Proceedings of the Standing Senate Committee on Banking, Trade and
Issue 45 - Evidence
OTTAWA, Tuesday, February 16, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at
9:00 a.m. to give consideration to the question and message from the House of
Commons regarding Senate amendments to Bill C-20, to amend the Competition Act
and to make consequential and related amendments to other Acts; and to give
consideration to Bill C-59, to amend the Insurance Companies Act.
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Honourable senators, our first subject this morning is the
consideration of the message from the House of Commons with respect to the
Competition Act, Bill C-20, which contains an amendment to replace the
amendment which the Senate introduced to delete the whistle-blower clause. The
House of Commons has come back with a different whistle-blower clause than that
which was in the original act. Our first witness this morning is the Minister of
Industry, Mr. Manley.
Mr. Manley, please proceed.
Hon. John Manley, Minister of Industry: Honourable senators, I am here this
morning to speak to proposals to address concerns raised by the Senate with
respect to the whistle-blowing provisions that were contained in Bill C-20.
Senators will recall that the aim of Bill C-20 is to improve and consolidate
the Competition Act. Mr. Konrad von Finckenstein, Director of Investigations and
Research for the Competition Bureau, is with me this morning, because some of
the key amendments are intended to equip the Competition Bureau to combat the
degrading crime of misleading telemarketing.
The bill also includes provisions for whistle-blowing intended to protect
employees who provide the Competition Bureau with information regarding
anti-competitive behaviour by their employers. In the course of the Senate's
deliberation of this bill, the whistle-blowing provisions were removed.
The subject of protection for whistle-blowers has been the subject of a number
of legislative proposals over the past several years.
In response to this, the Director of Investigation and Research of the
Competition Bureau asked Mr. Justice Dubin to study the matter and identify
provisions that would be relevant for consideration.
This study and its appendix on whistle-blowing were released on November 18,
1997 and posted on the Web site of the Competition Bureau for the public to
On the initiative of the member of the House of Commons for Ottawa Centre, the
whistle-blowing provisions were introduced into Bill C-20 on May 26, 1998, when
it was under consideration by the House Standing Committee on Industry. The
member for Ottawa Centre proposed these amendments to encourage individuals who
have knowledge of price-fixing arrangements to act in the public interest and
to report them. As the member indicated at that time, the amendments resulted
from consultations which he had conducted with many people throughout Canada.
The Canadian Bar Association raised its concerns about the whistle-blowing
provisions with this committee. One of the concerns was that there had not been
sufficient consultation. We have made use of this time for additional
consultation with the Bar and other groups that have expressed an interest in
As a result, the government is proposing to retain the substance of the
whistle-blowing amendments but we have used this occasion to make modifications
that would respond to the key concerns of the Canadian Bar Association.
The government has proposed an amendment to the whistle-blowing provisions which
will limit their application to conduct that is a criminal offence under the
Act and will not refer to conduct that is merely contrary to the Act.
Sections 66.1 and 66.2 of the act have been reworded to restrict whistle-blowing
provisions to criminal conduct only and will not apply in relation to civil or
reviewable practices such as abuse of dominance or tied selling.
Second, in order to minimize the chilling effect and to de-emphasize the
criminality of the provisions, the original offence-creating subsection is
deleted. This will not affect the criminal nature of the section but will
significantly lower the visibility of the penalty to a maximum penalty of two
years instead of five. An employer who violates the whistle-blowing section
could be charged under section 126 of the Criminal Code, which applies where
another act does not expressly provide a punishment.
The Canadian Bar Association has indicated its support for these provisions as
amended. In a letter to the Competition Bureau, the chair of the competition
law section of the CBA said:
I would confirm on behalf of our section that we are prepared to support the
proposed provisions. While we would have preferred to have an opportunity to be
consulted in regard to this provision, and we are still not persuaded of the
need for it, the proposed revisions do address a number of concerns we
originally expressed in this regard.
On balance, our preference is to have Bill C-20 come into effect, including the
whistle-blower provisions as proposed to be revised, rather than have it not
proceed at all or be significantly further delayed, given that there are a
number of needed changes that will be brought about by Bill C-20 that we
support. With the support of the CBA, the substantive issues have been resolved.
Now is the time to act quickly. We need to provide an appropriate protection for
whistle-blowers to enable the Competition Bureau to obtain the information
needed to properly investigate criminal activity. We need to bring C-20 into
force to provide effective measures against deceptive telemarketers.
With every day that passes, there are new victims of these scams. With your
concurrence of the revisions that are here for your consideration, we can
demonstrate to consumers across Canada that we are listening to their concerns.
I urge that you provide expeditious passage of Bill C-20.
Senator Lynch-Staunton: Mr. Minister, I gather from what you have said that the
bill has now been improved, thanks to this revised amendment you are proposing,
which will certainly receive support. You have given credit to the bar
association for alerting you, as it did the Senate, about certain provisions of
the original amendment, which Senator Oliver picked up on. He convinced the
Senate to unanimously pass his amendment. Now you have come back with a revised
amendment that satisfies your original purpose and the concerns expressed by
the CBA and the Senate. Although a couple of months have passed, we have an
improved bill before us.
Mr. Minister, how can you reconcile that attitude with a press release dated
December 11, headed "Minister Manley Disappointed Over Tory Senators
Scuttling of Bill That's Designed To Project Canadian Consumers,"
particularly as no such thing was done? The Senate unanimously approved the
amendment. I think it did the right thing, since you have come back, picked up
on the Senate's suggestions and concerns, and melded them into yours to make an
amendment we can all support. Why this negative reaction to what turns out to
be something positive?
Mr. Manley: Many good things come out of bad things. We have lost a number of
months when the bureau could have been enforcing the key provisions of this
bill. It is regrettable that we could not have dealt with these changes in
November and December.
Senator Lynch-Staunton: Why did you issue a press release in which you blamed
one political party in the Senate, when we were all together on the amendment
to the Competition Act? In your press release, why did you ask "Whose
public interest are the Tory senators serving?", implying that perhaps we
were not sympathetic to the bill as such? Why were we singled out, when
Liberals, Conservatives and Independents supported Senator Oliver's amendment?
Mr. Manley: Why did the bill sit on the floor of the Senate until the very last
moment in December, when it was no longer possible for us to make the changes,
which you seem to agree are useful changes? We could have had this enacted in
Senator Lynch-Staunton: We are not responsible for the management of government
business in the Senate. I will ask you this question for the last time. If you
have no answer, then that is quite revealing.
Why was one political party in the Senate singled out for delaying the bill,
when all senators agreed that the amendment was valid?
Senator Hervieux-Payette: I disagree. I was, in fact, supporting the government
bill by consensus.
Senator Lynch-Staunton: It was not on division; it was unanimous. In any event,
the question is still there.
Mr. Manley: I am sorry. There is no answer to the question as to why the bill
had to sit for so long.
Senator Lynch-Staunton: That is not the question, Mr. Minister.
Senator Oliver: He cannot understand the question.
Senator Lynch-Staunton: You issued a news release, the heading of which says "Minister
Manley Disappointed Over Tory Senators Scuttling of Bill..." No such thing
happened. Why did you issue such an erroneous press release? Would you be
willing to correct it by issuing a new press release once this bill passes, and
give credit where credit is due, which is to all senators, and not blame one
Mr. Manley: If that is your biggest concern with the bill before us, I guess we
are not in bad shape.
Senator Lynch-Staunton: My concern is with your attitude towards the Senate,
which goes way beyond the bill.
Senator Kenny: I think I understand what has been going on here.
Minister, perhaps you could briefly go through your opening introduction again.
Review the substance briefly for us, please.
Mr. Manley: We have taken a recommendation that came from the House of Commons
standing committee when the bill was reviewed, and we have included
whistle-blowing provisions in the bill. They were not there originally.
Mr. von Finckenstein had contracted with Mr. Justice Dubin to do a study.
Frankly, the study came back suggesting that whistle-blowing provisions would
not do any harm or would not make a lot of difference. The government chose,
when it tabled the bill, not to include the provisions. The will of the House
of Commons was to include provisions that give protection to an employee of a
company, for example, who feels that his employer is taking actions that
contravene the Competition Act. These provisions would protect him against
The bill came to the Senate in that form early in October. Concerns were raised
by the Canadian Bar Association, in particular, with respect to some of the
provisions. When we received the bill, we took those concerns into account. Mr.
von Finckenstein worked closely with the CBA and came up with these amendments,
which essentially retain the essence of the whistle-blowing protection, while
lowering the threshold, taking them out of certain provisions, applying them
solely to the criminal provisions and not to the reviewable provisions of the
Competition Act, which limit the application in ways the CBA feels more
comfortable in supporting.
The changes are there. I think they are improvements, which is why we brought
them forward. The House adopted them after a very short discussion. My hope is
that with that issue resolved, we can get on with the enactment of Bill C-20.
Senator Kenny: My impression, Mr. Chairman, is that there is no disagreement
around table about the substance of the matter before us. That is my instinct.
Would you say, Mr. Minister, that the amendment that came back from the Senate
gave you an opportunity to improve the bill?
Mr. Manley: Without any question.
Senator Tkachuk: I should like clarification on the substance of the bill as
Mr. Minister, when you say that the Criminal Code provisions are removed, what
happens when an employee reports his employer to the commission for what he
thinks is an offence against the act? Is he protected?
Mr. Manley: He is protected, but the definition of the offence falls into that
provision of the Criminal Code that defines the offence, and the penalty for
it, as a breach of any federal act. In other words, instead of defining the
offence as a criminal act within the Competition Act, it is a lower penalty. It
is a less prominent infraction because it is dealt with under the provision of
the Criminal Code that defines as an offence the breaking of any federal law.
Is that a fair description, Mr. von Finckenstein?
Mr. Konrad von Finckenstein, Director of Investigation and Research, Competition
Bureau, Industry Canada: As the minister has said, it is a criminal offence to
breach any statute. If the statute has a specific criminal provision, that
penalty applies. If the statute does not have one, you default to section 126
of the Criminal Code, which is a general section. That means that an individual
can receive up to two years in jail and be fined up to $2,000. That is
basically what we have done here. Rather than single it out as a specific
penalty, the general default provision of the Criminal Code applies.
The Chairman: Thank you, Minister, for attending this morning.
Senators, I would be happy to entertain a motion recommending that the message
received from the House of Commons with respect to Bill C-20 be accepted.
Senator Kenny: I so move.
The Chairman: Is that agreed?
Hon. Senators: Agreed.
The Chairman: I will report that back to the Senate this afternoon.
Senators, our second topic this morning is the continuation of our examination
of Bill C-59, to amend the Insurance Companies Act, otherwise known as the
We have with us again today witnesses from the Department of Finance who were
here on Thursday; specifically, Mr. David Tobin, General Director, Financial
Sector Policy Branch, and Mr. Charles Seeto, Director, Finance Sector Division.
Mr. Tobin, will you please identify the other gentlemen with you.
Mr. David Tobin, General Director, Financial Sector Policy Branch, Department of
Finance: With me this morning are Gilbert Ménard of the Business Income
Tax Division of the Department of Finance and Louis Lévesque, also with
the tax branch.
Senator Lynch-Staunton: Before the witnesses begin, I understood that someone
from Office of the Superintendent of Financial Institutions was to be here this
Mr. Tobin: Yes, senator, there are a number of other officials here as well, who
are prepared to answer questions, if required.
I should like first to address some of the points raised in your last session
regarding policy information, and Mr. Lévesque would like to address
some tax issues that were raised in the last session.
In the policy information packages, companies will be required, under the act
and under the regulations, to describe the conversion proposal in sufficient
detail to enable policyholders to form a reasoned judgment about the proposal.
In other words, the information must be complete, clear and understandable.
The regulations also set out very clearly what information must be included in
the policy information packages, including a description of the advantages and
disadvantages of demutualization; a description of the alternatives to
demutualization that the directors of the companies had considered, and why, in
their opinion, the conversion is in the best interests of the company and the
policyholders; and, finally, a summary of expert opinions of the various aspects
of the conversion proposals. The experts' opinions will include the opinion of
the company actuary, the opinion of the independent actuary, the opinions of
the evaluation experts, and the opinions of the financial market experts. In
addition, the companies are planning to provide a summary of their conversion
proposals in their policy information packages, so it will not be simply
The companies are planning to use various measures to ensure that this
information is understandable to policyholders, including the use of focus
groups and plain language experts, again to ensure that the material being
submitted, upon which the policyholders are required to vote, is
The companies will be required to describe, in their policyholder information
packages, the measures that they have taken or will take to provide
policyholders with information about the conversion proposal. That could
include information meetings, Web sites, 1-800 numbers and other such things.
Of course, before the information is released to policyholders, OSFI will review
the policy information packages to ensure that they comply with the
In addition, the superintendent may order companies to include in the packages
any additional information deemed appropriate. OSFI will also monitor questions
and concerns of policyholders and the superintendent may order companies to
undertake measures such as sending additional information or holding additional
information sessions for the benefit of policyholders.
The companies have already set up toll-free numbers to answer policy questions.
The government will also be setting up a toll-free number to provide an
independent source of information to policyholders. We are also planning to
prepare a general brochure describing demutualization and the process involved,
which can be made available to policyholders.
The government is working with the Canadian Association of Retired Persons to
provide information to their membership on demutualization. Concern was
expressed here that retired people would be particularly interested and would
require additional information. That could include an Internet site and
information in their own newsletters.
In order to ensure that policyholders have the right to dissent, the
superintendent may grant an exemption from requirements governing proxy
solicitation to allow policyholders to circulate information in a non-standard
format or to publicly solicit proxies through such measures as notices in
newspapers on Web sites.
I have tried to outline some of the measures that were taken to respond to the
concerns expressed in the last several sessions regarding the type of
information available to policyholders.
Mr. Louis Lévesque, General Director, Tax Policy Branch: I understand
that one specific issue, which has been raised a number of times, is how
demutualization will affect various benefits that people may receive. I am
pleased to provide you with some additional information on that.
As has been mentioned, approximately two million Canadians receive about $10
billion in benefits. Under the tax regime being proposed, there is no special
tax concession or special treatment of payments. People will receive two types
of payments. Some people will receive shares, which they will dispose of at
some time and which will trigger a capital gain for tax purposes. Other people
may receive cash that will be treated as dividends.
These payments will be treated as income like any other source of income. There
is no rationale to provide any different treatment. It would be grossly unfair
to people who receive pension payments or wages to have another treatment for
other types of income. That is the underlying approach to the tax treatment of
On the other hand, it is only reasonable to expect that the government will take
action to ensure that people are not left in a worse position as a result of
the receipt of those payments. We have reviewed the federal income tax and
transfer programs and concluded that in only very limited circumstances could
people become worse off, and that would be because there was a structural
problem with the treatment of dividends under the Guaranteed Income Supplement
program. The problem was due to the integration between corporate tax and
personal tax. That system work wells for people who do pay tax to the
government, because they benefit from a dividend tax credit. However, for
low-income people who do not benefit from this dividend tax credit, the
gross-up of income from transfer programs like the Guaranteed Income Supplement
would result in some people being worse off as a result of the receipt of those
An amendment has been proposed in a bill currently before the House of Commons
that would be a general fix of the treatment of dividends under the Guaranteed
Income Supplement. Its purpose is to ensure that no one ends up in a worse
position as a result of receiving payments from demutualization.
We have identified that problem area. Although it is true that the problem was
pre-existing, the incidence of the problem was very limited because the number
of people receiving both dividends and GIS benefits was very small. However,
with demutualization there is the potential for several thousand people to
receive such payments, which is the reason the government is proposing that
People may not be worse off; indeed, they will end up with more money because of
However, what is critical is the question of communications. The reason the
government is taking action on a number of fronts is to ensure that
policyholders have the ability to decipher the information they receive
concerning the potential consequences of their benefits in terms of taxation.
I have here an outline of the general approach to communications that the
government is considering, and I have asked that copies of that be distributed.
It is an approach that involves the companies, the government itself and the
provinces. I will come to the provinces at the end.
At the company level, as Mr. Tobin described, companies will be undertaking
communications to inform their policyholders about their rights and benefits
under demutualization along with their choices. On the tax side, we are
considering including a government insert with the material that the companies
will be providing to their customers. As well, companies will be providing
information on the tax and benefit elements.
At the federal level, we will have toll-free numbers, Internet sites and
brochures from both Human Resources Development Canada and Revenue Canada that
will be available to help people understand the consequences. Basically, it is
a cash-flow management situation. These are measures that will help people
manage the fact that, with these payments, they may have higher tax liabilities
or they may be facing reduced payments in the future. On balance, they are
better off, but they must set aside some of the money.
Obviously, we cannot direct the provinces to do this, that or the other thing.
However, we are reviewing with them each and every program that they have in
terms of income-tested benefits. Thus far, we have not identified any areas in
which people could end up worse off, as happened with the GIS. People will see
some benefits reduced. However, as I stated before, what is critical is
communication. People must know about the consequences and know that they will
have to set money aside from the payments they receive to take care of reduced
benefits or higher taxes.
We have begun to receive significant information from the provinces. We have not
identified any areas such as those which arose in the GIS situation, where
people were actually worse off.
The main purpose of the exercise is to develop the communication plan and to
ensure that these situations are identified. If any such situations are
identified, I can only expect that the provincial governments will want to
correct them for the same reason.
Senator Lynch-Staunton: Mr. Chairman, one of the various preoccupations that
have been expressed here is exactly the one that Mr. Lévesque has
discussed, that is, the tax consequences. I am not here to discuss what the
government has decided, but I do wonder whether the information the government
intends to see given to policyholders on the tax consequences will be as
complete as indicated.
The reason I ask this question is that in the regulations there is a provision
that sets out that information for each jurisdiction in which at least 1 per
cent of all eligible policyholders reside. It provides that there be a
description of the income tax treatment accorded the benefits referred to in
that jurisdiction. By itself, that is quite a complete statement. However, there
is another measure in the regulations that gives the superintendent the ability
to have a company not give out that information.
Why are there exemptions for this and other provisions, when, as I read this,
there is some key information that, at the sole discretion of the
superintendent, need not be given?
Mr. Lévesque: As a general point, it is impossible to put together
information that will take care of all the circumstances of all people. There
is a major trade-off here between trying to get at all possible situations and
trying to get at the main points. Given the variety of circumstances in which
people find themselves, it is impossible to have something that is targeted at
everybody. The main objective is to raise awareness. Thus, when people are
aware, they can seek the appropriate advice, depending on their own particular
There is a general principle that in a widely distributed brochure you cannot
aim at the specifics of an individual circumstance.
Senator Lynch-Staunton: I agree with that completely. I was impressed with the
quantity of information the regulations say should be provided to the
policyholders. It is quite extensive. However, some of the key information need
not be sent to the policyholders, if the superintendent on his own decides that
that need not be done.
Why do some parts of the regulations set out all the information that should go
to policyholders, when there are other parts that state that the superintendent
may exempt a converting company from any of the requirements, including what
some of us feel is a key bit of information, that is, the tax implications of
the receipt of cash or the disposition of shares?
Mr. Tobin: Mr. Chairman, I believe the senator is referring to section 11 of the
Senator Lynch-Staunton: Yes, that is right.
Mr. Charles Seeto, Director, Financial Sector Division, Department of Finance:
Mr. Chairman, the purpose of that section is to give the superintendent some
discretion, because these companies are operating in so many different
jurisdictions. For example, information about the situation in Hong Kong may
not be relevant for the Canadian policyholders.
Senator Lynch-Staunton: Let us limit ourselves to Canadian policyholders.
Mr. Seeto: It is unlikely that the superintendent will be exempting useful
information for Canadian policyholders.
Senator Lynch-Staunton: He has the power to do so.
Mr. Seeto: Yes, but I do not think he will exercise that power in the case of
Canadian policyholders. This was put in to deal with the fact that there are so
many different jurisdictions.
Senator Lynch-Staunton: Why not put in the law, then, that these exemptions
apply only outside Canada?
Mr. Seeto: This was to deal with the situation that requires people in some
jurisdictions to file a prospectus. If the information that has already been
sent to policyholders contains all the information in the prospectus, then it
is not necessary for them to send out a prospectus as well. That is one
Senator Lynch-Staunton: I am limiting myself to the jurisdiction about which I
think I know a bit. Therefore, I cannot go beyond Canada. I am looking for
assurances that the information package sent to Canadian policyholders will
include information supplied by the life insurance company on the tax
implications not only at the federal level but at the level of the jurisdiction
in which that policyholder happens to reside.
Mr. Tobin: That is the intention. If it would be helpful, senator, we could have
a representative from OSFI provide some clarification on that point, since they
are the ones working with the companies.
The Chairman: I think that would be helpful
Mr. Tobin: Perhaps Mr. Hale could answer.
The Chairman: Mr. Hale, what is your present position at OSFI?
I ask that because there has been another reorganization.
Mr. Michael Hale, Director, Actuarial Division, Office of the Superintendent of
Financial Institutions: I am director of the actuarial division. I have special
responsibility for the demutualization of the companies.
The Chairman: You have heard the discussion. Could you respond, please?
Mr. Hale: Let me say that, at a 1 per cent point, information about the taxation
position in each jurisdiction should be given. In the major jurisdictions such
as Canada, the U.S., the U.K., and probably even Hong Kong, that information
must be given to policyholders in the circular.
The only reason for the discretion is that, if there were small jurisdictions
where either the tax situation was abundantly clear to everyone or there was no
tax, there might be some reason to deal with that on a special-case basis.
However, Canadians will receive the full information that they should be
getting, as will American and British policyholders, where they are 20 per cent
to 60 per cent of the policyholders.
Senator Lynch-Staunton: Does this relate to the information regarding each
province's approach to this, on the assumption that they may vary one from the
Mr. Hale: With respect to income tax, yes.
Senator Lynch-Staunton: Recalling the discussion last week, no province has yet
committed itself one way or the other on how it will handle this; is that
Mr. Lévesque: In terms of the general treatment under the Income Tax Act,
the nine provinces that are part of the tax collection agreement will mirror
the federal treatment for income tax purposes. That is automatic. That is the
definition of "tax basis."
Our discussions with Quebec officials indicates that they will likely harmonize
their treatment with the federal treatment for tax purposes, such as the
treatment of regular capital gains, the treatment of shares received, the
treatment of disposed shares, and the treatment of cash payments as corporate
dividends. I have no indication that they would do otherwise. However, each
province has a decision to make in terms of its income-tested programs, where
income for tax purposes or some other definition of income is used to reduce
target benefits under these programs. That is a different scenario.
Senator Lynch-Staunton: What is the status of these regulations? One set of
regulations is the converted-company ownership regulations. Are these the only
regulations in draft form that have been made public thus far?
Mr. Tobin: There are three sets of regulations before you. One brings the act
into place, and that is a very simple regulation; then there are two sets of
regulations pertaining to the actual bill. Those regulations have been
circulated and consulted upon thus far.
Senator Lynch-Staunton: Are there more to come?
Mr. Tobin: No, there are no plans for any more.
Senator Lynch-Staunton: Are these regulations in their final form, or can they
still be fine-tuned or amended?
Mr. Tobin: They are in final form, but they have not been brought into law.
Senator Lynch-Staunton: Will they be tabled before both houses for discussion or
final review, as we are allowed to do now?
Mr. Tobin: That is not the plan. Given that they have been the subject of
consultation going back a number of months, there is no plan to table them
again before either this house or the other place.
Senator Lynch-Staunton: What is the next step? They have not been gazetted yet,
Mr. Tobin: No, sir.
Senator Lynch-Staunton: Does that have to wait until the bill is passed?
Mr. Tobin: They have not appeared in Part I of the Canada Gazette yet.
Senator Lynch-Staunton: In time, they will appear in the Gazette, and that will
give people an opportunity to respond.
The Chairman: This is very helpful. Take us through the process. You have a
draft set of regulations. What is the process?
Mr. Tobin: Given that the draft set of regulations has been consulted upon
already, the regulations will go back. Ministers have not yet formally approved
the regulations, but that will be the next step. Ministers will then have to
decide whether the regulations will be consulted upon, and for how long.
Whether a further consultation period is required will be decided when ministers
examine the regulations to formally approve them. That has not taken place.
The Chairman: Forget about the length of consultation. Let us suppose the
ministers decide there is no more consultation. What do they do then? Do they
still have to gazette the regulations for 30 days?
Mr. Tobin: No, they would not have to do that if they decided there was to be no
The Chairman: I always understood it was a minimum of 30 days.
Mr. Tobin: There is no minimum. They consider them. There have been cases in the
past where regulations have been the subject of pre-consultation before the
gazetting period. If it is felt that that is sufficient, there is no
requirement to go forward and have them consulted upon for a minimum length of
As I say, ministers have yet to formally approve these. I understand that they
have had one discussion on them, but they have not formally approved them.
Senator Kroft: I should like to ensure that I fully understand and that we have
on the record the fundamental philosophy of the treatment of these funds.
As I understand everything you have said in answering various questions, the
principle at play is simply that the funds coming to a policyholder by way of
the demutualization process, be they direct cash or a value in shares, are
considered a windfall. Hence, there is no preoccupation by the department with
recognizing that there is any other way of protecting any policyholder against a
sudden influx of income, even if in a given year that may have the impact of
putting them offside on an income-tested program or exposing them to tax.
Your focus is to ensure that no one is worse off or falls below zero. There is
no particular concern at any of the various levels with ensuring that they get
more or less of this windfall gain. Is that fair?
The government's windfall, since there is a tax side to all this, is not
Mr. Lévesque: The approach is that these are resources in the hands of
people, and these resources should be treated in the same way as other
resources. At the end of the day, if you have more resources, either through
demutualization or because you get a pension payment or wages or interest
payments, you have more resources.
Our tax and transfer system is designed in a progressive fashion. We give more
public resources to people who do not have resources of their own, and we tax
people with our resources. There is a gradual element to the system. The point
is that we want demutualization benefits treated in the same way as other
resources that people have.
With respect to the GIS program, we have taken a hard look at how all these tax
and transfer provisions interact, and we have discovered that at the federal
level some people could end up receiving $100 of demutualization benefits while
losing $125 in GIS combined with capital gains, and this example relates to
low-income, elderly recipients. No one in his right mind would say that that is
a fair situation; so we fixed it. We want to ensure a consistent treatment in
relation to other forms of resources people receive. In other words, let's
remove our most egregious errors.
The situation being what it is, many elderly people will be receiving dividends,
which is not the case normally. Low-income, elderly people do not usually
receive dividends. The provisions allow us to focus on that, and we are
remedying the situation.
That is the approach we are taking with the provinces. Generally, they have
programs that have a structure that allows them do what they are intended to do
-- that is, as you get more resources, you get less assistance from the
government. There is no reason that that principle should not apply in the
context of demutualization.
On the other hand, as has already been suggested, no one could sustain the
argument that someone should end up worse off; so we are actively pursuing
At a broader level, however, I do believe that we have taxation rates that are
too high and benefits that are too targeted; because of a lack of coordination
between the provinces and the federal government, that results in some people
paying too much out of the extra income they have. There is no reason not to
treat these resources in the same way as other resources.
Senator Kroft: Therefore, your concern is to ensure that no one ends up in a
worse position as a result of this.
Mr. Lévesque: One of our big concerns is informing people about the
time-lag and cash-flow aspects of this. We are actively pursuing the matter of
communications to ensure that, when someone receives the benefit, that person
will know that there will be some liability down the road so that he will not
spend it all and end up out of pocket later on.
Senator Kolber: On the question of taxation, $10 billion will be distributed in
one form or another. The biggest winner will be the government, which will get
$4 billion to $5 billion. I do not understand the rationale for this
zero-adjusted cost base.
Mutual insurance companies are basically private companies. If you take your
private company public, you do not have a zero base. You have the value of what
it is worth on that day. This strikes me as a terribly egregious tax grab. I do
not see how you can rationalize a zero base.
Senator Oliver: Particularly for policyholders who have been paying on policies
for 15 years.
Senator Kolber: There has to be a way to estimate a value.
Mr. Gilbert Ménard, Senior Chief, Financial Institutions Section,
Business Income Tax Division: The cost basis represents what you paid for a
share, for example. In this particular case, the voting policyholders paid for
an insurance policy. They purchased that policy and received coverage. They
purchased the policy at market prices that were competitive with those of other
companies -- among them, some stock companies. After demutualization, they will
still have the same coverage and the same policy, so nothing will have changed
What distinguishes this situation from the one to which you referred -- the
stock company or shareholder -- is that the voting policyholders bought
insurance coverage. If they were participating, they also bought the right to
Senator Kolber: Excuse me. Did they not also buy what they hoped was competent
management? Otherwise, there would not have been any funds to receive payment
from. If they bought competent management and the competent management did very
well, as most of these insurance companies have, why should they not benefit
from it like any other shareholders in any other company?
Mr. Ménard: They acquired an insurance policy. If it was participating,
they acquired a right to policy dividends, and they also got a voting right, a
very special and different ownership right. The important thing in establishing
the cost basis is knowing what they paid for the voting right. As I said, they
purchased this coverage at market prices.
Senator Kolber: The point is what it is worth the day you take it public.
Mr. Ménard: In my opinion, the cost basis is what they put in.
Senator Kolber: We disagree on that. I think it is a tax grab by the Canadian
Mr. Ménard: I just want to establish the facts. The cost basis is not
necessarily the market value when you sell the thing. If I paid $2 dollars for
a share, held it for a very long time, and it is now worth $100, I am taxed on
$98. I agree that we disagree, but the cost is what you put in. At issue now is
what the policyholder --
Senator Kolber: If you had shares in a private company that cost you 4 cents per
share, and the day the company went public the shares cost 90 cents, what would
be the cost basis?
Mr. Ménard: The cost basis is generally what you put in.
Senator Kroft: I think I actually agree with you.
Is the premium on a participating policy higher than the premium on a
non-participating policy that is identical in all other terms?
Mr. Ménard: The answer is probably yes, because the participating policy
gives you the right to a stream of policy dividends that has nothing to do with
your voting right. If the company makes a profit, you have the right to a share
of that through policy dividends. There is the participating part and the
voting part. The vote itself would not have a value.
Senator Kroft: The higher premium would arise from the fact that you would
receive dividends. After demutualization, any distinction between those
policies ends because everyone will then be holding the same kind of shares.
Mr. Ménard: You are still a participating policyholder. You have the
right to the same stream of dividends.
Senator Kroft: Everyone will receive dividends if everyone becomes a
Mr. Ménard: There are two different things. You can participate in the
policy, in which case it is a policyholder dividend. If you become a
shareholder, you may actually buy a share.
Senator Kroft: So you are getting value for the participation premium that you
Senator Meighen: At the risk of confusing myself even further, and everyone
else, I would like to ask a clarifying question. When calculating the cost
base, is there not a distinction between the situation of a private company, in
which someone has purchased a share, going public at a point in time and that
of a public company in which someone purchases a share? In other words, if I
purchase a share for 4 cents in a private company, and ten years later the
company goes public at $1 a share, what is my cost base when I sell that share?
Mr. Ménard: It is 4 cents.
Senator Meighen: That clarifies it. I agree with Senator Kroft. Senator Kolber
made the distinction.
Senator Tkachuk: I agree with Senator Kolber that this is a tax grab. When I
spoke to departmental officials previously about this, I understood it from the
point of view of a cooperative. For the purpose of buying products at a
particular cooperative, I purchase a membership. The wheat pools would be an
example of that.
When you looked at the tax treatment, did you consider how co-ops have done
their privatization, the wheat pools being an example? Were their shares given
a certain value? The Saskatchewan Wheat Pool was privatized two years ago, I
Mr. Ménard: I do not have information on that particular privatization,
but the principle --
Senator Tkachuk: It is close to a mutual company. I am buying insurance and I am
sharing in profits. I am not really a shareholder; I am a policyholder who
shares in profits, much like a credit union member who shares in dividends from
a particular credit union. Did you use the wheat pools as a precedent or did
you look at other jurisdictions throughout the world rather than the
jurisdictions here at home for determining how to value the shares? If I am not
mistaken, at the wheat pool, it was not treated at zero.
Mr. Ménard: I cannot comment on this particular situation because I am
not aware of the facts. However, the principle would be the same. It is not a
new principle that we are applying here. If a specific amount was paid to the
members of the organization, that could have been recognized as a cost.
Demutualization is distinct in that policyholders purchased insurance coverage.
They had voting rights that were not transferable, negotiable or for sale and
that did not give rise to any extinguishment when it lapsed or when the
policyholder died or stopped the policy. When something specific is identified,
applying the same principle would be recognized as a cost base. I am stating
that as a general principle. I cannot say that it applied there.
Mr. Lévesque: We can find out the information and convey it to you,
Senator Tkachuk: I would be very interested in receiving it.
Mr. Tobin: The U.S. and the U.K. followed the same approach being proposed here.
Senator Oliver: However, Australia did not, is that right?
Mr. Tobin: That is right.
Senator Oliver: My question is the same as Senator Kroft's. I want to go back to
the income tax treatment.
What you told us at the beginning is that there will be no special tax
treatment. You said that people can take it by way of shares or by cash, and if
it is cash it will be by way of dividends. You then went on to say that because
there are certain people who are in a lower income group, those who receive the
GIS, you will give them what you have called a general fix. You said that there
is a proposed amendment to do this. You talked at great length about this
general fix. However, you have not told us what it is. I want to know because I
suspect that it will be a special tax treatment.
Mr. Lévesque: No. There was an existing problem with the treatment of
dividends under the Guaranteed Income Supplement program. To discover the
problem, you have to go back to the fact that dividends have received special
treatment under the Income Tax Act to reflect the integration of corporate tax
and personal income tax. For example, if you receive a $100 dividend, we ask you
to declare $125 as income. However, in the computation of tax, we give you a
tax credit that is equivalent to the tax that has been paid at the corporate
This system works fine for people who have tax liabilities or for people who
have no tax liabilities. The problem with the Guaranteed Income Supplement is
that your income for tax purposes also serves to establish your benefits under
the Guaranteed Income Supplement. Let us say you are receiving $100 in
dividends. For the purpose of the GIS, your income has now increased by $125. So
far, it is not problematic to the extent that you benefit from the dividend tax
credit. It really reflects the situation we are intending. Basically, we have
put into your hands the resources that the corporation had and we are giving
you back the tax paid by the corporation. So far, so good.
The system breaks down in the context of low-income seniors because they are not
receiving the benefit from the dividend tax credit. They are not taxable. We
still say that they are receiving $125 for benefit purposes when in fact they
are receiving $100. That is where the problem was.
Senator Oliver: What is the fix?
Mr. Lévesque: We are proposing an amendment to the calculation of income
for GIS purposes, which will ensure that you actually benefit from the dividend
tax credit. Revenue Canada will calculate whether you benefit or not. If you
benefit fully from the dividend tax credit, then there is no change from the
current system. For tax purposes, you have full benefit of the dividend tax
credit. It is only right that you are being taxed and that your benefits are
being reduced on the basis of $125. However, if you are a low-income person and
you are not benefiting from the dividend tax credit, then the inclusion rate
for GIS purposes will be reduced from 125 per cent to 75 per cent. The basic
intent of the provision is the integration of corporate tax and personal tax. It
will ensure that everyone benefits correctly from the dividend tax credit.
Again, the whole point is that this problem existed before. However, the numbers
of people affected were very small. Should this problem have been fixed before?
Yes, there is no question about it. The situation was blatantly unfair.
The fact is that there are those who could end up worse off because they would
lose under the GIS program. However, in Ontario and some other provinces, they
could also lose their provincial top-ups to elderly benefits. All told, it
could be a loss of more than $100 on a $100 demutualization benefit.
Senator Oliver: What is the statute that is being amended?
Mr. Lévesque: It is the Old Age Security Act.
Senator Oliver: The specific amendment states that in the event that someone is
receiving a supplement and they do not have to pay, then Revenue Canada will
make that determination.
Mr. Lévesque: The determination of income is automatic. It applies across
the board for everyone. Revenue Canada will calculate for every senior whether
they will fully benefit from the dividend tax credit. If they do not, the
amount of income that will be included in the calculation for GIS purposes will
be reduced to match that fact.
Senator Oliver: It sounds like special tax treatment.
Mr. Lévesque: It is a rule of general application, which says that we
have this provision of integration between corporate and personal tax. It works
well generally. However, in this particular context, it does not work. We are
fixing it in the sense that this will apply not only to dividends from
demutualization but to all dividends as a going concern.
When I said that this is a general fix, it is something we should have foreseen.
However, we have focused on it in the context of demutualization and it will
apply across the board to all the dividends people receive.
Senator Hervieux-Payette: On the provincial side, I would like to inform my
colleagues that if you are receiving $5,000, for example, it can be paid over a
period of one year. This would not decrease the amount of welfare one is
receiving, at least in Quebec. In Quebec, GIS is not calculated on a yearly
basis but on a monthly basis. In Quebec, if you are entitled to $500 in welfare
and if you receive another $100 for babysitting or for repairing your
neighbour's car, your welfare stipend is not reduced. You will receive the same
You can do that every month. However, at the end of the year, it will amount to
nearly $5,000, and you will be able to keep the $5,000. This is a general rule.
When you are on workers' compensation, revenues are evaluated and so on. I do
not know what is happening in that respect. In this vein, I am talking about
the larger application of workers' compensation. Sometimes you receive it
because you are a complete invalid, or because you are temporarily
incapacitated. The same thing applies to victims of car accidents in Quebec.
Will these people have their payments cut off?
Senator Oliver: Workers' compensation is not taxable.
Senator Hervieux-Payette: I mean being cut off from what they are being paid.
Usually, there is a maximum to be paid. I just want to know if it will be
reduced. We are talking about tens of thousands of people. I am asking about
The Chairman: Correct me if I am wrong, but it has always been my understanding
that under Workmen's Compensation, the amount of compensation you get is a
function of what your salary was at the time you were injured, not a function
of winning the lottery or selling some demutualization shares.
Mr. Lévesque: That is correct.
The Chairman: Is that true in Quebec as well?
Mr. Lévesque: Yes.
Senator Hervieux-Payette: With this, if they were to receive $50,000, would they
keep the difference?
Mr. Lévesque: I will endeavour to check, but I am definite about Quebec
because I work there. There is no asset test under workers' compensation. It is
an earnings-based program, like EI. If you have $1 million in the bank, we do
not consider that. It is all based on earnings in the period prior to your
disability leading up to the accident. However, we can check on that.
Going back to your example on welfare, unfortunately, that is not the way it
works. An earnings exemption applies. People can earn money. The examples you
gave are good. You can babysit or work for a bit of money at the grocery store,
or deliver things. That is fine. Depending on the province, there is an
exemption of $100 to $300 a month. We call them "earnings disregard."
Demutualization benefits fall into a different category. It is other source
income. In all provinces that I am aware of, other source income reduces
benefits dollar for dollar, no matter what. There are no exemptions for other
Demutualization benefits would fall into that category. They are not earnings.
You get them in one shot, and you spread them out. They will reduce your
benefits. If you get a big amount of money while on welfare, you will be
probably be disqualified for the month, and you may be disqualified for a
number of months as long as you can draw on those assets. This is the situation
for all assets, and the provinces can decide. There is a basic principle of
last-resort assistance that applies. It is difficult to argue that a large
payment on demutualization is not resources.
On the other hand, the bright side of this is that there is no cash flow impact
because it is a monthly benefit. It is assessed on a monthly basis. We will not
be facing situations where people get that money, spend it, and then later
their benefits are reduced.
Senator Hervieux-Payette: To go back to my example, and to clarify the
discussion with Senator Kolber: I paid to earn the premium and the right to
vote and all that. Over the years, I paid $1,500. The evaluation that is being
given by the actuary is that today it is worth $2,500, but the market value is
$5,000. This is not taken into account. We always go back to zero. If it is
$5,000, I will be taxed on the $5,000 if I sell my share the day after the
program is in place.
Mr. Lévesque: Yes. Perhaps I should give an example. Say you were a
policyholder in the 1950s and you held your policy for 25 years and then died.
If there was any ownership right, you should have received something. Because
of this transformation, only current policyholders get those benefits. In any
way conceivable, you could not say they paid for those benefits. It reflects the
accumulation of 100-odd years of the company's good management. They paid
prices for their policy similar to other policies.
Senator Hervieux-Payette: Mr. Chairman, as I understand it, the company will
win, the management will win, the federal government will win, the provincial
government will win, and the policyholders who are earning good salaries will
win, but the poor people will lose.
My proposal is to have a deemed benefit of $5,000 exempt of any kind of taxation
so that, for the poor and the elderly who have not accumulated tens of
thousands of dollars, the first $10,000 would be exempt. We would certainly not
be getting as much money, but I think it is unfair that the only people to
receive nothing are the people who are at the end of the line and who are
actually receiving nothing from society. The entire scheme benefits everyone
but the poor people. I should like my colleagues to give their reaction to that
If I die, everyone will inherit my policy without any taxation. You will not see
anything. I just think that the $5,000 should be for everyone, because it would
be too complicated to relate it to income. Across the board, no one should pay
the first $5,000 on income tax.
Senator Austin: How much is $5,000 times 2 million?
Senator Hervieux-Payette: No, 5,000 does not give $5,000 to the government in
taxes. How much is the dividend on that?
Mr. Lévesque: The tax on dividends is perhaps 40 per cent in terms of the
Senator Hervieux-Payette: I would have to pay $2,000 for my dividend.
Mr. Lévesque: Yes.
Senator Hervieux-Payette: What about the capital gain?
Mr. Lévesque: It is similar. You basically pay very similar amounts of
tax on dividends and capital gains, average income.
The government's firm intent is that there are no losers. Everyone who gets
benefits will end up with more money in their pocket at the end of the day.
Senator Hervieux-Payette: For those that have the money, yes, but for the poor,
The Chairman: Let me try to clarify. When the government says "no losers,"
it means no one is worse off as a result of demutualization. When Senator
Hervieux-Payette says "no losers," she means that some people are not
better off, and in other cases some people are better off. She is defining the
people who are not better off. They are no worse off, but they are no better
off. She is defining that as a loser.
Senator Hervieux-Payette, your proposal has nothing to do with demutualization.
It is a tax proposal that says that certain classes of capital gains should not
be taxable. You referred to a $5,000 zero tax base so that no one would pay tax
on the first $5,000. That is not directly related to demutualization. I do not
know why you would do it for a share you received when an insurance company
demutualized if you would not do the same thing for a capital gain attained in
some other way. The question is beyond the bill.
Senator Hervieux-Payette: I was treating it as a one-shot deal because this is a
one-shot deal. It will not happen five times; it will happen once. In this
case, those who are tax lawyers know how companies are deeming this and deeming
that when they go to meet with the tax people and decide how a certain benefit
will be treated. It is deemed to be like this or like that. It has tremendous
tax implications. I am not a tax expert. I am saying it could be a one-shot
deal. It could be deemed as an inheritance or something. Most of the people who
receive this benefit will be seniors and people with low income.
This weekend, I received from a member of the family a letter from one of the
companies. The tax paragraph, out of four pages, is eight lines. It basically
says, "Consult your tax advisor," more or less. It is saying, "We
are now in the process of going through demutualization. We will advise you what
will happen." They tell you the processes they must go through, and, if
you want to reinstate your policy, you can think about it right now. I read it
On the tax question, I am quite sure that most people will not realize that they
will get almost nothing.
Those who have little income usually also have little knowledge of fiscal taxes.
There may be a $5,000 payment that is purported to be treated as whatever you
like. You find the word, you are the expert. I would apply it only to this kind
of thing because this does not happen for every company. It will only happen
Senator Kroft: I am totally confused. I find my colleague doing great battle for
the rich here. I want to speak out for the less advantaged. If you make an
across-the-board allocation for everyone, that is a totally non-progressive
benefit and everyone gets it. If you give the benefit to those who do not have
much, they will pay on either the capital gain or the income component at a
lower rate than someone who is taxed at a higher rate.
The person who has less income and is therefore paying at a lower rate will keep
more of their share than the person with more. There is a built-in fairness
slanted in the correct liberal, progressive --
Senator Hervieux-Payette: I would like to reply. I am applying the rule of this
government and the former government when they said that universality is the
simplest way of administering taxation. Do you want a modulated method or a
Senator Kroft: I want a progressive tax system where the person with more income
pays more in taxes than the person with less. If it just becomes part of the
ordinary tax process, then fairness will operate. If you try to convert it to a
lump sum and take away the graduated tax component, you will lose that.
Senator Tkachuk: We have a strange situation here that may tell us a lot about
our tax system and our programs when we are sending money to people and
worrying that they will be poorer because of it. It is a wonderful country,
Senator Angus: It is like raising funds for the United Alternative; you are
Senator Meighen: I wanted to come back to the plain language emphasis being
raised here. With no criticism of anyone in Canada, I do not think we have had
terrific success in achieving plain language. Lawyers are as much at fault as
anyone else. Who will be responsible for drafting the plain language, the
department or the companies?
Mr. Tobin: The companies are responsible for drafting that. We have been advised
by the company that they will be using focus groups to try to test that
language and that they will be using plain language experts. The material
before it goes out, however, must be approved or vetted by OSFI.
Senator Meighen: Both the complete material and the plain language sections are
vetted? Is that how it will be? A complete technical document will be overlaid
with a plain language summary?
Mr. Tobin: They have not all been finalized, but in the discussions we have had
thus far, that is my understanding. One package will run through the material
in a plain-language, summary form. Then attached to it would be the more
technical, prospectus-type language with which some people are more familiar.
Senator Meighen: We will have to hope that the plain language will be more plain
than we have seen in the past.
Senator Callbeck: I have concerns about low-income people and their potential to
lose their social benefits. If I understand correctly, every policyholder will
get a letter saying that they could take shares or cash, in which case the
amount will be spelled out. They have the option. Is that right?
Mr. Ménard: It depends on the companies.
Mr. Lévesque: The companies will decide the process to be proposed to
their policyholders for demutualization. That may include shares or dividends
but it is not that each policyholder will necessarily be offered a choice of
getting shares or cash.
Senator Callbeck: They do not necessarily have the option. In my own province of
Prince Edward Island, if people on welfare get this cash, they will be
automatically cut off but they may also lose some other benefits. For example,
if they lose their drug card, they must pay for all their own prescriptions.
Some people will be worse off.
Mr. Lévesque: That is a precisely what we are working on with the
provinces. A number of provincial programs operate on the basis of providing no
income assistance but still provide special services. We are addressing
precisely this kind of issue with the provinces. If you have assets, your
assistance can be driven down to zero but you can still be considered what we
call "in proximity of need" and be eligible for benefits and support.
We are working on this with the provinces.
Senator Callbeck: You will ask the provinces to make an exception?
Mr. Lévesque: We will not necessarily request an exception. Going back to
the principle, if I can show an instance where someone who is getting $100 of
income will end up losing $125, then anyone would accept a general application
fix for that situation. That is what we have done with the GIS. The situation
If our discussions with the provinces show those kinds of situations existing, I
can only hope that everyone would agree that it is not an acceptable situation.
This is obviously for the provinces to decide. They have provisions under
existing programs to ensure that a loss of some income benefit will not
necessarily cause other losses of service. Those provisions of general
application are already in existence.
Senator Callbeck: I have a question about the pamphlets that will be going out.
The information is to be is understandable, in plain language. Will all the
insurance groups use focus groups for this information? Will the government
also use focus groups?
Mr. Seeto: OSFI has received draft information packages from the two companies.
We understand both of them have been using focus groups to assist them in
developing the information package. We have not received all the proposals yet
because some of them are farther behind than others. The two companies who want
to demutualize have submitted draft proposals to OSFI to review, and both of
them are using the services of focus groups.
Senator Callbeck: Will the government be using focus groups?
Mr. Tobin: Right now, the government is not planning to use focus groups. The
material going out will be material prepared by the companies. The government
will be preparing a general brochure on what demutualization is all about, as
well as the tax issues.
Mr. Lévesque: To answer your question, on the tax and benefit side it is
my understanding that Revenue Canada has a plain-language policy. Most people
The Chairman: That is one of the funniest statements we have heard before this
committee in a long time. I trust Hansard will duly note that. It is even more
remarkable to note that the witness said it with a straight face.
Mr. Lévesque: Real people supposedly review these pamphlets, as they do
human resources development material. I understand from the reaction that they
have great success.
Senator Callbeck: You are saying that the information going out from the
government will be understandable, that it will be in plain language?
Mr. Lévesque: Yes.
Senator Lynch-Staunton: It will be understandable to the officials, you mean.
Senator Kolber: Could you refresh my memory? I believe the tax act has a
provision that if a private company does an IPO, there is an exemption. Could
you tell me how that works and, if so, would it work here?
The Chairman: His question is referring, I believe, to the fact that there is a
$500,000 small business capital gains exemption. The number was $500,000 at
some point in time.
Senator Tkachuk: Is that whether you do an IPO or not?
The Chairman: Right.
Senator Kolber: Would that apply to people getting money here?
Mr. Lévesque: No.
Senator Kolber: Why?
Mr. Lévesque: There are two issues. The first is a cost-base one. In this
particular case, the cost base would be very low. You will have full capital
gains. However, the government has decided for the purposes of assisting small
businesses that capital gains on shares of small businesses receive an
exemption up to $500,000.
Senator Kolber: Does that refer only to small businesses, not private companies?
Mr. Lévesque: It refers to small businesses and farming.
Senator Tkachuk: It could be a private corporation.
Senator Kolber: The government does not see fit to give these poor buggers
Mr. Lévesque: I would refer back to the point I made before.
Senator Kolber: We are a Liberal government and we should be doing Liberal
Senator Austin: I believe that getting into further arguments on the tax issue
is a tar baby, so I will avoid it.
I am curious about OSFI's role as a consumer protection agency. When we reviewed
the MacKay task force report, we debated whether OSFI should have a consumer
The Chairman: We agreed that was not its responsibility.
Senator Austin: This committee believed that that was not its responsibility.
However, this legislation and demutualization gives OSFI that role in a very
strong way for the purpose of protecting the policyholders, who are consumers.
The Chairman: The OSFI protects them with respect to communication.
Senator Austin: Yes, but communication is not just a process. Communication is a
substantive evaluation of the interests of the consumer, the policyholder.
Mr. Hale, what has been done operationally at OSFI to set up a team to oversee
the function of ensuring that policyholders are given full and plain disclosure
by companies proposing to demutualize? You were here on February 11, so this is
a way of asking you to respond to the briefs we heard on this point. Can
individual policyholders ask OSFI to answer questions or make representations
with respect to what they receive from insurance companies?
Mr. Hale: First, we have set up teams to deal with each of the four proposals we
expect will be coming along. We have put in place a steering committee of the
leaders of those teams -- myself and our advisors -- in terms of keeping
everyone plugged into what will be important in terms of clarity of
communication and the substantial financial issues of demutualization. In fact,
a good internal consistency will be applied to all of the proposals as they
come forward. We are very aware of the need and the mandate that the
information going to policyholders must be sufficient to enable a policyholder
to make an informed decision and vote.
Second, with respect to access, a 1-800 number will be established, as well as a
Web site, which will be under OSFI's auspices.
There have been a number of other corporate transactions involving companies
where policyholders have had concerns and where they were able to write to the
office and get answers to their complaints and concerns. We will be following
the same kind of process here.
Senator Austin: When the mutual insurance companies make proposals to
policyholders and provide an information sheet to them, will the OSFI 1-800
number be disclosed on that sheet? If people want to ask questions, not of the
insurance company, but of the good advisors at OSFI, can they do so?
Mr. Hale: The 1-800 number will be on the insert that will be required to be
sent by all the companies to their policyholders.
Senator Austin: With respect to each of your teams for the possible four
demutualizations, while they will specialize in the business affairs of each
company, what steps will you take to make sure that the same standards of
disclosure are applied by each of those teams?
Mr. Hale: There are a couple of things. The first is a cross-review. At any
point in time, more than one team will be cross-reviewing, so we should be able
to maintain some consistency that way. Second, we will air the issues in our
own steering committee.
Senator Austin: Will OSFI make it clear to the policyholders that they need not
support the demutualization of their company, that this is an option and not a
choice simply of demutualization with either cash or shares, as decided by the
Mr. Hale: Yes. The ballot must clearly indicate a vote in favour or against
demutualization. There may be an election for cash or shares as well, but that
is a separate thing. The first question is "yes" or "no" on
Senator Austin: It is clear that they need not vote for it if they are concerned
about the consequences of demutualization.
I did not understand Mr. Lévesque's answer, so perhaps you could explain
this to me, Mr. Hale. The demutualizing company need not offer an option of
cash or shares. It could offer cash to everyone or shares to everyone.
Mr. Hale: We would be fairly uncomfortable if they offered cash to everyone
because there would not be much capital left.
Senator Austin: I did not understand Mr. Lévesque's answer for that
Mr. Hale: It is not necessary that there be the option of cash given to
Senator Austin: They could offer only shares or shares and cash.
Mr. Hale: As it turns out, it is unlikely that they want to offer options. It is
Senator Austin: As far as you know, any of the four potential companies will
offer a package of both one or the other, or a combination of one or the other.
Mr. Hale: I cannot speak for all the companies. Some have not made up their mind
as to what they want to do yet.
Senator Austin: My final question in this area relates to the evidence on
February 11 in which our policyholder association witnesses argued that there
should be a minimum vote by policyholders. They feared that 10 per cent of the
policyholders, three-quarters of whom would be employees of the insurance
company, could make the decision for them all. They asked about a hurdle level.
One proposal was 50 per cent of all policyholders. Do you have a view of who
makes decisions for all the policyholders as a group?
Mr. Hale: About 5 to 10 per cent of policyholders turn out to vote at annual
meetings. This is something a little bigger and more special than that, and a
lot of activity is going on to encourage the vote. I would not be surprised to
see 30 per cent or more of policyholders voting.
I think that the idea of imposing a quorum is very dangerous. It could be very
detrimental to go through all of this and then have it fail because 29 per cent
turned up instead of 30 per cent, or 14 per cent instead of 15 per cent.
There are not very many precedents around the world for any kind of a quorum
idea. The only one that I have heard of recently was with respect to the
Prudential demutualization, where a quorum of 1 million voters was imposed.
That sounds impressive, but that is only 5 per cent of policyholders.
I believe that rather than having a fixed quorum, which would end up sounding
trivial, it is better to encourage the companies to do things to get the vote
out. That is what these regulations require them to do and that is what they
are in fact doing.
Senator Lynch-Staunton: Is it possible to ensure that, once the final offer is
made, all policyholders get the same offer? I am thinking of the possibility of
one jurisdiction not being satisfied with an offer that has been accepted by
all the others and insisting on an extra kicker. Is there a possibility that,
for whatever reason, one jurisdiction might get more for its policyholders than
the other jurisdictions would, or is it intended to ensure that all are treated
Mr. Hale: The intention is to use the same allocation formula for all
policyholders, regardless of where they are.
Senator Lynch-Staunton: Will you insist on that?
Mr. Hale: That is our objective.
Senator Lynch-Staunton: If one major jurisdiction does not accept it and will
not approve it, will those policyholders be eliminated from the process?
Mr. Hale: Then there will be a bun fight and I do not know how it will turn out.
Senator Lynch-Staunton: You will be involved in it.
Mr. Hale: Oh, yes.
Senator Lynch-Staunton: Has that ever happened before? When the smaller mutual
companies of less than $7.5 billion were converting, were there problems of
Mr. Hale: They never actually converted. Much of the precedent is from small
companies operating in only one jurisdiction. In any of the multinational ones,
the foreign regulators have generally deferred to the primary regulator and a
single allocation formula has been followed.
Senator Lynch-Staunton: When the minister was here, he agreed that in the
superintendent's annual report there would be a good summary of how this bill
is being applied. Would it be possible for the superintendent to write a letter
to the chairman indicating that, so that it would be on the record?
Mr. Hale: I am sure that is possible.
The Chairman: A number of issues were raised today, including the one we have
just discussed and the plain-language issue. I suggest that I write a letter
today to the superintendent outlining issues on which the committee would like
assurance. Even if the committee reports this bill back to the Senate today, as
I hope it will, we could have a reply from the superintendent prior to our final
vote on this bill. I would send such a letter this afternoon. We will not give
the bill third reading in the house until we receive a reply from the
superintendent. That will give a modest incentive for a quick reply.
Mr. Hale: The issues which have been raised are things that we intend to apply
rigorously. I do not think there will be a problem.
The Chairman: It helps us to have a written reply. First, my colleagues are very
concerned about a number of issues. Second, it has been our experience,
particularly with your office, that those letters are helpful because the
superintendent has historically been willing to come back and talk about what
actually happened as a result of the letters.
Senator Lynch-Staunton: I am reassured that the exemptions that are allowed the
superintendent, which are very broad, will not be allowed to Canadian
policyholders. Can that be included in the letter as well?
Mr. Hale: Yes.
Senator Lynch-Staunton: It would be interesting to see in the annual report
where those exemptions were applied, if at all, and for what reason.
Mr. Hale: I understand.
Senator Lynch-Staunton: I do not wish to burden you, but it is an interesting
and unusual exercise.
Finally, I understand that these regulations are the only regulations that we
Mr. Tobin: They are the only regulations for now.
Senator Lynch-Staunton: You might make some minor changes to them?
Mr. Tobin: None are planned.
Senator Lynch-Staunton: So there are no drafting errors?
Mr. Tobin: Not that we have discovered.
Mr. Tobin: I am told that four technical drafting errors were discovered during
the consultation period.
While I have the floor, the prepublication period is not a statutory provision.
Ministers decide on that.
Senator Lynch-Staunton: Regarding tax liability on low-income and income-tested
benefits, some policyholders would not have precise information when they
dispose of their shares and may receive an unexpected tax assessment, which
they will be unable to pay. Is it possible, in such cases, to spread out the
liability over a two- to four-year period? I believe that in certain cases
arrangements are made with the tax authorities.
Senator Austin: Are you referring to forward averaging?
Senator Lynch-Staunton: I do not know what term is used. Is there a provision in
the act that would allow that in certain cases?
Mr. Lévesque: Revenue Canada has the authority to make reasonable
arrangements for collection. If people owe the government taxes and have no
income, Revenue Canada will take whatever reasonable steps are available to
help people pay off their liability over a period of time. That is normal
practice at Revenue Canada.
Senator Hervieux-Payette: At the last meeting, I asked for legal advice on the
government's responsibility to validate the company's evaluation. I was told
that the government would have no responsibility whatsoever.
In the letter that we are requesting from the superintendent, I would like
confirmation that by giving advice to the policyholder, either verbally or in
writing, the government will not be liable to legal action by the consumer.
Second, I think that information packages sent to consumers should be validated
by OSFI. I think it is important that consumers get both sides of the story. If
a consumer association is willing to anticipate in the process by making some
analyses and recommendations to the policyholder, I do not think it would be
unreasonable to ensure that the information comes from people who are able to
make the decision.
They may even advise people to take the full payment or the shares because it
might be of more interest to them.
People should be told that if they take the shares, even if they are worth
$5,000, they will have no money in their pockets but they may have a tax bill
at the end of the year. People should know that. Knowing that they may have to
pay $1,000 or more in income tax might influence their decision.
I think the argument of the consumers' organization was valid. I would like you
to consider it.
I have been told that the tax aspects of this bill will be dealt with in a
different bill. Thus, I will come back with my proposal. It will give me time
to sort it out with the liberal, but more complicated, tax approach of Senator
The Chairman: Honourable senators, on behalf of the committee, I will write a
letter to the Superintendent of Financial Institutions today. In it, I will
give an undertaking on behalf of the government that third reading will not be
called until we have had assurances in writing from the superintendent in
response to my letter.
Subject to that proviso, I will now entertain a motion to report the bill
Senator Kroft: I so move, Mr. Chairman.
The Chairman: Is it agreed, honourable senators?
Hon. Senators: Agreed.
The Chairman: I wish to thank the witnesses for their appearance here today.