Proceedings of the Standing Senate Committee on
National Finance
Issue 14 - Evidence - June 10, 2014 - morning
OTTAWA, Tuesday, June 10, 2014
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the subject matter of Bill C- 31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning we continue our study on the subject matter of Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
[English]
As honourable senators are aware, five other committees besides our committee looked into the subject matter of Bill C-31. These committees have all reported their findings to the Senate. We have heard from the chairs and deputy chairs of the Senate Standing Committee on Legal and Constitutional Affairs, the Senate Standing Committee on National Security and Defence, and the Senate Standing Committee on Social Affairs, Science and Technology.
This morning, we will hear from the chair and deputy chair of the Senate Standing Committee on Banking, Trade and Commerce. We are very pleased to welcome our colleagues, Senator Gerstein, Chair of the Banking Committee, and Senator Hervieux-Payette, Deputy Chair of the Banking Committee. They will discuss the subject matter of those elements in Parts 2, 3 and 4, and Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24 and 25 of Part 6.
I would ask the honourable senators to give us an overview of what they studied, found and are now recommending to our committee, since our committee will be required to report. They will have to put another hat on and come back for clause-by-clause consideration on all of these. We have the report of the Banking Committee; and I ask Senator Gerstein to begin the discussion.
Hon. Irving Gerstein, Chair, Standing Senate Committee on Banking, Trade and Commerce, as an individual: Thank you, Mr. Chair. It is a pleasure to be here with the deputy chair before the committee.
As you mentioned, Banking was referred three parts, being Parts 2, 3 and 4 of the BIA, as well as 10 divisions of Part 6. The committee held five hearings. We heard from the Minister of Finance, government officials and a number of outside witnesses. I propose to give an overview of the intended legislative changes, as well as some of the views expressed by both witnesses and committee members.
I'm sure it will come as no surprise to you that certain sections generated relatively little discussion and others delivered substantially more. I propose to focus first on those parts and sections that did not generate much discussion before turning to the two sections that did, namely Part 6, Division 14, which contains proposed amendments to the Insurance Act; and Part 6, Division 25, which proposes to amend the Trademarks Act.
Starting with Part 2, amendments to the Excise Tax Act, the bill proposes changes regarding the administration of GST and HST and information-sharing. It removes specifically the GST and HST on the service to design a training plan to deal with managing a mental disability; health services such as acupuncture and naturopathic services; electronic eyewear; transactions between closely related corporate persons, for example, between holding companies and subsidiaries; and, of particular interest to many, hospital parking for both patients and visitors. It also allows the minister to register a person for GST/HST collection and allows Canada Revenue Agency to share information with police if it feels a crime is being committed.
Moving to Part 3, amendments to the Excise Tax Act and other acts. Regarding the Excise Tax Act, the changes affect how taxes on tobacco are calculated, increasing the excise duty in relation to inflation, which has not been adjusted since the year 2002. It also eliminates the preferential treatment on duty-free cigarettes, which is very much supported by the Canadian Cancer Society, the Heart and Stroke Foundation and the Canadian Medical Association, all of whom appeared before us. An issue was raised that increased excise duties might lead to an increase in contraband, but the department officials stated that it did not expect it to have a large impact.
Part 3 also proposes to amend other acts, allowing CRA to give feedback to the Financial Transactions and Reports Analysis Centre, which is Canada's financial intelligence unit, regarding the usefulness of information FINTRAC provides. It extends the reporting of electronic fund transfers over $10,000 to allow CRA to also receive that information rather than just FINTRAC.
Moving to Part 4, amendments to the Customs Tariff will effectively make permanent an ongoing temporary exemption on mobile offshore drilling units, which was first established in 2004. In other words, it was continual; they repeated it year after year, and now it has become permanent. It is very much supported, I must say, by the Canadian Association of Petroleum Producers, who was both supportive and very pleased with the change inasmuch as it allowed them to do their forward planning more effectively.
Part 6, Division 2 related to amendments to the Bank of Canada Act and the Canada Deposit Insurance Corporation Act, and it authorized the Bank of Canada to provide banking services to CDIC rather than the chartered banks.
Part 6, Division 3 was amendments to the Hazardous Products Act. This implements the globally harmonized system of classification and labelling, and brings us in line with most of our trading partners, particularly the EU and the U.S.
I would be neglectful if I did not draw to the committee's attention the very strong views indicated by Senator Campbell, who asked whether the food sector could be overregulated by these changes. In particular, Senator Campbell seemed particularly concerned about the example used of flour being explosive, since — and I'm quoting him directly — "if you grind anything fine enough, toss in a spark, it will explode." He wondered if it was a concern why it was not included under the workplace safety act as opposed to labelling hazardous products, which — and again I quote Senator Campbell — "makes no sense."
Officials, however, emphasized that all sectors would be consulted and that regulations were not about banning certain substances, such as flour, but about proper labelling and storage.
Part 6 was probably the least controversial of all. Division 4 was an amendment to the Importation of Intoxicating Liquors Act. It removes the federal restriction on importing beer and spirits from one province to another, and this is the last remnant of prohibition days in federal legislation. This follows up on Dan Albas's Bill C-311 from last session, which removed the federal restriction on wine. Again, I emphasize no one was opposed and there were no comments.
Part 6, Division 8, amendments to the Customs Act, extends the appeal of seizure deadline from 30 to 90 days; allows appeals to be filed directly with the minister, as opposed to line officers; and allows appeals to be filed electronically. It is meant to efficiently handle any questions relating to error and to avoid the appeal process for administrative oversights.
Part 6, Division 13, amendments to the Bank Act, deals with the regulation-making powers regarding derivatives and benchmarks. Although not specifically asked for by the Canadian Bankers Association, they were very much supportive.
Part 6, Division 19 amends the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This was very important to members of the Banking Committee. As you may recall, the Banking Committee undertook a major review of Canada's anti-money laundering and anti-terrorist finance regime, tabling its report last year in March. That report resulted in 18 policy recommendations to government.
The amendments contained in Bill C-31 reflect much of our report — if not an exact wording, at least I would use the word "thematically" — by capturing more at-risk sectors within the list of reporting entities, increased information-sharing within the regime, increased accountability of the regime, and more of a focus on risk-based approaches to combat money laundering and terrorist financing.
The amendments extend the list and types of reporting entities to include virtual casinos, foreign money service bureaus and virtual currency exchanges; strengthen customer identification and due diligence using a risk-based approach; streamline compliance and monitoring; strengthen information-sharing amongst regime partners; and strengthen the government's ability to deal with high-risk states and entities.
I would like to particularly draw the committee's attention to the testimony of Mr. David Murchison, Director, Financial Sector, Department of Finance Canada, who said, and I quote, "We have closely taken your report" — he's referring to the Banking Committee report of last year — "and I have to say it challenged us in a number of areas, and these amendments benefit from the work that you have done."
Officials further added that some of the committee's other recommendations would appear in forthcoming regulation, as opposed to the legislation now before us.
On balance, the Banking Committee was pleased that the efforts being made are at least in part a response to the review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and we look forward to seeing more positive amendments in the future.
Part 6, Division 22 is amendments to the Softwood Lumber Products Export Charge Act. This clarifies how payments to the provinces are to be determined. Currently, the federal government collects and remits payments due to the provinces, minus any costs incurred by the federal government. The federal government, of course, handles these matters because of the agreement on softwood lumber is between Canada and the United States or, in other words, between Ottawa and Washington. These changes would allow federal costs to be carried forward and recovered in the future when a payment is to be made to a province.
Part 6, Division 24 is amendments to the Protection of Residential Mortgage or Hypothecary Insurance Act and the National Housing Act and allows regulations to be made prohibiting the use of government-insured mortgages as collateral in securitization vehicles not sponsored by CMHC. This will apply to existing as well as new mortgages.
I would now like to focus on the two items that stimulated more than a little debate at committee.
The first is Part 6, Division 14, which contains amendments to the Insurance Companies Act. In effect, this part expands the Governor-in-Council's and affects the minister's authority to make regulations in respect of the demutualization of federal property and casualty insurance companies, including the process preceding a special meeting of eligible policyholders, the limitation on the ownership of shares of a converted company and the involvement of a court in a demutualization process. It does not allow P & C companies to demutualize immediately upon the passage of this bill.
Appearing at committee on May 1, the Minister of Finance indicated that the government is currently preparing draft regulations, and Finance officials emphasized that passage of the legislation is necessary to allow the government to publish those draft regulations and to engage in consultation with the industry.
Let me begin by saying that no one, witnesses or otherwise, questioned the right of a mutual company to demutualize. The issue that generated the debate was what to do with any surplus held by the mutual company that wished to demutualize.
As an example, Economical Insurance, based in Waterloo, Ontario, one of the largest mutual insurance companies in Canada, has a surplus estimated at approximately $1.6 billion. Presently, the company has 943 mutual policyholders, many of whom have ties to the company, such as employees or insurance brokers who sell for Economical, compared to the roughly 800,000 regular policyholders. Some groups fear that the surplus might only get distributed amongst the mutual policyholders.
Some witnesses, such as the Co-operators group and the Canadian Association of Mutual Insurance Companies, felt that surpluses are communal property and, as such, should be treated by reinvesting that money in either the mutual industry as a whole, such as promoting the establishment of new mutual companies, or in the community by way of grants or charitable gifts.
In addition, Economical Insurance, who first announced their intent to demutualize in 2010, stated that it is their understanding that the regulations will require a larger sharing of surplus than just amongst the mutual policyholders.
Senator Bellemare, in her well-prepared speech delivered last Tuesday in the Senate, shared her personal concerns about the distribution of the surplus and her preference to deal with the issue in legislation rather than regulation. But I, again, refer to the testimony of the minister who said, "The government will develop a framework and initiate stakeholder consultations." This was followed by officials who committed to provide, "a transparent and orderly demutualization process . . . that . . . should provide for fair and equitable outcomes . . ."
Colleagues, rest assured the Banking Committee will be keeping an eye on this to ensure that this is so.
The second section that generated debate was Part 6, Division 25, which amends the Trade-marks Act. This relates to three treaties the government seeks to ratify — the Madrid protocol, the Singapore treaty and the Nice agreement, certainly beautiful places, I suspect, to visit as well. The key issue is the elimination of the declaration of use form.
The majority of testimony received in person and in writing reflected a fear that the elimination of the declaration of use form would fundamentally alter the principle of use-based trademarks in Canada. Others expressed that simple registration, without any declaration of intended use, would lead to increased "trolling," where someone registers a trademark not intending to use it but with the goal of selling it at an inflated price to someone who will actually use it sometime in the future.
In a written response following the strong testimony against the amendments, officials from the Department of Industry clarified that the elimination of the declaration of use form is administrative in nature only and is meant to reduce the burdens and costs in registering a trademark and should not affect in any way the principle of use-based trademarks. They added that the existing form has no requirement to be verified by anyone and can simply be attested to by a lawyer, resulting in extra costs, and that often the courts pay little or no attention to the declaration form but rather the actual usage of the trademark.
Senators were unanimous in their desire to see the continuation of the principle of use-based trademarks. Senator Massicotte stated in committee that the issue is a very complex one and that, while the government should be aware of the issue, there was no reason to delay the legislation.
I would add that given the prompt follow-up from the department officials regarding the elimination of the declaration of use form, I am certain that the government has been following the deliberations of the committee and are well aware of the issue.
That concludes my remarks, Mr. Chair, and it will be a pleasure to turn the floor over to the deputy chair, Senator Hervieux-Payette.
[Translation]
Hon. Céline Hervieux-Payette, P.C., Deputy Chair, Standing Senate Committee on Banking, Trade and Commerce, as an individual: A number of you are certainly aware of the various speeches given on these controversial topics by members of our committee.
I would still like to add a comment about money laundering in the light of our report. One matter remained pending, the matter of real time, and this concerns one of our members. When an illegal act is suspected, up to 30 days can go by before any action can be taken.
As everything is done electronically, the member in question and I are of the same opinion that there would be more success, right at the very second the money is transferred, if the Canada Revenue Agency had the systems — and computer systems to trace back those suspect transactions can surely be put in place.
Those who have read the report are well aware that, currently, we are talking about an amount of $100 billion to $170 billion that has been laundered and that less than $50 million has been recovered in the last five years. So the system is not working. I am not saying that the proposal in the bill does not work, but, according to the recommendations of the committee, the requirement for real-time operation is absolutely essential. Second, better coordination between the various players is required, and a number of government players are involved. So, yes, we are happy, as my chair says, but happy in moderation, in my view and the view of my colleagues. I feel that we could go further to put controls into place.
As for Senator Bellemare's remarks, where we see eye to eye the most is in the matter of demutualization. I have to point out to you that the way of settling this matter fairly and equitably concerns us because the minister has not equipped himself with any specific powers. Perhaps the scope can be very broad in common law, but I do not believe that, in our hybrid system — a marriage of the civil code and common law — that would be accepted. There will be a court challenge because we are talking about more than $1 billion. So we are getting into millions of dollars in legal fees and several decades of delay. That will hurt all the policy holders.
There is a reason why they have accumulated such a large surplus: the company has been in existence for more than 100 years and has put an enormous amount of time into building up those reserves. Let us make an assumption. The company insures farmers mainly, because normal insurance companies were not available to insure farmers, who therefore equipped themselves with the means to protect themselves against perils. The problem is that, if an incredible drought or devastating floods were to occur and extraordinary amounts of compensation had to be paid out by the insurance companies — they insured their harvests against those perils — thousands of farmers could be in difficulty and the government would have to intervene. We have received no assurances at all from Economical Mutual, not even any information on the way the surplus is going to be distributed. We have simply been offered words of reassurance, but no actions that reassure us. I believe that we could have been reassured as to the means, but we have received no assurance about whether the 943 people in privileged positions could be sharing the jackpot.
I have personally worked in insurance and I am all the more concerned because this sector might actually need to have more reserves set aside. Private companies that are not cooperatives have not come into the market and it must be because the risk is higher. I think the protection should be kept; right now, I am sure of that and I will not be voting in favour of that division for the simple reason that it is ultra vires.
As for the division on trademarks, I have dealt with trademarks in my professional life. Like my colleagues, I have taken the time to read all the correspondence. I would like to point out two things; we heard about consultations, but no consultations were held on the new measures that have been passed. In other words, the entire private sector was informed of these measures, but has never heard discussions about them, has never discussed them with the Department of Finance. They were just dumped on them when the budget was announced.
After we did the research and read the government's documents, we assumed — even though we had no definite confirmation — that this had to do with the Canada-Europe free trade agreement. We know that the U.S. combines all the agreements that it promises to honour, but it has kept the registration measure to make sure, at the same time, that it keeps the use of trademarks. The Americans therefore have a hybrid system when they sign agreements.
One of the most important things that I was able to remember is their wish to enter into international agreements. That does not apply to our Canadian industry. Only large corporations will try to register their trademarks in 130 countries. There are costs associated with doing so and they are very high.
If small and medium-sized businesses develop a Canadian market, for instance, and their product is accessible in France, they will only take one step, so that they are protected in France. They will not sign all those agreements.
I am not at all opposed to signing agreements and although our officials have insisted on assuring us that these are just administrative measures, I do not think that all the representatives from all areas of the private sector have come to tell us stories. They are on the front lines. The costs with which they are threatened concern them a great deal. These are companies operating in all sectors.
As a result, if we impose a measure on all sectors that, at the end of the day, will have a negative impact on them, I do not understand why, based on the budget, the government would continue to ignore the method that was working, which is registering trademarks and commit to using it. For all intents and purposes, I do not think we would have any problems with our trading partners. We would keep our promise and sign the agreements, but, at the same time, we could keep our method.
In this context, there is also a legal problem for the countries that use common law and those that use civil law. Europe mainly uses civil law, and precisely because of our Canadian legal structure, we can manage to address major issues, in the same way as we deal with provincial-federal jurisdictions.
To sum up, I think Senator Bellemare simply suggested that some clauses be dropped, if I may say so, or that the issue be at least examined. As a result, in this case, I think the government has not done all it could with this amendment, which, for all intents and purposes, will not be in the best interests of Canadian businesses.
The Chair: Thank you very much. It seems that there are a few measures that we have to discuss. I will start with Senator Bellemare.
Senator Bellemare: I have a few questions and clarifications related to Senator Hervieux-Payette's remarks. I will ask all the questions and you can answer them in any order you like.
You said that Division 14 is ultra vires. Could you elaborate on that?
Now, as for Division 25, I might start by saying what my thoughts are on that. The reason why I strongly focused on this division in the Senate is that we did a pre-study on this bill, which is at third reading in the other place. So Minister Moore and Minister Oliver still have time to do something.
The government stated that it does not want to deal with administrative measures, but these measures are administrative. If they do not want to withdraw the clauses from this division, which deal with sections 16, 30 and 40 of the Trade-marks Act, they could at least make an official announcement that they will hold discussions with those opposed to making adjustments. In fact, the people who appeared before you are asking for adjustments to the procedure to ensure that the declaration of use, which is supposed to remain in our bill, be recognized as such. At any rate, if this whole thing is an administrative matter, I think there is a way to organize ourselves to reassure everyone. That was my vision when I sounded the alarm on the issue.
You seem to be saying that there is a connection between Division 25 and the signing of the agreement with Europe. However, the department clearly says that there is no connection between the signing of the Canada-Europe agreement and the Trade-marks Act.
There is no connection, but I would like to know why you said that.
Senator Hervieux-Payette: I will answer your first question about the ultra vires. The powers that the minister would give himself must be specified in the legislation. You cannot make regulations if you cannot attach them to provisions in the legislation. Since they are not in the legislation, there is a legal gap. I said "ultra vires," but it might just be a legal gap, which is just as important. I may have not used the correct term, but the minister must act according to the powers that are clearly set out in his legislation.
As for Division 25, "Administrative measures," since I have been on the Standing Joint Committee on Scrutiny of Regulations for more than 10 years, the regulations must also be connected to a bill. Since it does not say in the legislation that agreements will be signed while keeping the current system — I mean, even though we may have negotiated ad nauseam with the private sector, we cannot go beyond what the legislation states. In this case, the legislation is silent on the issue of keeping the declaration of use and the registration.
I think it is important for this to remain in the legislation. It protects our businesses and any trademarks that they develop.
My colleague was talking earlier about registering names and then creating a business. I think that is not at all the objective of a trademark registry. There is of course a cost to maintaining trademarks, and also ways to have access to them. It is extremely complex, especially for small and medium enterprises. We know that new products, innovation, need new trademarks. This concerns me.
You also asked me why I alluded to legal problems. I got my information in the government report on the free trade negotiations, where this is referred to in a specific way. It is not because I sit on the Finance Committee and on the Banking Committee that I do not read other official government documents. In that document, you can see that trademarks are included in the Canada-Europe accord negotiations.
I therefore concluded that if we amended the act, this would be directly related to that issue, because nothing else has changed with regard to trademarks.
I can understand that there is a rationale. You should know that one of the treaties has been in force for 20 years and we have not signed on to it; we could have, that would not have hurt. What is important at this time is that we preserve the system that protects our enterprises. In my opinion that is essential to ensure the viability of our businesses and of innovation.
Have I answered your questions?
Senator Bellemare: Yes.
[English]
The Chair: Senator Gerstein, do you have anything to add on those points?
Senator Gerstein: I do not. It was very well described.
The Chair: Senator Callbeck from Prince Edward Island is next.
Senator Callbeck: Thank you, Mr. Chair, and thank you for being here this morning. This is a very complicated issue, but I want to particularly zero in on Part 6, Division 14, because in my province we have the PEI Mutual Insurance Company. Now this was founded roughly 130 years ago, and it was founded mainly by four farmers in rural areas because they couldn't get insurance elsewhere, or if they did the premiums were sky high.
So, it's extremely important and they have a lot of policyholders in my province. Not only does it provide insurance, but it has a big presence in the community. It's out there giving money to all kinds of causes and, as well, it provides employment.
Of course, they would prefer that there's no legislation at all regarding the demutualization.
If the government insists, they really feel that a separate bill would be the way to go, because then you could really get into the nitty-gritty, rather than having to throw it into an omnibus bill with everything else in it.
But if this bill has to be amended, they have expressed concerns. The PEI Mutual Insurance Company was before the other place and they had a brief. The Canadian Association of Mutual Insurance Companies was before the Senate.
Basically you've covered off or mentioned their concerns on page 16, that if rules have to be established they must have super majority quorum approval thresholds. They feel the surplus is a common good — that surplus has been built up over years and years and years — and that it should remain in the mutual and insurance system, and that the issues regarding this should be resolved by elected officials and not by the courts.
I think that these are pretty fair requests, and I certainly agree with the concerns that they have expressed because I know how important the PEI Mutual Insurance Company is to our province. It's a section that I'm not going to be able to vote for.
On page 16, you talk about public consultations held in 2011 with the Department of Finance, they held them on this very issue. Do you know how extensive they were and what were the results?
Senator Gerstein: I can't respond to what they were in the past. Senator Hervieux-Payette, are you familiar with it?
Senator Hervieux-Payette: On the consultation, Senator Callbeck, I don't think we have heard that any extensive consultation was conducted prior to the changes. Also we have to know that we are dealing with one case and, normally when we pass a bill, it's supposed to apply to every other mutual. It would not just be for one, so that's why we want to have the framework clarified.
The conditions you're talking about should have been in the law. Like you say, for the super majority, it should be one of the conditions and there should be several conditions that allow them to take into account the fact that the surplus is a common good and how you distribute that. That's where the war will start, and that's why this section — the minister says "I will regulate," but he has no power to regulate because it's not in the bill. That's where I have some big concerns.
Senator Callbeck: I agree with you.
Was there any discussion in your committee about taking this out and putting it in a separate bill?
Senator Gerstein: I think that's for discussion of the Finance Committee, not for the Banking Committee. The Banking Committee really had the responsibility of reflecting testimony, much of what you have described yourself, to this committee, but I suspect the issue that you are raising about how it should be handled is something that will be dealt with by the Finance Committee.
Senator Callbeck: But did you have many witnesses that testified at your committee that brought this up?
Senator Hervieux-Payette: Can I answer that? Yes, we had many, but you have to understand, when we did prepare the report — some committees have made suggestions, recommendations and so on — it was agreed that we would report just on what we heard, not on our suggestions. What you are now suggesting is that we would have recommended removal, but there are zero recommendations in our report. We just took the facts of what we heard, and we had a pretty extensive list of witnesses on this subject matter. I would say the least — I would say for my own purpose — credible was the president of Economical who did not give us a real clear indication where she was going to go.
Senator Callbeck: Okay, thank you.
The Chair: Thank you. I'm looking at page 16. This is Part 14, demutualization. If I went back to the transcripts of your hearings, would I be able to find out what this public consultation that was held in 2011 comprised in relation to a proposed framework for demutualization?
Senator Gerstein: Chair, I don't recall extensive, if any, discussion about the consultation in 2011. Senator Hervieux- Payette?
Senator Hervieux-Payette: No, no.
Senator Gerstein: I don't believe it was raised.
Senator Hervieux-Payette: We heard there would be consultation for the regulations, but these consultations, of course, will be in the future.
Actually, the 2011, on this particular issue, I don't remember or recall.
The Chair: Well, it says "a proposed framework," whereas up earlier on at that page, at the top, it states: "the minister indicated the federal government is in the process of drafting a framework for demutualization and will be holding consultations." So, that's in the future.
Senator Hervieux-Payette: Yes.
The Chair: When Senator Gerstein gave his presentation, that's what I understood. The minister said, "Pass the legislation, we'll give some draft regulations and then we can have a discussion at that stage." That seems to me to be the essence of concern here. Do you have the discussion before you have the legislation or do you have the discussion after you have the legislation?
Tied into all of this is that this particular legislation comes in a budget bill, which means that there can't be any disclosure of what's coming until the bill comes out. Therefore, we have the problem of this kind of thing in a budget bill that prevents discussions with the industry and the stakeholders before it happens.
Senator Gerstein: My understanding of the 2011 consultations was they were consultations, but, to my knowledge, there was not a paper tabled or regulations tabled at that point. It's also my understanding that in order for the minister to table regulations, which he is required to do under the Insurance Companies Act, if there is demutualization to take place, he must have the ability to move forward through this bill. He can't table them without it. He can't have the regulations tabled.
The Chair: He can't have regulations without the bill. No, I understand that. The bill is priority and the regulations flow from it.
Senator Gerstein: Yes.
[Translation]
Senator Bellemare: What I wanted to say was that when there is a demutualization request, the law provides that the government must make regulations. So, Bill C-31 gives the Minister of Finance the power to regulate, except for the fact that the law states clearly that the regulations must govern property rights.
I will quote the wording of the act in English and in French; that way, things will be clearer.
[English]
Governing the ownership of shares issued by a mutual company that has been converted into a company with common shares, including limiting the circumstances in which the minister may give approval under subsection.
[Translation]
In French, the provision is the following:
Régir la propriété des actions d'une société mutuelle transformée en société avec actions ordinaires, notamment limiter les circonstances dans lesquelles le ministre peut donner l'agrément visé au paragraphe [...]
The subsection in question is subsection 211(2). And in the previous paragraph, it says "respecting the process that precedes the calling of a special meeting [...]". So, the government must make regulations, but regarding property rights we are not aware of, which may pose a problem.
Consultations were held during the summer in 2011. I consulted some of the briefs that were submitted at the time, in particular those from Quebec. Some Quebec institutions submitted briefs and their position was unanimous; their view was that the surplus generated by cooperatives or mutual companies was a common good.
Quebec brought in legislation in that regard. Thus, Quebec mutual companies that fall under provincial jurisdiction have nothing to fear, because the precedent that will be created will not apply to Quebec provincial mutual companies. The Quebec law is very clear: the surplus from cooperatives must be transferred to another cooperative, to the Canadian Cooperative Association.
The case once arose for a large mutual company, La Laurentienne, I believe. At a certain point, it demutualized and its surplus was transferred to the Caisse Desjardins. It used the surplus to start up other joint stock companies. But it is always the large mutual fund, which is collective property, that is used. It is comparable to a church that has been built over time. If it must disappear, does it belong to the members of the congregation, or is it a common asset, a place of worship? In short, the government makes regulations and then holds consultations. One gets the impression that there is a type of vacuum, because the Economical company is using the precedent of the life insurance companies. But the issue is different depending on whether you are talking about life insurance or property and casualty insurance. And that is where we are at.
[English]
Senator Mockler: In this bill, two things are happening. The government must take ownership of putting into place a structure for demutualization, because it is a process by which a company governed by its mutual policy holders converts into a share-based company, if that happens.
The process of the legislators or the parliamentarians is to put in this bill — and then the minister says on page 16, to follow up on your comment, Mr. Chair — the minister indicated that the federal government is in the process of drafting a framework for DMU. If that's the case, you cannot have regulations before you have a law. Then regulations will follow the law. The process here is that the minister has said there will be a mechanism in place.
My question is for Senator Gerstein: When do you think with this process that government will consult on such a framework?
Senator Gerstein: After they have published the regulations, they will have the consultations. With the consultations, they will see if the framework they have established bears the transparency, fairness and equity that should be recognized for these mutual companies that have been built up over so many years. If they don't, then they would be proceeding at their peril.
That would be my view.
Senator Hervieux-Payette: I think there is a difference. I don't know how many people have a law degree, but I'm just saying to you that I agree regulations follow the law. What I'm saying is that there is nothing in the law to follow up with regulations. That's why we say we needed to do the consultation to know what should be the guiding principles in the law, so that the distribution will be done in a fair manner and according to the spirit of the co-op movement. Actually, there's nothing in the law that gives any indication, so I don't know to what he is going to attach this regulation.
Even for the regulations, let's say that the law passes. I think he's bound to consult before passing the regulations, because how could you put some regulations without asking the co-op movement what they foresee with the regulations in the future?
In both cases, we need the principles in the law and we should consult. As the chair said a few minutes ago, this part of the bill should have been outside and discussed by the co-op movements, because it applies to every co-op in the country. This would settle the mechanism by which they can demutualize in the future. We cannot have it on a piecemeal basis, and I would say this is a bit inefficient because of Economical not giving us what they want to do and where they are going to go.
For Senator Bellemare, my office sent me some text about the free trade agreement of the government, and it says:
If European companies want to do business in Canada; they need to rely on the protection of their patents, trademarks, designs, copyrights or geographical indications.
The EU negotiated a meaningful chapter on intellectual property with Canada.
I add another quote from the top of a paragraph:
The EU wants to raise the level of protection and enforcement of intellectual property rights for its products in Canada to a comparable level to that of the EU.
I was just saying that they have an agreement with United States, and we could have gone along with the U.S. policy — and they are also a common law country — just to make sure that we don't enter into "legal chaos" in the future. There might be here in this country also some divergence of opinion when the government removes the question. It's not an administrative thing; it's a pillar for the implementation of trademark.
The Chair: I have two points. You've jumped to Division 25.
Senator Hervieux-Payette: No, but I have information here. I wanted this to be on the record.
The Chair: I understand, but just for our record, we have been dealing with Division 14. Now you've moved to 25.
Senator Hervieux-Payette: Okay.
Senator Eaton: Chairman Gerstein, Senator Bellemare brought up an interesting point about how Quebec has regulations in place for provincial mutual and cooperative companies. I wonder what other provinces have that, and I also wonder whether — and this is speculation, and perhaps you can't give me the answer — the federal minister will look how well these provincial regulations are working in each jurisdiction and take from that. Do you have any comment?
Senator Gerstein: I am not aware, Senator Eaton, of what other provinces, if any, have regulations on demutualization, other than the situation in Quebec. It's certainly my understanding that the Department of Finance and the minister are going to be reviewing all situations that exist.
I might also point out that it's my understanding that this will give the power to the minister to, in effect, put in place regulations. The first step is draft regulations, which are going to be published and circulated, and that's what is going to be consulted on. These are not the final regulations. They are creating a framework of draft regulations for which consultations will be held.
The Chair: I hope you're right. Senator Bellemare?
Senator Eaton: I just wanted to follow up with what he said, but that's all right.
[Translation]
Senator Bellemare: I would simply like to add that the provinces do not have demutualization regulations, with the exception of Quebec. It was Mr. Alphonse Desjardins who, around 1910, encouraged the passage of that regulation, because he was very far-sighted. As for the others companies, as the models were getting bigger, no one believed that they would accumulate considerable surpluses, and so there was a legislative void around that.
The Chair: It is very useful to have such well-informed members. Thank you very much.
[English]
I have one other question. If I could go to Division 25, Senator Hervieux-Payette, could you tell us from what you were reading? I didn't know that the free trade agreement had become public yet between Europe and Canada.
Senator Hervieux-Payette: No, this is a document, but I will give it to the clerk. It's an official source.
The Chair: Thank you. It's speculation as to what might be in there or is it actual?
Senator Hervieux-Payette: No, no.
The Chair: Because the agreement has not been made public yet. It has not been negotiated fully.
Senator Hervieux-Payette: It's an official document from the European Commission called The EU's Free Trade Agreement with Canada and its Intellectual Property Rights provisions. I will give you the document.
The Chair: That will be interesting. Thank you for telling us about that. I understand that I cut Senator Eaton off before she'd finished her line of questioning.
Senator Eaton: That was very generous, Mr. Chairman.
The Chair: My apologies.
Senator Eaton: Chairman Gerstein, I always thought it was normal when we have passed other legislation that regulations follow the legislation. Is that not your understanding?
Senator Gerstein: Well, my understanding in this situation is that they cannot publish the regulations without the legislation first.
The Chair: Regarding Division 25 on intellectual property trademark legislation, the Canadian Manufacturers & Exporters; the Canadian Chamber of Commerce; Bereskin and Parr, and I have known Dan Bereskin for many years as a highly respected practitioner in intellectual property; the International Federation of Intellectual Property Attorneys; and the Canadian Bar Association all said that at the very least this division should be dealt with separately so we can have a discussion on it, because it profoundly changes the law in Canada by eliminating the requirement for use before registration. I'd be pleased if you have any comment on that. That's just a matter of record and it's in your report at pages 25 and 26.
One point raised that I find most intriguing was the argument that, without use, the federal government has no jurisdiction under trade and commerce any longer. That's an intriguing argument that I want to think about. Do you have any development of that particular argument? Once a federal government abandons a requirement for use, there is no longer a trade and commerce basis for making any law in relation to trademarks.
Senator Gerstein: Mr. Chair, I would defer to the deputy chair, who is far more knowledgeable than I in this area.
Senator Hervieux-Payette: That's when I talked about —
[Translation]
Senator Hervieux-Payette: That is what I was saying about the legal problem involving civil law and trademarks. According to the way trademarks were administered, this was a matter of provincial jurisdiction which could become a matter of federal interest. As soon as you raise that aspect, you go into to a vague no man's land, because there are so many large enterprises, chambers of commerce and Bars. I have heard that there are 170 Canadian intellectual property specialists. It is a highly specialized field of law.
Intellectual property is a whole, and it is vital to a modern economy. In a country where there were not as many universities, nor people who hold university degrees, and new businesses, the impact would not be the same as in Canada. Here, intellectual property as a whole seems to be in jeopardy. Moreover, the federal government is in danger of losing its jurisdiction. This is what the United States concluded when they kept that commitment, that is to register and impose the duty to use. Without that, there could be an absence of federal jurisdiction in this regard.
This is not necessarily a simple administrative measure, as the officials claim. Sometimes the right hand does not know what the left hand is doing. Those who negotiated the free trade agreement and those who were drafting the budget were not necessarily communicating amongst themselves. This is a situation that can arise within our government just as it does in big companies.
I think we should have been very prudent and sought legal opinions. Even though the United States decided to ratify all of the treaties and agreements, and to keep their system, I think they did so out of concern for the common good. Otherwise, this would have fallen under the jurisdiction of each separate state. And since the country has more than 50 states, this would have created great confusion.
It is in Canada's best interest for this to remain under federal jurisdiction, in order to simplify things for enterprises. If adopting the act leads to all kinds of complications, this will imperil all of the Canadian economy.
[English]
Senator Gerstein: Mr. Chair, I'm not a lawyer, and I know you are, but it is my understanding that despite the elimination of the declaration of use form, a trademark must still be registered with the Canadian Intellectual Property Office. If it comes to a question in court, the trademark holder has to demonstrate use.
The Chair: That has been the case up until now. Now the question is whether that will continue. That is the concern of the industry on this.
You talked about trolls. Companies and individuals, who have no intention of using the mark, will register it and then try to sell it to somebody who wants to use it, like one might have done with lululemon 5 to 10 years ago. It happened to the Blue Jays. I recall when the team was created people were speculating on the name of the ball team. A number of individuals registered various names hoping to cash in and sell the name to the new owners. You may recall that, Senator Gerstein.
The other point made, and I don't know whether you followed up on this, was that the United States has implemented, under their law, all three of those international treaties. It has not been necessary for it to change its fundamental law, which requires use. Why are we doing away with that? Is it purely for administrative reasons? It costs money to process an affidavit of use. It hardly seems to be a good reason for deciding that we're going to fundamentally change the principle of the law in respect of trademarks.
Did you pursue that at all? You reflected it in the report.
Senator Gerstein: We did reflect it in the report, Mr. Chair. As I indicated earlier, the position the committee took was to reflect the testimony heard. Certainly, we heard the testimony you reflected a few moments ago from the various constituents. We did not have testimony on the other side, other than from the department.
The Chair: Okay.
Senator Hervieux-Payette: I remind the committee of when business people started registering their website addresses. There were millions of addresses so they had to establish a system whereby people wouldn't register almost every word of the dictionary, so others would have to buy the names. This is exactly the same philosophy. They had to order it, put it in place and set up an international organization with names. People could not use all these names, keep them indefinitely and be in the market of selling names. This is, in fact, a bit of what are witnessing.
[Translation]
Senator Bellemare: Here is what I heard and what I read in several letters from big companies: pursuant to the provisions of clause 25 of Bill C-31, the enterprise will now have to prove that the person who purchased the trademark is not using it. This is what concerns the business milieu. It seems that the entire legal procedure has been reversed. This will be very costly for businesses. They are always going to have to be on guard, and monitor who has registered what, and provide proof. If we used government registration, everyone would know what is going on. This is a matter of grave concern. When the government states that this is an administrative matter, it is because it does not intend to invest in the registry. All of this generates consequences for businesses, among other things the reversal of the burden of proof for those companies that want to protect a trademark or use one.
Senator Hervieux-Payette: I have the example of a company that I am familiar with. If a company wants to introduce a name in another country, such as the United States, the challenge alone would cost up to $1 million in fees. The cost is very high in this area. Obviously, the rights holders fight. For them, it is the very basis of their company. It is important to keep in mind that it comes before the courts and there are costs involved.
The legal fees involved can be much higher than simply ensuring that people are using the registered trademark. I think there is no comparison; the cost of a legal challenge is astronomical.
The Chair: Other comments?
Senator Rivard: Senator Bellemare spoke about Alphonse Desjardins, among other things. He was a forerunner in 1910. Exactly 100 years later, in 2010, Bill C-32 on tobacco was tabled. I remember quite clearly that, as with any bill, as members of the government, we were asked to adopt it without amendment. It often happens in the House of Commons that this is done quickly and, in the Senate, we have more opportunity to hear from witnesses.
I would like to take two minutes to explain to you what happened with Bill C-32 and what might happen with the budget measure on insurance.
Bill C-32 prohibited any cigarette manufacturer in Canada from using any tobacco other than Canadian tobacco, which we call Virginia tobacco. If the bill had been adopted as is, the impact of this would have been that, in Quebec City, too, the Rothmans company, which was bought by Philip Morris would have very likely shut down. Since that company was part of the Philip Morris group, it could manufacture cigarettes in Quebec City and in Toronto at Macdonald and, for example, in Quebec City — and people did not know this — it could manufacture French cigarettes like Gitanes and Gauloises, as well as American cigarettes like Camel and Marlboro. By prohibiting the use of any tobacco other than Virginia tobacco, it would have likely led to a shutdown, which would have meant the loss of 300 jobs in Quebec, and probably the same thing in Toronto.
How was that resolved? Minister Aglukkaq, who was Minister of Health at the time, appeared before the Social Affairs Committee. This was explained to her, and it was suggested that an exceptional measure be included in the regulations. It would allow cigarettes to be manufactured with tobacco other than Virginia tobacco, but the product could not be sold in Canada.
So, here is my parallel with insurance; we can adopt the budget as is, but we could add a note stating that we would like it to be recorded in the minutes of the House of Commons or the Senate that the minister commits to correcting the bill, in the context of the regulations.
In the case I just mentioned, Minister Aglukkaq did appear in the Senate in June 2010 and told us that she would include an exception and that she would resolve the problem. And it was. Macdonald in Toronto and Rothmans in Quebec continue to manufacture products, but the products are not sold in Canada.
This example shows that we can understand and believe that a minister who commits to using regulations to correct a situation that is discovered later, without blocking the bill, can follow through, and the example of Bill C-32 adopted in June 2010 can happen again.
The Chair: Thank you.
Senator Chaput: After hearing the committee report containing some very interesting points, I am wondering how the committee would like to deal with it.
The Chair: We will study Bill C-31 when it is sent back to our committee.
Senator Chaput: It will be sent back while the bill is being studied?
The Chair: That is right. Probably in a few days.
The only thing that still needs to be done is to study the report of the Standing Senate Committee on Transport and Communications. We will do that this afternoon, at 2:20 p.m., in room 160-S. That is the last report that we need to study. After that, we will have to wait until Bill C-31 is sent back to us.
Thank you.
(The committee adjourned.)