; yet you want people to spend on renovations.
It is similar to the chicken and the egg scenario in regard to the Canadian consumer. With respect to our responsibility in this committee, a major stimulus package was announced for home renovations with marketing all over the place but no legislation, no program and no regulation.
It is a question of trust also. How can you expect Canadians to trust what you are putting forth as a stimulus package when it is not in the budget bill? Without regulations, legislation or administration premise for the program, basically, we are selling a ghost tax credit to the Canadian people.
I have been on this committee for a number of years, Mr. Lalonde, and you have come before us many times. However, this is the first time that I have seen such a scenario. It is also the first year, I think, that this committee will be having — probably by the end of May, hopefully June, maybe the end of June — a second budget implementation bill.
We should have had a budget implementation bill and then an omnibus bill in regard to pay equity, navigable waters and so forth because, as you said, you have to issue cheques. Can you tell me when the regulation and the administration of this program will be put in place?
Mr. Lalonde: You have mentioned regulations a number of times; I do not anticipate there will be any regulations. There will be amendments to the Income Tax Act to implement this. As to when it will be put in place, the parliamentary secretary to the Minister of Finance was asked the same question at this same committee, and he indicated that that was beyond his mandate to answer that particular question; so, too, is it of mine. It is up to the government of the day when the second budget implementation bill will be tabled.
You have indicated this is the first time you have ever encountered such a scenario. In fact, it has been common practice within the government to issue a bill, as you mentioned, shortly after the budget for those items for which cheques are required to be issued and a variety of other spending initiatives. Usually the tax portion of the budget is included in a later bill, often released in draft over the summer and tabled in the fall, along with what you might refer to as an omnibus bill. That is a regular occurrence.
It has only been over the recent history that we have seen as many of the income tax measures pushed into a first budget implementation bill as we are seeing in Bill C-10.
Senator Ringuette: I reiterate that millions of dollars are being spent of taxpayers' money to promote a program that, as yet, does not exist.
Mr. Lalonde: I cannot comment on the advertising that was done.
Senator Di Nino: I want to make a comment on the remarks of my esteemed colleague, Senator Ringuette. It is a fact that if you are trying to attract activity for your business, you have to promote it well in advance to get people to start thinking about it so that they can actually buy services or products. Therefore, I think it is appropriate for the government to do that.
The one item that has not been covered, which I think is a very positive thing, is the increase in the amount that one can withdraw from their RRSP, from $20,000 to $25,000, to be able to purchase a home. That is for first-time homebuyers or those who have not owned a home for four or five years since their last home.
I believe — and I would like a comment from you on this — that home renovations as well as home building is probably one of the best stimulus that we can have in that it affects a variety of different industries. For home purchase, most of that stimulus would be a Canadian homemade-type of stimulus instead of importation of products, et cetera.
Is that correct? Do you have any information on that?
Mr. Lalonde: A large portion of the cost of putting up a new home comes from homegrown construction services — the carpenters, plumbers, pipe fitters and furnace people who come to install that — plus most of the wood products are Canadian. Home building has a high Canadian content to it. With this budget, you can extract more from your RRSP for the first time.
For homebuyers, when they purchase a home, they can get the First-Time Homebuyers' Tax Credit that is also proposed in the budget, saving $750. Of course, if the home that they buy requires renovations, they can tap into the Home Renovation Tax Credit. Many of the stimulus measures are pointed at that particular sector of the economy.
Senator Di Nino: Can you quantify the expectations this will have on the economy — the additional $5,000 one can withdraw from an RRSP for home ownership?
Mr. Lalonde: That particular measure on its own, no, I do not have that breakout. Another honourable senator here had asked almost the same question. I can attempt to get that number, but I cannot promise I will be able to.
Senator Di Nino: That would be useful.
I have a quick question on the increase to $500,000 of the small business tax rate. It has been suggested that making a profit will be difficult in today's economy. I tend to agree with that. However, is it not true as well that this measure would capture those companies that, in the past, may have been making more than $500,000 and now, because of the economic conditions, may be making a little less, so it would not just be those companies that yesterday were considered small but also any of those others that would fall into that category, regrettably, which would be an additional benefit to Canadian business?
Mr. Lalonde: That is absolutely correct. If I can anticipate your second question, yes, it is permanent.
The Chair: Honourable senators, I will ask Mr. Lalonde, Mr. Nowak, and Mr. Halley to stay here, because some of the questions may well relate to your area of expertise. I also ask the five people who have been patiently waiting to help us with respect to Part 5 to come forward.
Senator Gerstein will have the last word on this round and we will make that switch.
Senator Gerstein: Gentlemen, you have comprehensively and ably reviewed a number of tax changes: income tax, in particular, excise tax, customs tax. If I were to characterize the tax changes you have talked about as being positive for all Canadians, particularly low- and middle-income tax payers, would you agree with that characterization?
Mr. Lalonde: You are pointing probably mostly at the income tax system.
Senator Gerstein: Yes.
Mr. Lalonde: I would say that in terms of absolute numbers, yes. You can get into situations where percentage-wise, you will see differently because, obviously, if you reduce $20 of tax from someone who is making only enough income to have $20 of tax and that disappeared, you will see 100 per cent reduction there, which skews the figures. The percentages and the absolute numbers will not show different things, but they may give a different impression.
The Chair: Gentlemen, if you would remain but give up your seats to the other group of witnesses, we will pause for a moment and move along with Part 5.
Part 5 is headed Stability and Efficiency of the Financial System. We have witnesses here with expertise in these various areas. I propose to start with the witness who is familiar with Division 1, Financial Administration Act, and we will proceed chronologically. Division 2 is the various Canada deposit insurance; Division 3 is Export Development Act; Division 4, Business Development Bank of Canada Act; Division 5, Canada Small Business Financing Act; and Division 6, Legislation Governing Institutions.
Could you help us in understanding the initiatives that we are being asked to vote on with respect to each of these divisions? Please tell us what is in Division 1, Ms. Pearse.
Jane Pearse, Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: We have a range of people at this end of the table for this part of Bill C-10. I will give a short opening remark, and then we are open to take your questions on the various divisions of Part 5.
The global credit crunch has impacted the ability of Canadian financial institutions to provide access to financing for Canadian consumers and businesses. The budget takes action to strengthen the capacity of financial institutions to extend financing to Canadians by establishing the extraordinary financing framework through which it is providing up to $200 billion in existing and new measures.
The Extraordinary Financing Framework, EFF, initiatives have already been successful in supporting the provision of funds to Canadians, for example through the Insured Mortgage Purchase Program, IMPP, which has facilitated a reduction in prime and mortgages rates. Other programs under EFF, such as the Canadian Secured Credit Facility and the Business Credit Availability Program provided through Export Development Canada, EDC, and Business Development Bank of Canada, BDC, will help facilitate the provision of financing to Canadian businesses in this period of turmoil.
Budget 2009 also contains other important measures to improve the competitiveness and stability of the Canadian financial sector and helps consumers of financial products. These measures will help maintain the position of Canada's financial sector as one of the strongest and safest in the world.
Cliff Lee-Sing, Chief, Reserves and Risk Management Section, Financial Sector Policy Branch, Department of Finance Canada: Bill C-10 introduces, for the first time, a new section to the Financial Administration Act called Part IV.1, which deals with financial stability. It gives the Minister of Finance the legislative authority to implement and carry out existing or new support programs to help the financial system in Canada. This is in response to the turmoil going around internationally. The government wanted to have the facility or the ability to equip itself with a broad range of tools to help support businesses, promote financial stability and address potential problems related to areas in the credit markets.
This new section of the Financial Administration Act broadens the Minister of Finance's authorities in two ways. First, it gives him new authority to promote financial stability where he had authority, under Part IV of the Financial Administration Act, just to manage the government's debt and financial assets and liabilities.
The second way is that it allows him, for the purpose of promoting financial stability, to enter into a number of contracts, such as purchasing, lending, selling or pledging securities, providing loans, lines of credit, guarantees, loan insurance or credit assurance. There is a statutory appropriation as part of this to be able to pay for these securities through the Consolidated Revenue Fund, CRF.
The Chair: Thank you. We recall this committee dealt with a similar authority to the governor of the Bank of Canada a year or so ago to participate in the acquisition of corporate securities and that type of thing. Now, this is allowing the Minister of Finance to participate in the purchase of corporate securities and to take the funds out of general revenue.
Mr. Lee-Sing: Yes. The objectives are the same, to promote financial stability. In this particular instance, the Minister of Finance can purchase securities from private-sector entities, as the Bank of Canada has the authority to do, again, under the goal or the purpose test of having to meet the financial stability benefits for the government.
The Chair: Are financial institutions included? With this authority, will the Minister of Finance be able to purchase shares and other financial documentation from financial institutions?
Mr. Lee-Sing: This particular act allows the Minister of Finance to purchase fixed-income securities — that is, debt securities — but not ownership or equity stakes in those financial institutions. There are other acts, part of Bill C-10, to which others may speak, which allow the minister to do that, but in consultation with Office of the Superintendent of Financial Institutions, OSFI, and the governor of the Bank of Canada. Also, a number of additional tests are required for him to do that. Of course, it would be used in extraordinary circumstances.
The Chair: Yes. Honourable senators, I am in your hands. We could proceed with further questions in relation to Division 1, or we could hear on all of the divisions so that we get the information on each. Do you have a preference?
Senator Ringuette: I have questions with regard to this issue.
The Chair: We have a number of senators with questions. If you have a question that involves Mr. Lalonde or the other witnesses, you can ask that question also.
[Translation]
Senator Rivard: I have a short question about Part I that goes to Mr. Lalonde.
My question is short and perhaps the answer will be too. One of the budget's most popular items is the TFSA savings program. Is the government looking at changes in another financial year or will it stay the way it is?
Mr. Lalonde: The government does not anticipate major changes to the program, but, as for all government programs, small changes could be made to make the program run more smoothly.
Senator Rivard: My last question deals with RRSPs and RRIFs. The effect on the year's budget is $30 billion for the government. We are told that there will be no impact in subsequent years. Is that correct? Does that mean that we will go back to the old system where there will be no loss of taxes in subsequent years?
Mr. Lalonde: The government's change is to put into effect last November's announcement that you can now withdraw less from an account of that kind. This is just for one year.
Senator Chaput: Thank you, Mr. Chair. My question is on Division 2, Part 5, which amends the Canada Deposit Insurance Corporation Act. I feel that this institution is very important, safeguarding Canada's financial stability as it does.
My question is this: What will be the impact of the proposed changes on the Canada Deposit Insurance Corporation?
Sandra Dunn, Chief, Financial Sector Stability, Financial Sector Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you for the question. The major changes to provisions in the act give the corporation more flexibility, more tools to deal with problem institutions in the financial sector. There are no great changes in the way the corporation operates, but I can perhaps explain them.
[English]
The Chair: We are dealing with Division 2, Part 5. Why do you not cover each of the institutions referred to there?
Ms. Dunn: Division 2 of Part 5 deals with changes to the Canada Deposit Insurance Corporation Act. It provides greater flexibility to the corporation, essentially, to deal with resolution of problem institutions. It provides bridge- bank powers to the corporation.
Briefly, the bridge bank would operate as follows: If a member institution was deemed to be non-viable — for example, no acquirer eminent or available — and the view of the Canada Deposit Insurance Corporation, CDIC, board was that closure and payout was not the most advisable resolution, either because of the cost or because of impact on stability, the bridge-bank tools would provide for the failing institution to go into liquidation and for the Minister of Finance, with GIC approval, to create a new institution, which would then be owned by CDIC in the interim and would transfer the insured deposits from the failing institution into the new institution. It would allow the new institution to continue to operate until such time as a private-sector resolution could be sought.
The bridge-bank powers exist in the United States. The Federal Deposit Insurance Corporation, FDIC, in the United States has used these successfully over the years in order to keep banking services available to depositors. That is one of the major changes to the Canada Deposit Insurance Corporation Act.
In terms of the effect of the changes on the corporation, the corporation would not be running the new institution. It would rely on a board to be appointed to run the new institution. It would rely on people who know how to run a bank and on outside experts, as available, to come in and augment the resources necessary to run that institution.
In terms of CDIC's role, they would be responsible for ensuring that they could bring those resources into the new institution quickly and keep a seamless operation.
I will now go over some of the other tools.
The Chair: Ms. Dunn, we are a finance committee, so we are interested in how much more exposure to the public purse is caused by these actions. We understand that these provisions indicate that within its mandate, the Canada Deposit Insurance Corporation can, in certain circumstances, ignore its own exposure to losses. It also has an opportunity to increase its maximum indebtedness.
Ms. Dunn: That is right.
The Chair: What are the quanta? How much more exposure will there be if we pass this legislation? That is what we would like to get to at this time.
Ms. Dunn: The corporation is funded through premiums from its member institutions. In terms of impact on the taxpayer, there would be no impact from any of these changes. The corporation can borrow from the CRF if it needs to do so. It also has $1.7 billion built up in order to address the Consolidated Revenue Fund. The corporation has access to this $1.7 billion fund internally and access to borrowings on the market or from the Consolidated Revenue Fund at an appropriate interest rate and at appropriate terms. Any costs to the corporation would then be replenished through premium rate adjustments, if necessary, to its member institutions. I am not sure if that addresses the full question.
The Chair: That is information we would like to have quickly from you with respect to each of these institutions.
Ms. Dunn: The borrowing limit was raised from $6 billion to $15 billion to acknowledge the growth in the deposit- insurance base over the years. The borrowing limit had not been increased. Again, there would be no cost to the corporation or to the government as a result of that. This is simply allowing them to access funds in the market, if necessary.
The other tools or increased flexibility would actually give the board the option of choosing a resolution mechanism that was perhaps not deemed to be the least cost at the time. However, if the board were deemed to choose the least cost, there may be overriding stability concerns. That would not be taken lightly.
The objects of the corporation remain to provide the least cost or minimize the exposure to the corporation. In some respects, however, an occasion may arise where one institution is looked at and minimizing the exposure may mean a payout. However, if that institution were to lead to a loss of confidence in the system more broadly, then it may mean that other types of resolutions should be considered. Those override flexibilities are provided for in this provision.
Another flexibility is that the Tax-Free Savings Account is considered to be an insurable category of deposit. It is not anticipated that would change the overall insured deposit level very much, at least not in the near term, given it is likely just a substitution effect of savings at this point. However, any increase would be funded by premiums, as deemed necessary.
The corporation also has greater flexibility in doing preparatory exams to go in and look at the books of an institution in question, if they were necessary. Again, no cost impact accompanies that.
The Chair: I see in Division 2 there are also amendments to the Access to Information Act, the Canadian Payments Act, the Financial Administration Act and the Winding-up and Restructuring Act. Are they all what we might terms ``consequential amendments''?
Ms. Dunn: They are, and they are related to the bridge bank — the method for introducing the bridge bank.
Senator Neufeld: My question is for Mr. Halley, from the last group of witnesses. I do not expect that you would have this information with you, but I would like you to provide it so that we could all have it.
With respect to the reduction in tariffs on certain machinery and equipment, and you mentioned power generation, I think you said that there were about 200 items. I do not know if there is someplace I can quickly go to find out what those items are. If not, could you please provide a list of those 200 items, what the reduction in the tariffs were for those items and also the rationale of how you pick 200 items out of possibly thousands? Please provide a brief explanation of your rationale behind how you picked those. I am certain you do not have that information in your back pocket, but, if you could give it to us, that would be great.
Mr. Halley: Yes, I will. The items are all obviously included in Part 3 of the bill. It is a cryptic list; I do agree. I will provide you with a more descriptive list, which will mainly be the list that was published in the Canada Gazette in August. However, it will be a modified list with a little more information with respect to the rationale.
The whole exercise was to try to assist Canadian industry, to lower the costs. When they buy machinery and equipment, often world-class machinery has to be imported. With respect to the tariff, you are correct; there are more than 8,500 tariff items. The list of 200 machinery and equipment is a subset of those 8,500. Over the years, many rounds of trade liberalization have lowered the rates on those specific machinery and equipment. We took the list in terms of what machinery and equipment is still subject to tariffs, and that is a smaller subset, obviously. Those machinery and equipment are concentrated in Chapters 84 and 85 of the Schedule to the Customs Tariff 2009.
Senator Neufeld: The power generation interests me because of wind generation, turbines and so on that everyone is talking about now and the need to build up that industry in Canada and not abroad. Having been involved in that quite extensively in British Columbia, I know many companies wanted to come to British Columbia or Canada and start producing some of that equipment here because it is needed across the country. That is my interest in this. You said that it went from 2.5 per cent to 11 per cent, if I remember correctly. Beside each of the 200 items, I would like to know the tariff reduction for each one of those, if possible; if it was 5 per cent, 11 per cent or whatever.
The Chair: Mr. Halley, if you could provide that to our clerk, we will circulate that in both official languages to the members of the committee.
We also have our government officials here. We finished Divisions 1 and 2. We have Divisions 3, 4, 5 and 6 to do. We have a half-hour. It may turn out that we will have to ask you to come back, but let us see how far we get.
Who can help us with the Export Development Corporation and the changes there, and what impact Bill C-10 has on the operation of the EDC?
Lise Carrière, Chief, International Finance, International Trade and Finance, Department of Finance Canada: I am with the International Finance Section of the International Trade and Finance Branch. There are four measures related to EDC in the budget bill. The first one relates to a temporary change to the mandate of EDC. It is to allow it to quickly support domestic trade and not only export trade. The purpose is to fill gaps in market access in domestic trade. EDC will be working with financial institutions and private credit insurers to complement and to leverage their capacity to support Canadian business in the downturn. The change will be in place for two years; its purpose is to close gaps. The bill also lifts the regulations that applied to domestic financing and domestic insurance related to EDC.
The second change is to increase EDC's contingent liability limit from $30 billion to $45 billion. This will enable EDC to grow and enhance its guarantee and insurance programs. It will provide more flexibility to the corporation.
Another change is to increase the Canada Account limit from $13 billion to $20 billion to ensure the government has the capacity to provide direct credit and to meet the financing requirements of businesses in strategic hard-hit sectors of the Canadian economy. This is close to the existing limit of $13 billion but adjusted for inflation.
The purpose of the Canada Account is to support transactions that EDC cannot support under its corporate account, for example, loans to the auto sector.
The last change to EDC is to increase the authorized capital limit of EDC from $1.5 billion to $3 billion. This will allow the government to inject additional capital into the corporation, should it be needed, in order to increase the availability of finance in future years.
The Chair: From where does that capital come?
Ms. Carrière: It is an increase in the authorized capital. It is not new capital injected into EDC. The act allows authorized capital of $1.5 billion. We have increased the limit to $3 billion. Thus far, $1.3 billion has been injected into EDC. This is non-budgetary capital that the government is able to inject into the Crown corporation.
The Chair: Is there authority for the government to give to Export Development Canada the additional revenue authorized capital if it is deemed necessary, without having to come back to Parliament?
Ms. Carrière: Yes, if it is deemed necessary, the government will be able to inject more capital into EDC. Right now, we have $1.3 billion, and we can go up to $3 billion.
The Chair: You mentioned the Canadian Secured Credit Facility. I understand that credit facility is managed by the Business Development Bank of Canada. Will that come up later on?
Ms. Carrière: That will come up — are you talking about BDC?
The Chair: That will come up later on. You have nothing to do with that?
Ms. Carrière: The Business Credit Availability Program, BCAP, involves both EDC and BDC, as well as financial institutions. The idea is that they will work together more efficiently to be able to provide financing. The financial institutions can make referrals to EDC and BDC; and we are hoping through this program, it will generate $5 billion of new incremental financing to Canadian businesses.
The Chair: We will proceed to the Business Development Bank of Canada. Perhaps you could deal with that issue because you have Export Development Canada dealing domestically, playing in your backyard now. How will you coordinate the activities?
Erin O'Brien, Chief, Microeconomic Policy Analysis, Policy Analysis and Coordination, Economic Development and Corporate Finance, Department of Finance Canada: To provide you with a quick overview of the Division 4 measures in the Bill C-10, it is quite straightforward. The bill increases the authorized paid-in capital limit of the Business Development Bank of Canada by $1.5 billion, to a total of $3 billion.
Lack of excess capital, combined with capital requirements and dividend policies, means that the BDC has little flexibility to rapidly or unexpectedly grow its business to meet existing or anticipated demand. By increasing the paid- in capital limit, this will provide the government with flexibility to inject additional capital into the BDC in the future, if required, to increase the availability of financing to Canadian small and medium-sized enterprises.
You had posed a question in terms of cooperation between the Business Development Bank of Canada and Export Development Canada. Under the BCAP facility, an advisory steering committee is combined of private sector financial institutions as well as these two financial Crown corporations. The steering committee provides a forum through which a number of policy and business issues are being discussed.
As well, specifically between BDC and EDC, they are negotiating a memorandum of understanding to ensure no overlap or competition exists between the financial Crown corporations.
The Chair: Has that agreement between the two organizations been completed?
Ms. O'Brien: I would have to double-check. It certainly is well under way.
The Chair: I am assuming it is not completed, unless you advise us otherwise. I would also be assuming then that EDC would not be doing anything domestically until that is completed. Am I correct in those assumptions?
Ms. Carrière: No. EDC has begun to provide domestic financing. The way EDC looks at it is if they have a demand that they know the banks cannot completely fill, and if they know that BDC is not able to provide the financing support, EDC will be willing to provide a loan. EDC's mandate is to be complementary to financial institutions, and they also view it the same way with BDC. They view their activities to be complementary to what BDC is able to provide in the marketplace.
The Chair: Are you dividing up the business end?
Ms. Carrière: The purpose of the steering group is to talk about these issues.
The Chair: You have not figured that out yet. You are doing it, but you have not figured out how to divide it, is that what you are telling us?
Ms. Carrière: Certain loans fit more with EDC's larger loans; for example, a loan that is significant, where BDC would not be willing to provide that loan. EDC will also focus on companies that have a trade focus or that do export. They may not be meeting its internal definition of an exporter, but they do export and do have an international focus.
The Chair: When that agreement is reached and becomes public, could you share that with this committee so that we will understand how you will divide up that particular work domestically? Presumably they will have some provision in there for withdrawal from the domestic market by Export Development Canada at the end of the two-year period; some arrangement will have to be made for that too, presumably.
Ms. Carrière: The mandate for EDC is for two years. Provisions exist that allow for transition out of that market. The two conditions are complementary and two years.
Senator Di Nino: I thought that the two-year term was also renewable. Is that correct?
Ms. Carrière: It is renewable by order-in-council should there be a need to do that.
Senator Di Nino: I think that is useful — a two-year authority, renewable for an additional two years by order-in- council.
The Chair: Is that in Bill C-10?
Senator Di Nino: Ms. Carrière verified that.
Ms. Carrière: It is in Bill C-10.
The Chair: That it may not be for two years. I think Senator Di Nino is implying that it may possibly be extended for a further period of time.
Ms. Carrière: The way the legislation is drafted is that it is a two-year period, but there is built-in flexibility that if the economic crisis was prolonged, it would be possible for EDC to continue to provide domestic financing and insurance for a period of time. It requires an order-in-council to lengthen the period beyond two years.
The Chair: To extend it.
Ms. Carrière: Yes.
The Chair: That is the only basis upon which it would be extended — if a financial crisis, as determined by the cabinet, is continuing to such an extent that it should be?
Ms. Carrière: The purpose of Bill C-10 is to respond to the crisis, so I would presume that is the case. I should also mention that a legislative review of Export Development Canada is under way. The issue of domestic financing is being examined as part of that EDC legislative review.
The Chair: You are not able to tell us if that is the only basis upon which it can be extended. You will have to get advice from somewhere else in that regard, is that right?
Ms. Carrière: I am trying to say that the legislative review is taking a longer-term view of EDC, and one of the issues is domestic financing and insurance. That review is being considered by the Standing Senate Committee on Foreign Affairs and International Trade. It will also be considered by the house in the next little while.
The Chair: We thank you for that information. In response to Senator Di Nino's clarification, you said earlier that it could be extended by an order-in-council, by cabinet, if the crisis is prolonged or continues. Is that the only basis upon which it can be extended at this time, and is that provision in Bill C-10?
Ms. Carrière: It is the only basis I can think of in which it could be extended.
The Chair: Did you say you ``think''?
Ms. Carrière: Yes.
The Chair: That is what I thought you said. We will check. Does EDC lend money or insure other institutions to lend money?
Ms. Carrière: It provides both. It provides direct loans as well as insurance policies.
The Chair: We have heard already from Canada small business financing, but could someone here help us a little bit? We were told that Bill C-10 would be bringing along some more opportunities. Perhaps you could explain that to us.
Ms. O'Brien: Indeed. In Division 5 of Bill C-10 are some changes to the Canada Small Business Financing Act, which will make amendments to the Canada Small Business Financing Program.
There are two key changes. Notably, it will increase the current loan limit, which I note has not changed in the past 15 years. This loan limit will be raised from the current $250,000 to $350,000 and to $500,000 for loans made for acquiring real property. With the passage of Bill C-10, the changes to the loan limit amounts will take place for new loans made after March 31, 2009, so starting tomorrow.
The other change made in the act concerns the lenders' cap ceilings under the program. Currently, institutions with a portfolio of eligible loans above $500,000 — these are the large users of this program — can claim reimbursement on losses of up to 10 per cent of the value of their portfolio. This measure proposes to increase the limit to 12 per cent for loans made after March 31, 2009 in order to encourage increased lending to small businesses under the program. Those are the two primary changes.
The Chair: Thank you for that. Are you also able to help us with Division 6, Legislation Governing Financial Institutions? Ms. Pearse.
Ms. Pearse: Thank you very much. I realize I did not answer your first question, which was to introduce myself, so I will do that. I am Jane Pearse, Director of the Financial Institutions Division at the Department of Finance.
The Chair: The perfect person to be here to help us with Division 6. Tell us what is there.
Ms. Pearse: Division 6 concerns legislation governing financial institutions. There are four components to the changes in this division. A couple of amendments are related to mortgage insurance where we provide authority to make regulations that will ensure that consumers pay no more than the actual cost of mortgage insurance, so it controls some of the business practices of the financial institutions. It also provides authority to make regulations dealing with disclosure to improve consumers' understanding of what mortgage insurance is.
The second component concerns credit cards. It provides authority to the government to make regulations dealing with the business practices of financial institutions with respect to credit card business. It also expands or allows for the expansion of the cost of borrowing rates that will improve disclosure in terms of credit card information.
You had previously raised the question of whether the government has the ability to purchase shares in federally regulated financial institutions. Sections in this division provide authority for the government to purchase equity, as mentioned, with certain constraints. It must be for the purpose of ensuring financial stability, and it has to be after discussion with the Bank of Canada, the Office of the Superintendent of Financial Institutions and the chair of the Canada Deposit Insurance Corporation.
Finally, there is an exemption to the continuation provision for trust companies. The provision was put into the Budget Implementation Act 2009 to allow for an exemption for lease firms related to the Canadian Secured Credit Facility. In the budget, it mentioned that firms that wanted to participate in the proposed secured credit facility would have to be federally regulated financial institutions. Therefore, since there was an anticipation that some lease firms may wish to participate in that new facility, the Budget Implementation Act allowed for the continuation of some leasing firms as trust and loan companies that would otherwise not be able to continue with federally regulated financial institutions because there is a prohibition on leasing activity of cars, personal vehicles and so on by federally regulated financial institutions. Is that clear?
The Chair: There is a prohibition?
Ms. Pearse: There is a restriction that federally regulated financial institutions not engage in leasing activity related to personal vehicles and household property. The budget also announced that there would be a consultation on that issue, the question of whether federally regulated financial institutions should be able to move into the lease market. However, pending a recommendation and a decision on that consultation, a temporary exemption was provided in the statute to allow lease companies to continue with federally regulated.
The Chair: We understand that the budget referred to a $12-billion amount in relation to the Canadian Secured Credit Facility. How does that work? Does the government make that amount available to federally regulated leasing companies as soon as they agree to be federally regulated? They can then borrow this money from the public purse. How does it function?
Ms. Pearse: Unfortunately, it is more complicated than that.
The Chair: Can you make it as simple as possible for us so that we can understand?
Mr. Lee-Sing: I will try. The $12-billion program will be run by BDC initially. It will provide money to federally regulated financial institutions that sponsor what is known as asset-backed securities, ABS. These are securities backed by bundles of loans and leases provided by car dealers, dealers, equipment dealers, who sell these securities to a bank, and the bank sponsors the ABS. Therefore, anyone who wishes to be a sponsor could get access to this facility.
Senator Ringuette: Twelve billion dollars of taxpayers' money to buy asset leases. That is what you just said.
Mr. Lee-Sing: They are buying asset-back securities that are backed by loans and leases; that is right.
The Chair: Up to $12 billion. Other questions may arise on that, but you have made it clear to us, which was your objective. Thank you.
Those, honourable senators, were the six divisions of Part 5 that we hope to deal with. If we get close to 11:30, I will ask all the other senators to get their questions on the record, and then we can get written answers back.
Senator Callbeck: I would like to ask Mr. Lalonde a question.
The Chair: I would have you ask the question and we will get him to reply to it in writing.
Senator Callbeck: You are expanding the definition of eligible charities for the purpose of tax deductions for donations of medical or pharmaceutical products. What added charities are to be included here?
I am wondering who has asked for that. Is it the charities or the pharmaceutical companies that have been pushing for it? What types of audits have been done on the pharmaceuticals that have been sent to developing countries? Have they been found useful? I would like to know what the follow-up is here. Who does the Finance Minister consult with before wanting to broaden this definition?
I would like to ask Mr. Halley about the tariffs and, in particular, the modification of the tariff on the treatment of milk protein substance by granting a preferred tariff treatment for most exporting countries. I would like to have a written answer on that as to how that will affect our dairy farmers.
I would also like to know from Mr. Lalonde if a gender analysis has been done on this budget.
The Chair: On all the provisions of the budget?
Senator Callbeck: Yes.
The Chair: If there has been, could you produce it for this committee to see how you do that kind of gender-based analysis of the provisions and the impact on different genders?
Mr. Lalonde has indicated that he has heard the questions. I have four further names on the list. We have eight minutes, two minutes each of you to have your question on the record, and then we will ask whoever is the best person to answer it to let us know so that we can make a note that we are expecting an answer back from you. I will start with Senator Ringuette.
Senator Ringuette: The most lethal question is with regard to this $12 billion to EDC to do asset-backed securities with regard to the auto industry, probably. Who will be entitled to this $12 billion? How much would they be entitled to?
The Canada Mortgage and Housing Corporation, CMHC, came in front of us and said that they now have only 67 per cent of the market. The total mortgage exposure in Canada is $333 billion; the minister is looking into buying $175- billion worth of this mortgage exposure, which is roughly 60 per cent of all mortgages. CMHC, which is a Crown corporation, owns 67 per cent of the market, and a new player that came into Canada three years ago, a company by the name of AIG, already has 20 per cent of the market. Does that mean that, of the actual insured mortgages that were bought with $53.4-billion worth of taxpayers' money, AIG got $10 billion? Could they go up to $35 billion in insured mortgages because of their portion of the market? I hope that you will be invited to come before this committee again, once we receive your answer, so that we can further investigate the situation.
The Chair: Ms. O'Brien, will you take the lead on getting us an answer on those questions?
Ms. O'Brien: I will certainly work with my colleagues at Finance Canada.
The Chair: Could you do that, and will you all agree to work together on this? I am not asking for the answer now because I am running out of time. I want to get the questions on record because it may well be that we will have to ask you back once you produce the answers to the first round of questions.
Senator Mitchell: First, when officials from CMHC were here, they indicated that only one third of 1 per cent of the entire portfolio of mortgages that they ensure is in distress. I find that absolutely impossible to believe in this economy. Could you please confirm it?
Second, when you talk of asset-backed securities, how is it that you confirm that they are not the equivalent of the subprime securities that were packaged with triple-A and minus triple-C or quadruple-C loan securities?
Third, now that banks are beginning to renegotiate mortgages, what is the relationship between the mortgages that they will allow to be renegotiated in total and the ultimate risk of those particular mortgages failing?
Finally, with respect to CDIC reserves, I think you indicated that there is about $1.7 billion of reserves. Could you compare that with the total risk that you have assessed of failure in the total portfolio of bank assets against which those reserves would be compared?
The Chair: Do you want a clarification of the question?
Ms. Pearce: Yes. On question 3, when you are talking about renegotiation of mortgages, I did not understand your comparison.
Senator Mitchell: The banks are now allowing mortgage holders to begin to reduce the amount of payments, to not make certain payments for a period of time, possibly to actually forgive, I would think, the principle on the mortgages in order to make it easier for mortgage holders to hang on in the face of the economic difficulties that they are confronting.
Ms. Pearce: Did you want information on the percentage of mortgages?
Senator Mitchell: I want to know whether someone has made the assessment of what risk that actually indicates in the mortgages that you will be backing in that respect, and the likelihood of them failing as indicated by this rather dramatic move.
Ms. Pearce: Okay.
Senator Mitchell: It is a risk-assessment issue.
The Chair: Senator Di Nino is next on my list.
Senator Di Nino: First, I would like to ask our witnesses, when they provide the information, to provide the rationale for these provisions as well — that is, why did we undertake these changes?
My second question is for Mr. Lalonde. This is an issue of which I am not too sure. We were told that the Tax-Free Savings Accounts, TFSAs, are ensured by CDIC. If they are insured by CDIC, are the investment vehicles that these funds can be placed in restricted? If so, give us a list of that. RRSPs and RRIFs are protected from creditors. Do the TFSAs have the same provision as the RRSPs and RRIFs — that is, protection from creditors in the case of bankruptcy and so on?
Ms. O'Brien: May I please seek clarification? When you asked for a rationale of all the measures, is that for all the elements included in Part 5?
Senator Di Nino: All of the questions that you are responding to right now. The questions that have been asked require a written answer. If you could provide the rationale as to why those changes or the provisions were put in so that we do not have to write you a letter, we would understand it better.
Ms. O'Brien: Fair enough. Thank you.
[Translation]
Senator Chaput: I would like to go back to the Société d'assurance-dépôts du Mantoba. I chaired the French- language Société d'assurance-dépôts du Manitoba for several years. What changes will there be in the way that organization operates as a result of the amendments to the act? Could you prepare a table for us that would show how the Société operated beforehand? What changes and effects will there be as a result of the amendments?
My second question goes to Mr. Halley. It deals with the reduction in customs duty on milk products and protein concentrate. I would like to have a list of the products on which customs duty will be reduced.
Third, are there financial consequences for dairy producers and manufacturers? If so, what are they?
[English]
Senator Ringuette: This is in regard to BDC and the increase in loan limits. You are the second group that has come before us — actually the Business Development Bank of Canada has been before us. Both of you are seeing more flexibility with respect to providing loans for small and medium-sized business.
How have you communicated that in the local offices? The feedback I have received in the last three weeks is that more restriction on loans has occurred from BDC to small and medium-sized businesses in my area. How are you communicating the need for more flexibility in the system?
The Chair: When you are providing us with your written answer to Senator Di Nino's question, will you tell us whether this is a two-year stimulus package initiative after which time it will go back to the status quo ante, or whether this will continue? I am speaking of initiatives such as the $12-billion Canada Secured Credit Facility.
In the budget document, will I find these all included as part of the stimulus package? If we see, in the budget document, $12 billion for the Canadian Secured Credit Facility, is that part of the $64 billion, or are there initiatives in here that will expose the public purse that are not considered part of the stimulus package?
Mr. Lee-Sing: The $200 billion that comprises the Extraordinary Financing Framework is laid out in the budget documents. You could add the numbers up to the $200 billion.
Briefly, $125 billion is for the Insured Mortgage Purchase Program; $12 billion is for the Canadian Secured Credit Facility; and $13 billion for BDC and EDC through additional provisions.
The Chair: Are you reading from the budget document?
Mr. Lee-Sing: Yes, this is on page 79.
The Chair: That is all we need. We can read it ourselves. I just want to ensure that all the items we have talked about and the increased capital for the various institutions from $1.5 billion to $3 billion are part of the $200-billion stimulus package.
Mr. Lee-Sing: Yes, they are.
The Chair: We have run out of the authorized time for our committee to meet. We look forward to receiving your written replies, and we thank you for helping us to understand this complicated legislation a bit better. We look forward to perhaps meeting with you again to explore questions that may arise.
(The committee adjourned.)