Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

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 comment.


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 this amendment.


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 December.

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 particular party?

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 retribution.

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 well.

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 demutualization bill.

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 morning.

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 complicated legalese.

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 understandable.

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 regulations.

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 those payments.

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 payments.

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 change.

People may not be worse off; indeed, they will end up with more money because of these payments.

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 circumstances.

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 regulations.

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 example.

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 other?

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 correct?

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, have they?

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 consultation period.

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 time.

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 inconsiderable either.

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 that.

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 for them.

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 receive --

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 government.

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 shareholder.

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 are paying.

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 believe.

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.

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 level.

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 amount.

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 implications.

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 source income.

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 exemption.

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 rate.

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, no.

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 carefully.

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 once.

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 sliding scale?

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, though.

Senator Angus: It is like raising funds for the United Alternative; you are poorer afterwards.

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 was highlighted.

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 would disagree.

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 anything.

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 things.

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 protection role.

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 company?

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 the proposal.

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 reason.

Mr. Hale: It is not necessary that there be the option of cash given to policyholders.

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 not necessary.

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 equally?

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 that kind?

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 will receive.

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 Kroft.

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 without amendment.

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.

The committee adjourned.