Proceedings of the Standing Senate Committee on
National Finance
Issue 21 - Evidence
OTTAWA, Tuesday, November 16, 2010
The Standing Senate Committee on National Finance, to which was referred Bill C-47, a second Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010, and other measures, met this day at 9:30 a.m. to give consideration to the bill.
Senator Irving Gerstein (Deputy Chair) in the chair.
[English]
The Deputy Chair: Honourable senators, ladies and gentlemen, I will call the meeting of the Standing Senate Committee on National Finance to order.
Today, we will receive an overview of the measures contained in Bill C-47, the proposed legislation on sustaining Canada's economic recovery. This is the second bill we have studied that implements measures contained in Budget 2010. The first, as I am sure honourable senators will recall well, was Bill C-9, the Jobs and Economic Growth Act, which we studied in considerable depth in the spring and into the summer.
It is standard practice to have two budget implementation bills in a given year — the first for measures that can be enacted immediately and the second for measures that require transition time to give stakeholders appropriate notice, time to conduct consultations and so forth. For example, I understand that following the release of Budget 2010, the Department of Finance Canada held public consultations on the tax measures contained in Parts 1 and 2 of this bill.
Parliamentarians have already received the technical briefing on Bill C-47, provided by officials of the Department of Finance Canada and other relevant bodies. Honourable senators also have been furnished with a briefing binder. Today, we will have yet another opportunity to familiarize ourselves with Bill C-47, this time in a more intimate and interactive setting under the direct tutelage of the departmental officials who are expert in the various parts of the bill.
We have 17 witnesses with us today to explain the nine parts of the bill. In order to fit them all in, I urge honourable senators to keep their questions succinct and factual. I would remind honourable senators that the role of departmental officials is to describe the bill from a technical standpoint and not from a policy standpoint.
I welcome to the table from the Department of Finance Canada, Mr. Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch and Mr. Tim Wach, Director, Legislative Development and Chief Legislative Counsel, Tax Policy Branch. Welcome back again to both you gentlemen.
They will explain Part 1 of Bill C-47, amendments to the Income Tax Act; and for Part 2, we have with us on the same panel, Mr. Carlos Achadinha, Legislative Chief, Sales Tax Division, Public Sector Bodies and Mr. Pierre Mercille, Senior Legislative Chief, GST Legislation, Sales Tax Division, Tax Policy Branch.
Honourable senators, we will begin by hearing from the officials on these two parts, after which we will ask questions and then move on to the next two parts and so on through the meeting. Who would like to lead off?
Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: I will start. Thank you for having us back again. It is always an honour to appear before this committee, as I have many times.
I will be very brief today. Mostly, the reason for that is that in the course of his duties as the director of legislative development, Mr. Wach is also the chair of the interdepartmental tax legislation review committee, so he will have detailed knowledge of every one of the clauses in Part 1 of the bill.
Part 1 of the bill includes some 90 clauses that relate to 9 discreet measures introduced in Budget 2010, as well as 4 other items that were either previously announced or that relate to previously announced measures or measures included in the bill. Mr. Wach will talk us through a description of each of those 13 topic areas, following which we will be open to take questions.
With that brief introduction, I will turn the table over to Mr. Tim Wach.
Tim Wach, Director, Legislative Development and Chief Legislative Counsel, Tax Policy Branch, Department of Finance Canada: Good morning. I am proposing to give an overview of the 13 different topic areas so that everyone has a base from which to work. Then we can take questions, if you like, subject to any other comments you may have.
The first topic area addressed in Part 1 of Bill C-47 is changes to assist principally insurance companies in the transition to the adoption of International Financial Reporting Standards, or IFRS as it is known internationally. The changes are principally intended to assist insurance companies as they make the changeover to adopt IFRS over the next few years and to smooth that transition.
The department is monitoring changes to IFRS and considering, as IFRS is adopted over the next few years, how it will impact taxpayers and where changes are needed to assist in that transition and, at this point, rules that are applicable as of January 1, 2011. It is only these rules applicable to insurance companies that we have identified and that are dealt with in Bill C-47.
The second topic area, which is more of a technical change, deals with entitlement of individuals to receive benefits under the Canada Child Tax Benefit, CCTB; the Universal Child Care Benefit, UCCB; and the Goods and Services Tax/Harmonized Sales Tax credit. The change here deals exclusively with couples who are in shared custody arrangements with their children, where both individuals qualify for these various benefits.
Under Canada Revenue Agency's — CRA — administrative practice prior to Budget 2010, the only way to deliver these benefits to qualifying individuals in a shared custody situation would be to pay to one of the individuals over part of the year and to the other individual over the balance of the year. For example, they would pay to one of the now separated spouses for the first six months and then to the second qualifying person over the second six months.
The changes included in Bill C-47 are intended to allow for a smoothing of those payments. Both individuals would receive the same net amount over the year but over the entire year rather than over the first six months or the second six months. It simply allows individuals in those circumstances to have a smoother cash flow from the benefits they receive.
The third topic area, covered in Bill C-47 in Part 1 from an income tax perspective, deals with the rollover in the Income Tax Act that is available from a Registered Retirement Savings Plan, RRSP, upon the death of an individual. The rules prior to Budget 2010 permitted rollovers to occur upon the death of an individual to the RRSP of a surviving spouse or of a dependent child.
Several years ago, the Registered Disability Savings Plan, RDSP, was introduced into the Income Tax Act. The changes in Bill C-47 will permit a rollover of amounts from the RRSP of a deceased person into the RDSP of a surviving individual who was dependent upon the deceased for support. Mr. Lalonde reminds me that it was in Budget 2007 that the RDSP was first introduced into the Income Tax Act.
The fourth broad area of changes deals with charities. The changes principally eliminate and modify the disbursement rules that apply to charities. For a number of years, charities have been subject to two principal disbursement regimes: one that required that they disburse 80 per cent of receipted gifts in a year and one that applied to capital accumulation and required that they disburse 3.5 per cent of their capital in a year on charitable activities. The changes in Bill C-47 will eliminate the disbursement quota for receipted gifts and modify and streamline the rules that apply to capital accumulation.
The fifth broad area covered deals with employee stock options. A number of different rules are being amended or introduced that deal with employee stock options in Bill C-47. The first deals with a circumstance in which both employers and employees were able to get deductions with respect to employee stock option benefits, where the employee did not receive shares under the option but instead received a cash-out of their employee stock option benefit.
Therefore, if an employee had an in-the-money option, for example, where he or she received an option to acquire shares at a $10 strike price, and at the time that he or she was going to exercise the option, the shares were worth $15, and if instead of providing the shares the employer provided cash equal to that differential — the $5 appreciation per share multiplied by the number of shares subject to the option — then the employee could get the deduction in terms of the amount of benefit that is required to be included in income, which is only 50 per cent if a number of circumstances or conditions are satisfied, and the employer could also get a deduction for the cash paid to the employee.
The changes in Bill C-47 will bring the treatment of cash-outs of employee stock options more in line with the original policy and with the treatment that would occur if the employee were to actually receive the shares, being that only one deduction will be available. In these circumstances, the employer will be entitled to a deduction equal to the amount paid unless the employer elects to forego that deduction in which case the employee will then be able to take advantage of the ordinary deductions available in section 7 of the Income Tax Act, provided of course that the other requirements for qualification for that deduction in section 7 are met, section 7 being the provision in the Income Tax Act that lays out the rules that apply to employee stock options and their grant and exercise.
The second change dealing with employee stock options is to clarify what had always been the policy intent, namely, that the employee stock option rules should apply to both options granted to employees dealing at arm's length with their employers and those that deal not at arm's length with their employers. Some taxpayers had been making the argument that the rules did not apply in a case of an employee dealing not at arm's length. Therefore, the rules are being clarified to ensure that they apply both to arm's-length and non-arm's-length employees.
The third area within the broad area of employee stock options that is addressed is a repeal of a provision introduced back in 2000 to allow for the deferral of the recognition of the employee stock option benefits in the case of public company shares. This change is intended to require that in those circumstances the employee will be required to take into account in computing income the amount of the benefit received on the exercise of the option at the time that the option is exercised and will not be able to defer the recognition of that amount until the option shares are disposed of.
This is really part of a further change being introduced to address the situation that a number of employees had found themselves in where they had exercised options at a time when the option shares had appreciated significantly in value. They deferred the recognition of that benefit and then found that the shares had decreased significantly in value, so they were sitting with shares that were worth significantly less than they had been at the time the option was exercised. They had this tax benefit that had not yet been brought into income. They would have to recognize that upon the disposition of the shares, but they did not have the value in the shares to be able to pay all of that tax, or at least they might face a significant tax burden compared to the value of the shares.
To address individuals who had faced those circumstances, Bill C-47 also includes an elective provision that will allow those who have found themselves in that circumstance where they have exercised the option and the shares are now significantly less in value than they were at the time that the option was exercised to elect into a special, almost transitional, set of rules that will allow them to treat the income amount, the employee benefit, as if it were a capital gain. This will allow them then to take advantage of the capital loss that they realize on the option shares and match those up better to reduce the impact of the mismatch of the timing in the tax. A number of rules in Bill C-47 provide for that elective treatment.
The sixth area addressed in Bill C-47 from an income tax perspective is an expansion of the accelerated capital cost allowance rules — CCA — for clean energy generation. Class 43.2 of the Income Tax Act provides accelerated CCA deductions for specified clean energy generation and conservation equipment. This will be expanded to include certain heat recovery equipment used in a broader range of applications than was the case prior to Budget 2010 as well as distribution equipment used in district energy systems that rely primarily on ground source heat pumps, active solar systems or heat recovery equipment.
A further change is that the Canadian renewable and conservation expenses rules will be amended to expand the definition of "principal-business corporation." The principal-business corporation definition is a key definition in allowing corporations to issue flow-through shares. Therefore, that definition will be amended under Bill C-47 to allow a corporation that engages principally in any combination of producing fuel, generating energy or distributing energy to qualify as a principal-business corporation.
The second-last of the Budget 2010 items is a change to the capital cost allowance rules for television set-top boxes. The proposed change is to increase the CCA rate to 40 per cent, which is intended simply to reflect the useful life of those assets to better match the deduction with the actual economic life of the assets.
Finally, in terms of Budget 2010 measures, this last one takes up the greatest number of clauses, numbering 26 out of our 90 clauses in Part 1, and will allow CRA to issue online notices to taxpayers. Where taxpayers elect — and it will only be where they elect and choose to receive notices in this manner — CRA will be able to send to taxpayers by electronic notice notices of assessment and other notices that under the current provisions of the Income Tax Act can be sent by regular mail. A regime will be set up pursuant to which taxpayers using, for example, "My Account" electronic accounts with CRA will be able to receive the notices electronically.
As Mr. Lalonde mentioned, there are four other items that were not Budget 2010 items directly but that were previously announced or that relate to items in the budget. The first is a set of rules intended to establish a regime for the establishment and operation of what are to be known as employee life and health trusts. This is intended to allow employers to set up trusts separate from the employer themselves to administer and provide a number of employee benefits, particularly life and health benefits, that employers traditionally have provided and allows them to move this to a trust regime separate from the employer.
The auto industry first approached the government back at the time of the restructuring of the auto industry to see if something such as this could be established, and, instead of something specific to that industry, a regime was proposed of general application that all taxpayers can take advantage of.
The second item in this broad category is the change to the Working Income Tax Benefit, WITB. The WITB was enhanced in Budget 2009, but, at the time, the enhanced amounts were not indexed. Bill C-47 proposes simply to index the amounts that are relevant for purposes of delivering the WITB.
Bill C-47 also includes provisions that were announced in October 2009 to deal with certain schemes and arrangements that were becoming prevalent in the use of the relatively new Tax-Free Savings Account, TFSA. Some fairly aggressive tax plans were making their way around the tax community. On October 16, 2009, a number of amendments were proposed and announced publicly to counter these inappropriate schemes that were becoming more prevalent.
Finally, a technical change is being included to deal with TFSAs and labour-sponsored venture capital corporations, LSVCCs. It is an amendment simply to clarify that LSVCC shares that are redeemed or transferred to or from a TFSA are subject to same conditions that apply to other redemptions or transfers of LSVCC shares. It is a fairly narrow and technical a change.
That is an overview of the 13 different broad areas.
The Deputy Chair: Thank you, Mr. Wach, for your comments on the Income Tax Act and related acts and regulations that make up Part 1. I would like to go to Part 2 now, which relates to excise duties and sales and excise taxes.
Carlos Achadinha, Legislative Chief, Sales Tax Division, Public Sector Bodies, Department of Finance Canada: Part 2 of the bill includes amendments relating to excise duties and excise taxes in the sales tax system. I will cover the amendments to the excise duty framework and the excise statutes. My colleague Mr. Mercille will cover the amendments to the Excise Tax Act and those dealing with the GST-HST legislation.
With respect to the excise duty framework, two principle amendments or measures are introduced in this bill. The first measure deals with amendments to the Air Travellers Security Charge Act; the Excise Act, 2001; the Excise Act; and the Brewery Departmental Regulations and Brewery Regulations to reduce the administrative and paperwork burden on certain small excise tax payers or tax remitters or licencees. The proposed amendments will allow certain small excise remitters, for example, small brewers, small vintners and small spirits producers, to file semi-annually rather than monthly, as is the case currently. These amendments allowing them to file every six months, or biannually, will reduce the number of times they have to file a return from twelve to two. This is commonly referred to as the paperwork burden reduction initiative, one of the measures being introduced that was previously announced. The bill will include the legislative amendments to specifically provide for the introduction of this new system or the new filing requirements.
The second measure relates to online notices, and it is similar to what Mr. Wach described. This will allow the taxpayers to be able to get information via online.
I will now turn to my colleague on the GST issues.
Pierre Mercille, Senior Legislative Chief, GST Legislation, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Part 2 of the bill also contains two short amendments on the GST side. The first amendment, as just explained, is to provide the legislative authority to CRA to issue online notices when the taxpayer so requests, so it is exactly the same thing as was discussed for other tax acts.
The second amendment basically is to amend the GST-HST legislation to protect from civil liability claims vendors who collect the GST-HST on behalf of the government as an agent of the Crown. To give a bit of background, under the Income Tax Act and other federal statutes, Crown agents who collect taxes and other amounts as agents of Crown are protected from civil liability claims. However, when the GST legislation was written, Part 9 of the Excise Tax Act did not provide such protection. Basically, when a vendor is collecting the GST on a sale to a purchaser, he or she is doing it as an agent of the Crown, but the vendor does not have the same protection as an employer who deducts source deductions under the Income Tax Act. The proposed amendment is to correct this oversight for Crown agents who collect GST in intended compliance with their statutory obligation, basically extending the protection to the GST legislation.
A similar amendment is made for the Air Travellers Security Charge Act because when the Air Travellers Security Charge Act was drafted, it was modelled on the Excise Tax Act where that omission existed. That is where someone sells an airline ticket and collects the air travellers security charge on behalf of the government and remits it to the government, so the same protection is provided to vendors of airline tickets.
That is it for the GST part in this bill.
The Deputy Chair: Thank you very much.
In my opening comments, I made reference to the fact that it is usual to have two budget implementation bills. The second gives a period for, in effect, notice to be given of what is being contemplated and also the ability to conduct consultations with stakeholders. Could any of you give the committee some idea as to what the department has done to consult with Canadians and to talk about the issues being raised here?
Mr. Lalonde: As is the case with almost every budget, a number of measures are put forward explicitly for consultation. For example, in Budget 2010, the provisions applicable to foreign investment entities and non-resident trusts, as well as the provisions applicable to aggressive transactions reporting, were put forward explicitly for consultations and with a consultation period.
Other measures not explicitly stated for consultation are usually the subject of informal consultation after the budget. That is to say, taxpayers and their representatives will be making representations to the government, saying, "You proposed X in the budget, and we think that, in the course of implementing policy X, you should bear in mind these particular factors." Those kinds of representations are often helpful.
With that in mind, we usually have the first budget implementation bill, which includes measures that are unlikely to include those kinds of representations and are fairly simple to move forward or, in other cases, measures that have to be implemented, for example, for CRA to issue tax refunds.
In the course of preparing the second budget implementation bill, or, in this case, Bill C-47, the measures included were of sufficient importance that it was decided not to put them in the first budget implementation bill but rather to include them in a release that went out in August to collect commentary. There was not much commentary on these particular measures, and, accordingly, they have been introduced in Bill C-47, sustaining Canada's economic recovery.
A limited number of other measures are still the subject of commentary, notwithstanding that the period for commentary is closed on these. They are important, new measures in some cases, for example, the aggressive transactions reporting measures, that are still being considered and finalized within the department. With that in mind, there may well be another bill that would include measures from the 2010 budget reflecting some of these consultations.
The Deputy Chair: Thank you, Mr. Lalonde.
Senator Ringuette: I would like to open up by saying that it is unusual to have more than one budget bill in a budget year. We only started last year to have two budget bills on the same budget speech, and now you have just indicated that we might have a third budget bill on the same budget speech.
I think that it has to be clear that in addition to the 900-some pages of Bill C-9, the first budget implementation bill, we have another bill here, and we might have a third one. I have been around for quite a while, at least for the last 15 years, and it is only since last year that we have started to have two budget bills.
On Part 2 relating to the breweries' six-month ability to file their GST, why has six months been decided on for the breweries while, in the last budget bill, it was twelve months for the financial institutions?
Mr. Lalonde: May I interrupt? Before we start off on the second question, I do have to comment on your opening statement about it being very unusual to have two budget bills in any given year. In my experience, it has been that way for quite a while. I was not expecting this particular issue to come up, so I do not have the details with me. However, it is very common practice to have a bill tabled shortly after the budget — sometimes with tax measures, sometimes without tax measures.
Maybe the difference that you are seeing in the past few years is that there have been more tax measures in that first budget implementation bill. However, for years there has always been a bill tabled shortly after the budget with budget implementation measures in it — not always with tax measures.
I will accept that it is less common to have a third budget implementation bill.
Mr. Achadinha: Six months was chosen as a relevant time period for those taxpayers, licensees, who will be remitting $120,000 or less annually. Currently, they are required to file monthly on how much they collect and do regular remittances on filing. Six months was determined to be a fair period.
Senator Ringuette: Six months for the small breweries is a fair period, but 12 months for the banking institutions in Canada is also a fair period for the GST remittance filing system, is that correct? Therefore, it is very arbitrary — there is nothing objective about it.
Mr. Achadinha: No, there are a variety of filing requirements under various legislation. They are sometimes quarterly, semi-annually, annually or monthly. Various factors are considered, and a decision is made for an appropriate filing period in the circumstances of a particular statute. The statute itself is looked at.
There has generally been strong controls and oversight in the excise framework. That is why there has always been a requirement that you file monthly. The tax is very high versus the value of the goods in some cases, so you want to ensure that you have regular collection and oversight of remittances.
It is determined that for very small remitters — those who collect and remit $120,000 a year and under — the risk is not so great. Therefore, you would allow them to remit less frequently. Also, the paperwork burdens are significant for them to file every month.
There have been representations on the part of a number of these small businesses to say "We have to file regularly; in other statutes, we get to file quarterly, semi-annually or even annually, so would you consider an extended period?"
Senator Ringuette: That brings me to my second question on this issue. Why has the brewery been targeted? Why not make it an overall policy for all the other small and medium-sized businesses that have made the request?
Mr. Achadinha: It is for all excise duty licensees, other than those that produce tobacco products — anyone who is covered under the excise duty framework. It also includes those covered under the Air Travellers Security Charge Act, so it is small registered air carriers, also small fuel producers — anyone who is covered by the excise duty and tax framework.
Senator Ringuette: It is not only the brewers, correct?
Mr. Achadinha: That is just one example. It includes wine producers, spirit producers, small gas and diesel producers, small air carriers — anyone who is covered by what we refer to as the excise duty tax structure and framework.
Senator Ringuette: My final question is about the employee stock option. Mr. Wach, from your explanation of the issue, is this in reference to the Nortel employees who were able to buy Nortel stock at a discount when the stock was high and, therefore, on their income tax return had to report that benefit? Now the stock is worth much less, and they paid quite a lot of taxes for the benefits of those stock options at a certain period of time. You said that they would be allowed to claim capital gains loss, but for how long retroactively?
Mr. Wach: There are a couple of questions there. The technology industry is a good example of an industry where employees did face this issue because of the tech bubble around 2000. I should clarify that generally with a public company, the employees are not entitled to buy stock at a discount. They generally receive their options at the prevailing market price.
This is exactly what employee stock options are intended to do — to allow them to participate in the growth of the company and the appreciation in value, so they would have received the option at the then current fair market value. The value goes up, and they exercise the option at a time when the stock is worth much more.
Prior to 2000, the benefits of options on public company shares were not entitled to be deferred. There was a deferral introduced at that time. That is what has created the mismatch, where an employee took advantage of that deferred recognition of the tax benefit, and then found that the stock that they had acquired had significantly dropped in value. Nortel would be one example of that.
The elective provision that is included in Bill C-47 will be retroactive. It goes right back to 2000, so anyone who exercised prior to 2010 will be required to take advantage of that elective before the end of 2011, I think. Let me check my notes.
Senator Ringuette: That would make sense. It would give them a year.
Mr. Wach: Yes, you cannot give them forever. CRA has to be able to deal with this in a relatively expeditious and efficient manner. However, there is a transition period for those who may have exercised several years ago to fit themselves into the new elective provision.
Senator Runciman: What are the tax implications of that particular initiative with respect to the stock option issue?
Mr. Wach: Do you mean in terms of individuals who may have been in the circumstance where several years ago they exercised and now the stock value has decreased?
Senator Runciman: No, there must have been an assessment at the time.
Mr. Wach: In fact, they would not have faced the assessment at the time. Public company options are subject to securities regulations and restrictions on exactly how many options can be issued and what the exercise period can be. For example, an employee who received an option in 2000 and exercised in 2003 may have come to the end of 2003 and the option period would have been expiring. They had to exercise to be able to take advantage of it.
Therefore, they exercised and realized a benefit of, let us say, $100,000 at that time. Prior to 2000, they would have been required to include that $100,000 in income in that year. There may have been some deductions available — and there are some that are available under section 7 to reduce the amount of the benefit — but they would have had to pay the tax at that time.
They then would have been sitting on the shares. Perhaps they would have sold some of the shares to get the cash to pay the tax. Then they would have driven on and would not be facing this tax overhang, so to speak. However, with the changes in 2000, the employee in that circumstance could have elected to defer the tax, and most people would think that deferring the tax is probably a good thing, right? Why pay now when you can defer until you sell the shares? It is almost a form of leverage because you can now keep all of the stock that you have acquired under the option without having to sell any of it to pay your tax. However, you leave yourself open to the potential that the stock could go down significantly in value.
Most people, entrepreneurs, those with an entrepreneurial bent, will take advantage of that. Those who are extremely risk-averse, such as myself, would say "I want to pay the tax now because I do not want to take that risk." We have eliminated that. There will not be the potential for getting into that situation in the future. In addition, we have introduced the elective provision to try to assist those who did take advantage of the option deferral over the last 10 years.
Senator Runciman: You talked about the civil will liability issue and described it as an oversight. Was anyone caught by that oversight with respect to liability implications?
Mr. Mercille: What do you mean by "caught"?
Senator Runciman: You were talking about how this will protect people against any civil action. I wonder if anyone was caught in that loophole or oversight.
Mr. Mercille: That was brought to our attention because there was actually a civil liability claim filed. I will not discuss the details of the court case.
Senator Runciman: Has it been resolved?
Mr. Mercille: No, it is still pending in front of the tribunal, so I will not comment on something that has not been resolved.
Senator Runciman: I was not asking you to get into specifics of the case. Since this is being changed, hopefully no one will be left out on a limb at the end of a day.
I want to talk about the Tax-Free Savings Account and the changes there. When that was implemented and came into effect, how quickly did abuse begin to occur following implementation?
Mr. Wach: I have been in the tax business for 25 years. Probably it is fair to say that I have not seen aggressive tax advisers move any faster than they did in this circumstance.
Senator Runciman: How quickly was that it was being abused?
Mr. Wach: It was discovered very quickly. The announcement in October was also a pretty quick response.
Senator Runciman: What was the timeline from implementation to the announcement?
Mr. Wach: It was Budget 2009 that the TFSA was announced, and it was October of 2009 that we had to take action.
Senator Runciman: I am wondering about the processes within the ministry when you develop this kind of initiative because these very aggressive tax folks seem to be able to discover these, as you indicated, very quickly. What is the process internally to ensure as best you can that these opportunities are not presented?
Mr. Wach: When you are drafting legislation to implement policy, you try to balance very detailed rules. However, that can take up many pages of legislation, and we are at times criticized for introducing overly complex legislation. You balance that against trying to provide a simpler system, one that is easier for taxpayers and advisers to comply with but that may in some circumstances leave open opportunities.
I can remember the first time I went to a Canadian Tax Foundation conference in my work with the department back in the 1980s and realized that there were 30 of us in the Tax Legislation Division and about 2,000 people at this particular conference, and that is not all of the people that are out there thinking about the rules that we draft and ways to perhaps use them in not exactly the way that they were intended.
Senator Runciman: That is amazing.
Senator Marshall: As we are under time restrictions and I have two questions, I will get both questions out and leave it up to the officials to respond.
First, to pick up on what Senator Runciman was saying about TFSAs, our briefing notes refer to using TFSAs for inappropriate tax planning schemes. Could you elaborate on that?
Second, the section on the International Financial Reporting Standards, when you were explaining that, did I understand correctly that it was only related to or focused on insurance companies, or did I misunderstand you? Could you explain that a little more? It sounds as though you are trying to level out the income under the new rules, so could you go over those two items?
Mr. Wach: Certainly. An example of one scheme that we became aware of with TFSAs would be deliberate over-contributions to a TFSA account. Under the current rules before Bill C-47, where a taxpayer has made a deliberate over-contribution to their TFSA, they are subject to a tax of 1 per cent per month on the excess contribution, which at 12 per cent for a year is not insignificant. However, what we were told and became aware of was that, for example, if a taxpayer had an asset that he or she thought would significantly increase in value, the payment of that penalty tax was small compared to the tax that they might face if they were to hold that asset outside their TFSA and realize the gain or the income outside of their TFSA. Therefore, parties were effectively saying to us that the tax was not significant enough to deter them from using their TFSA in this manner.
On the IFRS question, your characterization of the IFRS changes is accurate. It is focused on insurance companies, on valuation of insurance contracts that they hold. As you can imagine, with a change in accounting methodology, there can be a significant bump in income up or down as a result of the changeover, so the change is intended to smooth that transition over a five-year period.
Senator Marshall: Would that not be an issue for companies in other lines of business? Why would it just be focused on insurance?
Mr. Wach: As I said earlier, we continue to monitor IFRS changes so that we ensure that the Income Tax Act does respond to unique circumstances such as this, and also interested parties obviously bring situations to our attention. We will continue to do so, but this was the only circumstance that we were aware of that needed to be addressed for January 1, 2011.
Senator Marshall: It refers to a five-year transition. What happens after the end of five years? Do they just use new accounting rules, and that is it?
Mr. Wach: That is correct. The proposed rule in Bill C-47 takes an income measurement based on pre-IFRS rules, a measurement based on IFRS rules, and then takes that difference and allocates it over five years so that at the end of the five years, they are fully transitioned into IFRS accounting.
Senator Callbeck: Thank you all for your explanations. I want to come back to this TFSA. You say that right now if there is a deliberate over-contribution, there is a charge of 1 per cent per month?
Mr. Wach: That is correct.
Senator Callbeck: That is not stopping it. Some people are still doing that. What is in this legislation to address these concerns about inappropriate tax plans?
Mr. Wach: The proposed rule is that, in a situation where there is a deliberate over-contribution, the amount of the over-contribution will be subject to a special tax.
Senator Callbeck: What is that special tax?
Mr. Wach: It is equal to the amount of the over-contribution.
Senator Callbeck: You have to pay the whole thing?
Mr. Wach: Yes.
Senator Callbeck: That should stop it.
My other question is on charities. You mentioned two things there, and I want you to talk about that a little more. You eliminated the disbursement rules, which were 80 per cent of receipted gifts. Am I right on that?
Mr. Wach: That is correct.
Senator Callbeck: Then you said that you modified the rules on capital accumulation. How do both of those affect charities?
Mr. Wach: On the disbursement quota, we were hearing, largely from the charity sector itself, in groups such as Imagine Canada, that the receipted gift disbursement quota was impacting different charities in different ways. In particular, smaller charities that rely on receipted gifts for all or substantially all of their funding were being impacted much more than larger charities that may have other funding or fundraising activities that make up a smaller proportion of their overall funding. The charity sector came to us and suggested that we should reconsider and perhaps even eliminate that disbursement requirement.
Senator Callbeck: There is no requirement whatsoever now?
Mr. Wach: Not in terms of receipted gifts, that is correct.
Senator Callbeck: What about the rules that have been modified on capital accounts?
Mr. Wach: I will have to refer back to the more detailed notes. I am actually looking at the budget document itself, page 352, where there is a discussion of the modifications dealing with capital accumulation. The first change is to increase from $25,000 to $100,000 the threshold at which the disbursement requirement on accumulated capital applies, and clearly that is intended to address the situation for smaller charities for which that disbursement requirement had greater impact and also imposed a relatively higher compliance burden on them.
There is a second change dealing with computation of these rules as they apply to charitable foundations and charitable organizations, clarifying that it will apply to both. Along with that are some changes to some of the anti-avoidance rules in the charities set of rules to address situations where, for example, a charity might make a gift to another charity to satisfy its disbursement quota, but that receipt of a gift by the second charity was not subject to disbursement by it, so some anti-avoidance provisions are being strengthened to deal with those types of circumstances.
Senator Callbeck: Have all these changes been asked for by both small and large charities?
Mr. Wach: It has been very well-received by the charitable sector, yes, and both small and large charities have responded favourably.
Senator Peterson: On the rollover from the RSP to a disability fund for an infirm child or grandchild, what is the threshold for infirm, and who determines that?
Mr. Wach: It is the rule that is generally applicable under the Income Tax Act and the rule that applies for all other purposes for the Disability Tax Credit and other measures.
Senator Peterson: Can you get an advance ruling on that, or do you have to wait until the time it occurs?
Mr. Wach: I am not aware that CRA issues advance rulings on those circumstances.
Senator Peterson: On the charities, are the non-profits included in that legislation too, or are they somewhere else?
Mr. Wach: They are not part of this regime, no.
Senator Peterson: On the stock option, if you exercise your options and pay for them, buy them, hold them, and then sell them at some later date, is that when the tax kicks in, or is the adjusted cost base whatever the price is at the time you exercise?
Mr. Wach: We are talking public company options here. Do you mean under the current rules or the proposed rules?
Senator Peterson: Under the proposed rules.
Mr. Wach: At the time of exercise, the employee will recognize the benefits or the difference between the strike price and the fair market value at that time, and that amount will be included in income at that time. Absolutely, their adjusted cost base will be increased to reflect both the amount paid for the stock and the benefit that was included in income so they get a full recognition for future capital gains purposes.
Senator Ringuette: Last year, the Auditor General, Ms. Fraser, requested or recommended an interest rate for income tax that had been overpaid intentionally. Has a fixed interest rate been put into place or decided, and has it been implemented?
Mr. Wach: Yes. That was in Bill C-9.
Senator Ringuette: What is the interest rate?
Mr. Wach: The rate is adjusted on a quarterly basis. The regulations in the Income Tax Act look back to the prior quarter and to the average rate of government treasury bills, and then, on top of that, 0 per cent, 1 per cent or 2 per cent is added, depending on the circumstances in which the interest rate is relevant for purposes of the Income Tax Act. In Bill C-9, that was adjusted for corporate overpayments of tax to that prescribed rate plus 2 per cent.
Mr. Lalonde: That was in Bill C-9, which was the first budget implementation bill for the 2010 budget. One of my colleagues from the department has brought me some facts from previous years indicating that, in fact, there have been several instances of at least two budget implementation bills: for 2009, Bill C-51 and Bill C-10; for 2007, Bill C-52 and Bill C-28; for 2006, another Bill C-52 and Bill C-28; and for 2005, Bill C-33 and Bill C-43. I am quite confident that we would find a similar pattern for previous taxation years.
The Deputy Chair: I will note to the committee that we have used almost half of our time for Parts 1 and 2, but I also draw to your attention — and I am sure there is no correlation — that we have covered 109 of the 143 pages. We will move aggressively with the balance of the parts.
I believe there is a comment from Mr. Wach.
Mr. Wach: Yes. I misstated, and I appreciate Mr. Mercille correcting me. The payment that the government makes to corporations on overpaid taxes was not increased by 1 per cent to be the prescribed rate plus 2 per cent, it was decreased to be the prescribed rate plus 0 per cent, so my apologies. I was going the wrong way.
Mr. Mercille: It is explained on page 365 of the budget.
The Deputy Chair: Next we will deal with Part 3, amendments to the Federal-Provincial Fiscal Arrangements Act with respect to income tax. From the Tax Policy Branch, we have Ms. Kei Moray, Director, Intergovernmental Tax Policy, Evaluation and Research Division; and Ms. Deanne Field, Chief, Federal-Provincial Taxation Section. For Part 4, amendments relating to an external complaints body, we have Ms. Pascale Dugré-Sasseville, Chief, Consumer Issues, Financial Sector Policy Branch.
Kei Moray, Director, Intergovernmental Tax Policy, Evaluation and Research Division, Tax Policy Branch, Department of Finance Canada: Part 3 amends the Federal-Provincial Fiscal Arrangements Act, FPFAA, to provide authority to the federal government to share two federal taxes with provinces.
The first tax is a special tax on deferred stock options, which is the provision that Mr. Wach explained to you earlier. The amendments to the FPFAA will allow the federal government to share one third of the revenues that are raised by the special tax with provinces that are party to a tax collection agreement.
The second tax that will be shared with provinces is a tax on certain income from Registered Education Savings Plans, RESPs. The income that is earned within these plans is earned on a tax-free basis. In cases where there are no beneficiaries that pursue post-secondary education by the age of 21 years, the earnings from the RESP can be refunded back to the contributor. When this happens, a special tax is imposed at the rate of 20 per cent, and 40 per cent of these tax revenues will be shared with provinces as well.
That is an overview of those two amendments.
The Deputy Chair: Ms. Field, did you have anything to add?
Deanne Field, Chief, Federal-Provincial Taxation Section, Tax Policy Branch, Department of Finance Canada: No, I do not.
[Translation]
Pascale Dugré-Sasseville, Chief, Consumer Issues, Financial Sector Policy Branch, Department of Finance Canada: Mr. Vice-Chair, it is a pleasure to talk to you this morning about the legislative changes in Part 4 of Bill C-47 you are presently considering.
[English]
The Bank Act currently requires that all banks have dedicated procedures and personnel in place to address consumer concerns and complaints. In addition, all banks belong to an external complaints handling system. However, there is a wide variation in the procedures used among financial institutions.
To ensure consumers receive consistent treatment, Budget 2010 announced the government's intent to strengthen the dispute resolution framework for consumers. The government will move forward with regulations to establish minimum standards for institutions' internal complaints procedures. This will ensure fair, efficient and timely treatment of consumers' complaints. These regulations are currently under development and will be shared for public comment in the normal course of the regulatory process.
[Translation]
The government also announced it would require banks to belong to an approved third party dispute handling body with clear approval criteria. These are the amendments contained in Bill C-47.
[English]
The proposed amendments to the Bank Act would require banks to belong to a dispute resolution body approved by the Minister of Finance, as well as provide for the establishment of criteria for approval in regulation.
[Translation]
The proposed amendments to the Financial Consumer Agency of Canada Act are consequential amendments to those of the Bank Act to allow the agency to oversee compliance of external complaints bodies with the approval requirements.
[English]
The Deputy Chair: We have also been joined by Mr. Robert Turnbull, Senior Counsel, Department of Finance Canada. Do you have an opening statement?
Robert Turnbull, Senior Counsel, Department of Finance Canada: No, I do not.
Senator Callbeck: Ms. Moray, I want to ask you about the amendment to the FPFAA, which will provide for the minister to give some money back to the provinces. How much money roughly are we talking about for the stock options, and how much are we talking about for the RESP program?
Ms. Moray: For the RESP program, that tax was introduced in 1998. Since then, up until 2008, the amount of tax that has been collected that is due to provinces is $1.1 million. It is not a large amount of tax. It is a tax that applies in a narrow circumstance — the circumstance where the funds are not being used in the way that was intended.
For the stock option, I do not have that number with me.
Senator Callbeck: I think I heard you say that since 1998, it has accumulated to $1.2 million.
Ms. Moray: It is $1.1 million.
Senator Callbeck: Therefore, a percentage of that accumulated amount is going back to the provinces, correct?
Ms. Moray: That entire amount is going back to the provinces; that is the provincial share.
Senator Callbeck: Is that two fifths?
Ms. Moray: The provincial share is 40 per cent of the total. The total then is somewhere between $2.5 million and $3 million.
Senator Callbeck: That is going back to the provinces.
Ms. Moray: Yes.
Senator Callbeck: For the stock option, you do not have the figure.
Ms. Moray: No, I do not.
The Deputy Chair: Could you obtain that and forward it to the clerk, please?
Ms. Moray: Yes.
Senator Callbeck: Why are those figures different — one third for the stock options and two fifths for RESPs?
Ms. Moray: The 40 per cent was provided for back in 1998, and the one third was provided for more recently.
Senator Callbeck: If this was provided back in 1998, why has the money not been paid out to the provinces?
Ms. Moray: The money was not paid out because there was not the legislative authority to make the payments. It required an amendment of the FPFAA, which we are doing at this time.
If I can go back to your question on why the rates are different, the rates were set differently because they are based on an estimate of the rates that would apply to the taxpayers who would be affected by the tax.
Senator Marshall: My question relates to the amendments that are being looked at to govern complaints to banks. There was no mention in the briefing notes about the banking ombudsman. Will that organization still exist?
Ms. Dugré-Sasseville: If this organization wants to continue, it will have to be approved by the minister. The approval criteria will be set out for everyone who wants to offer that service. They will have to go through the approval process, and they understand that.
Senator Marshall: What is in place now? The banking ombudsman is in place; I am familiar with that organization. In addition to that, the individual banks have their own internal processes.
Ms. Dugré-Sasseville: Yes, they do.
Senator Marshall: What is envisioned? Will it be that the individual banks will now have to standardize internal processes according to criteria established by the minister?
Ms. Dugré-Sasseville: We are looking at the full complaints handling system as a whole. There is the internal component, as you mentioned, and the external. For the internal component, a set of regulations will standardize the complaints handling processes that they use at the internal level. Right now the Bank Act warrants that they have personnel and procedures in place but does not speak to what the procedures ought to be. This will bring specificity and standardization to those procedures.
On the external side, which is the subject of this morning's amendments, we had to make changes to the Bank Act to require that banks belong to an approved third party — this complaint handling process — and set approval criteria that need to be met to be approved and to maintain that approval. Therefore, it is a question of meeting these criteria at the outset, and then on an ongoing basis.
Senator Marshall: These external organizations that have to be approved, do they exist now?
Ms. Dugré-Sasseville: Yes, there are currently two in the banking world.
Senator Marshall: What would they be?
Ms. Dugré-Sasseville: The first one is the Ombudsman for Banking Services and Investments, OBSI; and ADR Chambers is used for one specific financial institution.
Senator Marshall: There will be standardized criteria for those also.
Ms. Dugré-Sasseville: That is right.
Senator Ringuette: On the same issue, the Minister of Finance seems to be extremely sympathetic to moving forward on code of conducts instead of regulations, to not overburden the business community or the financial institutions. Why are you going ahead with regulations for dispute resolution for consumers instead of a code of conduct?
Ms. Dugré-Sasseville: It is difficult for me to speak to the minister's preference in terms of the instrument. The budget text was quite clear that we are moving with regulations in this regard for both. The internal processes will be regulations for which no legislative changes are required. However, for these, we needed to establish the enabling framework, which is the subject here, and then the approval requirements will be set in regulations.
Senator Ringuette: Will your regulations include issues of complaints?
Ms. Dugré-Sasseville: I am not sure I understand what you mean.
Senator Ringuette: Let us say the consumer wants to make a complaint against the Royal Bank and its Visa credit card. Would that be under the regulations you are talking about?
Ms. Dugré-Sasseville: Maybe it is worth distinguishing between the complaint handling system and compliance. Right now — and this is exactly the subject of the complaint handling system — a consumer may make a complaint to their own institution about a product or service they have received, an error made or whatever the situation is. The complaint is handled internally by the institution first, and if it is not resolved to the customer's satisfaction in the internal process, then they have access to third-party dispute resolution. That will not change; it will still be there. However, we are strengthening those two components to ensure that the consumer receives efficient, fair and consistent treatment among institutions and through the process.
Senator Ringuette: It could include a consumer complaint to a particular bank, such as the example I stated earlier.
Ms. Dugré-Sasseville: Yes. If a particular bank is the issuer of a credit card, and a consumer has a complaint about their credit card, they currently have access to the complaint handling process. That will continue.
Senator Ringuette: Thank you.
Senator Callbeck: What will be the role of the Financial Consumer Agency of Canada, FCAC? Will it supervise this new external complaints body?
Ms. Dugré-Sasseville: Yes, it will.
Senator Callbeck: I understand that currently you can go through an internal process or an external process.
Ms. Dugré-Sasseville: One is not an alternative to the other; they are a continuum. The consumer has to start with the internal complaints process, and hopefully the complaint is resolved at that level; but if not, they have access to the external level.
Senator Callbeck: Do we have that now?
Ms. Dugré-Sasseville: Yes.
Senator Callbeck: Is this legislation setting that up?
Ms. Dugré-Sasseville: That is the current system, which will continue under these changes. We are ensuring that we have specific standards imposed on both to strengthen the process in its entirety.
Senator Callbeck: Is that all it is doing, setting up to ensure that the standards are consistent? There is no new body being set up here.
Ms. Dugré-Sasseville: That is too early to tell. Do you mean in the sense that people would have to go through the external redress system? Any resolution body that would want to provide that service to banking clients would have to be approved, so it would go through the approval process. It is a bit early to say, before the requirements are in place, whether there would or would not be new players.
Senator Callbeck: I do not understand why there would be new players if you have a system now within the banks that will be strengthened by these regulations to standardize procedures and an outside body that currently exists that you will put in regulations so that there is consistency in procedures.
Ms. Dugré-Sasseville: We have two bodies currently at the external level. These changes will ensure that if these two bodies decide to seek approval from the Minister of Finance, they would be subject to consistent requirements.
Senator Callbeck: Why do we have two bodies at the external level?
Ms. Dugré-Sasseville: Currently there is no specific rule. There is just a requirement to have an external body. Historically there was only one. A change was made by one of the financial institutions in 2009 that introduced a new service, so it was felt that consistency needed to be provided in that area.
Senator Callbeck: What was the financial institution in 2009 that introduced the new service?
Ms. Dugré-Sasseville: The Royal Bank of Canada, RBC, elected to go with another service provider.
Senator Callbeck: Will the Financial Consumer Agency of Canada supervise both of these?
Ms. Dugré-Sasseville: They would supervise anyone approved by the Minister of Finance.
Senator Ringuette: All these internal ombudsmen offices and the two external ombudsmen offices for consumers to make a complaint about their banking institution are financed and operated by the banking institutions. Therefore, the consumer makes a complaint to a said banking ombudsman, and that ombudsman is financed to operate by that particular financial institution. Is that not grand?
The Deputy Chair: Is there a question?
Ms. Dugré-Sasseville: That was my question.
Senator Ringuette: I was hoping you would say no, they are not financed by the banking institutions.
Ms. Dugré-Sasseville: There is a difference between captured and financed by. That is the distinction I would make. The internal process is absolutely part of the bank, but not the external process. With the external, particularly with this new requirement to be approved, there is no out, so they will have to belong to one approved body. One of the key criteria that we are considering for the approval is the notion of independence and how that will affect it.
Currently at OBSI, the members have to pay, and the formula is established in advance. It is not a surprise. It is not specific to a case. It provides for funding that is consistent for third-party dispute resolution. With international standards, when it comes to external complaints-handling bodies, it is a question that is key everywhere, and that is what we are certainly looking at.
Senator Marshall: When we heard from other witnesses this morning, they indicated the impetus for some of the tax changes that are going through. What was the impetus for this change with respect to the investigation of the complaints with the banks?
Ms. Dugré-Sasseville: We always look to ensure that the framework continues to work as efficiently as it should. That is a regular concern of the Minister of Finance and the department. These requirements for the internal process have been in place for a while. However, as they are used, we understand where there are best practices and maybe not best practices, and we want to ensure it is standardized and that consumers receive fair and consistent treatment. It is the product of the natural evolution of the marketplace.
Senator Marshall: Is there some indication that the current system is not working? If it is not broken, do not fix it. Based on your comments, it appears there were complaints about the present system or some problems identified.
Ms. Dugré-Sasseville: As I mentioned before, the issue is that the Bank Act now only speaks to the need to have a procedure but does not speak to those procedures, which allows for a variety that may not be serving the Canadian public as well. Having a common understanding of what it means to go through the complaint handling process will assist with that at every level of the process.
Senator Dickson: Having sat on the regulations committee myself, when do you expect the regulations to be formulated and become law, in six months or six years? What is the time frame? What is the period for consultation, if any?
Ms. Dugré-Sasseville: These regulations are currently under development. It is a bit early days to be speaking to when they would be in the public space, but we would be looking at having something for public comment in the New Year. For the internal and for the external approval criteria, now that we have the enabling framework in place through these regulations, hopefully they will go through the parliamentary process and allow us to move forward. We need the regulation-making authority that is contained in the act right now to move forward. Then we will engage on the development of these regulations. In the normal course of the regulation-making process, we will make them available for public comment, as we always do.
Senator Dickson: Are the financial institutions in support of these changes?
Ms. Dugré-Sasseville: I believe they are. I think they all see the public policy rationale for having a strong complaint handling process. It is a requirement of the framework. If you have a requirement, it should work well for everyone.
There is value for the financial institutions in the information gathering that occurs from the complaint handling process. If they have a strong, well-documented process in place, there is a learning opportunity for them to improve their business processes. There is value for every stakeholder in this file.
Senator Dickson: Is this process similar to one used in the United States? What other jurisdictions would have a process such as this? Which jurisdiction has a better process than this?
Ms. Dugré-Sasseville: Most G7 and G20 countries have similar processes in place for complaints handling. Many have systems that are relatively similar to what we are looking at. However, in the United Kingdom, the third-party dispute resolution is actually a semi-public body.
The Deputy Chair: Thank you, panel. We appreciate you being so forward with us on Parts 3 and 4.
We will now deal with Part 5, on the Canada Disability Savings Act. We have Ms. Jessica Kerr, Director, Programs Division, Human Resources and Skills Development Canada; and Mr. Guy Morrissette, Manager, Canada Disability Savings Program. For Part 6, the Customs Act, we have Ms. Sara Wiebe, Director General, Pre-Border Programs, Canada Border Services Agency; and Mr. John Layton, Chief, Trade in Services and Investment, International Trade and Finance Branch, Department of Finance Canada.
Jessica Kerr, Director, Programs Division, Human Resources and Skills Development Canada: In order to better situate the provisions stemming from Budget 2010, I will give an overview with respect to the Registered Disability Savings Plan, RDSP, which is a long-term savings plan intended to help people with disabilities and their families save for the future.
Budget 2007 announced the creation of the RDSP, the Canada Disability Savings Grant and the Canada Disability Savings Bond. The RDSP became available to Canadians in December 2008. The grant portion is a matching grant that the government deposits into a RDSP. The government will provide matching grants up to 300 per cent, depending on the amount contributed and the beneficiary's family income. The lifetime limit is $70,000 for each beneficiary. The bond is funding that the Government of Canada provides to low-income and modest-income Canadians with disabilities. Beneficiaries that qualify for the bond can receive up to $1,000 a year from the Government of Canada, with a lifetime limit of $20,000. No contributions are required to receive the bond.
Budget 2010 announced improvements to the RDSP that include a provision to allow carry forward of the Canada Disability Savings Grant and bond entitlements. Part 5 of the budget implementation bill will permit a 10 year carry forward of the Canada Disability Savings Grant and the Canada Disability Savings Bond entitlements.
[Translation]
Beneficiaries will be able as of January 2011 to carry forward for a ten-year period their unused entitlements to the grant and the bond. The amount of both the grant and the bond will be established according to the family income of beneficiaries in those years. When contributions are made, government grants will be deposited into the RDSP at the most advantageous matching rates. However, the maximum grant paid in a year is limited to $10,500.
[English]
I recognize that is a fast overview, but we are more than happy to answer any of your questions as well.
[Translation]
Sara Wiebe, Director General, Pre-Border Programs, Canada Border Services Agency: Mr. Vice-Chair, I would like to thank you first of all, as well as the honourable senators, for inviting me to appear before you today.
[English]
As mentioned, I am the director general of Pre-Border Programs at the Canada Border Services Agency, CBSA.
[Translation]
The Canada Border Services Agency's mandate is to provide integrated border services that support public national security priorities and to facilitate the free movement of people and legitimate goods.
[English]
To support this mandate, CBSA has created a number of Trusted Traveller programs that facilitate the flow of pre-approved, low-risk travellers based on risk-management principles. Membership in these programs is voluntary, and only individuals that meet a high level of strict risk assessment and security criteria are considered for participation in a Trusted Traveller program.
CBSA has a number of Trusted Traveller programs, including two binational programs with the United States. Accelerated border passage for frequent low-risk travellers means reduced wait times, a reduction in border congestion and improved overall border management.
Our domestic initiatives include the CANPASS suite of programs, which are designed to expedite the border clearance process for low-risk, pre-approved travellers into Canada. They include CANPASS Air, CANPASS-Private Aircraft, CANPASS-Corporate Aircraft and CANPASS-Private Boats.
Our binational programs with the United States include the NEXUS and FAST driver registration programs. They are joint initiatives between the CBSA and the U.S. Customs and Border Protection, CBP. These programs enable pre-approved, low-risk travellers and commercial drivers to receive expedited entry into both Canada and the United States.
NEXUS members are able to use self-serve iris-recognition kiosks at eight Canadian international airports. They can use cards with radio frequency identification technology at 18 dedicated land border crossings, and they use expedited telephone reporting at approximately 430 marine reporting sites. FAST drivers are able to cross into Canada with their shipments through a series of dedicated commercial clearance lanes.
NEXUS is our most popular program. It has over 460,000 members, and we expect that number to reach 830,000 by 2015. The program has grown by over 30 per cent in each of the last three years; last year alone, it increased by 39 per cent. This translates into approximately 2,000 new members a week and has required the agency to expand hours of operation and increase staffing at NEXUS enrolment centres across Canada to meet the demand.
NEXUS members who cross the border frequently for business purposes gain a competitive advantage from expedited processing in the form of cost savings and time savings. Members who travel for tourism and pleasure arrive at their destination and often return home earlier than otherwise would have been the case, and also are beneficiaries of expedited processing and reduced wait times at the border.
A May 2008 program evaluation of the NEXUS Highway and FAST programs indicated that 97 per cent of NEXUS members surveyed joined NEXUS Highway to avoid line-ups and benefit from quicker border clearance. Members stated that NEXUS processing saves time. On average, they estimated saving about 30 minutes each time they crossed the border into Canada and the United States.
Program participants also have indicated strong support for the implementation of a new pilot program at Ottawa, Toronto and Montreal airports, whereby NEXUS cardholders have access to a dedicated Canadian Air Transport Security Authority lane, or CATSA lane. This is a clear example of how the government is leveraging its trusted programs in an effort to streamline the functioning of its programs.
Expedited processing and quick border passage are benefits that accrue directly to NEXUS program members and are not available to all individuals wishing to cross the Canadian-U.S. border. We believe it is appropriate to share the costs of the work required to process applications, issue cards and review memberships, as well as all other work in support of program delivery with those who benefit directly from these programs.
As you know, Budget 2010 included a commitment to enhance CBSA's Trusted Traveller programs and to ensure that these initiatives, including their fees, are better coordinated with international partners such as the United States. In working with international partners toward facilitated streamlined border services, the Government of Canada requires the ability to be flexible and responsive in negotiating and setting fee arrangements.
The bill before you now contains a legislative amendment to the Customs Act, whereby certain provisions related to the fee approvals processes set out under the User Fees Act would not apply to the CBSA Trusted Traveller programs where fees are coordinated with international partners. An essential tenet of the User Fees Act is the obligation to consult Canadians on cost-recovery and to reflect their views on the final outcome. However, attempting to apply the User Fees Act to international agreements such as NEXUS makes it difficult to coordinate fees with partners because the views of Canadians may not align entirely with our international partners.
It should be noted here that domestic views on fee changes are taken into account during established regulatory approval processes. It is our position that this requirement would undermine the ability of Canadian negotiators to work effectively with international partners to identify appropriate program fees.
I will add, so it is clear, that while CBSA is seeking this amendment for its international programs, the User Fees Act requirements would continue to apply to any changes to the agency's domestic Trusted Traveller programs, such as the suite of CANPASS programs.
The amendment would not only allow the CBSA to enter into discussions with current international Trusted Traveller partners on behalf of the Government of Canada to set and coordinate fees but also would position the agency well to deal and speak with new international Trusted Traveller partners to set arrangements effectively where it is determined to be in Canada's best interest.
If, in the course of any future discussions with international partners, we are successful in concluding mutually agreed to, coordinated fee arrangements, the agency will undertake a subsequent fee approval process as per established Treasury Board processes for regulatory amendments, including the publication of the fee proposal in the Canada Gazette.
[Translation]
I would like to conclude by stating that even if amending the Customs Act would indeed streamline the international fee approval process, the agency wants to reaffirm its respect for the basic principles of consultation, transparency and accountability enshrined in the User Fees Act. These principles will remain an essential part of any fee adjustment process.
I will now be pleased to answer your questions.
[English]
The Deputy Chair: Do any other witnesses wish to make an opening statement?
Ms. Wiebe, first, on a personal note, I must compliment you on the NEXUS program. I have made use of it on a number of occasions, and I certainly confirm the effectiveness that you outline.
I was surprised to see in our notes on Bill C-47 the statement that NEXUS members may use their cards for entry into the United States in lieu of a passport. Are you suggesting that you could cross the border where you may still be stopped by a U.S. immigration official and not have your passport with you if he or she should ask for it?
Ms. Wiebe: That is correct. Many of you may be familiar with the U.S. Western Hemisphere Travel Initiative, WHTI, which the United States government initiated and implemented over the past few years. In so doing, under the WHTI, the U.S. government identified which documents they would recognize as secure, as approved by the United States Secretary of Homeland Security. Those documents that would be identified as secure would be seen as a document that could be used for entry into the United States.
We were very pleased to see that the U.S. government did in fact confirm that the NEXUS card can be used in lieu of a passport to enter the United States.
The Deputy Chair: Thank you for that clarification.
Senator Ringuette: I want to continue on the same issue of NEXUS. What is the current fee for a Canadian that wishes to have a NEXUS card?
Ms. Wiebe: The current fee is $50, which is shared jointly between the Canadian and U.S. governments.
Senator Ringuette: It is $50?
Ms. Wiebe: It is $50, yes.
Senator Ringuette: Is the $50 per year?
Ms. Wiebe: That is for five years.
Senator Ringuette: If that is only renewed on a five-year basis, how would you keep abreast of the information on that certain individual?
Ms. Wiebe: In terms of what?
Senator Ringuette: I have not applied but some have. There must be some specific additional information on a person who wants to have the NEXUS card in addition to the Canadian passport.
Ms. Wiebe: Part of the work that my team does is marketing, identifying opportunities to inform Canadian and U.S. citizens, if we are talking about NEXUS, about the benefits of the NEXUS program. There is the marketing issue, and we are trying to be aggressive.
Senator Ringuette: That is not my question. I am asking what additional information about a Canadian citizen is on the application for a NEXUS card. Is it a fingerprint? Is it an iris scan? What additional pertinent information is on the NEXUS card that you would not have on your Canadian passport?
Ms. Wiebe: The information we ask for is generally the same — your biographical information, address information. Perhaps what might be extra that we do not ask for in the passport application is a history of employment and residence. We ask that just to ensure that you meet the criteria.
However, in the application process, we do the security vetting, as I mentioned, to ensure that you are someone who we can define as trusted. The Government of Canada will run you against Government of Canada databases; the United States will run the applications against their parallel databases. We each decide on our own side whether, for example, Sara Wiebe meets the requirements. If we both answer yes, and we have decided jointly, then Sara Wiebe will become a member of the program.
In the application process, we do ask for two biometric measures. We ask for fingerprint and iris biometrics. We use the iris biometrics in air passage. As Senator Gerstein well knows, when you travel through the Ottawa airport, for example, entering from an international destination, you can go up to the NEXUS kiosk where it will prompt to you stand in front of the kiosk to register your iris biometric. It confirms whether that person is Senator Gerstein, for example, or not. Once it has confirmed that you are a member of the program, it runs you against our databases to ensure something has not happened since the last time you went through a port of entry or you applied. If it is a green light, it provides you with a receipt, and then you proceed, pick up your bags and leave the airport.
Senator Ringuette: With the data that you collect on Canadian citizens to provide them with a NEXUS card or deny them a NEXUS card, where does that data reside? Who manages that data?
Ms. Wiebe: We each have our own database that includes information about NEXUS members. The Government of Canada has that information.
Senator Ringuette: Do you mean your department?
Ms. Wiebe: CBSA, yes.
Senator Ringuette: CBSA for Canada has all that information for NEXUS applications and cardholders?
Ms. Wiebe: That is correct.
Senator Ringuette: Is it shared with your U.S. counterpart?
Ms. Wiebe: We each have our own parallel databases. The only information that we share is on the application process and on revocation. For example, I mentioned that in my case my application was approved, so what went over to the United States was a green light. That is all they received about me other than the information that I had already provided in my application form.
Senator Ringuette: The green light is also your work history.
Ms. Wiebe: All it says is that I am approved, that the Government of Canada has approved Sara Wiebe for the NEXUS membership.
Senator Ringuette: Does it say Sara Wiebe was born on this date and at this location?
Ms. Wiebe: That is correct. It is based on all the information that I provided in my application form.
Senator Ringuette: That is what I want to know. What is "all the information" you are referring to?
Ms. Wiebe: The basic biographical data: name, date of birth, address, citizenship, residence, employment history and residence history.
Senator Ringuette: All the data that you put forth on your application is also sent to the U.S., is that correct?
Ms. Wiebe: That is correct.
I am sending that to the United States as an applicant. The CBSA is not sending that to the United States. If I am applying for a joint program, if I am applying for NEXUS, that means I am applying to both the United States and Canada. If I am applying for CANPASS, which is a Canadian domestic program, I am only applying to the Government of Canada and sending the information to the Government of Canada, no one else.
Senator Marshall: Thank you for appearing here today. Could you briefly outline the current approval process for the fees? I just want an idea of what the process is that we are changing.
Ms. Wiebe: We set the fee when we created the program, and that preceded the implementation of the User Fees Act. Therefore, at that point in time, we set the fee in consultation with the United States and determined what we thought would be an appropriate fee level.
Now, given the existence of the User Fees Act, in the absence of this amendment, if we were to seek a fee increase, we would be required to follow all of the procedures as identified in the User Fees Act. That includes a series of extensive consultations with Canadian citizens, setting up performance measures, tabling this information in Parliament, going through that entire process and ending with the process for the regulatory amendment, which would signal and implement that new fee.
Senator Runciman: I hope the other witnesses are not feeling neglected, but my questions are for Ms. Wiebe as well. They do not necessarily have to do with the bill before us. With respect to NEXUS, the area in which I live has two international border crossings. How many Canadians hold NEXUS cards?
Ms. Wiebe: Of the 460,000 people holding Nexus cards, approximately two thirds are Canadian residents.
Senator Runciman: It has not been as big a seller in the United States?
Ms. Wiebe: Not yet, but the United States is moving forward with its parallel program to our CANPASS. They have implemented what they call Global Entry, their domestic trusted traveller program. I understand it has been quite successful.
Senator Runciman: What is happening in land-based crossings with respect to NEXUS lanes? I know the Thousand Islands bridge and the Ogdensburg bridge do not have such a thing. However, I have heard there are NEXUS lanes so that we can expedite traffic through these crossings.
Ms. Wiebe: That is correct. As I mentioned, there are 18 land border crossings where we have dedicated NEXUS lanes. Therefore, I, as a NEXUS member, driving my car, can go to that lane. In an ideal scenario, that lane will be shorter, and I will be able to go through the land border crossing more quickly.
Senator Runciman: What is your actual experience?
Ms. Wiebe: I have not gone through a land border crossing. I travel much more by air. As I mentioned, the survey, which was primarily with land border users, shows the level of satisfaction is significant. It is over 95 per cent. As I mentioned, the majority of the respondents to that survey found they were saving an average of 30 minutes every time they crossed a land border.
Senator Runciman: I have one final question about the iris scans and fingerprints. There was talk a couple of years ago — and I am not sure if this is happening any place else in Canada — about the Windsor border crossing operating a joint facility with the U.S. and Canada. However, I heard that was stopped because of Canada's concern about fingerprinting and the privacy issue. However, if you are using a NEXUS card, you have to give both fingerprints and an iris scan. Where does that stand in terms of joint facilities, which make a lot of sense in many areas?
Ms. Wiebe: We are continuing to engage the United States in a wide series of discussions to try to make our border more efficient. The main difference between an issue such as joint facilities and NEXUS is that NEXUS is a voluntary program. As I was mentioning, you choose to give that information. You choose to give those biometrics. It creates a scenario whereby it is voluntary. However, if you go to a joint facilities approach, then it is no longer voluntary. If you want to cross at that border crossing, then you must be subject to whatever requirements are set up at that crossing. It is a different context.
Senator Runciman: Does Canada's privacy concern continue to be the major stumbling block with respect to joint facilities?
Ms. Wiebe: I would not speak in detail to that issue, but I can tell that you that we are continuing to explore options with the United States on issues such as joint facilities at the land border.
Senator Dickson: I will give Ms. Wiebe a break and direct this particular question to Ms. Kerr. I am interested in the veteran's charter and changes to the veteran's charter that would be helpful to veterans. My question relates to the Canada Disability Savings Act. Will that be advantageous or disadvantageous to veterans? If advantageous, please give me some comments or submit the answer to the chair.
Ms. Kerr: The plan is designed to help people with severe and prolonged disabilities and their families to save for the future. It is a long-term disability savings program. As for its benefit to veterans, we have not done any extensive analysis at this point. We could look into it further and provide you with additional information.
However, the plan was designed for long-term savings, so 10 or 20 years out, with the idea being that people would save until the age of 60. At that point, they have to start pulling out some of the money they have put into the plan. It is more for the long-term.
Senator Dickson: Many veterans have long-term disabilities, as you are aware. I will look forward to receiving the answer.
Are there NEXUS lanes and all the facilities that are required to use all these programs you are talking about at the Robert L. Stanfield International Airport in Halifax?
Ms. Wiebe: Yes, there are. In fact, there is a NEXUS kiosk for entry in Canada and also a NEXUS kiosk to go through the U.S. pre-clearance area in Halifax.
Senator Peterson: Is Canada an issuing country for the NEXUS card?
Ms. Wiebe: When a determination is made that someone has been approved by NEXUS, both governments issue the card. It is a joint decision to issue the card.
Senator Peterson: On the card I have, the issuing country is the U.S.A.
Ms. Wiebe: The actual printing company that prints the card is located in the United States.
Senator Callbeck: The RDSP became available in 2008, I believe. Do you know how many savings plans have been opened, and is it becoming more popular every year?
Ms. Kerr: Yes. The take-up since we introduced it to Canadians in December 2008 until September 2010 has been 36,347 accounts, which amounts to over $122 million in grants and over $53 million in bonds. With respect to the take-up, we have seen a steady and progressive take-up. We see many individuals registering for the savings plans, and it increases significantly every year.
The Deputy Chair: Thank you, witnesses.
Members of the committee, we have eight minutes. Perhaps we can run five minutes longer, at most. If you do not feel that is adequate, we will ask the witnesses to come back to conclude.
To discuss Parts 7, 8 and 9, from the Department of Finance Canada, we have Mr. Tom McGirr, Chief, Equalization and Policy Development, Federal-Provincial Relations and Social Policy Branch; and Ms. Lynn Hemmings, Senior Chief, Payments, Financial Sector Policy Branch. We also have Mr. John W. Grace, Specialist, Pension Policy, Office of the Superintendent of Financial Institutions Canada.
Tom McGirr, Chief, Equalization and Policy Development, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: The provisions set out in Part 7 of the bill amend Part II of the Federal-Provincial Fiscal Arrangements Act, which deals with fiscal stabilization payments to provinces. The stabilization program was created in 1967 to protect provincial governments from sharp, year-over-year declines in their own source in equalization revenues resulting from extraordinary economic downturns. To receive a payment, provinces are required to file a claim. Based on the claim, the Minister of Finance is responsible for making the determination of the payment.
As you are aware, the first budget implementation bill, Bill C-9, the Jobs and Economic Growth Act, provided one-time transfer protection payments to certain provinces to ensure that their total major transfers in 2010-11 are no lower than they were in 2009-10. The amendments in Part 7 of Bill C-47 are required to integrate the 2010-11 transfer protection payments into the stabilization program to avoid stabilization compensation in 2011-12 for the very same declines that led to the original transfer protection.
Other changes are also being made to update legislative references and to make the program more transparent by aligning the existing provisions with other transfers. These other changes do not embody any change in policy.
Lynn Hemmings, Senior Chief, Payments, Financial Sector Policy Branch, Department of Finance Canada: With respect to Part 8, the bill proposes amendments to the Office of the Superintendent of Financial Institutions Act to put in effect a policy announced by the government in October 2009. The proposed amendments harmonize the assessment of costs associated with the administration of the Pension Benefits Standards Act, 1985, with the regime in place for the assessment of costs associated with the administration of legislation governing federally regulated financial institutions.
The proposed amendments allow the superintendent to remit assessments, interim assessments or penalties and to write off certain debts owed to the Office of the Superintendent of Financial Institutions. To provide greater clarification, the superintendent could decide, in exceptional cases, to remit or forgive an assessment where, for example, proceeding to collect the debt against a pension plan that has terminated in an underfunded position would impose hardship on plan members. The superintendent could also choose to writeoff a debt where it would not be cost-effective to pursue further efforts to collect it. In brief, that is Part 8.
Senator Ringuette: On the shared cost for the Office of the Superintendent of Financial Institutions, if I am wrong, please advise me, but you have two different entities: One is really to look into the pension plans, and the other is in regard to financial institutions.
The unit that would be supervising the pension fund would be receiving supervisory fees, I guess, from the pension fund only and would not take fees from the financial institutions. Am I right? There are two different streams of income for your office.
Ms. Hemmings: I am not from the office; I am from the Department of Finance. However, I would turn to Mr. Grace, who is from the office, to respond to that question.
John W. Grace, Specialist, Pension Policy, Private Pension Plans Division, Office of the Superintendent of Financial Institutions Canada: As you said, the Office of the Superintendent of Financial Institutions oversees banks, insurance companies and financial institutions as well as pensions. The operations and the activities happen in different divisions, different parts of the office. The costs associated with the different activities, as you say, related to different kinds of institutions, are then assessed against those institutions. I work in the pension area, and the costs associated with supervising pensions are charged back to pension plans.
There would be, of course, some overhead that has to be apportioned, but generally, the costs associated with the supervisory activity are considered with respect to the particular type of institution or pension plan, and fees are assessed.
Senator Ringuette: You mentioned earlier that this legislation will provide for the superintendent to waive, if need be, fees to a certain pension fund, if a company is going bankrupt, for instance. Form where else will that operating fee be taken? The costs of your operation will not be lowered because one company is going bankrupt and the pension fund does not have the financial means to pay its fees to you. How will you recover the cost?
Mr. Grace: As you say, the costs would still be specific to the area, the type of institution regulated, and the fees would have to cover the costs. Therefore, if the costs are not recovered from one pension plan, they will have to come from other pension plans.
This remittance or forgiveness is not something we would anticipate using frequently. However, there may be circumstances where there is really not an expectation that the fees would be recovered, or there may be situations where it is not in the best interests of members to recover those fees, so authority is being given with this amendment to remit fees in those instances.
Senator Callbeck: Thank you for your explanations. Part 7, amendments to the Federal-Provincial Fiscal Arrangements Act, clarifies the conditions under which transfers would be made. Is that what this is doing?
Mr. McGirr: The main purpose of it is to integrate the total transfer protection payments that are being made in 2010-11 into the stabilization program. At the same time, the previous provisions of the stabilization legislation were pointing to previous editions of the act. If there is a reference to the Canadian Health and Social Transfer, CHST, for example, that no longer exists because it has been split to the Canadian Health Transfer, CHT, and the Canadian Social Transfer, CST; so we are using this opportunity to clarify the legislation and bring it into line with existing provisions.
Senator Callbeck: Under this legislation, the province makes the claim.
Mr. McGirr: That is correct.
Senator Callbeck: Does the Minister of Finance have much leeway as to whether or not the province will receive the money?
Mr. McGirr: The Minister of Finance must, of course, abide by the provisions that are set out in the stabilization legislation in terms of assessing a claim. There are provisions that stipulate how you compare the revenues from one year to the other, in that you are supposed to abstract away from policy changes.
The Deputy Chair: Thank you, witnesses. Thank you, committee. We have gone through a tremendous amount of material today.
On behalf of the Finance Committee of the Senate, it is my great pleasure to express our appreciation to all witnesses who appeared today.
(The committee adjourned.)