Proceedings of the Standing Senate Committee on
National Finance
Issue 18 - Evidence - Meeting of December 4, 2009
OTTAWA, Friday, December 4, 2009
The Standing Senate Committee on National Finance, to which was referred Bill C-51, An Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009, and to implement other measures, met this day at 9:33 a.m. to give consideration to the bill.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Honourable senators, I wish to thank you all for being here this morning. We are continuing our study of Bill C-51, which is the government's second Budget Implementation Act. Other items described as "miscellaneous" are included in the bill, and we have been dealing with them as well.
Our work today will be divided into three sessions. In the first session we will hear from representatives of the Canadian Home Builders' Association. In the second session, further to our discussions yesterday, we have arranged to hear from the President of the CBC, who will be with us via videoconference from Vancouver. Finally, we will have a session focusing on the Canada Pension Plan provisions in Bill C-51. Our time in each session is limited, and you will appreciate that in order to arrange for the videoconference, the first session will have to finish at precisely 10:15.
Without further ado, I would like to welcome Mr. Gary Friend, President of the Canadian Home Builders' Association. Mr. Friend is accompanied by his Chief Operating Officer, Mr. John Kenward.
Mr. Friend, you have some introductory remarks, and then honourable senators may have questions and comments. The floor is yours, sir.
Gary Friend, President, Canadian Home Builders' Association: As the chair mentioned, I am the Canadian Home Builders' Association (CBHA) national president. I have been a new home builder and home renovator in Surrey, British Columbia for over 25 years.
The Canadian Home Builders' Association represents Canada's residential construction industry. Our membership includes new home builders, renovators, developers, suppliers, trades, manufacturers, lenders and other professionals. We are pleased to provide the committee with brief comments on some aspects of Bill C-51.
My remarks focus on how the bill relates to the home renovation sector of our industry. Specifically, I would like to address the Home Renovation Tax Credit and issues pertaining to home renovation activities by Canadians.
The CHBA supported the introduction of the Home Renovation Tax Credit (HRTC) earlier this year. Given the economic uncertainty that confronts our nation, the HRTC is an appropriate measure to stimulate consumer investment in home renovations. The HRTC is having a significant and positive effect on the level of home renovation across the country. As a result, we are not experiencing the same downturn in renovation activity that we are seeing in new house construction.
In their work with consumers, renovators report that the HRTC is a significant factor in motivating homeowners to initiate home renovation projects. This view is reinforced by building material retailers, who also report increased sales as a result of the HRTC. In short, the experience of our industry is that the HRTC is stimulating a significant level of economic activity.
I can offer the committee some additional brief points in relation to the credit. First, there is evidence that the HRTC is complementing other federal initiatives, such as the ecoENERGY Retrofit - Homes program. Our renovator members report that many consumers are including energy-efficiency measures in their projects. This is allowing them to take advantage of both the HRTC and the ecoENERGY grants, as well as compatible provincial grants and incentives. This observation is supported by data from Natural Resources Canada showing an unprecedented consumer demand for home energy evaluations, a prerequisite for ecoENERGY grant eligibility.
Taken together, the HRTC and the ecoENERGY grants form an effective package that is working well. This is stimulating home renovation projects that are enhancing both the value and the environmental performance of Canada's housing stock. I note that in the government's recent fourth report on Canada's Economic Action Plan, it is estimated that some 4.6 million families will take advantage of the HRTC. In short, the HRTC is a success story.
We have also been pleased to see some major building material retail chains add additional incentives for consumers doing renovation work that qualifies for the HRTC. The HRTC has also delivered another important benefit by encouraging consumers to carry out projects using the services of legitimate tax-paying renovators. By requiring receipts to support HRTC claims, the government is moving consumers away from dealings with underground cash operators. Given the Canada Revenue Agency's apparent inability to address the underground cash economy through tax compliance measures, it is instructive to see that the HRTC is having a positive impact in this area. This is a benefit shared by consumers who are better served when dealing with legitimate tax-paying companies. It also benefits government through higher tax and other revenues that would otherwise be lost to underground cash activity.
I will conclude my comments with a caution. It is clear that the HRTC is having a positive impact on the level of home renovation activity in Canada. This initiative will end in early 2010. A few months later, the harmonized sales tax will be introduced in both Ontario and British Columbia, resulting in a tax increase on home renovations amounting to about $1 billion each year.
Our industry is extremely concerned about this situation. Clearly, it will have a significant impact on both the level of renovation activity and the number of jobs lost to the underground cash economy. We know this because it is exactly what happened in Atlantic Canada when the harmonized sales tax was introduced there in the 1990s. To put matters simply, the positive benefits flowing from the HRTC will be more than nullified by the impacts of sales tax harmonization.
In order to address the situation, the CHBA calls upon the federal government to introduce a permanent 2.5 per cent GST rebate for home renovation expenditures. This would be a rebate that, like the HRTC, would go straight to the consumer. It will achieve tax neutrality with the pre-GST federal sales tax.
I should note that the federal government did not provide a renovation tax rebate when it implemented the GST. This resulted in a substantial additional tax burden on Canadians who renovate their homes using the services of tax- paying renovators. In both Ontario and British Columbia, CHBA provincial associations — the Ontario Home Builders' Association and CHBA-BC — are urging their provincial governments to enact similar renovation tax rebates to achieve revenue neutrality in relation to the provincial portion of the harmonized sales tax.
I would point out that our association recognizes that the harmonized sales tax offers broad economic and competitive benefits. However, housing presents a unique case where HST impacts will be particularly significant and unfair. This represents an acute problem in relation to home renovations and can be best addressed through permanent renovation tax rebates, federally and provincially.
We brought reports on the Canadian housing industry performance and trends and the potential impact of sales tax harmonization on the renovation sector.
The Chair: Mr. Friend, thank you very much for your comments.
I remind senators that the second portion of Mr. Friend's submission deals with the harmonized sales tax, which is a bill currently before the House of Commons. This bill has not arrived in the Senate, but perhaps Mr. Friend is foretelling something.
The indications are that that bill may be coming to us, if it passes in the House of Commons. You have already given us some information on it. Although we do not have authority for a pre-study, it helps us a little to understand the impact it has on the industry.
We will now focus on what is contained in Bill C-51, namely, the home renovation tax credit. It is interesting that you should point out that there is a synergy with the ecoENERGY program. Everyone here is pleased to see movement towards a green industry and energy savings in relation to renovations. You are seeing that in your industry, and I am glad you are here to confirm that for us.
I will now go to my list.
Senator Ringuette: Welcome, gentlemen. I can see that you have done a lot of analysis on the different issues affecting your industry.
Yesterday, we were told by officials that this 15 per cent tax credit will generate a loss in revenue of $3 billion. For that to happen, there would have to be $20 billion of purchases either of products or labour. Is it your observation that this program has generated $20 billion of purchasing throughout the country?
Mr. Friend: We do not yet have any hard numbers on what the home renovation tax credit has brought in. From talking to renovator members across the country, I gather that it is foremost on consumers' minds. It is almost always brought up in their phone calls, and it has brought people into the marketplace to do renovations. It has dramatically increased the amount of renovation going on, and it is creating jobs and employment.
In my own area of Vancouver, most renovations are well above the $10,000 limit for the tax credit. There is a lot of spinoff of extra economic activity.
Senator Ringuette: Calculations also indicate that it is generating $1 billion in GST revenue for the federal government. I cannot talk about the net income because we still do not have the information about the cost of all the advertising for the program.
You mentioned the underground economy. What impact has the current financial crisis, with all the layoffs across the land, had on your members? Are people who are laid off doing renovation work on the side and contributing to the underground economy? Have you noticed an impact?
Mr. Friend: Our industry, like others in Canada, was severely affected by the downturn in the economy. There is historical data on the renovation sector that has an underground cash economy operating in it. That occurred when the HST came into Atlantic Canada.
One of the successes of the Home Renovation Tax Credit is the requirement for receipts, because it takes away from the underground economy. The consumer needs the receipts to get the tax credit, which stops the underground economy from growing. That is a positive benefit.
Senator Ringuette: You are unable to say at this time whether the laid off workers have gone into the different trades to do home renovations and thereby removed jobs from your membership that do pay income tax and GST.
Mr. Friend: In my own market, I am not aware of people I have had to lay off in my own company that have gone to the underground. Traditionally, those in the underground economy are not the professional tradespeople that work within the industry.
Senator Di Nino: I was struck by one of your comments, Mr. Friend. Did you say that your own experience indicates that the renovations being undertaken by homeowners are usually over the $10,000 mark?
Mr. Friend: When I made that comment, I was making a reference to my own experience. I am from the Vancouver marketplace where houses are expensive.
Senator Di Nino: That is what you have seen yourself.
Mr. Friend: Yes.
Senator Di Nino: Has your experience been that those who are renovating do not stop at the $10,000 maximum but are spending more than that?
Mr. Friend: Yes.
Senator Di Nino: Have any of your colleagues expressed similar thoughts in your discussions across the country?
Mr. Friend: In my own market in Vancouver and in meeting with my members across the country, it seems to be fairly prevalent that the renovations are going above the $10,000 for those who have the money to spend. It is common that people are spending more than that and creating more jobs.
Senator Di Nino: It seems that the economic activity is greater than some may have anticipated.
Mr. Friend: I think so. Renovations as an industry in the housing sector is larger than new construction today. It was $53 billion in 2008. That is a large part of the industry.
Senator Di Nino: That is worth repeating. I did not know that. The renovation market is larger than construction in the new housing market.
Mr. Friend: Yes.
Senator Di Nino: That is a good statistic for us to know.
I want to go back to your comment about the underground economy. I was struck by your comment that some people who participate in the underground economy are generally not qualified professionals. They are people who are handymen and handywomen, as opposed to those who would have professional qualifications.
Mr. Friend: That is correct.
Senator Di Nino: The program that the government initiated has not only enabled the government to collect its share of the revenue, which must be added to the calculation that my friend is talking about with respect to the actual tax pluses and minuses, but it has also been an indirect benefit to the trades and the industry itself.
Mr. Friend: Absolutely.
Senator Di Nino: I must admit that it caught me by surprise because I had not thought about it, but you linked the HRTC to the ecoENERGY Retrofit grants. You suggested that individual homeowners are spending over $10,000. Is that partially because of the ecoENERGY Retrofit grants as well, or would that be over and above?
Mr. Friend: Yes, it is over and above.
Senator Di Nino: Those two programs are generating a great deal of economic activity, particularly at this time of our country's economic challenges in the global crisis. The news that we got this morning about the increase in job numbers may be a reflection of this as well.
Mr. Friend: Absolutely.
Senator Gerstein: Mr. Friend, I was interested in your comment that the renovation market is larger than the new home building market. Would you have any information or statistics as to the balance of renovations done by individuals themselves on their own homes versus how much is put out to contractors?
Mr. Friend: The numbers on the level of the market and the dollar amounts are contained in both these reports in different fashions. As a general rule of thumb, the renovation activity is two thirds renovation contractor and one third do-it-yourself or home owners.
The Chair: That information is in the brochures you have made available.
Mr. Friend: That is right.
The Chair: We will give those to the clerk and he will make them available to all members of the committee. Thank you for bringing those along.
In that report do you have any statistics on the success of eco-renovations? How much energy is being saved by this investment by Canadians in eco-renovation?
Mr. Friend: The report contains the amount of budget allowed for ecoENERGY retrofits. We are seeing a large uptake in the marketplace. As far as the amount of energy saved, we will not know until the end of the year how many audits have been done and what has happened. However, I would say it is significant. Consumers have a real appetite for reducing energy use.
The Chair: With respect to the eco-renovation, there is a pre-renovation audit and a post-renovation audit required. That information will be compiled and will be available in due course?
Mr. Friend: When it is all done, yes. We have seen a substantial increase in the audits by NRCan.
The Chair: I have a question that flows from those of Senators Di Nino and Gerstein.
These programs are maintaining employment in this industry. What is your position on the fact that these programs are coming to an end in a month? Do you anticipate a major drop in employment in this area following the incentive programs?
Mr. Friend: Both programs are a much needed incentive to the consumer to carry out these renovations. Energy retrofits are not inexpensive. It is very expensive to change windows, heating systems, et cetera. The fact that these programs are coming to an end is one reason we are calling for a permanent 2.5 per cent GST rebate on renovations, which would allow tax relief and neutrality to the consumer to be able to spend monies moving forward.
The Chair: You tied that into HST implementation did you not?
Mr. Friend: Yes.
The Chair: Do you want to separate those now?
Mr. Friend: We are calling for a permanent federal GST rebate of 2.5 per cent on renovations. We are also calling for a rebate at the provincial level on the HST.
The Chair: Irrespective of whether Ontario and B.C. go ahead with the HST program?
Mr. Friend: Yes. We are calling for a federal rebate on the GST, and our provincial associations are also calling on their own provincial governments for a rebate for renovations under the HST provincial portion.
The Chair: You anticipate that the 2.5 per cent federal rebate that you talked about on GST would make up for the Home Renovation Tax Credit program that is coming to an end at the end of January?
Mr. Friend: I do not know if it would make up for it directly in that way, but it would bring relief to the consumer and create tax neutrality on the GST charge on renovations. The net result is that it would help them.
The Chair: We have heard suggestions from others on an individual basis, not before this committee, that because the recovery is so fragile it might be a good idea to extend the home renovation tax credit for another year. What is your position on that?
Mr. Friend: It has obviously been taken up by the marketplace. It has done a lot to raise awareness of renovation and has created activity and jobs, so it has been of benefit.
The Chair: You do not have a position as an association as to whether it should be extended?
Mr. Friend: I will ask Mr. Kenward to comment on that.
John Kenward, Chief Operating Officer, Canadian Home Builders' Association: Our position is that if the economy remains fragile, this is certainly one of the stimulus measures the federal government has put in place that would deserve serious consideration for renewal. At the same time, we are also saying that we would not see that as a substitute for the permanent home renovation tax rebate of the goods and services tax.
This is a success story, and there is a deep rationale for continuing it as an economic stimulus, if that is required.
The Chair: We will not know how successful it was until income tax time when people make claims on the program. However, from the industry you are seeing that it is a successful program?
Mr. Kenward: Absolutely. When the stimulus program first came out, we were not sure what effect it would have. As Mr. Friend has observed, it has had a profound impact. It has been quite amazing. It is impressive to see how much activity the tax credit motivated. We are all quite taken aback by it.
Mr. Friend: I have a figure that I use when I look at the marketplace. Renovation activity has grown for the last 10 years. This year, renovation activity has remained stable. At the same time, new home starts have decreased in some markets by double digits. Using that comparison, renovation is outperforming new home starts in this market. Part of that has to be due to the renovation tax credit.
The Chair: You are suggesting that, had it not been for this program, there would have been a drop in home renovations, as there was in new home construction?
Mr. Friend: Yes, the numbers seem to show that.
The Chair: That is helpful.
Senator Lang: I want to pursue one aspect off your recommendation to have a decrease in the HST if it does come about, both federally and provincially. If you had to choose between the extension of the Home Renovation Tax Credit and a decrease in GST and HST, what would be your position? I want to have this clarified, because one interesting aspect of your comments was that the necessity for homeowners to get receipts for the work they are having done is causing a significant decrease in the underground cash marketplace, which does not pay taxes to any level of government.
Just as an observation, it seems to me that, if there is to be a continuation of economic stimulus and incentive for people to spend, we should be looking at the extension of the Home Renovation Tax Credit, in view of its success, as opposed to doing strictly a marketplace decrease in HST or GST.
Mr. Friend: CHBA's position is that we are calling for a permanent GST rebate of 2.5 per cent on renovations. Just as with the Home Renovation Tax Credit, you would need a receipt. When we do new homes, people are audited to ensure that when they claim for the GST rebate, they have the figures to back it up.
The stimulus program has done a lot of good, but it has a sunset clause. In the long run, it does not protect the consumer in terms of tax neutrality, so we would call for a permanent rebate if we had to choose between the two.
Of course, in these economic times it may be worth considering that the Home Renovation Tax Credit be extended.
Senator Lang: I would like to ask questions on the First-Time Home Buyers' Tax Credit, which you did not comment on, as well as on the increase to $20,000 for withdrawals from RRSPs for first-time home buyers.
In your experience in this past year, has it worked in some cases?
Mr. Friend: Yes, it has. It has helped first-time home buyers to be able to use their RRSPs for a down payment. Of course, the First-Time Home Buyers' Tax Credit for the purchase of a new home gives them $750 back on up to $5,000 of closing costs, so it is a benefit to home buyers.
Senator Lang: Has that been another reason for people to get into the new home construction marketplace?
Mr. Friend: Yes. Every penny helps, particularly for first-time home buyers.
Senator Peterson: Thank you, gentlemen, for your presentation. What are the rules with regard to the program that ends early next year? Do you have to be completed before the deadline? Can new starts go right up to the deadline? What validates a new start? Is it someone filling out a form? How does that keep moving, to maximize it?
Mr. Friend: I do not have the rules before me, but I understand the cut-off date is the cut-off date. Whatever work is done to that point can be claimed.
For example, if you are doing your windows and they are ordered but not installed you may claim the cost of the windows but not the installation because it has not been done yet. As long as you have a valid bill for what has taken place that qualifies, you can use that. If you have product where there is supply and installation and the supply is done, you can still capture that, but you may not get the installation because of the cut-off date.
Senator Peterson: Do you think that is an area where there could be some relief? It is no fault of the home owner that there was a delivery problem. They were probably counting on that.
Mr. Friend: I think it is on consumers' minds because I am hearing from our renovator members in Vancouver that their phones are quite busy right now. We feel that part of that is people are looking at the date coming up and they have to get things done.
The Chair: My understanding is that the advertising done by the government says it is for goods and services supplied by the end of January. Anything after that and the program does not apply.
Senator Ringuette: We are all aware of the dire housing situation in our native communities. Would you know what the impact of this program has been in regards to the renovation, purchase or building of housing in our native communities?
Mr. Friend: I do not have direct figures on that, but I will pass it on to Mr. Kenward to provide some information.
Mr. Kenward: I cannot provide specific numbers but I would just register that the federal government has implemented a major program on the affordable housing front. A considerable portion of this is dedicated to the rehabilitation of housing. I would imagine that there has been considerable investment, or there is considerable money available for investment in that area.
Senator Ringuette: Has there been anything noticeable from your members in regards to the CHBA and the specific program we are examinigt?
Mr. Kenward: No, I do not have specific information. I can certainly try to get it for you.
Senator Ringuette: I would appreciate that. .
Senator Lang: I would like to pursue another area that, as a home owner, I found confusing. We have the various programs put in by the federal government. Then the local territorial and provincial governments put in programs and you have to apply to various agencies. You almost have to be unemployed for a period of time in order to have the time to apply for everything to go about reducing your carbon footprint and the other things that you are attempting to do.
The Chair: Then you cannot afford the accountant to help you.
Senator Lang: That is right.
All these programs are well intended and put in place politically by the various levels of government to meet various objectives. Has your organization ever considered looking to see what could be done to coordinate between the federal, provincial and territorial governments? There could perhaps be two or three easy-to-apply-for, streamlined programs to give better value for the tax dollar that may be forgiven and provide more incentive so more people take advantage of it? Have you done reviews of that?
Mr. Friend: We have a fairly up-to-date list of the incentives and programs out there in the jurisdictions federally, provincially and locally that we provide to our members to inform consumers. Mr. Kenward could expand on that.
Mr. Kenward: It is difficult to keep that list up to date.
Senator Lang: That is my point.
Mr. Kenward: However, I would observe that in addition to our list, Natural Resources Canada has also developed and is maintaining a pretty good list of various initiatives. We have not taken the step of suggesting to various levels of government that perhaps one should consider pulling these together and amalgamating them. Our sense of urgency was to position our renovators more strongly in terms of their ability to advise potential customers of what was available. We managed to put together a list, but that probably needs to be updated in the near future.
Senator Lang: I have a question about employment. We talked about how successful the Home Renovation Tax Credit program has been across the country. The $53 billion involved in home renovations is a huge number. Do you any idea of employment statistics? How many jobs have been created? Are we at the stage where you can give an indication on that?
Mr. Friend: We have not yet put together the numbers for this year. Renovation activity is larger than new home construction, so it creates a lot of jobs. There is no question about that.
The Chair: Mr. Friend, do you have any statistics on the rate of unemployment within the industry of new home builders and renovation? How does that compare to the 8.5 per cent of Canadians looking for work and the many who have given up?
Mr. Friend: I do not have the figures before of me of what part our industry plays in the current employment rate.
Mr. Kenward: I will try to get information for you on that particular point. It does stretch us into another field, which I will not go into in detail. Despite the fact that we may be in difficult times economically, the rate of unemployment simply does not reflect the demand that continues to grow within our industry for trades and people with special skills. It is an interesting point that even during very difficult economic times our members in many parts of Canada continue to report that finding the kinds of qualified people they need is a challenge. That is another issue altogether.
The Chair: I was hoping you would get into that issue because we are talking to many Canadians who are looking for work. If you are telling us that there is a shortage and you anticipate, for the foreseeable future, a shortage in skilled trades for new home building and renovation, that should be made public.
Mr. Friend: I can tell you firsthand, as a builder in Vancouver, even today I have difficulty getting the qualified people I need to complete my jobs. I know the economic downturn has masked the shortage of skilled trades in the short term. I can assure you that in the long term this problem is not going away. There is a worldwide competition for qualified trades and they have the mobility to choose where to go. It will haunt us for some time to come.
The Chair: This is getting into an area not covered by this particular matter but it is an area we may want to get into in the future. That is, what is the best way to train these people for the skilled trades where there is a shortage and a foreseeable shortage? We will look forward to that debate again sometime in the future.
Senator Finley: The question I was going to pose has been asked by my colleague, Senator Lang, but just so I understand this. It is certainly a key part of Senator Ringuette's equation on tax balance.
There have been new jobs created by HRTC. You do not know how many, but there have been. Would you say it was significant? Do you have any kind of guess at it? Is it 5 per cent or 3 per cent?
Mr. Friend: I could not guess a percentage. I look at the fact that the renovation sector has pretty much held steady compared to the declines in new house starts. I would say in today's market, it has contributed significantly to maintain and increase employment.
Senator Finley: These people pay tax.
Mr. Friend: Absolutely. One of the benefits of the Home Renovation Tax Credit is it gets the consumer involved and ensures the receipts are on the table.
Senator Finley: The newly employed people pay tax.
Mr. Friend: The contractor has to be on the books to issue a receipt which is a great benefit.
Senator Finley: That should be added to your tax balance, Senator Ringuette.
Senator Ringuette: Perhaps we could look at a total cost of this program as even less than $1.5 billion, if you remove the GST portion and add the taxable income it is generating. Maybe at the end of the day this is a revenue-neutral program.
Senator Lang: Perhaps you could put on the books, as well from a revenue-neutrality position, is that for those new employees who are paying taxes, a percentage would be taken off the Employment Insurance program.
The Chair: All of this has to be calculated, and as the National Finance Committee, we have a habit of doing that, of thinking about the overall cost to the public purse as well as the social costs that are important to take into consideration.
Thank you, Mr. Friend and Mr. Kenward, very much for being here. We wish you well in your business and thank you for bringing to our attention some of these other important issues that are outside of what we are dealing with today in Bill C-51 but are important points that we will pursue.
Mr. Friend: It was our pleasure.
The Chair: During our discussions yesterday, some points came up with respect to CBC/Radio-Canada. On very short notice and with our thanks, we have arranged for a video conference with Hubert T. Lacroix, President and CEO of CBC/Radio-Canada. We are pleased he is with us from Vancouver. Mr. Lacroix, if you have a few introductory remarks, honourable senators may then have some questions and dialogue.
Hubert T. Lacroix, President and CEO, CBC/Radio-Canada: Mr. Chair, it is a big day for Vancouver, for British Columbia and for public broadcasting in Canada because we are opening our new broadcast centre here. We expect approximately 20,000 Canadians to visit our new premises. The building improvements are spectacular, and it will help improve our connection with the Vancouver community.
I understand you have questions about Bill C-51 with respect to CBC/Radio-Canada's borrowing provisions. Before I get to questions, I will give you some background of what has been happening over the last 18 months at CBC/Radio-Canada.
We have been under financial pressure, like other broadcasters. Between 40 and 50 per cent of television budgets come from advertising. Those ad revenues have been on a steady decline for a number of years. The meltdown everyone experienced last year made things worse. As we entered our financial year, April 1, 2009, to March 31, 2010, we were facing a budget shortfall of $171 million.
We are in a strange position, when you look at us with respect to the other broadcasters in the country, because we have no access to capital markets. We cannot borrow. When we lose ad revenues like we did, we can only do one of two things. When we lose a dollar of revenue, either we cut the expense or postpone the expense. We simply decided that we would put together a recovery plan to deal with our shortfall.
To start the plan, we anchored it into a set of guiding principles to protect our most important priorities. These priorities were that we did not want to put any advertisements on our radio networks; we wanted to continue investing in new media; we wanted to continue creating strong Canadian programming across all our networks; and, very important, we wanted to ensure we were going to stay deeply rooted in our communities. As a result, we did not close a station across the country as we implemented this plan.
However, we had to make difficult decisions because you cannot "find" $171 million. It is more than that amount when you factor in the severance payments that we had to make. The total was about $221 million. We eliminated 800 full-time positions from our corporation. We cancelled some programs and reduced the number of episodes of others. We made permanent reductions in our discretionary spending. We froze or reduced the target compensation for all our senior managers. It still was not enough so we had to start thinking about selling some assets to make up for the shortfall.
The first asset we sold was some receivables from a transaction carried out three years ago, the sale of the Galaxy Digital Radio service. This gave us about $20-21 million. The provisions in Bill C-51, which we hope are passed, will enable us to complete a second transaction, which is modelled on the first one. It is a set of receivables from a land transaction in Toronto a few years ago. The payments started when the transaction was made and go until 2027. If we are able to complete that transaction, if the advertising revenue projections from the beginning of the year hold — and we are seeing now that they willd — and if we complete our sales of assets, I am confident we will balance our budget by March 31, 2010. This has been the number one focus of the CBC management team since we identified the shortfall.
In the meantime, we are making some changes to our programming. We are trying to be more efficient. We are trying to be closer to Canadians. We have new programs and have revamped our news. We are trying to ensure value to Canadians, despite all the crazy challenges.
I would be happy to take your questions on the bill because we have been at this since the beginning of January 2008. I might help you with some of the concerns that I read that you had yesterday.
The Chair: Thank you, Mr. Lacroix. We appreciate your thorough analysis of the finances. You are speaking, as you know, with the Standing Senate Committee on National Finance. Could you expand on the receivables from land transactions in the Toronto region to which you made reference?
Mr. Lacroix: Absolutely. I will give you a little more feedback before I get to the precise answer to your question. When you look at the assets we have on our balance sheet, CBC/Radio-Canada has a simple balance sheet in terms of assets. We have programming rights and inventory, so we cannot sell that.
We were trying to find ways to balance the budget so we had to sell some of the furniture in the house to save the house. What did we have in the house?
We had some land across the country, but a down market would have been not the best of timing for us to come in and do sale and leaseback transactions. It was not as if selling the land would have been the end of our problem. Selling the land, the broadcast centres or the stations we had across the country would simply have meant that the physical premises would have gone to a new owner, but we would not be moving the studios. We would have become a tenant, and that would simply adding liabilities. We were not sure we would get full value. In addition, the timing of these transactions was going to be 12 to 18 months, which was outside our budgeting year. We looked at all of this. We thoroughly analyzed our real estate portfolio and we thought that that was not the best way to do it.
We had two other things we could have done. We looked at our accounts receivable and factored some of them. That was not a good idea because of the discount involved. We would not get full value for the accounts receivable.
What we did, was to look at the result of a sale of land in Toronto around the broadcast centre. The total value was $220 million, to be paid to us $11.6 million every year for 20 years. There was value in that stream of receivables. We went to investment bankers, because I did such transactions in my previous life on a regular basis. The idea is to find a person who will give you today the value of those amounts owed to you over time. You have to negotiate a discount factor because $11 million in 2022 is not worth $11 million today.
Sitting down with government officials and with our investment bankers and advisers, we structured a deal. These receivables will be monetized to us and for us as soon as Bill C-51 is passed. We think it will take about three weeks. They will be sold in the marketplace through an investment banker. Pension funds and other institutions of that kind are willing to buy that stream of receivables over time and to pay you right now some amount of money for it. We think that we will get something like $125 to $130 million if the markets hold and if we are good at negotiating at the last minute the lowest possible discount factor to our receivable.
That is the concept behind trying to plug the big hole we had on the budget shortfall in selling some of the assets on our balance sheet. The only assets that we could go to that were liquid enough to allow us to do this within the budget year were these two streams of receivable, the Galaxy transaction and the other deal. Does that answer your question?
The Chair: It does clarify matters, and there may well be questions arising from that. From looking at the clause without any background and explanation, and we are pleased we have that information today, I understood that the borrowing authority of CBC/Radio-Canada was being increased, which means you could go out and borrow from any institution. What you are describing to me sounds more like you are selling some assets.
Mr. Lacroix: That is exactly right. Let me tell you why we have to go through our Broadcasting Act and the borrowing authority. I will try not to fall into too much detail here, but I will give you some of it so I can bring you to the borrowing concept.
We sold those receivables to a third party, to Cadillac Fairview in Toronto. Cadillac Fairview, as you know, is a wholly owned subsidiary of the Ontario Teachers' Pension Plan. It has pretty good credit. We feel confident that the $11.6 million that Cadillac Fairview owes us every year, would be paid to us until the end and the termination of the debt. This has been the case so far
If I turn around and I sell you the receivable that comes from Cadillac Fairview, you might say: "It is really a good thing that your debtor is Cadillac Fairview, but I do not want to deal with them. I want to deal with the CBC. You will have to give me a guarantee that if the dollars that come from the people at Cadillac Fairview are not paid to me, now that you have sold me the receivable, I can come to you and I can make a claim on you." That is fair. We are not too concerned.
On top of that, if we give a guarantee of the kind that is requested from us in the public markets, we actually get a better value. Because of the government's credit, we get a better value for the sale of that receivable and the discount factor is less. It is all to the advantage of Canadians.
When you look, then, at the accounting principles behind this transaction, the guarantee given by CBC to a third party is the equivalent of the concept of borrowing. Because we borrow from the government to try to extend the guarantee to a third party, we then run afoul of the $25 million limit that we have in the act. That is the reason we are in front of you trying to get the limit increased from $25 million to $220 million, because that is the value of the whole of the transaction that we are trying to monetize, over time, in tranches.
Now you understand the context in which we are selling our assets. This does not mean that all of a sudden we have a free rein to borrow $220 million. The transaction is already done, and it is simply the backstop of the government guarantee to CBC selling the assets that is akin to borrowing that forces us to have you look at Bill C-51 and have a conversation with me this morning from Vancouver.
The Chair: You have made that very clear. We appreciate that.
Two other points came up from our discussion yesterday. Assuming you are within your borrowing authority, can you pledge assets to borrow? What steps do you have to go through in order to do so?
Mr. Lacroix: Regarding the pledging of assets, we have no free rein for any transaction which is akin to borrowing,. Let us say we were trying to sell something outside our limits. Any transaction has to go through our minister and the Treasury Board Secretariat, the framework within which we work on a regular basis. Right now, we are looking at a transaction in Toronto where we will lease some square footage to new tenants in our building. We have to do what we normally do. It starts with the minister and then goes to Treasury Board Secretariat. The Finance Committee looks at it, and then it comes back to us. All the same guidelines and touch points and restrictions we have with respect to our financial abilities, will be there in this context.
The Chair: That is helpful. The second point that came out yesterday that we did not have an answer to was in relation to federal grants to CBC/Radio-Canada. We saw a figure in the Main Estimates, and we were wondering if that is an increase or decrease over previous years.
Mr. Lacroix: Are you talking about the $60 million that is the envelope that we normally get on a yearly basis?
The Chair: Yes.
Mr. Lacroix: The $60 million is an amount that government has given to us since 2000. It is the same amount. It is either given to us for two years or one year. Last year, April 1, 2009 to March 31, 2010, the government gave it to us for one year. The purpose of the $60 million is to invest in Canadian programs and Canadian programming. We have to hand over a detailed list of where those dollars go. It is the same amount we have been receiving since 2000.
The Chair: Was there any special, extraordinary injection of funds from the federal government to CBC/Radio- Canada as a result of the economic downturn in this fiscal year?
Mr. Lacroix: Absolutely not. We have managed our way out of a difficult situation. The only help we got from government, once they realized that we had to sell some assets, was to figure out a way to get all the approvals for the transactions that we suggested, which is the sale of our receivables. We did not get a dollar from the federal government in this context.
The Chair: Thank you. Some of those questions may prompt other questions from honourable senators. I will begin with a senator from New Brunswick, Senator Ringuette.
Senator Ringuette: Thank you, Mr. Lacroix. I appreciate the explanation that you just gave us. However, I have major concerns. This deals with year one of less advertising. You are selling your accounts receivable to compensate for a loss in operating funds. What will you do next year and the year after that?
Mr. Lacroix: That is a good question, senator.
Senator Ringuette: This concerns me, because CBC/Radio-Canada plays a vital role in many facets of our nation. I would not want to see you being obliged to sell more of your necessary assets in order to continue operations.
I want to add a second question or comment with regard to that. Even though you are facing this shortfall in this budget year of operations, you laid off, in a period of financial crisis, 800 employees. They lost what I consider to be good jobs.
[Translation]
The government is boasting about its action plan whereby billions of dollars are invested to stimulate economic activity, while at the same time you had to lay off 800 employees to compensate for your budget shortfall, without any help from the federal government.
[English]
Mr. Lacroix: Thank you for that comment. Let me say a few things to try to alleviate some of the concerns you have with respect to next year.
In the context of the recovery plan that we put together and the 800 jobs that we took out, we permanently reduced CBC/Radio-Canada's costs by $135 million. Not only did we do one-offs, meaning we cut everything we could see to bring it to $221 million, but we also brought the whole of the costs of CBC/Radio-Canada's production units down by $133 million. Therefore, less revenue is now matching less expense.
With what we are seeing right now for the next 12 months in the next budget, I think we will be okay. It will work, subject to getting the $60 million. That one-off for Canadian programming is important for us. It will work, subject to some of the CRTC initiatives being available to us like they are to everyone else. For example, there are things called the Local Programming Improvement Fund and the Canada Media Fund. Right now, the rules are being made, and the only point we are making to the regulators and to the world, is that we do not want to be prevented from participating. We want to be treated like everyone else, with the same rules applying to everyone. We think we should have access to these dollars.
The last thing I will say is that you have heard about the conversations about value for signal between the broadcasters and the cable companies. We think there is value in our signal, and that is why, again, we want to be treated like all the other private broadcasters and given a fair chance.
If all these pieces are available to us in a fair way, then we will be able to manage ourselves out of a difficult situation.
Senator Ringuette: You are saying that, in your future budget operation years, you are anticipating getting a share of this new CRTC tax for broadcasting?
Mr. Lacroix: It is not something that we have factored into our budgets because right now we do not know what the outcome is. My only point to you is that should there be dollars available to help the broadcasters in this country, private and public, we should be entitled to those dollars like everyone else. That is my point there. We have not factored in a single dollar of that as we are starting the budgeting process for 2010-11 because we do not know what the outcome will be.
Senator Ringuette: Concerning the 800 employees who were laid off, did you have a plan with regard to those who were not at retirement age to try to identify new job avenues for them? I know you are a socially conscious corporation.
Mr. Lacroix: Absolutely. We did a few things. Because of our collective bargaining agreements, when we start cutting jobs, through the bumping process, the people who are normally affected the most are the last hires, the younger people in our corporation. We tried to give incentives to some of the older people to give away their spot as they were nearing retirement, so we could keep the jobs at the bottom. Three hundred and three people took what we coined the "voluntary retirement incentive plan."
For the people who moved on, we had all sorts of mechanisms to help them, as they left our company, to ensure that we treated them as best as we could. Equally important, we are focusing on the people who stayed behind. They have to work extra hard, because we have to deliver to Canadians the same kind of services as when there were 800 more people in the company.
Senator Ringuette: Thank you very much, Mr. Lacroix. I congratulate you for dedication in ensuring that the CBC survives through all of this.
Mr. Lacroix: Thank you, senator.
Senator Peterson: Thank you, sir, for your presentation. You indicated that you do not want to sell your broadcast properties because you do not think you could get fair value for them. It seems to me that if you were to go to the market and sign a 25- or 30-year lease, you could possibly even get a premium on that because the returns that investors are getting are not as high as they used to be. This would give you some breathing room as you move forward in your restructuring.
If you were to do that and sell the property, would CBC get to keep the money or would you have to share it with other parts of the government?
Mr. Lacroix: Thank you for your question, Senator Peterson. Here is how we started this process. The first thing we did is we sat down with our minister and said, "Sir, if we do these transactions, we need some kind of commitment from government that we can keep the dollars for our own operations, because if we do these transactions and we cannot keep the dollars, then this is all for naught."
We got confirmation from our minister and from government that if we did these deals and they made business sense, and sense for Canadians, that we could keep the dollars. That is to your first point, which is an important point.
To your point on the real estate properties, I want to bring you back to September/October 2008, as world markets were melting and the financial institutions did not want to give credit to anyone. That would have been the time for us to go into the markets and try to sell real estate assets. In order to be able to sign a lease, as you know, I need a landlord. I need someone to buy the asset that we have in our different locations, for example, Regina and Saskatoon in your province, and Calgary.
Someone must be strong enough to buy the real estate at a value that we think is fair in that kind of market and get us as a tenant. The worst thing that we could have done, Senator Peterson, is to sell our assets at a discount and then walk in as a tenant, stuck with a 25-year lease actually paying premium rent to a landlord. We were concerned about this.
We were also concerned because when we talked to our advisers, they said it would take between 12-18 months to do this. That would have brought us into next year. Not only did we have issues with the value that Canadians would lose on our real estate portfolio, but we were concerned that we could not do this transaction within the necessary timeline to balance our budget for March 31.
Senator Peterson: Is it too late now? If you went into the market now, I think you would fare a lot better. Have you solved your problems and therefore do not need this? Why could you not go to the market now?
Mr. Lacroix: With the transactions that you are looking now, with the ONTREA transaction which is the object of Bill C-51, we will be okay and we will not touch our real estate portfolio. Should we see markets collapse again and ad revenues disappear even further, we will not have any choice but to go to the real estate portfolio. As I mentioned, we have a simple balance sheet involving simple assets, and the only item we could look to for sale is the real estate portfolio. I hope we will not have to go there, but if we have to, that would be the next step.
Senator Di Nino: Good morning, sir, and welcome. First, let me congratulate you on your clear explanation of this transaction. Frankly, even those of us who may have a little more knowledge in this area than others are not particularly clear about what was happening with this borrowing authority. I want to congratulate you because you put it in everyday, proper terms.
I want to make sure that I understand — and for the benefit of the record — that when you monetized your receivable, which is the mortgage you got back on the property, the current market value of $130 million was an actuarially calculated value. Is that correct?
Mr. Lacroix: No. The $130 million that we hope we will get out of the sale of this receivable will be a market- negotiated discount. Let us assume we get your approval today and we get the last Treasury Board Secretariat approval on December 10. We would like to start selling this on the market for about a five- or seven-day period. That is where we will know the exact rate for this kind of paper, the value with the government guarantee.
Based on the information we currently have, we have a feeling that the value will be about $130 million. The value that we are selling is about $202-203 million, over time, in the market today, depending on what the rates are. The rates will only be finalized, allowing us to determine what CBC/Radio-Canada gets from the sale, once the buyers of that paper sit down with our investment bankers and us, in a market-negotiated transaction in the week, we hope, of December 14. We do not know that the value will be exactly $130 million. The result of those negotiations will give us the final number. Is that clear?
Senator Di Nino: Yes. Thank you for that clarification. I thought that number had been established already.
Mr. Lacroix: No.
Senator Di Nino: The fact that the Government of Canada is backing you should enable you to get some extra value than would be the situation otherwise; is that correct?
Mr. Lacroix: Absolutely.
Senator Di Nino: You advised us that 800 employees were let go. After consideration of all retirement costs and so on, how much will that save you in the first year and in ongoing years, making an assumption, which may be incorrect, that none of them will be replaced, at least in the second or third year?
Mr. Lacroix: It is difficult to pinpoint this number. I would like to return to the figure I cited a few moments ago. It is $130 million in reduced costs for CBC/Radio-Canada on a permanent basis. Those labour costs are factored into the number I gave you. I should also help you by saying that the labour cost component is between $38 and $46 million. I am running it up to $50 million when you put in a few other charges related to labour. The 800 jobs trigger a severance amount of close to $50 million with the ancillary charges. That is factored into a permanent reduction of our budgets of $133 million.
Senator Di Nino: Your comment about being treated like everyone else was related to the revenue sharing that may come because of a number of different initiatives. I took from that, as well, that you understood that the actions that you had to take were the same sort of medicine that the rest of world had to take in this economic crisis and that you are satisfied with the solution that is suggested. Am I correct?
Mr. Lacroix: It is not fun to lose 800 great employees and to be fighting through the challenges that we have. However, if Bill C-51 goes through as it is presented, and if we get the $60 million of investment that we need for Canadian programming, I am satisfied that we will have received what we should be receiving to balance our budget this year, yes.
Senator Gerstein: I understand that CBC/Radio-Canada indicated in the spring that their funding is not stable. As you indicated, you might not know what advertising revenue might be. You also indicated that the $60 million that is received from the government was, perhaps, an uncertainty. As I understand what you said today, this $60 million has been given by the current and previous governments since 2000.
Do you factor the revenue that is being applied for in Supplementary Estimates (B) into your annual budget, or do you look at this each year as a possibility, that you may or may not get it?
Second, when you do get the $60 million, does it have any strings attached as to how you can use it?
Mr. Lacroix: With respect to the $60 million, we are never sure when we receive dollars from the government in something which is not our government appropriation because the $60 million does not form part of our base. We are never sure whether we will get it. When you are trying, as president and CEO, to build budget in a tough year, and you see this amount having been received by CBC/Radio-Canada since 2000, you factor the $60 million in your budget and count it. You also know that if you do not get it, you need a plan B.
This year, and this is not a criticism, it is simply a fact, we got confirmation that the $60 million was going to be in the sups on March 28, which is three days before my year end. It is difficult to plan, as you know, when we get these dollars so late in the process. That was the point I made this spring, which you probably read, because I was in Toronto and I made a comment in a speech there. That was the comment, perhaps, that you remember. That is the issue with the $60 million.
Does it come with strings attached? The idea behind the $60 million from day one was that this goes into Canadian programs and Canadian programming. If you know our industry, Canadian programs are expensive, and we are the only ones that actually commit to a full line up of Canadian programs. Our competitors, CTV and CanWest-Global, because of their requirements to maximize their ad revenues, basically, have an all-foreign, all-U.S. programming schedule in the evening. The $60 million that we get is to ensure that Canadians see great Canadian programs in prime time.
Does that answer your question, sir?
Senator Gerstein: Yes, it does and I thank you.
Mr. Lacroix: Thank you.
The Chair: Mr. Lacroix, your answer about the $60 million in Supplementary Estimates (B) having been announced in late March leads to this question: Were you given an explanation as to why the $60 million was not in Supplementary Estimates (A)?
Mr. Lacroix: No, sir. I do not have an answer to that question.
The Chair: Neither do we.
Senator Gerstein: As a clarification, could I add that it has been in Supplementary Estimates (B) since the year 2000, under both the current government and past government.
The Chair: Supplementary Estimates (A) were sooner this year than previously.
Mr. Lacroix: I am told, senator, that sometimes it is in Supplementary Estimates (A) or Supplementary Estimates (B). Being told that we would get the $60 million and being able to plan for it in our cash flow, knowing that it would get to us and get to the right places by the end of December was better than not getting the $60 million, so we are happy that it is in front of you now.
The Chair: In the end, I understand your point. It was just an interesting question. I have no idea why, but the Treasury Board Secretariat will be able to tell us why it was not reflected in Supplementary Estimates (A) and was in Supplementary Estimates (B). We see them regularly, and we will be able to ask them.
Senator Ringuette: I congratulate you on your analysis with regard to the sales of buildings at fire sale prices, and having to lease them back for 25 years, which is detrimental in comparison to just operating and having the occasional maintenance of the building. I must congratulate you because we in this committee have seen that it has been the trend for the current government to sell buildings and then lease them back for 25 years at a higher cost to taxpayers.
You said that you had to go to an investment banker and you have to negotiate a market discount. Do you have the approximate cost for these two items?
Mr. Lacroix: Do you mean what kind of discount we expect in the market?
Senator Ringuette: First, if you went to an investment banker you have to pay commission to that investment banker.
Mr. Lacroix: Clearly, yes.
Senator Ringuette: The other issue is that you are looking at a discount. Are you looking at a 2, 3, 4 or 5 per cent discount? I know it is not done yet, but you must have a general feeling about how much these two items, either separately or together, will cost the corporation.
Mr. Lacroix: Yes, we know this. You would be disappointed if I did not tell you that we know exactly what kind of numbers we are looking at now. Investment banking fees are regular fees for a transaction of this kind. When you are CBC/Radio-Canada and you are selling assets to maximize their value in the context of third party buyers who are experienced buyers and will negotiate the better discount rates in their favour and you are trying to maximize value for Canadians, you will equip yourself with the best investment banker to maximize the value for Canadians.
Through an RFP process, we went to RBC Capital Markets. Depending on the value of the transaction, they will get a standard fee, which is a percentage. Off the top of my head I do not remember what the percentage is, but it is not an irregular fee. Returns depend on the markets rates at that time. For example, a 10-year Government of Canada bond is 3.5 to 5 per cent in the markets. There are some comparables. You benchmark the value of your paper against that, and this is being negotiated.
To tell you what the rates are, one would have to look at today's rate and speculate from there. I hope my answers give you a feel for what we are expecting for final numbers.
Senator Ringuette: I feel that it will cost you roughly 7 per cent.
Mr. Lacroix: Frankly, I do not know. These are still market sensitive and kind of confidential in the conversation we are having now with the possible buyers. I do not want to jinx or affect the value of our deal.
Senator Ringuette: I am asking this because one of my colleagues, Senator Di Nino, says that you are being very well backed up by the federal government right now. I can tell you that you are not, and I will tell you why. It is because of the two costs that you must incur in selling those receivables. The federal government has bought $64 billion of mortgages and car leases to provide liquidity in the financial sector.
You are a Crown corporation. These receivables should have been backed without you having to incur all these costs from an investment banker and the discount in the market so that at the end of the day you would have had more operating money.
Mr. Lacroix, because of the costs you have to incur, because of the current financial crisis, and because the federal government has bought $64 billion worth of mortgages and car leases from private entities, I think you are not properly backed by the current federal government.
The Chair: You may or may not wish to reply to that.
Mr. Lacroix: Senators, my job and that of my team is to manage CBC/Radio-Canada as best we can given the cards we have. What is in front of you is a solution to a nasty problem that we face this year. We did not like having to let 800 go people. A number of media companies in our environment had to do the same thing. We are just about able to balance our budget, and we hope that the two pieces before you now, the $60 million for Canadian programming and the approval of the Bill C-51 amendment to our act to allow us to do the ONTREA deal will be approved so that we can move forward and look at 2010-11.
Senator Di Nino: I thank the witness for his response. It was very well done.
I am not sure what Senator Ringuette was saying. If you were wondering why we did not buy the paper and save all these costs, I suspect that when you put an asset on the balance sheets of the government you have to go through the same assessment that you would if you were selling it to the public. The costs would probably be just about the same, as would the discount. If you are going to manage the affairs of the people of this country in a professional and proper manner, you would have to do that. I do not think that would have saved any money, if that is what you were suggesting.
You said that perhaps we should have given an extra grant to the CBC. That is always an option, but there are many difficulties in this country. The federal government has undertaken a certain program which seems to be working quite well, better than in most other places in the world. Our witness understood that anyone involved has to be part of that solution and if there is a price to pay, we all have to pay it together.
The Chair: Mercifully, we are almost out of time, so I will not invite Senator Ringuette to respond.
Senator Lang has promised that his question will be very short.
Senator Lang: I am looking for more information. I believe that in your opening remarks you stated that CBC/ Radio-Canada made the decision not to pursue ads on the radio. Is that correct?
Mr. Lacroix: Absolutely. Do you want me to comment on that, sir?
Senator Lang: We are talking about possible revenues, and I wonder why we would not go after that type of revenue.
Mr. Lacroix: In looking to increase our revenue lines in a number of ways, one way could be to add revenues to our radio networks. However, CBC/Radio-Canada has a duty to be distinctive and to provide Canadians with something different from the other networks you listen to. We also think that getting ad revenues on our radio network would be detrimental to the economies of the communities we are in. For example, the person who has a lumber store could choose, instead of putting his or her ad in the local paper, to put the ad on our local network. That would hurt the local economy in a different way. We also think that trying to leverage this at our level might not get us as far as we would want.
I do not know whether that will be our position forever. We will have to look at it on a year-by-year basis, but we do want to keep our radio networks in French and in English free from ads.
The Chair: Thank you very much, Mr. Lacroix.
I have two points to round out our record. How many employees does CBC/Radio-Canada have after the reductions?
Mr. Lacroix: About 9,200.
The Chair: If the CRTC rules in the manner in which you are hoping it will, although I appreciate you have not factored that into next year's budget, have you anticipated the revenue from those royalty fees?
Mr. Lacroix: It is impossible to assess that. In the old way of looking at the value of the signal, the CRTC coined the phrase "fee for carriage." It was going to be a percentage of revenue taken away from them and given to the broadcasters for the value of their signal. The CRTC has changed the way they are looking at the problem.
They are saying the broadcasters, cable and satellite providers should sit down and negotiate a rate which will express the value of the signal for the broadcaster and the cable provider. Depending on what that value is, and there is a whole set of criteria to be used to determine the value, then an amount would be paid to us and to CTV, Global and TVA and all the other private broadcasters in the country. That is why I cannot tell you what the impact would be on us and why we cannot factor in a single dollar in our budget next year. The amount we would receive would be the result of a negotiation to come between the parties. Obviously I do not know what that would be.
The Chair: Thank you very much for that answer and for all of your answers. This dialogue has been very helpful to us. I know I speak for all members of the committee in wishing you well in the opening of your broadcast centre in Vancouver and in thanking you for the good work that you and all 9,200 employees with CBC/Radio-Canada are doing for Canada.
Mr. Lacroix: Mr. Chair, thank you. I know it is difficult through a screen in your room. I wish I had been there. As I told you, it will be a pretty fun day here in B.C. Thank you for your questions.
The Chair: Thank you.
We are continuing to deal with Bill C-51, the second act to implement provisions of this year's budget.
For this final portion of today's session, we are very pleased to have with us: from the C.D. Howe Institute, Mr. Finn Poschmann, Vice President, Research; and from Towers Perrin, Mr. James Pierlot, Senior Consultant.
We will be discussing the provisions of Bill C-51 in relation to the Canada Pension Plan.
Finn Poschmann, Vice President, Research, C.D. Howe Institute: Thank you for inviting me. I have not been before this committee for some months at least. It is delightful to be back.
I speak for myself always. The C.D. Howe Institute does not take institutional positions, and that is not always clear to everyone. I always remind people that I do not speak for my members or board of directors, so do not blame them for things that I say.
I know that this committee mostly wants to hear about the second part of the budget implementation act, but there is a broader context. In the fiscal measures and tax measures introduced in Part I we have the Home Renovation Tax Credit, the home buyer's credit, and changes to the Working Income Tax Benefit. These are important things.
I have a couple of things in different directions that I will direct you to. One is process and timing. It is December, and these are some important personal income tax measures that will affect many people. In fact, the eligibility for the Home Renovation Tax Credit will run out soon and we have not legislated it yet. I want to express some frustration over the timing and process, which I understand is beyond this committee's control.
I have written on this point a number of times in the past. It is a little disturbing that Canadians are expected to comply with tax measures of different kinds long before they are legislated. It is a funny world we live in, and we ought to mention it and think about it every now and then. That is just process and does not really address the substance of the bill.
On the substance I want to make a point about the broader fiscal context and the importance of long-term planning. The Part I measures were described as being intended to address economic stimulus issues. That is perfectly reasonable. I will not comment on the specifics of those measures other than to express some doubt about their efficacy and some worries about the ease with which the home renovation credit in particular will be administered and complied with. I see potential issues there.
The broader question is the long-term fiscal plan. The worries on this front do carry over to the reasons why we pay attention to some of the things in Part II of this act.
Worries on the long-term fiscal plan are connected to the sustainability or the ability to fund measures in the budget. More specifically, there are worries about the ability to fund these measures while achieving a balanced budget in the second part of this decade.
It is important that we do that. Much of it has to do with the population aging which will come up over and over again. The fact is that the ratio of people out of the workforce and over 65 to the number of people who are working will roughly double over the next 20 years. That puts huge fiscal pressures on government. We need to be fiscally armed to be ready for that, and that means careful stewardship of the budget balance between now and then.
I will finish my lecture, if I may, by pointing out that in order to achieve a balanced budget by 2015-16, leaving aside the fiscal stimulus measures which will come out over the course of the cycle any way, we would have to trim program spending something on the order of 1 to 2 per cent to per year in real terms. If interest rates creep up by a percentage point next year and then stay a percentage point higher, that would mean more trimming on the discretionary side to the order of 2 or 3 per cent annual shrinkage in federal discretionary spending over the next few years. That is how hard it will be to reach some of those targets and why it is important to think carefully about the long-term fiscal plan.
That said, it is good to be concerned about having flexible arrangements, flexible social supports for people who are near to retirement, thinking about retirement or in retirement. We would all agree that it is part of public policy's duty to treat people well as they make decisions about how long they work, when they retire and the terms of retirement. We have built in a certain amount of unfairness in the Canada Pension Plan, some unfairness and some over-generosity. The goal is a neutral policy with respect to the retirement decision, so you do not unduly penalize people for either retiring early or continuing to work past the age of eligibility for the public pension plan, the CPP and QPP in particular. That is what this is all about.
f you look back to the earlier part of this decade, similar reforms to these in Part 2 of the budget act were proposed for the Quebec Pension Plan. We did quite a bit of publishing on these measures at the time and recommended them, as did a number of working groups who looked at the Canada Pension Plan at the time. The measures themselves are generally the right ones. I am referring to two measures specifically. First, the provision to permit people to continue to work even if they have taken an early retirement provision under the Canada Pension Plan and to actuarially adjust their future benefits in a fairer way. Second, the provision respecting people who continue to work after 65, or wish to do so, making it possible for them to contribute to the Canada Pension Plan, continuing to earn eligibility, and, in other words to make work pay and make it pay reasonably sensibly. It is basic fairness and getting at some basic neutrality in those systems.
Those are broadly good things, and we should probably be generally supportive of the direction. The direction is important. Whether or not the numbers are exactly right is an actuarial question. Mr. Pierlot may have more to say about the adjustment factors. I do not know how much detail you want. It is important to try to get them right. The adjustment factors affect the benefits' generosity or the rate at which you accrue entitlements, either in the pre- or post- retirement phase.
A new, interesting feature about those adjustment factors is in clause 33. Whereas the adjustment factors for the next two years will be set by the chief actuary at OSFI, there is a mechanism now that would allow the Governor-in- Council to set adjustment factors by regulation as they see fit but in agreement with provinces containing two thirds of the population. The initial rules that governed the creation of the Canada Pension Plan, a partnership between the federal government and the provinces, are being carried through into these reforms. It is probably a good idea that future adjustments are agreed to by the provinces and we do see that in that legislation. This is the right thing to do.
With that, I will stop and turn things over to Mr. Pierlot.
James Pierlot, Senior Consultant, Towers Perrin: Good morning, Mr. Chair, senators. Mr. Poschman covered the broad issues associated with the changes and the act. Canada's population is aging. By 2015, seniors will outnumber children; by 2031, the proportion of non-working to working Canadians is expected to increase to 61 out of 100 from 45 out of 100 today. These have very significant long-term implications for Canada's budgeting because, as the tax base from employment income and work shrinks, what will replace it? As pointed out, the choice will be between finding new sources of revenue and cutting budgetary expenditures in real terms.
As I mentioned the last time I was here, there is a study done by the University of Waterloo that indicates that by 2030 two thirds of Canadian retirees will not have enough pension income. All of this points to a need to try to encourage workers to participate in the labour force longer than they do now, both from their own point of view, for retirement saving, and also from the point of view of maintaining government tax revenues.
I will focus my comments on measures in the bill. As you know, other things have been discussed with respect to the CPP, such as expansion of benefits, whether it be done through the promised benefits under the CPP or through the addition of personal accounts under the CPP. If you have specific questions about those, I am prepared to talk about that generally.
As an overview of what the bill will do, many pension plans, the CPP included, contain incentives to retire early. This applies to private employer pension plans within the public and private sectors as well as the Canada Pension Plan. One change allows people to start to collect a pension at age 60 without ceasing work, provided that the pension is actuarially adjusted so it is value-neutral to the plan, or in theory value-neutral to the plan.
This is a good thing. It may increase take-up, causing some to depart the labour force more quickly. Overall it would be expected to keep people in the workforce longer. The effect on employers will be positive for labour supply. The effect on government is that it will cause an increase in tax revenue from employment income as people continue to participate in the workforce. It is good for individuals because it gives them more choice and an ability to transition into retirement rather than working at full speed and coming to full stop, which suits very few people.
The bill also provides for continuing pension contributions under age 65 and over age 65. It is mandatory until age 65. Thereafter, there is an opt-out provision. The employee can decide not to make pension contributions and just receive those pension contributions that he or she would have made as increased income.
In practice, experience with negative option choices shows people typically do not choose them, so it can be expected that most people will continue, if they work past age 65, to make contributions.
People often talk about the ability or the right to work after age 65. The challenge we have in Canada is getting people to work even to age 65 because the median retirement age in Canada in private sector is age 62; it is lower in the public sector. When there is discussion about changing withdrawal rules for pension plans or registered retirement income funds to increase it past age 71 to allow people to continue working, it really will not affect anything. We need to try to get people to work to age 65. If they work beyond, that is great. However, that is not where the real problem is.
The bill also provides for an increased dropout of low earnings years under the Canada Pension Plan. It will move from a 15 per cent dropout today to a 17 per dropout by 2014. This would increase the cost of providing CPP benefits and the value of benefits for long service workers. It has some social advantages because it gives workers assistance from a pension savings point of view if they leave the workforce to retrain, for child care and so on.
The dropout provisions have the effect of encouraging people to retire earlier. The Quebec proposed approach for dealing with these incentives is to move from the dropout approach to a 40-year accrual rule, which means that people would get the pension after 40 years of accrual and you would not have dropouts.
There are competing social interests here. You want to encourage people to retrain. You want to encourage higher birth rates. At the same time you want to encourage longer working lives. The question is, can you really have both? I do not have any specific criticisms for that part of the bill.
To give an example of a pension payable in 2009, under CPP the maximum pension is $10,905 or $10,908. If you collect that pension earlier, it is currently reduced by a factor of 0.5 per cent per month, so that if you collect it earlier, it will be value equivalent to a pension payable at age 65. The question is whether those adjustment factors reflect the true cost of providing it early. Certainly, the mechanism in the bill where it can be set by regulation with agreement of the provinces representing two thirds of the population is workable. It is important that those adjustment factors be reviewed regularly and that they be neutral for purposes of fairness and also to not increase incentives to retire earlier under the plan.
With that, I will stop my comments and open it up to any questions you may have.
The Chair: I wish to thank each of you for your comments. Can you talk more about the adjustment factors? We learned earlier that these adjustment factors will be fixed in regulations. After that, it will be a matter of negotiation to change them with the provinces.
Mr. Pierlot, you indicated that it is important that the adjustment factors have an actual objective background and basis. Will not moving these into the political realm of negotiations between the provinces, not move it away from objectivity and more into politics?
Mr. Pierlot: For the first two years, before 2010, the adjustment factors will be fixed by the minister on the advice of the Chief Actuary. They will then be fixed by regulation after 2010. The act contemplates obtaining actuarial advice, as necessary, from the Chief Actuary.
I am not sure that I see a huge risk that political considerations would, somehow, cause the actuarial adjustment factors before age 65 to be seriously out of whack. Right now they are talking about moving from an actuarial adjustment factor of 0.5 per cent to 0.6 per cent per month. This was in a May 2005 consultation paper on the Canada Pension Plan. Moving from 0.5 per cent per month to 0.6 means moving from 6 to 7.2 per cent a year. It is material for sure, but I would not expect a political process to lead to actuarial adjustment factors that would deviate very significantly from what is actuarially neutral. Anything is possible. Given that the Canada Pension Plan is a joint venture between the federal government and the provinces, I think the provinces would want to have some input into the process for determining those factors. That seems reasonable to me.
The Chair: Mr. Poschmann, you indicated you thought it was a good idea to move this into the political realm and have this in regulation. In order to change it, it would require the agreement of the provinces. Do you have any concern about getting away from actuarial stability here?
Mr. Poschmann: Normally, I would. Normally, I would like to see politics or other political concerns express themselves during the shaping of general policy and, after that, set a framework for the rules that play themselves out over time.
However, this is one where my answer is much the same as that of Mr. Pierlot. It is not terribly high stakes politically, but it is important to recognize that it is a partnership involving the federal government and the provinces. Historically, that has been one of the reasons why reforms and changes can take a long time. Taking a long time sometimes is okay, notwithstanding my previous concerns about things that drag out altogether too long. Sometimes political processes involving a number of parties can improve rather than worsen the outcome. I am relatively sanguine on this point.
The Chair: Could either or both of you comment on what is happening in some other jurisdictions, in addition to the factors being adjusted, to try to encourage people to stay in the workplace longer? Adjustments are also being made with respect to when one can opt for early retirement with respect to a pension. Is there any movement toward changing the age of 60, either up or down, and the age of 70, either up or down?
Mr. Poschmann: Canada, like most other western countries, is facing significant increases in the share of the elderly population, in part because of increased longevity. It is not just the baby boomers cycling through. In fact, we are living longer.
If you think about this, at first sight, if people are living longer probably they want to be working longer, and we should facilitate that. That is one of the reasons why it is reasonable to look at the retirement system in general and features of public pension plans, as well as the rules surrounding drawdowns from RRSPs, LIRAs and the other retirement savings tools that we have, to reflect the aging age structure of the population and the fact that we are living longer.
These changes would and should all be in the direction of liberalization, first with respect to choice and, for the most part, making them optional. As Mr. Pierlot said, one of the issues is getting people to work past the age of 60, never mind facilitating working past the age of 70. That said, people should not be penalized in their pension entitlements simply for doing so; they should be treated in an actuarially fair manner.
When it comes to the big public plans like the Canada Pension Plan, like Social Security in the U.S. and similar plans mostly in the Commonwealth countries, there is huge tension around the notion of pushing up the retirement age. The U.S. has done it over a very long time horizon to defuse that tension in order to put the U.S. social security plan on something a little closer to actuarial soundness. However, they are very far from there.
This is one area where Canada stands out pretty well in the sense that the Canada Pension Plan is actuarially sound. We made some hard decisions on the funding of the program in years past. We should have a note of caution about the expansion of benefits, and Mr. Pierlot pointed out that there are some expansions of generosity of benefits here in this bill. However, they look to be of the sort that will not blow the bank over the time horizon at which we examine the pension plan as to its sustainability.
Public pensions are a big issue in many places. The U.S. tried to take some measures, but they are nowhere near sustainability. Canada actually is, and we should be mildly pleased about that, at least.
The Chair: Presumably you would want us to continue to be close to actuarial soundness
Mr. Poschmann: Yes, sir.
Mr. Pierlot: As everyone knows, we have the Quebec Pension Plan and the Canada Pension Plan. They were designed to operate similarly and provide similar benefits. Currently, the contribution rates are identical. At normal retirement date, the pension is identical. That will probably change. Quebec has different demographics from the rest of the population. The population is older. The fund is managed by an entity that is different and separate and apart from the Canada Pension Plan Investment Board. Its investment performance in 2008 diverged significantly from the investment performance of the Canada Pension Plan Investment Board. I think the Caisse de dépôt et placement du Quebec had a return of negative 25 percent in 2008, and the CPP, in the three quarters ending December, 2008, had a return of minus 13.7 per cent, which is about twice as good, roughly, as the caisse.
The Chair: Or half as bad.
Mr. Pierlot: Yes. Both funds are certainly doing better in 2009. However, this points to the risks of having a large amount of money, which is generally in large institutional plans, managed well. It points to the risks of having all your eggs in one basket. That ties in to design issues with any expansions to the CPP, which I can talk about further.
I will get back to your original question about what is happening in other jurisdictions. A consultation paper that Quebec released this year proposes to increase the contribution rate of the QPP from 9.9 to 10.4 per in 0.1 per cent increments starting in 2011. It is hard for them to not consider contribution increases, given the performance of the fund and the aging population. Practically speaking, the benefits on the contribution rates of the Canada and Quebec pension plans will diverge. You will not have the uniformity that you did in the past.
It is clear that Quebec is committed to keeping its plan on a sustainable path and, as Mr. Poschmann has mentioned, the pension plan is on a sustainable path.
The Chair: Your question raised a supplementary question in terms of portability, because people do not work in Quebec all the time. They may start paying into the Quebec Pension Plan and then move to British Columbia. Is there portability in the plans? Does the contributor then have the option of choosing which plan would pay benefits when he or she is ready to retire?
Mr. Pierlot: My understanding of how that works — and I have not looked into this for a while — is that there is a form of portability. I think the way it works is that you get your pension from the jurisdiction where you retired. There is recognition of service under the plans. For that matter, there is recognition of service under foreign social security plans — that is, agreements between Canada and the United States and Canada and a number of countries. If you are in Quebec, you will be paying the higher contribution rate and you will earn that pension. I actually cannot recall how the portability system works, but obviously some people will be paying a bit more for their pension if they work in Quebec and in another jurisdiction as opposed to people who work uniquely in a non-Quebec jurisdiction.
The Chair: As benefits diverge, as they may over time, Mr. Poschmann, you can see where there may be some jurisdiction shopping going on when people start to draw their pension. They will want to choose the one that will give the best benefits.
Mr. Poschmann: If portability measures are badly designed, that would be a risk. However, and this is unusually optimistic for me, but our policy managers with respect to pension both in Quebec and in the rest of Canada will and do surely recognize the potential problem and, therefore, will take steps to limit the divergence in benefits. That is what will be primarily salient in retirees' minds. There will be, we can expect, small differences in the contribution rates, but limiting the divergence in benefits will probably be not an all-determining goal but an important goal of the design of the two systems.
Mr. Pierlot: One of the items noted for discussion in the Quebec consultation paper was whether they would expand the defined benefit guarantee under the QPP — that is, provide greater pensions by increasing the pensionable earnings. If Quebec did that and the Canada Pension Plan did not, or vice versa, you would see a significant divergence in the pensions payable. It remains to be seen what will be done with that.
If you did expand the pension payable under the CPP or the QPP, it would lead to a problem of intergenerational fairness. We are currently in a situation where our children will be paying for our pensions, and we are paying for the pensions of current pensioners. There are wealth transfers. Those intergenerational wealth transfers would be exacerbated if the CPP were to be expanded to increase the benefit promise.
Senator Di Nino: I have a quick supplementary on that. Does the paper you gave us this morning speak on the issue that you just raised?
Mr. Pierlot: I do not think that one does, but there may be some comments.
Senator Di Nino: That is fine. We only have 10 minutes. I wanted to know if we should be looking at that in the same vein, or otherwise.
Mr. Pierlot: I gave that to you because it provides an overview of the proposed changes for the Quebec Pension Plan and the Canada Pension Plan. I am not sure that it specifically addresses that question of intergenerational fairness.
Senator Ringuette: I have one question for both of you in regard to taxable benefits, that is, taxable CPP as income. If someone takes up the option of receiving their CPP benefits while working, then their total income is in a higher tax bracket. Therefore, they will be paying more tax on their CPP benefits than if they were non-working Canadians. Have you looked at how much that will increase the income tax that these individuals will be paying on those CPP benefits while working?
Mr. Poschmann: The short answer is no, but it is fairly easy to describe the practice first and then the principle.
It is absolutely correct, senators, that pension income is taxable. Therefore, it will be taxed at the marginal tax rate that applies to the recipient, whether or not that recipient is working. If we imagine that the marginal tax rate of a worker between ages 60 and 64 is, federally plus provincially, in the neighbourhood of 40 per cent, then about 40 per cent of the incremental benefit will come back in federal and provincial income tax. That is a fact of arithmetic.
From a policy perspective, that is not problematic in any way, once you have made the decision that pensions are taxable. A lot of tax policy and a lot of the tax act goes into defining "income" and what is taxable. Remember, pension income could be investment income. Conceptually, retirement income could come from a lot of places. It could come from taxable and nontaxable investments.
Senator Ringuette: However, in this bill we are looking at CPP.
Mr. Poschmann: Part of the taxable stream.
Senator Ringuette: Therefore, if you receive CPP benefits while working, then those benefits will probably bring you into a higher tax bracket than if you were receiving these benefits while not in the workplace. People who will be receiving CPP while working will be paying a higher income tax on those benefits than if they were retired.
Mr. Poschmann: Absolutely.
Senator Ringuette: That makes sense.
Mr. Poschmann: In many circumstances, that would be true.
Senator Ringuette: Have you made any assumption with regard to what that additional income would be?
Mr. Poschmann: No. It would not be hard to do, though.
Senator Ringuette: Could you do that?
Mr. Poschmann: Of course.
Senator Ringuette: Thank you.
Senator Lang: I would like to query further the question of demographics and the way our country is changing as far as our population is concerned. The point was made that no matter what we do, it is difficult to entice people to work longer than, say, their object of age 60, or perhaps lower because they happen to work in a different part of the economy.
In view of what has transpired here in the last number of years, with the depth of the recession that has faced many of us, and its consequences, do you have any statistics that show an increase in the number of people who would normally have retired but have continued to work? I personally know many people who had plans and changed them dramatically with the meltdown, internationally and nationally, in their savings.
Do you have any statistics that show that perhaps there has been an incentive for people to continue in their jobs, or to find a job and become part of the labour force, as opposed to what was going on prior to the meltdown that we had?
Mr. Poschmann: That is an interesting question and one that has come up several times over the past year. I do not have a clear empirical answer. The presumption is probably correct that under financial pressure, many older workers will either work longer than they otherwise might have chosen to, or will seek to re-enter the workforce under the pressure of recent events in financial and economic markets.
That pressure will be there for a certain number of workers who have been keenly affected by a significant economic slowdown. However, we have not yet seen data on the extent to which that is taking place. I imagine there are surveys out there that could tell you, but there is nothing that I am aware of from our regular survey cycle to this point.
Senator Lang: We talked about demographics. You made the statement, Mr. Pierlot, that currently 40 per cent of our population is retired, 60 per cent is working, and that that will flip around to where 60 per cent will be retired and 40 per cent will be carrying the load.
Looking at those statistics, and looking ahead, has whoever provided you that information taken into consideration, for example, increased immigration? We need people in the workforce, so obviously that is where you would look. Do you have any comments on that?
Mr. Pierlot: The figures I quoted to you have taken into account projections on what immigration and birth rates are expected to be. It is broadly recognized that at current levels, immigration will not keep our population young. Those numbers are based on projections of immigration at current levels or modest increases from current levels.
Mr. Poschmann: If I might add to that: We take great care in building models that account for the situations that you would normally think of. You can also build models with high, low and medium immigration scenarios. That is a normal part of population modelling. You have a range of fertility and immigration assumptions.
Our work has shown that there is no reasonable scenario under which you could come close to freezing the age structure of the Canadian population. No reasonably assumed level of immigration, even with a youth/age filter, one that preferentially targeted younger immigrants, will do that.
The Chair: Honourable senators, that concludes my list and we are just at the time that we had designated.
On the committee's behalf, I would like to thank Mr. Poschmann from the C.D. Howe Institute and Mr. Pierlot from Towers Perrin.
As you know, we have been dealing with the Canada Pension Plan and other pension issues previously. Mr. Poschmann was here earlier on to help us in that regard. We will continue to work on this issue, which happened to be raised at this stage because it appears as part of the bill that we are dealing with, Bill C-51. Thank you both very much.
(The committee adjourned.)