Proceedings of the Standing Senate Committee on
National Finance

Issue 10 - Evidence - June 17, 2010 - Afternoon meeting

OTTAWA, Thursday, June 17, 2010

The Standing Senate Committee on National Finance, to which was referred Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, met this day at 3:03 p.m. to give consideration to the bill (topic: Parts 4, 5, 15 and 23).

Senator Joseph A. Day (Chair) in the chair.


The Chair: I call this meeting of the Standing Senate Committee on National Finance to order.


This is our sixth meeting on Bill C-9, the 2010 budget implementation bill.


Over the course of our previous five meetings, departmental officials have reviewed the provisions of 14 parts of the bill thus far. We are moving along nicely, honourable senators.

All of these parts have elicited a great deal of discussion, and we have not always been able to complete all of the work that we had planned in a given meeting. This afternoon, we will begin hearing from officials in relation to some of the parts that we had scheduled for previous meetings but for which we ran out of time. At five o'clock this afternoon, we will hear from the Minister of Finance.

In this part of our meeting, we will focus on Parts 4, 5, 15, and 23, if you would like to make a note of those. We will now concentrate on Part 4, on page 157 of the bill. To speak to Part 4, which deals with the Softwood Lumber Products Export Charge Act, 2006, we welcome Mr. John Drummond, Director, Softwood Lumber Controls, Foreign Affairs and International Trade Canada.

Mr. Drummond, we tried to deal with this section earlier, and I want to thank you very much for coming back after waiting to participate with us earlier. That is the same for each of the witnesses who appear this afternoon. We very much appreciate your understanding and cooperation. We are trying to deal with this bill and the various 24 parts as expeditiously as we can.

If you could begin by explaining clauses 98 through 103, which begins at page 157 of the bill, we will then proceed to questions and answers. The floor is yours.

John Drummond, Director, Softwood Lumber Controls, Foreign Affairs and International Trade Canada: Thank you very much. I would like to present a short summary of Part 4 of the bill. As you say, it deals with amendments to the Softwood Lumber Products Export Charge Act, 2006. These amendments — there are 6 clauses, clauses 98 to 103 — are to implement a temporary, additional export charge of 10 per cent on softwood lumber product exports from Ontario, Quebec, Saskatchewan, and Manitoba. These are known as the Option B regions under the Softwood Lumber Agreement between the Government of Canada and the Government of the United States, signed in 2006.

This temporary, additional charge is required due to an arbitration tribunal ruling that dates back to September of last year. The additional charge will replace a duty that has already been collected by the United States presently. The arbitration ruling required Canada to collect this additional charge from the regions that I mentioned until a total remedy amount of approximately CAN $68 million has been collected.


As for amendments to section 12, the key components are found in clauses 99 and 100. These are the main elements for implementing the temporary additional export charges. The new subclause 12(1) allows for a 10 per cent export charge in addition to existing charges. The charging of these temporary additional fees was the subject of consultations with the industry and the provinces, who agreed that this measure was needed to maintain the agreement. Under this bill, the temporary additional charges would start to be levied on the date set by order in council.


There are only six clauses here. As I say, the main one is the one that adds the additional 10 per cent, but I would be happy to answer any questions that you may have.

The Chair: First, can you explain this coming into force in clause 103? It says that is has to be not earlier than April 15, 2009.

Mr. Drummond: Coming out of the arbitration, the United States had the right, according to the rules of the agreement, to begin imposing this charge themselves, so they did on April 15, 2009. Canadian lumber exporters from the four provinces mentioned have been paying an additional 10 per cent duty to enter the United States going back to April 15, 2009. Following a couple of appeals to the tribunal, it was clarified that the tribunal intended for Canada to collect the charge ourselves, so we are putting that into place with this amendment.

In consulting with industry and the provincial governments, it was clear that they wanted us to avoid a situation whereby the Canadian charge and this additional U.S. tax would be in place at the same time. It is tough enough times for the lumber industry as it is. They did not want a double jeopardy of paying the tax at the same time. We have had to work with the United States trade representative to identify a date when they would lift their duty, so clause 103 basically leaves it open to an order-in-council, a Governor-in-Council decision to fix the date. It could have been any time going back to when the Americans had started collecting the charge. It is meant to basically be open and give us flexibility to start collection in Canada essentially at the moment that the Americans lift their duty.

The Chair: The decision was made in the London Court of International Arbitration, LCIA, right?

Mr. Drummond: Yes.

The Chair: You indicated that it was clear from that decision that they intended that Canada would impose and collect the duty for going over the quota. Did I hear you correctly on that?

Mr. Drummond: That is right.

The Chair: However, the Americans started doing so and not Canada. Does that mean that they were in violation of the order of LCIA?

Mr. Drummond: No. There were several phases in the arbitration. In March and April of last year, the initial conclusion of the tribunal was not entirely clear to both the parties in terms of how we should proceed. At that time, Canada was simply instructed to remedy the breach of the agreement that the tribunal had found, but it did not specify how that might be done. Bilateral discussions took place with the United States. At that time, Canada proposed simply making a lump sum cash payment to remedy the breach of the agreement. This offer was made following consultations with the industry and with the provincial governments.

The United States rejected that offer and, according to the agreement, deemed the offer not sufficient. They then started collecting the duty themselves.

The Chair: They did that unilaterally.

Mr. Drummond: Yes, unilaterally, but that was within their rights according to the agreement. We have pursued an additional appeal and further clarification from the tribunal. The decision was given last September, when they said that what they had in mind was for Canada to collect a 10 per cent charge until that total of $68 million had been reached.

The Chair: The amount of $68 million was determined by the court of arbitration as being the penalty for selling more than the quota amount.

Mr. Drummond: The number came from the tribunal and was based on arguments by both the parties during the arbitration. It was related to the amount that was shipped during this breach period, during the first six months of 2007. The conclusion was that if Canada had been assessing the charges as the United States contended that we should have been, there would have been an additional $68 million in charges collected. It is to make up the amount that wasdetermined to be owed from that initial breach period.

The Chair: For clarification, under the 2006 agreement, there was a quota. Is it by province?

Mr. Drummond: It is by region. The British Columbia coast and the British Columbia interior are separate regions. Other than that, it is by province.

The Chair: If a province or region shipped more softwood lumber than the quota in a certain period of time to the United States, Canada was to impose an additional fee. Is that correct?

Mr. Drummond: That is very close to being accurate.

The Chair: It is a start.

Mr. Drummond: The additional level of nuance is that two sets of rules apply. I mentioned the Option B regions; there are also Option A regions. For Option A regions, which is Alberta and the two British Columbia regions, if a certain volume is exceeded on a monthly basis, there is an additional charge, as you described. For the Option B regions in question here, it is a combination of a charge and a quota. The quota calculation really was at the base of this arbitration.

The Foreign Affairs and International Trade calculates monthly a volume for each provincial region that cannot be surpassed, and the arbitration pertained to the specifics of those calculations. The United States contended that if the quota had been calculated in a different manner, the volume would have been lower. No rules were broken at the time, but a higher volume was exported than would have been if the quota had been calculated in the manner that the Americans contended. The volume and the charge that would have been paid on that volume were in question.

The Chair: I am glad my earlier comment was close to right because I am not sure that I fully understand all of the ramifications, but I understand generally.

For what period of time was the arbitration award for breach of the Option B rules?

Mr. Drummond: It was for the first six months of 2007. The agreement came into effect at the end of 2006. In the initial stages of implementing the agreement, there were different interpretations on both sides of the border of how these admittedly complex calculations are were to be carried out.

I might add that during the arbitration, the Americans had two contentions. They said that these adjustments should apply to both Option A regions and Option B regions. They contended that the adjustment should apply as of January 1, 2007. The Canadian interpretation was that the adjustments applied only to Option B regions and applied as of July 1. We came to that interpretation in consultation with the industry and with provincial governments. The arbitration decision was split because we were right that the adjustments did not apply to Option A regions. They prevailed on the point that it was January 1 rather than July 1. The award all comes down to a volume of over shipments during the first six months of 2007, hence the $68 million.

The Chair: Are any other disputes since the first six months of 2007 that are working their way through the system that we will see in the future in relation to this?

Mr. Drummond: There is one. One of the engagements that Canada has under the agreement is with respect to provincial programs and support for the industry. A second arbitration relates to contentions by the United States that support provided to industry has not been in accordance with the stipulations of the agreement. That is in an earlier phase, and we have not seen a result of it yet.

Senator Ringuette: Correct me if I am wrong, but I understand the 10 per cent import tariff is part of the softwood lumber agreement for certain regions where the quota exceeds the agreement.

Mr. Drummond: Canada agreed to impose an export charge and volume restraints under the agreement. That is built into the agreement. Option B regions pay between 2 per cent and 5 per, and Option A regions pay between 5 per cent and 15 per cent, unless the price level rises to such a point that there are no charges, and it becomes a free-trade price. In fact, this month of June is a free-trade month. No charges are being paid.

The 10 per cent in question is an additional charge, so that is why the amendment to the act is adding an additional 10 per cent to what would normally be calculated.

Senator Ringuette: However, it is applicable only to the first six months of 2007.

Mr. Drummond: It is applicable until a total of $68 million has been collected. The amount of $68 million was arrived at by looking at the export levels during the first six months of 2007.

Senator Ringuette: Does the $68 million stay in the Consolidated Revenue Fund of Canada, or is it forwarded to the U.S.?

Mr. Drummond: Under the terms of the agreement, the export charges are all disbursed to provincial governments. They are collected by the federal government and then distributed to the provincial governments, based on the origin of the companies that paid the charge.

Senator Ringuette: You indicated to us that the United States had charged import duties. What happens to that money?

Mr. Drummond: Since April of last year, the United States has been collecting the charge themselves, and that money will stay in the U.S. general revenue.

Senator Ringuette: That is not in accordance with the agreement.

Mr. Drummond: The United States was within their rights to impose the charge and is within their rights to keep that revenue. In the clarification that resulted from our appeal, the tribunal said that what they had in mind was for Canada to collect the money, which is the spirit of the agreement.

Prior to this agreement, the United States was collecting countervail and dumping duties, and they were keeping it up. One of the main elements of this agreement is that $5 billion of that money was refunded. As it stands, Canada will only keep and disburse to provinces the amount that we collect according to this award.

Senator Ringuette: How much do you estimate that the 10 per cent of the surcharge that is staying in the U.S. will be?

Mr. Drummond: U.S. customs has the final totals on that, and there is a time lag in the availability of those numbers. They share them with us on a confidential basis. Generally speaking, between one third and one half of the award has been collected thus far. We can estimate based on the shipment volumes that we see. A little less than half of the $68 million has already been collected.

Senator Ringuette: That will stay in the U.S. When was that decision rendered by the tribunal?

Mr. Drummond: A series of decisions occurred. I will highlight two main ones. In March of 2009, it became clear that the tribunal had made the decision that Canada had prevailed on the non-application of this provision to Option A regions but that we should have been applying it from January 1 as opposed to July 1.

In September 2009, the decision was made that clarified that Canada should be collecting the additional 10 per cent charge.

Senator Ringuette: The supplementary budget last fall could have contained this bill, which probably would have limited the surtax charged by the U.S. If I remember correctly, that supplementary budget bill was brought forth in November.

Mr. Drummond: I am not the best person to comment on what legislative means might have been used to do this.

Senator Ringuette: This type of legislation is not needed in a budget bill anyway. It could have been a stand-alone bill.

Mr. Drummond: I suppose it could have. After the clarification from the tribunal in late September 2009, it would have taken us a month or two, so toward December 2009, to assess and consult with industry on the implications of how the tribunal spelled out the remedy. It was in January of this year that we got into detailed discussions with the United States trade representative on the lifting of their current duty.

As I said earlier, the main thing that industry has asked is to ensure that we do not double tax. We would not be in a position to start collecting until we ensure that the U.S. removes their duty, in any case. They are just now indicating that they are prepared to lift their duty in favour of this charge.

Senator Ringuette: The Canadian softwood lumber industry has been paying a surcharge to the American government all this time, although there was a final decision last September, almost a year ago. I am not impressed.

Clause 98 would replace section 4(2)(b) of the Softwood Lumber Products Export Charge Act, 2006. Could you explain that to us?

Mr. Drummond: I can make a couple of general comments. This clause was added by the Department of Finance Canada. It is not necessarily related to the implementation of this arbitration award. As I understand it, it has to do with the amount of interest that is paid on overpayments of charges, and it is something that appears in other parts of the budget. I am not well placed to say much more than that.

Senator Ringuette: Do you expect that this will come into force on July 1?

Mr. Drummond: The United States has just recently initiated the process for lifting their duty. They had invited public comment, which they have to do any time they modify a section 301 trade action such as this. That public comment period expired on June 14, a couple of days ago. The comments from U.S. industry indicated that there was no opposition to lifting the duty and leaving Canada to collect the charge, but the industry attached a few conditions, one of which is that they would like to see Royal Assent on this legislation.

We have explained to the United States that Royal Assent is not necessary to begin to collect the charge, but they say that if we really want to enforce it, we need to have it.

I imagine that, with the conclusion of this comment period and their remaining administrative procedures, as of August 1, they should have no more impediments or roadblocks to lifting their charge. We are working closely with Office of the United States Trade Representative, USTR, and with Canada Revenue Agency, CRA, to orchestrate the transition of the charge and the duty for August 1. We have been trying to do this for a number of months to, as you say, keep as much of the money in Canada as possible.

Senator Ringuette: There could have been a stand-alone bill to accelerate the process.

Mr. Drummond: As it stands now, I think that August 1 would be the earliest possible time. The other consideration is that a first-of-the-month transition date is desirable for accounting purposes. Basically, we go with August 1 or September 1, depending on how quickly we can move.

Senator Callbeck: When I look at figures on the softwood lumber, the exports, it seems as though this agreement has really devastated our export market. If you go back and look at the year 2005, the year before the agreement, our worldwide exports of wood products totalled U.S. $16.8 billion. The American figure was $6.1 billion. They had about a third of what we had in exports.

Now, it seems that between the years of 2005 and 2009, Canada's worldwide exports really collapsed. In 2009, the Americans had exports of U.S. $5.5 billion compared to Canada's $6.5 billion. Do you agree that this softwood lumber deal has devastated the export market?

Mr. Drummond: Given that that gives some context for the consideration of the amendment to the act that we are talking about, I would note that the economic crisis, the impact on the U.S. housing market, a decline in housing starts in the United States and economic conditions in general in the last couple of years, have certainly had a very serious impact on the industry.

We work closely with the industry and the provincial governments. By and large, all we hear from the stakeholders is that this agreement has contributed stability to the economics of the industry under what would otherwise be even worse conditions, given the economic crisis.

Senator Neufeld: Coming from British Columbia and being the largest portion of the softwood lumber agreement, the province is pretty happy that we have one. However, would you tell us, prior to the softwood lumber, how many dollars in import tariffs the U.S. was charging the industry? How many dollars was it that they were keeping? I think it was somewhere around $7 billion that they had amassed, but maybe you could help me a little on that. If we did not have the softwood lumber agreement — you think it is tough for them to take $34 million — think about the billions they were taking before that.

Mr. Drummond: You are correct; it would have been in the range of U.S. $5 billion to $6 billion in duties at the time that it had been collected. In the absence of rules or an agreement, they were initiating countervailing dumping actions and imposing the duties.

Senator Neufeld: The provinces all across Canada worked with the federal government, along with industry, to actually get a softwood agreement to eliminate that and to be able to continue, as you said earlier, to have a stable business. We understand that a huge crash took place in the housing market in the U.S., and you can cut all the lumber you want, but if no one is building houses, you will not be selling any lumber unless you give it away.

Mr. Drummond: The management of the file requires close cooperation between industry from all regions of Canada and the provincial governments. Suffice to say that you cannot go very far without everyone being on the same page and being supportive of what we are doing.

Senator Callbeck: This agreement was supposed to stop litigation, but we have just had two cases under this agreement in the courts.

Mr. Drummond: This agreement does have a dispute settlement provision for situations where either of the parties may have different understandings of how it should be implemented. Prior to the agreement, you had unilateral imposition by the United States of duties, which Canadian industry paid and the U.S. kept. The agreement has stopped the imposition of these duties by the United States in favour of collection of charges by Canada, but there is still scope within the application of this agreement for difference of opinion, and that has been the source of these arbitrations.

Senator Callbeck: The $68 million that you talk about, I believe you said that half was collected.

Mr. Drummond: A little less than half has been collected.

Senator Callbeck: When do you expect the full $68 million to be collected?

Mr. Drummond: It depends to a certain extent on the price of lumber, which has been up recently but has dropped a little, and on the export volumes. Very generally speaking, it could be collected toward the second half of 2011, at the current price level and current export volumes. However, seasonal volatility and different changes will come into play. The sense of DFAIT and the industry is that if things continue as they are, the charge would be paid by the end of next year.

Senator Callbeck: When the agreement was negotiated, constraints were put on Canada's exports to the United States. Were there any constraints put on the Americans for their exports?

Mr. Drummond: No. The agreement deals exclusively with lumber being exported from Canada to the United States.

The Chair: Four provinces are outlined in this particular piece of legislation; Quebec, Ontario, Manitoba and Saskatchewan.

Mr. Drummond: That is correct.

The Chair: They were what you called the Option B provinces.

Mr. Drummond: That is right.

The Chair: Did each of those provinces contribute to the over-shipment in an equal manner? It would appear that all of them are sharing the 10 per cent charge. Can you tell us if they all committed to the over-shipment to the same extent, or are some of them being charged more now than others?

Mr. Drummond: It is a good question. The first six months of 2007 corresponded to the peak of the housing market in the United States. Volumes from all regions were very high, and all regions were shipping very close to their allowable levels at that time. Each of the regions had over-shipments. It is possible Saskatchewan — I would have to check that for you — may have been one region that did not over-ship at the time, but certainly the big provinces were all over-shipping.

One of the reasons for this gap between March and September in the arbitration process was because we were seeking some clarification as to whether it would be possible to attribute who was paying this extra charge based on the origin of the over-shipments in question. There is some difference; it is not an enormous amount, but ideally you might have liked to track precisely the origins of the over-shipments; but the tribunal looked at it and said that you could not do that because you could not have a situation where exports would be leaving one of the Option B regions and not paying the tax until the total award had been paid. This was the key part of what they ruled in September. It is a first- to-ship basis on all the Option B regions, and that was the definitive conclusion. That is what this measure does.

The Chair: Consultation have taken place with the various provinces in Option B, with the understanding that they are all paying 10 per cent even though they might not have committed the fault to the same extent.

Mr. Drummond: Very detailed conversations took place. As we were saying earlier, everything is done in close coordination. The industry and the provinces all share that interpretation of the September ruling. That is very clear on first-to-ship. It was in consultation, this delay between April and September, when we sought the additional clarification because it was necessary to receive guidance on exactly how the additional charge should be applied. It was carefully done, and that was the result.

Senator Ringuette: Is the certificate-of-origin process applied? I remember distinctly that in the Atlantic provinces the softwood producers had designed and implemented, by themselves, a certificate of origin. Is that being applied to all the provinces? Is that process being applied at all, with respect to determining the quotas?

Mr. Drummond: It is very important, and it is a good point that you make. As you know, the Maritime regions are excluded from the coverage of the agreement, so no quota and no charge are applied to Maritime lumber entering the United States. It is DFAIT that manages the export control regime. It is a system of permits issued on a shipment-by- shipment basis that are mill-specific by truckload or train car — mill-specific and region-specific so that you know from where it is coming. It has a commercial implication because it determines what the tax is.

We run and maintain this permit regime, and we also have a regime of verification and inspection to ensure that the permits are accurate.

Senator Ringuette: In clause 102, there is the third-country adjustment. What does that third-country adjustment imply? I thought it was an agreement between Canada and the United States. All of a sudden, we are talking about a third country.

Mr. Drummond: Clauses 101 and 102, just writ large, a number of calculations are made according to the agreement and in the implementing legislation. These calculations take into account the charge level because the charge changes.

Clauses 101 and 102 were there specifically to ensure that this temporary 10 per cent charge does not have an impact on these other calculations. I will say a few words about each of them to put them in context.

Clause 102, as you say, refers to the third-country adjustment calculation. Under the agreement, Canada has essentially secured access to 34 per cent of the U.S. market as defined by expected U.S. consumption on a monthly basis. If, under any circumstances, the Canadian share of the U.S. market declines while at the same time lumber is imported from a third country, from Europe or South America, for example, our market share is going down to the detriment of a third country, then the logic is that that should demonstrate that Canadian lumber is not threatening or damaging the U.S. market, and in such circumstances the export charges that are paid can be refunded to the exporters for those periods.

Senator Ringuette: They are refunded from your charges?

Mr. Drummond: That is right. That has happened once previously. In the fourth quarter of 2007 and the first quarter of 2008, the Canadian share of the U.S. market went down and the imports from third countries rose by a sufficient amount that all of the charges that we had collected were refunded to the exporters.

The language here is just to ensure that the additional charge is not refunded, because the additional charge is linked to the arbitration. The normal charges are refunded.

Senator Ringuette: Therefore this 10 per cent does not apply; is that correct?

Mr. Drummond: It would not apply because it is a previous period. That is to carve the 10 per cent out of any potential future refunds. Clause 101 refers to this surge mechanism in the event that the surge rule, which is set out in the legislation, ever applied to any of these provinces. It is to again remove and carve out this additional 10 per cent from those calculations.

The Chair: Mr. Drummond, thank you for being here. We appreciate you helping us through these various sections and congratulate you on the work you are doing.

Mr. Drummond: Thank you very much. It was pleasure. Good luck with your ongoing considerations.

The Chair: We will proceed with Part 5, dealing with customs tariffs.

Honourable senators, we now welcome Patrick Halley and Carol Nelder-Corvari. We are very pleased that they are here to help us through a huge piece of Bill C-9, running from page 158 to page 470.

We are always worried when there are this many clauses that there may be some intended or unintended consequences to some of these changes. I am always worried about the unintended ones, but Senator Murray reminded me that we should be worried about the intended ones as well.

Who would like to speak first and give us an overview? The more you can refer to sections of the bill, the easier it is for us.

Carol Nelder-Corvari, Director, International Trade Policy Division, International Trade & Finance, Department of Finance Canada: It would be my pleasure, chair, and thank you, honourable senators.

Part 5 of the bill is quite large, as you have explained. It deals with amendments to the customs tariff, which is legislation that governs the application of tariffs to imported goods into Canada. The amendments eliminate remaining tariffs on imports of machinery and equipment, as well as goods imported by Canadian industrial manufacturers for further production. This involves 1,541 tariff lines, hence the lengthy nature of the initiative reflected in clauses 104 to 1645. While it is very lengthy, the initiative is fairly simple to explain.

These tariff reductions are intended to assist manufacturers by lowering their cost of production and allowing them to source the best quality inputs in machinery from anywhere in the world without the burden of detailed customs rules in certain cases. This measure is intended to help improve competitiveness in Canadian industry, their productivity, their innovation and create jobs.

By this bill, 75 per cent of the tariffs will be reduced immediately, and 381 tariffs are gradually eliminated no later than 2015. Upon full implementation, this initiative will provide $300 million in annual duty savings for Canadian manufacturers.

That provides you with an overview. I do not think you want us to go clause by clause here, but Mr. Halley can walk you through in clusters to give you a sense of what types of tariff items we are dealing with in each section.

The Chair: That would be helpful. Your overview was very good, but an overview of 300 pages in two minutes causes us a little angst. Mr. Halley, would you go group by group for us?

Patrick Halley, Chief, Tariffs and Market Access, International Trade Policy Division, International Trade & Finance, Department of Finance Canada: Certainly; I will start with clause 104, which is on page 158 of the bill. That clause is also linked to clause 1642 and to the introduction of Schedule 1 to the act. It is a little technical. This clause essentially repeals 5 existing tariff items out of the 1,541 that Ms. Nelder-Corvari talked about, and it introduces 10 more. Essentially, it splits those tariff categories.

The items for which the tariff rate will be eliminated gradually over time will be one part of that split, and the other part would be for a subcategory of products for which the tariff is eliminated as of March 5. For example, the minister received a recommendation from the Canadian International Trade Tribunal with respect to tariff relief on textiles. The recommendation was that, for specific products, the tariff be eliminated immediately, so we are doing that through this, while allowing a certain gradual phasing of the tariffs for the other portion of that subcategory. I admit it is a very technical part.

The Chair: Are these finished products, not products that will be further refined in Canada?

Mr. Halley: These are always items that will be further refined or used in production of products here in Canada.

For the remaining clauses, as Ms. Nelder-Corvari mentioned, I will do them by clusters. Clauses 105 to 127 are with respect to mineral products that are used in further manufacturing in Canada. It allows for the reduction of tariff rates ranging from 3 per cent to 12.5 per cent. Those rates will be eliminated as of March 5, 2010.

The second cluster, clauses 128 to 538, is with respect to the tariffs on chemical products, again used in manufacturing in Canada. The rates on these items range from 2 per cent to 8 per cent, and the large majority of them will be duty-free as of March 5, 2010. Some others will go to a tariff rate of 0 per cent by no later than January 1, 2015. The third cluster, clauses 539 to 639, is with respect to plastic products, once again used in the production of goods in Canada. The rates ranged from 3 per cent to 6.5 per cent, and, as set out in Schedule 2, the majority of these items will be duty-free as of March 5, 2010.

Clauses 640 to 666 are with respect to rubber products used in further manufacturing in Canada. The rates ranged from 6.5 per cent to 11 per cent, and these items will be duty-free as of March 5, 2010.

Clauses 667 to 750 are with respect to raw hides and leather used in further manufacturing in Canada. The rates range from 2 per cent to 6.5 per cent and, as set out in Schedule 2, these items will be duty-free as of March 5, 2010.


The next category deals with clauses 751 to 768, which refer to certain forestry products used in the production of other goods in Canada. The rates of duty vary from 2.5 per cent to 9.5 per cent, and most will be brought back to duty free status as of March 5, 2010. The customs tariff will gradually be eliminated by January 1, 2015.

Clauses 769 to 1229 deal with goods, that is fibres, threads and fabrics, used in the manufacture of other goods in Canada. The rates of duty on these goods vary from 4.5 per cent to 14 per cent. In schedule 2 of the bill, you will see that some products become duty free as of March 5, 2010, and that the rate of duty on a certain number of these items will gradually be reduced to zero by January 1, 2015.

Clauses 1230 to 1259 deal with ceramics and glass products, including fibreglass used in the production of goods here in Canada. The duty rates vary from 2.5 per cent to 15.5 per cent, and for most of these goods, the duty rates will be reduced to zero as of March 5, 2010, but a few of them have been staggered over time as set out in schedule 2 of the bill.


Clauses 1260 to 1268 concern certain precious and semi-precious stones and precious metals. The rates on these items range from 2.5 per cent to 7 per cent and will be duty-free as of March 5, 2010.

Clauses 1269 to 1449 are with respect to certain base metals and articles of metal for which the rates varied from 2 per cent to 9 per cent. The majority of these items will be duty-free as of March 5, 2010 with a small number being duty-free no later than January 1, 2015.

Clauses 1450 to 1612 are with respect to certain machinery and equipment used for production in Canada by various industries. The rates range from 2 per cent to 9.5 per cent. Again, the majority of these items, as set out in Schedule 2, are duty-free as of March 5. Some will gradually be eliminated over time.

Clauses 1613 to 1641 are with respect to certain optical and precision equipment used by Canadian manufacturing industries. The rates range from 2 per cent to 6.5 per cent. They will be duty-free as of March 5, 2010.


Finally, clauses 1642 to 1644 simply deal with the presentation of schedules 1 and 2, which set out the tariff items staging categories that we have just discussed.


The Chair: Thank you for taking us though that.

In my layman's way of understanding this, where the tariff was not removed from the goods in March, it will be backdated to that date when this is passed. The goods that are not immediately reduced to zero, are they to do with an indigenous, local industry that we are trying to protect, so they are decreased more slowly? If I am not correct, why were most dropped to zero in March and others will take five years?

Ms. Nelder-Corvari: While this proposal is of general benefit to all manufacturers in Canada, there were certain sensitivities in that some manufacturers prefer immediate tariff relief on certain goods they import but not on others where they have a production interest. Those were managed by a phase-out over the five-year period; you are correct.

The Chair: Explain where you say that they have a production interest.

Ms. Nelder-Corvari: Where we are reducing tariffs on goods that they process further.

The Chair: They want the break of 0 per cent for their input, but not on what they produce used by someone else?

Ms. Nelder-Corvari: They may not want tariff relief on those products used by another manufacturer. We had to balance those interests.

The Chair: However, that is a Canadian company. There is no tariff on a product made by a Canadian company if it is sold and further refined within Canada. Is that not correct?

Ms. Nelder-Corvari: Their concern is with relieving the tariff on imports.

The Chair: They want to keep the tariff higher on their competition; I understand.

Ms. Nelder-Corvari: That is correct.

Senator Murray: They make a competitive product.

Ms. Nelder-Corvari: We undertook the consultations last September. A Canada Gazette notice was issued and intensive consultations were held with industry. We received a great deal of input, especially from small and medium- sized enterprises, SMEs. It was instructive as to how prevalent it is that our SMEs are plugged into global supply chains. We took that input and held further consultations with those that had sensitivities and tried to strike an appropriate balance, which is reflected here.

The Chair: I am glad you had that consultation beforehand and were not constrained by virtue of the fact that it is in the budget implementation bill.

You were probably here for that earlier discussion. If you were not, that was a little flashback.

Senator Ringuette: I know well the most-favoured-nation concept. Is there reciprocity with them?

Ms. Nelder-Corvari: No. This is a unilateral, made-in-Canada initiative. It essentially makes Canada a tariff-free zone for manufacturers. The intent is to attract investment and strengthen the competitiveness of our domestic industry.

Senator Ringuette: How many of these products are already manufactured or produced in Canada?

Ms. Nelder-Corvari: As indicated, 315 items were phased out over a five-year period. Those are the ones for which there were sensitivities. Out of the 1,541, I cannot be absolutely sure, but it should reflect where there is production in Canada.

Senator Ringuette: How will these sensitivities affect Canadian output in producing and manufacturing these products for the domestic market? This is an intensive piece of legislation that does not come out of thin air. I am happy to hear you had consultation with the stakeholders. However, I cannot believe a major study was not undertaken on the effects that this will have on Canadian industry.

Ms. Nelder-Corvari: That is correct. The Department of Finance did economic modelling on this measure. Research showed this should increase gross domestic product, GDP, by 0.1 per cent once the measure is fully implemented and create 12,000 jobs. Over time, if you apply a fiscal multiplier to that GDP growth, it should offset the loss in tariff revenues.

Senator Ringuette: In which year?

Ms. Nelder-Corvari: Upon full implementation.

Senator Ringuette: In 2015?

Ms. Nelder-Corvari: That is correct, for the full amount.

Mr. Halley: The fiscal profile in the budget shows, as Ms. Nelder-Corvari said, $300 million when the measure is fully implemented; $210 million is the forecast for 2010-11. Seventy per cent of the benefits accrue in the first year.

Senator Ringuette: My concern is that we are opening our border for import products to compete with domestically made products without any reciprocity from the most-favoured nation on these items. The most-favoured-nation tariff is much bigger than that; I know that.

However, there is no reciprocity. I am concerned about the domestic production.

Ms. Nelder-Corvari: That is an important question. I should explain something. There are already authorities under the Customs Tariff to deal with requests from Canadian manufacturers for reduction in tariffs on their imports to enhance their competitiveness.

The government was faced with more and more requests under that authority because of intensification of global competition. The department was dealing with an increasing caseload of manufacturers who wanted that sort of tariff relief to improve their competitive position. The government pursued that through this budget; as the Minister of Finance has indicated, it is part of Canada's Economic Action Plan to assist manufacturers. We responded with this general measure rather than on an ad hoc basis over a period of time, given the urgency of the need of Canadian manufacturers.

Senator Ringuette: How many Canadian manufacturers and producers will be negatively affected by these measures?

Ms. Nelder-Corvari: To give you some context here, some of those manufacturers that had sensitivities are also some of the biggest beneficiaries. When you look at the 75 per cent of tariffs that were done immediately, it suggests there is no controversy with respect to those. In others, some sensitivity was present; they wanted certain things but did not want other things. That was balanced by the 351 that were phased out over five years.

There is overwhelming support among industry for these measures. The Canadian Manufacturers & Exporters association is very supportive. We work through them as an umbrella organization with sectoral working groups. Then we dealt separately with those that had sensitivities in one-on-one meetings at the Department of Finance in an effort to get this right.

Senator Ringuette: Could you table with the clerk the extensive economic study that you referred to earlier that was done by the department?

Ms. Nelder-Corvari: I can check on that. To return to your point about trade, I forgot to mention that that study showed that it will increase exports by an estimated 3.6 per cent.

Senator Ringuette: There is still no reciprocity. Usually when you release imports into your country, you expect reciprocity. That is why we sign bilateral and free-trade agreements, et cetera, but there is no reciprocity here.

Senator Finley: We are successful at the moment.

Senator Ringuette: I do not view as successful the non-reciprocity with all these tariffs with the most-favoured nation only being abided by our Canadian government to the detriment of our own domestic producers. However, when the economic study is tabled, I will study it careful.

The Chair: Did you want to make a comment on this other exchange that went on or would you rather let that pass?

Ms. Nelder-Corvari: I would like to say that I was a chief negotiator for the Colombian and Peruvian free trade agreements. Mr. Halley is negotiating with the European Union on market access. Therefore, we are very much aware of reciprocal agreements and the value of those, as well. Canada is pursuing trade liberalization on all fronts, on a multilateral basis, a bilateral-regional basis and on a unilateral basis where it meets our economic interests.

In those trade negotiations, with respect to reciprocity, the detailed negotiations focus on about 10 per cent of the exchange between two nations. When you begin negotiations, you ask what all the things are that we can make immediately free that are not an issue. These are the types of measures in which you would do that.

They are not a direct form of leverage in those negotiations. Canadian manufacturers who have been asking for these duties to be reduced have been waiting patiently for the multilateral trade agreement — the Doha round — to deliver these tariff reductions. They have been waiting almost a decade. That is why we were getting more and more pressure to do this on a unilateral basis, which made sense during the difficulty times that manufacturers have been facing.

The Chair: That is helpful. Thank you.

Senator Callbeck: You mentioned that these tariff reductions will create 12,000 new jobs. Will those be created by 2015?

Mr. Halley: It is when the measure is fully implemented. As I said in the previous response, the fiscal profile of the measure provides for about 70 per cent of the duty savings in fiscal year 2010-11.

Senator Callbeck: Therefore, with 70 per cent, how many jobs do you feel that will create in 2010-11?

Mr. Halley: The number is based on full implementation of the measure. During the consultation, we heard that many companies are waiting for such a measure so that they can either repatriate production from overseas or at least maintain or enhance Canadian production in Canada.

It may take somewhat of a transition period for them to adjust their supply chains appropriately, but certainly the number is on the full implementation of the measure, with 70 per cent of the fiscal profile of the measure being in 2010- 11.

Senator Callbeck: However, the 12,000 jobs relates to 2015.

You said that manufacturers will save, and you used the figure of $351 million. Is that in the year 2015?

Ms. Nelder-Corvari: No. I am sorry if I was not clear. This measure will save $300 million in annual duty payments once fully implemented, and 75 per cent of those benefits are being realized now.

Senator Callbeck: The $300 million is annual.

You said that you consulted manufacturers. Have you heard from any manufacturers that want tariffs reduced that are not in Bill C-9?

Ms. Nelder-Corvari: Some manufacturers proposed reductions that were not within the items notified in the Canada Gazette notice. We are still working with those manufacturers. We will see if we can use existing authorities to help them if there is agreement among industry representatives.

Senator Callbeck: Can you list some of those manufacturers?

Ms. Nelder-Corvari: Most of those requests are made on a confidential basis.

Senator Callbeck: Did you hear from any manufacturers that did not want the tariff reduced?

Ms. Nelder-Corvari: As we indicated earlier, there were sensitivities, and that is reflected in the 300-plus tariff items that are phased out over five years rather than immediately. If you assume that the Doha round will produce a successful result, which we are all hoping for, it may be that the five years will be superseded by Doha tariff reductions.

The Chair: Did you just say that the five-year phase-out might be superseded by Doha?

Ms. Nelder-Corvari: Yes, in many cases, if you have a successful Doha round, several tariffs would be phased out. You would have some type of alignment. Some would be immediate and some would be phased out.

The Chair: Are you involved in many bilateral and multilateral negotiations in the Doha round?

Ms. Nelder-Corvari: The Department of Finance is responsible for most of Canada's import legislation, and the Customs Tariff is an important part of trade negotiations.

Senator Marshall: In this afternoon's session, it looks as though we will get through about one third of the legislation. I am curious as to why the tariffs are listed individually. Why would it not be done by regulation? Why is it all detailed in the legislation?

Ms. Nelder-Corvari: It is for transparency and immediacy, to do a large measure of significant benefit at one time. As I said, the alternative was case by case, under existing authorities; that would be quite a lengthy process.

Senator Marshall: Could it be done through a regulation or some alternative?

Ms. Nelder-Corvari: It could be done through our existing authorities on the Customs Tariff. We do have requests on an ongoing basis under our authorities. We are allowed to consider and make recommendations to the Minister of Finance about the reduction of tariffs on goods used for further manufacturing in Canada to enhance Canadian competitiveness. Because of the mounting requests under that, and because of the need during the recession, this was put forward as a general measure.

I do not know if you recall in the last budget, 2009, there were unilateral tariff reductions on machinery and equipment. This follows on the heels of that. Once we did the machinery and equipment, the industry pressured us to do more within the current time frame or in the short term. In fact, many industry sectors were asking for duty-free zones in Canada, which is something that is very difficult to deal with in the Canadian economy because you do not want to create disadvantages on a regional basis.

All these factors entered into the need to move forward with a bold measure.

Senator Marshall: You made a good point, too, about transparency because now it is all outlined in detail.

Senator Murray: To follow up on Senator Marshall's question to clarify the situation, maybe mostly for historical reasons, you cannot really bypass Parliament when it comes to lowering tariffs, can you? You have to go through Parliament for most of this, I had always thought.

Mr. Halley: Under the Customs Tariff, Parliament delegated to the Governor-in-Council some powers to eliminate duties through order-in-council, but it is narrowly defined. It essentially says that the government can reduce the tariffs on goods used in the production of other goods, which are manufacturing inputs and machinery and equipment. As Ms. Nelder-Corvari mentioned, this has been a long-standing policy of the government to help manufacturers through that authority, but it is a narrowly defined one.

Senator Murray: You came with all these reductions because you had to; am I right? You had no option on all these reductions that are before us. You had to come to Parliament with this and put it in a budget.

Ms. Nelder-Corvari: With a general measure of this nature, yes.

Senator Murray: I think the information is here somewhere, but I will ask you just for fun what the foregone revenue will be from all this. In doing so, I want to observe, interestingly, that in the early days of Confederation and — I think I am correct — right through the first third of the 20th century, revenue from customs was a very important source of revenue for the federal government. When I look at the outlook for budgetary revenues in this present budget, it turns out that in the present fiscal year, out of the total budgetary revenues expected of $231 billion and change, customs will bring in $3.4 billion.

Believe it or not, this is growing somewhat over the next few years, to the point where, in 2014-15, out of the total budgetary revenues expected of $296.5 billion, you will be taking in $4.1 billion in customs import duties. It is certainly far less important than it was many years ago.

What is the foregone revenue? You must have that number somewhere.

Ms. Nelder-Corvari: The revenue from the tariff represents about 1.5 per cent of total government revenues. The tariff relief from this package, as we indicated, will be about $300 million in foregone revenues.

However, as I noted, it is supposed to lead to GDP growth. Therefore, if you apply the fiscal multiplier, an offset of those losses is expected over time.

Senator Murray: I presume the growth in the customs import duties over the period of time from now to 2014-15 that will go from $3.4 billion to $4.1 billion is just inflation or increased economic activity or whatever. It is not vital that I know this, but I am just curious.

Mr. Halley: It is a good question. It is more like a return to more normal growth after a fairly significant decrease in import volumes over 2009 of about 18 per cent. Really, the ramping up of the customs import duties projection on page 176 simply reflects returning to normal. You will note that in 2008-09, the revenues were at $4 billion, so it is returning to normal levels.

Senator Murray: How much is left with respect to this type of protectionism? To look at this bill, you would think we had done away with all the tariffs.

Ms. Nelder-Corvari: This initiative represents about 6 per cent of total tariff revenues.

Senator Murray: Is that the figure I am looking for, I wonder? What I really need to know is how much protection is left. By the time you have eliminated all these, what is left to eliminate? Is there much?

Mr. Halley: After full implementation of this measure, 72 per cent of the roughly 8,500 tariff items in the Customs Tariff will be duty-free — so about three quarters. About 2,300 tariff items remain, and they are mainly on finished products or consumer products. Some tariffs on automobiles and some in agriculture remain as well.

Senator Murray: What about spirits and beer?

Mr. Halley: There may be a small tariff left some place, but I think, generally, it is more an excise duty.

The Chair: I would like to thank you for providing us with this extra document. During our discussion, I tried to pick out some of the items.

It occurred to me that many of these items might be imported by a company that is trying to sell them to another entity for input manufacturing but may not have a customer for the product when it is imported. Does that matter? As long as the product is likely to be used as an input for further manufacturing in Canada, is this tariff removed, even though an intermediary company is handling the product?

Mr. Halley: That would be the case. Obviously, depending on which of the 1,541 tariff items we are talking about, the import values will vary greatly. My recollection is that all of these items contain at least some minimal amount of imports.

Some manufacturers import those products, and they can almost exclusively be used for further processing in Canada, and then be sold as either intermediate or finished products to other Canadians customers or customers abroad.

The Chair: There could be an intermediary, and that would not matter, as long as the product is the type of product that will be sold to another manufacturer. Is that correct?

Mr. Halley: Yes.

The Chair: If the product was something that might possibly be used for further manufacture but might also be sold at retail, how is that treated? Perhaps they would get into the fine-tuning and get out of the business.

Mr. Halley: These products are primarily used by manufacturers. As you say, some of them might be imported by distributors, but they are distributors that then distribute to manufacturers for various purposes. The finished consumer products are not part of this initiative.

The Chair: You provided us with this document of the schedule of the tariff elimination. I happened to notice, on page 18, that nuclear reactors are losing their protection, so CANDU is losing its protection as a local manufacturer. The 8 per cent tariff has already been dropped as of March 5. Am I reading that correctly?

Mr. Halley: That is correct, as well as parts of nuclear reactors in the line below that. The tariff is a Canadian law, but it follows a classification system of products that are globally traded, and that classification system is internationally applied through the World Customs Organization, WCO. Therefore, some of the descriptions might appear a little odd, but, in general, they represent the classification of categories of goods that are globally traded.

The Chair: Thank you for helping explain this to us. I know you were here in sessions earlier in the week and we were not able to get to you, so thank you for persevering.

Honourable senators, we are now dealing with Part 23, which is found at page 714 and headed ``Telecommunications Act.'' We are very pleased to have, from Industry Canada, Mr. Allan MacGillivray, Director, Industry Framework Policy, Telecommunications Policy Branch.

Thank you, Mr. MacGillivray, for being here. If you could tell us what the impact of this proposed change is and just how it will be implemented, we would appreciate hearing from you. You have the floor.

Allan MacGillivray, Director, Industry Framework Policy, Telecommunications Policy Branch, Industry Canada: Thank you. I will provide some context for everyone. You are probably aware that the Telecommunications Act contains restrictions on the participation of non-Canadian companies in the industry. In fact, these provisions require that all telecommunications common carriers be Canadian-owned and controlled.

Part 23 of the bill would exempt from those provisions telecommunications common carriers who offer service only by means of satellites. It is worth clarifying that this exemption would apply only to section 16 of the Telecommunications Act, the section on Canadian ownership and control requirements. The act would otherwise continue to apply to all satellite providers offering service in Canada.

The Chair: Do I read section 16(5) correctly, that other exceptions already exist and this is just adding an exception?

Mr. MacGillivray: That is correct.

The Chair: You may want to tell the honourable senators about the other exceptions.

Mr. MacGillivray: Certainly. In 1998, Canada made some treaty-binding commitments in the context of the World Trade Organization Agreement on Basic Telecommunications Services, BTA, which is an annex to the General Agreement on Trade in Services, GATS. We agreed to lift the restrictions on international submarine cables, for example, a cable from Halifax to the U.K. We also agreed to lift the restrictions on satellite earth stations. This is particularly germane to the context in which this change is being proposed because as a consequence of that change in 1998, foreign-owned satellite providers were permitted to offer service in Canada. Most of those foreign providers and indeed all of the large providers do not face any foreign-ownership restrictions in their home market.

This has created an unlevel playing field for companies such as Telesat, for example, who is our largest satellite company. They face direct competition in Canada from foreign providers who face no ownership restrictions, where they themselves face these restrictions. This amendment is intended to level the playing field to put companies such as Telesat on the same footing as their competitors.

The Chair: One reason companies such as Telesat may wish to see this type of exception is to raise funds in the marketplace, I assume.

Mr. MacGillivray: Yes. Obviously, what Telesat will choose to do if and when this exemption is passed is up to them. However, I think they are on the record as saying that a number of options are open to them. They may consider an initial public offering, IPO. They talk more often about deepening their partnerships internationally.

While they are the fourth largest provider in the world, they are relatively small. They have 12 satellites in operation now, whereas the largest provider, Intelsat, has 55 and another 8 in construction. SES has 44 satellites. Telesat is a relatively small player.

I believe the intention is that they would like the opportunity to partner with another provider to increase their scale and, therefore, their competitiveness in the world.

The Chair: Is this something that the Canadian Radio-television and Telecommunications Commission, CRTC, would have anything to say about?

Mr. MacGillivray: In what sense?

The Chair: On this amendment and the regulating of Canadian entities.

Mr. MacGillivray: It is the responsibility of the CRTC to administer the Telecommunications Act, so it is, in fact, the CRTC that administers this provision.

The Chair: Can we assume that they are content with this amendment?

Mr. MacGillivray: This is a government proposal, and the CRTC is an independent regulator. The Minister of Industry is responsible.

The Chair: Has the CRTC been lobbying for this? Have they spoken on this?

Mr. MacGillivray: I am not aware of that.

The Chair: One way or the other?

Mr. MacGillivray: No.

Senator Ringuette: My line of questioning is along the same lines that you started about what the consultation has been with respect to putting forth Part 23 in this bill.

Mr. MacGillivray: This provision probably has its genesis in the Competition Policy Review Panel that the government struck in 2008, I believe, chaired by Red Wilson. That panel was asked to look at ways that the Canadian economy could become more competitive and productive. In the context of that process, Telesat made a very long submission seeking this liberalization. That is on the public record and probably where the debate for this change originated.

Senator Ringuette: That was in 2008?

Mr. MacGillivray: Yes.

Senator Ringuette: Will any other participant in the industry be affected positively or negatively by these measures?

Mr. MacGillivray: Currently, Canada has four satellite operators. I mentioned Telesat; we have three other providers that each operate a single satellite. Ciel Satellite Group has a fixed satellite, and TerreStar Corporation and SkyTerra Communications are two providers of mobile satellite services.

Senator Ringuette: They were consulted also?

Mr. MacGillivray: I personally have had discussions with one of them but not with the other two.

The Chair: Does anyone else from your department know if there has been any formal consultation on this?

Mr. MacGillivray: As I said, going back to the Wilson panel, the mandate clearly included all foreign-investment restrictions in the industry. They made some recommendations for change that were actually broader than satellites, but I understand only Telesat chose to make a submission in that context.

Senator Callbeck: Has there been expression of interest in buying Canadian satellites?

Mr. MacGillivray: All four operators are privately owned, so I am not aware of any proposals to acquire or purchase any of those companies. I hope you appreciate we are talking about the companies themselves as opposed to the spacecraft.

Senator Callbeck: You say that we have four in Canada; is that correct?

Mr. MacGillivray: Yes.

Senator Murray: I think I understand the policy consideration as to why this change was proposed as you have explained it but not why the satellites and so on were included in the first place and included all these years under those restrictions.

Mr. MacGillivray: Canada has had foreign-investment restrictions more generally in the industry going back to, depending on how you date it, the 1980s. However, the provisions in the act came into force in 1993. In the context of the trade negotiations in 1996-97, there were particular requests for liberalization in the area of satellites. Therefore, it was in that context that Canada actually committed to allow foreign satellites to serve Canada.

Senator Murray: You may have covered this, but I take it consultation took place with what are broadly called ``the stakeholders'' before this measure was proposed?

Mr. MacGillivray: Yes. As I said, Telesat has been the most strident in seeking this change. It is they who feel most constrained. Telesat has only about 50 per cent of the revenues in Canada. It is about 50 per cent outside, so they feel very constrained internationally. The other three service providers operate only in North America with the single satellite, so they are not in the same position as Telesat with respect to feeling constrained by the restrictions, as I understand it.

The Chair: Did we establish that the exception we are making means companies from Canada will also be able to participate in the United States' market without restriction?

Mr. MacGillivray: Yes. In fact, that was achieved in the late 1990s in the context of the GATS agreement that I mentioned. That was part of the deal, as it were. Therefore, Telesat has been allowed to serve the U.S. market since the late 1990s. That, in part, explains much of the growth and that only half the revenues come from Canada now, so they are already participating in the international marketplace.

The Chair: That is very helpful. Mr. MacGillivray, thank you very much for being here and persevering. It has been four days of hearings and you win the prize as the fastest and most succinct.

Mr. MacGillivray: I have never been called succinct before.

The Chair: We will let you know what your prize is in due course.

We will now look at Part 15 and are joined by Ms. Nakatsu and Ms. Moynihan. We ask you to explain to us clause 1885, Canada Post Corporation Act, and then we would like you to talk about the ramifications, the impact on Canada Post.

When the minister arrives, you will understand that the minister has limited time, so we will adjourn the meeting. You can stay and listen to the minister if you like, but we will not continue afterwards and will make arrangements to finish the questioning at a later time, probably Monday, if that is okay. You are not going on vacation on Monday, I hope.

April Nakatsu, Director General, Crown Corporation Governance, Transport Canada: Not anymore.

The Chair: That is what we like to hear; neither are we. You have the floor.

Katherine Moynihan, Director, Portfolio Management, Crown Corporation Governance, Transport Canada: As the honourable senators will have noticed, this is a single clause making a change to Canada Post's exclusive privilege. It removes from Canada Post's exclusive privilege the privilege of collecting and delivering mail that is destined outside the country.

Canada Post will continue to have the exclusive privilege to collect and deliver mail to Canadian addresses. It will also continue to compete in the market for international mail. For about the last 20 years, a number of re-mail firms have been active in Canada, and it is only in fairly recent years that there has been some question about whether their activity was in compliance with the act or not. There was eventually a court ruling that Canada Post had exclusive privilege over both mail destined for Canadian addresses and mail that was destined for other countries.

An injunction was put in on one of the larger re-mail firms. There has been a stay essentially to allow those companies to continue operation until further clarification of their status.

That leads me into the potential implications and ramifications for Canada Post. Canada Post has been competing with these re-mail firms for the last 20 years. They have been able to continue to deliver on their mandate for universal service, including rural service across the country. Canada Post estimates that the revenue risks, should this part of Bill C-9 be passed, would range from $40 million to $80 million. That is against a revenue base in the corporation of $7.3 billion. Between 0.5 per cent and 1 per cent of their revenues would be at risk. It is somewhat difficult to be more specific and to know exactly what the impact will be because we do not know as much about the industry as we would like to know, given the legal questions that have been asked about its status. As I say, Canada Post has been competing with them for 20 years and is quite confident that they are able to continue to compete in that market.

The Chair: Do you have the name of the court case?

Ms. Moynihan: I have the stay. A decision by Justice Cumming extended the stay in the case against G3 Worldwide (Canada) Inc., also known as Spring Global Mail, Spring Canada or Spring. The stay on the injunction has been extended until December 31, 2010.

The Chair: A case before that gave the injunction and whichever court ordered the injunction, gave the first stay, followed by an application for a further stay.

Ms. Moynihan: Yes.

The Chair: You said that they have been competing for 20 years.

Ms. Moynihan: Yes, and I believe the court cases only go back about four or five years.

The Chair: You have set the stage for us. We will go to questions. I will begin with a senator from New Brunswick, Senator Ringuette.

Senator Ringuette: How long has Spring been incorporated?

Ms. Moynihan: I do not have the answer to that question.

Senator Ringuette: I can tell you it is not 20 years. Do you know who are the partners are in Spring?

Ms. Moynihan: Re-mail is a dichotomous industry. Some are larger firms, such as Spring, many of which are affiliated with postal administrations from elsewhere in the world. Another large part of the industry, which has been quite vocal in support of this amendment, is the printing industry, the graphics industry, often small and medium-sized businesses operating across the country. An example of their type of work is printing catalogues that might be taken across the border and introduced into the U.S. mail delivery service in the United States.

Senator Ringuette: Spring is a joint venture with Royal Mail, of Britain; a Dutch mail service, Royal TNT Post; and Singapore Post Limited, known as SingPost, a mail service benefiting developing countries as per the Universal Postal Union, UPU, designation. Therefore, TNT Post and Royal Mail are using the UPU Singapore-assigned postal code to do re-mail. Other re-mailers in Canada are Deutsche Post DHL, a German postal service; and Key Mail. There are only three re-mailers in Canada. As far as I know, Spring's joint venture is no more than 12 years old. As an entity, Spring does not have a universal postal code. They are not a recognized post office.

What will you provide to Canada Post to balance the $200 million-plus per year in outbound mail that you are assigning to these three foreign entities: Spring Global Mail, Deutsche Post DHL and Key Mail.

Ms. Moynihan: Some of these firms that you mention are part of the re-mail industry, but it is not the entire re-mail industry that is active in Canada at this time. Earlier in the consideration of this bill, representatives of the printing industry spoke to your colleagues in the house about their involvement and the jobs lost in the industry. There were specific examples of jobs lost in British Columbia due to uncertainty about their ability to stay in the industry, given the clients they had lost.

Senator Ringuette: What will you provide in the way of financial compensation to Canada Post for the more than $200 million a year to balance the removal of the income through this piece of proposed legislation?

Ms. Moynihan: Canada Post is not being removed from the international mail industry. It will continue to compete for it. I believe that Canada Post is in the best position to estimate the impact of this change on their company's operations, and they have identified that the range would be $40 million to $80 million. Canada Post sees that as a fairly marginal amount. Given their revenues, they do not expect it to impact their ability to deliver their universal service.

I would also mention that in September 2009, the government introduced a Canadian Postal Service Charter to make clear its expectations of Canada Post in terms of universal service to Canadians and, in particular, the protection of rural postal service, mail security, and the like. Canada Post has not asked for compensation. They have told this committee, and told the house committee in April, that they feel well placed to compete effectively in this market, despite the legislative change that may be made.

Senator Ringuette: Per year, 0.11 billion units of letter mail go outbound from Canada. When you send out mail, there is a return provision. Who will return the mail to the Canadian return address?

Ms. Moynihan: When that mail comes into Canada, as any mail coming into Canada, it will come through Canada Post, who will deliver it. With respect to that, Canada Post would collect terminal dues from the source countries.

Senator Ringuette: Pardon me?

Ms. Moynihan: A system of terminal dues is established under the Universal Postal Union.

Senator Ringuette: They are not recognized as part of the Universal Postal Union entity. UPU cannot collect fees from these entities to return mail to Canada and have Canada Post assume the cost of all these returns without any form of compensation.

Ms. Moynihan: I want to ensure that I have understood the question. You are speaking about a piece of mail that was collected in Canada and delivered by a re-mailer to England. For the return of that, someone in England who received that letter would be sending it back to an address in Canada, maybe a Canadian university, for example. The person that is returning the mail would have the choice of sending that through Royal Mail or through some bulk mail. We talking about an envelope being returned, are we not?

Senator Ringuette: I will provide you with a clearer scenario of the reality.

The Chair: Can I ask you to hold that thought and come back at a time to be arranged?

Ms. Moynihan: Yes, of course.

The Chair: Thank you very much. You can see the line of questioning, so you may want to prepare yourself for your return.

Mr. Minister, thank you very much for being here. We appreciate your attendance. We had hoped to have completed our study of the entire bill by now. We are moving along quite nicely, but we are not there yet. However, as this window was available for you, we have changed the schedule in response to the pleas of Mr. Menzies. We are pleased that the two of you are able to be here with us today.

Hon. James M. Flaherty, P.C., M.P., Minister of Finance: Thank you for the invitation to be here. I am pleased to be here with my Parliamentary Secretary, Ted Menzies, who, as you know, was just acknowledged as being the hardest working member of the House of Commons. I am fortunate to have him doing all that work as Parliamentary Secretary at the Department of Finance.

I first want to thank the committee for some of your ongoing work, including examining the costs and benefits of Canada's one-cent coin to taxpayers and the economy.

I want to speak to a few of the important aspects of Bill C-9.


Today's bill is an important component of Canada's Economic Action Plan, because it implements critical aspects of the recent federal budget.

As you know, Budget 2010 deals with the second year of our plan and has three objectives: first, it confirms $19 billion in federal stimulus spending measures to create and protect jobs; second, it invested in a limited number of targeted new initiatives to create jobs and ensure the economic growth of tomorrow, to benefit from Canadian innovation and to make Canada a destination of choice for new commercial investment; third, it proposed a plan to return to a balanced budget once the economy has stabilized.


Without a doubt, Canada's Economic Action Plan is working to create jobs, fuel economic growth, restore confidence and put Canada in the best position of all industrialized countries. In the first quarter of this year, Canada's economy grew 6.1 per cent. This represented the strongest quarterly rate of economic growth in a decade. What is more, Canada has now seen seven consecutive months of economic growth. Positive May job numbers represented the eighth month of job gains in the past 10 months. Since July 2009, Canada has created almost 310,000 new jobs. The Organisation for Economic Co-operation Development, OECD and the International Monetary Fund, IMF, have both recently forecast that Canada's economic growth will, by a wide margin, lead all G7 countries this year and next. In the words of one OECD official:

I think Canada looks good — it shines, actually. . . . Canada could even be considered a safe haven.

While Canada may be in one of the most envied positions in the world, we must remain cautious and focused on the economy. We are not out of the woods yet. The economic recovery is fragile. Our Conservative government is not satisfied with resting on our laurels. As Will Rogers said, ``Even if you're on the right track, you'll get run over if you just sit there.''


This is why we are taking the proactive and aggressive measures to give a solid foundation to the current economic recovery and benefit from tomorrow's opportunities in the Jobs and Economic Growth Bill. One of the most obvious means of achieving this objective in today's bill is to transform Canada into a tariff-free zone for manufacturing.


This is the core of the proposed jobs and economic growth act in substance and, more important, in size, as it makes up 52 per cent of the legislation. In other words, over 450 pages relate exclusively to this single measure.


We carried out extensive public consultations when we developed the duty-free zone for manufacturing initiative. Throughout these consultations, we very clearly heard Canadian manufacturers emphasizing the fact that the elimination of tariffs will contribute to production growth, exports and particularly jobs.


When combined with other Canadian advantages, such as the lowest overall tax rate on new business investment in the G7, Canada will be on an even more attractive scale for business investment. This will complement our government's efforts at diversifying trade relationships such as the recently concluded free trade agreements. Since the initial unveiling of the tariff-free zone for manufacturing initiative in early March, we have heard very positive feedback from Canadian entrepreneurs.

For example, Canada Goose CEO Dani Reiss, the manufacturer of the world renowned Arctic coats, said:

This is a great move . . . tariffs only made it more expensive to be a Canadian manufacturer. . . . I think this move by the government will make 'Made in Canada' viable for more apparel companies.

Our tariff elimination will help to ensure that more and more Canadian manufacturers can showcase their products in the global marketplace and succeed.

That is on Canada being a tariff-free zone for inputs and manufacturing.

Another major step in this proposed law is on venture capital. The proposed jobs and economic growth act takes steps to strengthen Canada's entrepreneurial advantage to encourage greater venture capital investments. As honourable senators know, venture capital provides crucial financing to promising, innovative start-up firms to give them the means to introduce new technologies, invest in new capacity and create new high-quality jobs. This is crucial to building Canada's economy of tomorrow. That is why, in this bill, we are eliminating the need for tax reporting for many investments under section 116 of the Income Tax Act by narrowing the definition of ``taxable Canadian property.''

There has been a tremendous reaction from Canadian business to the Budget 2010 measure. This is particularly true in places such as the Waterloo Region, Ontario, home to one of Canada's most prominent high-tech clusters.

Communitech Technology Association Inc., the organization that represents the Waterloo Region technology companies, applauded the move when they remarked:

Access to capital is a huge issue for companies. . . . This is an important step in overcoming that challenge, and it will make a real difference to companies . . . right across Canada.

Along with these two measures, the tariff-free zone and the venture capital change, the proposed jobs and economic growth act also legislates many other initiatives. It would enable credit unions to incorporate federally, strengthen federally related private pension plans, implement an enhanced stamping regime to counter contraband tobacco, and provide one-time transfer protection payments to provinces, extend the Mineral Exploration Tax Credit, provide tax fairness for single-parent families claiming the Universal Childcare Benefit, and much more.


In conclusion, allow me to emphasize once again that our Economic Action Plan was a spectacular response to a formidable challenge. It was not created for all time. Eliminating temporal measures as planned is the first step in the government's strategy to achieve budgetary balance.

As well as gradually ending the Economic Action Plan, we are also taking many austerity measures in order to better target spending.


The proposed jobs and economic growth act legislates two strategic restraint measures. First, we are starting with belt-tightening on our own. We propose to freeze the salaries of the Prime Minister and all ministers, along with all members of Parliament in the House of Commons and the Senate.

Second, we propose to cut nearly 10 per cent of all Governor-in-Council appointments to federal institutions. The elimination of these 245 appointments follows a comprehensive review announced in Budget 2009 and will reduce overlap in the management of Canada's federal agencies, boards, commissions and Crown corporations.


During the few minutes of my presentation here today, I have presented but a few of the highlights of the Jobs and Economic Growth Bill. This legislation is vital to Canada's Economic Action Plan, a plan that is protecting and stimulating the recovery.


That is why I urge Parliament to support this legislation as the next step in Canada's economic recovery. Moreover, we cannot afford — and I say this respectfully — to delay this legislation and put at risk the timely and important economic measures, such as over $500 million involved here in transfer protection payments to numerous provinces. There is key funding for organizations such as Genome Canada; Pathways to Education Canada, to support disadvantaged youth; and the Rick Hansen Foundation; important reforms to protect federally regulated pension plans; legislative authority to enforce the code of conduct for the debit and credit industry; crucial tax changes to revitalize Canada's venture capital industry; and much more.

With that, I invite questions from the committee.

The Chair: Thank you, Mr. Minister. I am sure you were not referring to this committee's work or, indeed, the Senate when you talked about delay in general terms, having in mind that the bill was 72 days in the House of Commons and has been with us for less than 10 days. These ladies and gentlemen and honourable senators have been working diligently on this bill six or seven hours a day for the last week.

Mr. Flaherty: We all work hard, senator.

The Chair: However, we would not say that that is delaying.

I am calling on the deputy chair of the committee, Senator Gerstein, from Toronto.

Senator Gerstein: Thank you very much, Mr. Chair, and Mr. Minister and Mr. Menzies.

Canada's financial system has been described by the World Economic Forum, WEF, as the most stable and efficient in the world. Our inflation and interest rates remain extremely low. Our currency is strong. Our debt-to-GDP ratio is the envy of our major partners and our tax rates are becoming increasingly attractive.

I must say to you both that you have had your hands on the wheel of the finance ship through some very turbulent global economic times, and although we have not yet arrived in calm waters, I am sure you recognize that many of us, particularly on this side of the table, would want to express to you our great confidence and applaud you in the way you have handled this most difficult situation.

There is a question coming, I want you to know.

Mr. Flaherty: I like it so far.

Senator Gerstein: The issue of pensions is a major matter on the minds of many Canadians. We know that the federal and provincial governments are now working together on some proposals that you put forward for the retirement income system and pensions. We also know our Conservative government has been hard at work on this issue.

The proposed jobs and economic act includes a number of important reforms to the federally regulated private pension plans. Perhaps you could give us your thoughts outlining some of these reforms and share some of the feedback that you have heard in response to these important changes.

Mr. Flaherty: Mr. Menzies has worked very hard, for more than two years, on public consultations and public meetings, working with our partners in the federation. We just met on the weekend, on Prince Edward Island, with the federal-provincial-territorial ministers of finance, and some other ministers who are responsible for pensions and retirement income issues in the provinces and territories. Of course, we share jurisdiction in this area with the provinces and territories. Federally, we regulate 10 per cent or less of private-pension-plan members. We do have the Canada Pension Plan, but of course we share governance of that with the provinces and territories as well.

Bill C-9 contains provisions requiring an employer to fully fund benefits if the whole of a pension plan is terminated. There is a provision establishing a distressed pension plan workout scheme, under which employers, employees and retirees may negotiate changes to the plan's funding requirements. There is permission to the Office of the Superintendent of Financial Institutions Canada, OSFI, to replace an actuary if they are of the opinion that it is in the best interests of the members or retirees, and a couple of other provisions.

The background to this is not academic. We had the situation last year in Canada where we would have lost a couple of major enterprises in this country, with very substantial unemployment resulting from that because of the decline in equity markets and the place where that put their pension plans. That includes Air Canada. We dealt with that on an emergency basis, being innovative, getting an arbitrator, getting all the unions to agree to the particular arbitrator, getting the management to agree, getting them to meet in Toronto for three weeks and work out an arrangement so that the enterprise could continue to function.

It is not a permanent solution, but what is in this bill reflects that process, that emergency workout process that we used in the Air Canada situation. In one other situation, which I will not get into, we used that process as well to preserve the enterprise and keep the jobs during the bad times so that as they come back, and their pension plans become better funded with equity markets performing better, the employees do not lose their jobs. We did that in a cooperative way with the unions and with the executive management of these enterprises. That is reflected in this bill.

Senator Ringuette: Long time no see, Mr. Minister. It is nice to have you here.

I have three lines of questioning. The first one is Atomic Energy of Canada Limited, AECL, the second is the Canada Post Corporation and the third one is the environment.

With respect to AECL and your objective of creating jobs, the nuclear industry in Canada, as per the 2008 data, creates 71,000 jobs, 17,000 of which are directly in the nuclear power companies, and 54,000 in spinoff jobs through the value chain provisions. It produces 15 per cent of Canada's energy needs. It is an industry of $6.6 billion in Canada, according to the 2008 data, and it generated, in 2008, $1.5 billion for federal-provincial governments in different forms of taxes.

In the event of the sale of AECL to a foreign business or a foreign Crown corporation, what review process will be implemented, including but not limited to the net benefits to Canada as it would be by the process under the Investment Canada Act?

Mr. Flaherty: Thank you, senator, for the question. I can speak about AECL in terms of the budget bill, but not more broadly because I am not the minister responsible for AECL, and I do not deal with AECL on a daily basis.

The government proposes, in this bill, to create the conditions whereby AECL can be restructured, which is fundamental to strengthen AECL itself and to try to maintain those 30,000 highly skilled jobs. As we go through the restructuring, we are committed to ensure that the jobs are retained and that more are created. We want to ensure that AECL's commercial reactor division can attract strategic investors to seize new opportunities at home and outside Canada as well, while reducing the financial risk to taxpayers.

AECL, as I am sure you know, senator, has been a major drain of taxpayers' money these past number of years, including all of the years that I have been Minister of Finance, year after year, and more than once a year.

Senator Ringuette: The 2008 data does indicate $1.8 billion per year in tax revenue of different types to the federal and provincial governments.

Nevertheless, I will go to my other question about AECL.

I have not seen, in this legislation, a provision for the sale of all patents or intellectual property under the control of AECL. The current bill before us will not protect the intellectual property and patents. What measure are you prepared to take to ensure that Canadians still own that intellectual property and those patents?

Mr. Flaherty: As I say, the bill before you deals with restructuring of AECL. It does not deal with the issue of intellectual property or assets. That would have to be dealt with as part of the way going forward with AECL. One protects assets in the course of these transactions, so I expect that the corporation would be very mindful of the major assets it has in intellectual property.

Senator Ringuette: That is certainly not a very satisfying answer.

Then we go to clause 2146. Minister, I know that you probably have not read all of these clauses, so I will read it for you. It concerns AECL and is subtitled ``Appropriation.'' It reads as follows:

On the requisition of the Minister and with the concurrence of the Minister of Finance, there may be paid out of the Consolidated Revenue Fund any amount that is required to carry out a measure . . . .

That measure is the restructuring, the sale, in whole or in part.

Mr. Minister, this is quite the blank cheque that you acquire through this clause. Could that eventually include payment to an entity, or a loan to an entity, or a loan without interest to an entity, to acquire parts or the whole of AECL?

Mr. Flaherty: Would we lend money out of the Consolidated Revenue Fund to someone to acquire part or all of AECL, is that what you are getting at?

Senator Ringuette: This article gives you that power.

Senator Murray: The answer is, over my dead body.

Mr. Flaherty: That is not the purpose of the provision. The purpose of the provision is to enable funds to be expended to restructure AECL. That is the purpose of the provisions in the bill, senator.

Senator Ringuette: What guarantee can you give to the Canadian population about the isotope production at Chalk River facility? As per the media this morning, it should soon be able to operate for quite a few decades and provide 50 per cent of the isotope production worldwide. Will that remain in Canadian hands?

Mr. Flaherty: There are ministers who are responsible for and much more knowledgeable on this subject than I, senator. It is not part of the budget.

Senator Ringuette: It is not out of the delegation of authority that you are requesting from us.

Mr. Flaherty: In the restructuring, yes, but we are not dealing specifically with the isotope situation. In the bill, we are asking for the legislative authority to restructure AECL.

Senator Ringuette: It is not only to restructure; the bill before us talks about the sale, the divestiture, in whole or in part, of AECL; and the Chalk River facility is part of AECL.

Mr. Flaherty: It is; a very expensive part, yes.

Senator Ringuette: It is very expensive for our health, too.

Senator Marshall: Mr. Minister, welcome. In your opening remarks, you spoke about debit and credit cards and the voluntary code of conduct. Almost everyone has a debit or credit card, probably both or more than one. We had quite a discussion here yesterday on the voluntary code of conduct. I know that it has been very well received by Interac, the banks, et cetera. Could you comment on where you see this going in the future, and also in the context of Bill C-9? It does get covered under Part 12. I am interested in your comments on that, and of course your expectations for the future.

Mr. Flaherty: I will try to be relatively brief on this, although it is a long story. This is a difficult issue. I know there were some hearings in the Senate on this as well. I know senators know how complex this becomes.

There are seven or eight participants in this, in various aspects of credit and debit businesses, and they are all self- interested. No white knights have come across. It is difficult to try to get into any type of code of conduct.

We consulted broadly, and we did arrive at a code that, I am pleased to say, has been voluntarily accepted.

You may ask why we have to give the government a regulatory power in the bill. It is because they may not persist in their acceptance voluntarily. However, so far, everyone has agreed to comply voluntarily.

Merchants were concerned. We have not seen the expansion that has been seen in the United States and elsewhere of increased charges to merchants for the use of debit cards. We have Interac, as you know, in Canada, which is a really inexpensive way of using a debit system. Some of the large credit card insurers in the United States and elsewhere have got into the debit business. Merchants are concerned about being pushed into situations where they are paying significantly higher fees for the use of debit cards.

We developed the code, which provides clear information about fees and rates, and to give advance notice of any new fees and fee increases to merchants. Merchants will be able to cancel their contracts if one of the large credit card companies changes the rules in the middle of the game. That provides them with some protection. We are trying to promote competition here as well.

This is an ongoing issue, though. The world is changing dramatically. In some countries in the world, as in Korea now, people are paying for things with their iPods and BlackBerrys and so on. You do not see much cash. We are looking at payments as well. Tomorrow, I will speak to the Canadian Payments Association in Vancouver on this subject of payments systems, and as we become more and more a cashless society, how we will do this.

Credit cards are not the end of this story. They are partway down the road. It is an ongoing saga, and we will go ahead and study and get advice on the payments system as well as this code.

Thus far, everyone has been cooperative on the voluntariness, so we do not have to have an involuntary code.

Senator Marshall: I notice a provision there for the regulations for the Financial Consumer Agency of Canada, FCAC. It will be interesting to see where it will go in the future. Thank you.

Mr. Flaherty: It is interesting. The Chancellor of the Exchequer is just announcing a new financial consumer agency in the United Kingdom. The United States Congress is creating a new financial consumer agency. Canada has had one for years. This is not a partisan comment, as it applies to all of us, regardless of political party. It has been a well- functioning and well-run consumer agency for the protection of consumers in Canada.

Senator Callbeck: Welcome, Mr. Minister and Mr. Menzies. I hope you enjoyed Prince Edward Island when you were there last weekend.

Mr. Flaherty: It was wonderful.

Senator Callbeck: I want to ask you about the transfer protection payment that protects the provinces so that when the three major transfers are added together — the health, social and equalization — the provinces will not receive less than they received in 2009-10. That is only for one year. Under that — and we went through it this morning — my province is receiving another $3 million. My concern is that it is only for a year. Most of your programs under the stimulus program were for two years. Why is this only for one year?

Mr. Flaherty: The short answer is that the budget is only for one year. Canada's Economic Action Plan is over two years, but it is two budgets. In the economic action plan, we covered 2009-10 and 2010-11. This budget just covers 2010-11 in terms of transfers to the provinces.

You will recall, senator, that we have in place transfer agreements, the Canada Social Transfer, CST, and the Canada Health Transfer, CHT, which have agreements between the provinces and the federal government, and they run out to 2013-14. In fact, we discussed them this weekend. Not surprisingly, the provinces raised this issue with me on the weekend, on beautiful Prince Edward Island.

It was a beautiful weekend, thank you, with great hospitality and wonderful seafood. It really was splendid. Mr. Menzies could not go because he was staying to vote, et cetera. It was quite spectacular.

The issue was raised by the provinces. They are pleased with the fact that they will be kept whole for the current fiscal year. Their major concern was when we can start talking about renegotiating the CST and the CHT. We agreed that our officials would start working on that now, provincially and federally.

Senator Callbeck: Obviously, discussion took place with the provinces about continuing this transfer protection payment.

Mr. Flaherty: Actually, we did not talk about that. They understand how fluid this situation is. Times are changing in Canada: Newfoundland and Labrador is not receiving equalization; Ontario is receiving equalization. Who would have guessed that a few years ago? It is a fluid situation, and we do talk about it, but this specific issue of what we will do next year was not raised.

I do not want to be misunderstood. The agreements apply next year, and we are committed not to reducing transfer payments to the provinces as part of the economic action plan.

Senator Callbeck: You said, ``Not to reduce transfer payments.'' You are talking about the three major transfers, is that correct?

Mr. Flaherty: That is right.

Senator Callbeck: You are committed to the fact that next year they will not receive less than they receive this year?

Mr. Flaherty: No, we are not committed to that. In their budgeting, they know what the floor is. They would like to see us top it up, of course, and it may be possible to do that. We do not know yet. We will look at that later in the year.

Senator Callbeck: Bill C-9 includes a great deal more than the budget. For example, Senator Ringuette has talked about AECL. The post office is in here, as is the environment. There was a standalone bill for the post office, and now that standalone bill is in Bill C-9 as Part 15. Why would you include all these things in Bill C-9 rather than having standalone legislation? These issues are important for Canadians, and it is important that we have time to study them properly. There is so much in Bill C-9.

Mr. Flaherty: One answer is that one can do again what has been done before. Certainly Liberal governments and Conservative governments have had expansive budgetary bills over the years covering many subjects.

Let me give you this answer as Finance Minister. When we prepare the budget, we look at everything. It takes months. We do consultations across the country. We listen to interest groups. We listen to many business people, union people, academics, the whole gamut. We see matters such as the economic cost to the Canadian taxpayers of AECL — and that is a major financial obligation of taxpayers in Canada now, and it is a negative. Similarly, Canada Post is a negative overall.

On the environment issue, we are looking at a situation where we have an economic action plan with major stimulus spending and duplication of environmental assessments. No one is suggesting that we ought not to have environmental assessments, but it is being suggested that we do not need to do them twice, most of the time, because it causes twice the delay and twice the cost. How does that serve the environment or taxpayers? Again, these are initiatives that have significant economic aspects in Canada.

Senator Finley: Mr. Minister, welcome. I do not often get to ask you questions. Normally, you are usually asking me.

I want to cover the credit union industry. The credit unions, as you well know, are important particularly in rural Canada. They help to create a fairly vibrant economy. In your budget bill, Bill C-9, you are proposing to have federal charter legislation for credit unions. I wonder if you could explain how you see this move benefiting Canadians in general but rural Canadians in particular.

Mr. Flaherty: Thank you, senator, for the question. Credit unions are known better to rural Canadians than urban Canadians, although Canada has many urban credit unions. My riding in Oshawa, Ontario, has a substantial number of credit unions. The credit union movement came to the federal government and said, ``We want to grow and expand and move interprovincially in Canada. Would you permit us to fall under federal regulations so that it would be easier for us to do business?'' That is what this bill proposes to enable. The bill also provides, though, that if a credit union wants to incorporate federally, they will need to get permission from their province to do that. We will not interfere with the provincial jurisdiction in this way.

Credit unions in Canada range from relatively small institutions to large institutions such as Desjardins Financial Group in Quebec, which, if it were a bank, would be a substantial bank. It would be number seven by capitalization in Canada, and it is the largest employer in Quebec and has substantial employment in Ontario and wants to grow.

We are interested in competition. I am often asked, as I am sure senators are, about competition in our financial institutions, about bank rates for accounts and so on. The more we have competition, the better. The credit unions can contribute to that competition in Canada.


Senator Poulin: Thank you for being here, Mr. Minister. We are very aware of the fact that you are much in demand wherever you go. I have two questions for you.

First, Bill C-9, which we are currently studying, is a bill with schedules. The bill itself is 772 pages long, and the schedules are 108 pages. It is a bill in 24 parts; and most of those would amend more than 50 existing acts. These are nevertheless significant amendments to existing legislation. You yourself in fact made reference to the significance of certain parts.

This week, Senator Murray tabled a motion in the Senate intended to split the bill. This would have allowed the Standing Senate Committee on National Finance to study each of its parts according to government priorities, but above all according to the time required to review each part.


The key responsibility of the Senate of Canada is to bring sober second thought to all legislation tabled before it. However, when senators voted on the motion of Senator Murray, all Conservative senators voted against it. This indicates clearly that you did not wish to have this bill divided. Why is that?

Senator Finley: We are more independently minded than that, do you not think?

Mr. Flaherty: The bill, in its entirety, advances Canada's Economic Action Plan. It advances our economy strategy in Canada. It addresses some of the important liabilities we have. For example, Senator Ringuette asked me about AECL. As a whole, the bill addresses economic issues. I realize the bill has much in it — it does not have as much as it appears to in looking at it. More than half the provisions relate to that one tariff initiative to remove tariffs on inputs in manufactured goods. That is detailed out of necessity because it is tariff legislation.

In comparison to other budgets, Bill C-9 is not as complicated — from my own point of view as Finance Minister — as the budget that we did during the crisis on January 27, 2009. That was a large deficit budget, an emergency budget, really. I thank the Senate for dealing with it relatively expeditiously when we were in a time of crisis and recession.

I met with European journalists before I came to appear before the committee today. Everyone acknowledges that we are still in a fragile time given the situation in Europe. We must be prudent in our economic planning and relatively expeditious. I am not suggesting that you deal with anything hurriedly, but I would hope that you are able to deal with the bill as a whole.


Senator Poulin: I would like to tackle the issue from another angle. Certain parts of Bill C-9 will have major impacts on some institutions. The most glaring example concerns Part 18 and you yourself made reference to it: this concerns changes to the Atomic Energy of Canada Limited Act and the Nuclear Energy Act; a change that would facilitate not only the restructuring of a government agency, which is a key agency for Canada's energy future, but even the sale of its commercial component. Why did you choose to table so many issues of importance to the future of the country in one single bill?


Mr. Flaherty: AECL has been a substantial drain on the treasury and continues to be so. In our judgment, that issue needs to be addressed. It would be fiscally irresponsible not to address the issue.


Senator Poulin: We do not disagree. You therefore acknowledge the importance of Part 18. But why not give us the opportunity to study Part 18 on its own, so that we could truly study such an important issue?


Mr. Flaherty: I appreciate your concern, senator. I am sure you will analyze the bill and have views on that and other parts of the bill.

Having said that, AECL is a budget issue. It is a major drain on the treasury, and not just once per year. They come back every year, usually in the summer, with another tale of woe looking for hundreds of millions of dollars in the middle of the fiscal year. It is time that we deal with AECL as a budget priority. That is why the bill includes AECL.

Senator Poulin: We will have to agree to disagree on the way to study it.

Senator Murray: I will not follow up on the remarks made by Senator Poulin. I lost my attempt to have the bill split. I will not bother today. That is not to say that I will not try another time. Frankly, it is a matter for the House of Commons and, in particular, for its Speaker to show due consideration for Parliament when confronted with this type of bill.

You will be glad to know I want to deal with something in a more positive way. It is yours and Mr. Menzies' approach to the pensions issue. I take your point that a relatively small proportion of private plans are within the federal domain. However, as a layperson, this looks like a grave problem in the country as whole.

A couple of months ago there was an article in L'actualité about private pension plans. They had a centrefold listing these plans. They were colour-coded to show whether the plans of individual companies were safe — as with the banks and a few others in your jurisdiction — bear watching or are in danger. I was startled to see the number and names of the companies whose pension plans — according to the criteria relating to under-capitalization, et cetera — were in danger.

Having Mr. Menzies consult and do what you can to bring everyone on board is great because a serious approach to this is important.

With respect to the Canada Pension Plan, CPP, you are probably doing the correct thing by increasing premiums, although I see some commentators who are against that and think there is another way to go. I think it is the most direct thing you can do.

What do you make of the apparent intention of Alberta and Quebec to block changes you may propose to the CPP and the Quebec Pension Plan, QPP?

Mr. Flaherty: Let it never be said that this federation is not fascinating.

Senator Murray: Do Alberta and Quebec have the numbers, the population to block changes?

Mr. Flaherty: Approval of changes to the CPP will require two thirds of the population and two thirds of the provinces.

On the weekend, the way it lined up on CPP was that Quebec did not take a position. They stayed on the fence because they are thinking about their own Quebec Pension Plan. Alberta was negative about any changes to the mandatory part of the Canada Pension Plan. Quebec and Alberta also have concerns about a national securities regulator. One may not have to do with the other.

Together we agreed on the weekend that our officials will work on how we could make a modest, gradual, fully- funded increase in the mandatory part of the Canada Pension Plan. That will require a great deal of work. They will work on it and come back to us.

Senator Murray: Why? It seems so simple.

Mr. Flaherty: Beginning with what is ``modest,'' there may be differing views of what that is, and also for ``gradual.''

Senator Murray: You will wear it anyway, even if they agree to it. You know that.

Ted Menzies, M.P., Parliamentary Secretary to the Minister of Finance: The other part that came out of the PEI talks — and this is not specific to Bill C-9, but you raised the pension issue — is that many Canadians at this point do not have a registered pension of any form.

Senator Murray: The Senate Banking Committee is working on that, by the way.

Mr. Menzies: We appreciate that and are looking forward to seeing the results. The House of Commons Standing Committee on Finance is bringing forward a report on that, as well.

The options the officials are now working on are how to develop a multi-employer plan. Previous to this, you basically had to be within the same sort of industry to group a plan. This can allow a forest industry, a shoe manufacturer and an engine manufacturer to come together. For the small employers, which before could not participate in a larger fund, economies of scale can then come into play and create a larger fund together. They may only have three employees, but they can bring them into the multi-employer plan.

Senator Murray: How does the federal government come into that?

Mr. Menzies: We do not. That is why we have to work with our provincial partners. They have all recognized the same issue that you have just highlighted. Their constituents are our constituents; we are trying to protect the same people.

Senator Runciman: Senator Finley was asking you about credit union changes in rural Ontario. As you know, I would say that over the past 30 years, we have seen the major financial institutions run away from rural Ontario. During this negotiation or consultation, was there any indication of filling that void?

I know banking is transitioning now with electronic banking and so many other modes of carrying out these functions. However, a real hole exists in Eastern Ontario in terms of access to financial institutions in a direct way. I wonder if that was ever a part of the conversation.

Mr. Flaherty: If I can answer in a general way, yes, it was. I have had conversations with some of the larger credit unions. Especially as they amalgamate with others, they would be interested in filling voids left by commercial banks in retail banking. In Ontario, we have seen the old Province of Ontario Savings Office acquired by Desjardins Group. They kept the branches, and they tell me it is profitable.

Senator Runciman: I have a follow up to Senator Callbeck's comment about transfers and the experience that you went through as part of another government with respect to the devastating impact that the cut of transfer payments in the mid-1990s had on the provinces and territories.

In the budget, you were speaking to a commitment to ensure that that situation will not occur again. I wonder if you could speak a little more about how you demonstrate that in this budget.

Mr. Flaherty: Thank you, senator. As anyone who was in provincial government in the mid-1990s and late 1990s anywhere in Canada knows, the cuts and transfers to the provinces were devastating in education, health care and social services. If one is looking to balance a federal budget, I must say, the easiest thing to do is to cut transfers to the provinces. It is simple and you can try to pass it off onto the province that they are responsible for all the bad things that follow from doing that.

There are three major areas of spending in the federal budget: transfers to provinces; transfers to individuals for Old Age Security, persons with disabilities or the Guaranteed Income Supplement; and our program spending. It is in the budget, and we will take certain steps with respect to program spending, but we will not cut transfers to the provinces or to people from the federal government.

There are a couple of major areas in which we can restrict the rate of growth of spending, which we will do in a couple of big-spending departments, but we will not have to do any cuts. The other major thing is some restraint in the cost of the public service. Most of this can be done through attrition because, as you know, we have an aging population, and many people will be retiring in the coming years. Many people are retiring now in the federal public service. We can accomplish the fiscal prudence goal and balanced budget goal without cutting transfers to our partners in Confederation.

Senator Dickson: It is nice to have you here, Mr. Minister and Mr. Menzies. I want you to know the minister does a tremendous job for you; he is on the line all the time.

Coming from Nova Scotia, I want to follow-up on Senator Callbeck's questions relating to federal transfers. You mentioned that you are looking forward to the negotiations brought up in Charlottetown for when the end of the agreements come along in 2014, and you made some reference to a floor. What is the floor at which you will start those negotiations? Does it exist? Is it ramped up 6 per cent, so we are at whatever the amount is there? I am curious about that floor.

Mr. Flaherty: No decision has been made about that. That is far away right now when we are still planning to get out of this crisis and have a strong recovery in Canada. When I referred to a floor, I meant during the course of these agreements, the years left in the CST and CHT; everyone knows what the floor is.

Senator Dickson: In relation to the gas tax in municipalities, there are many potholes. Do you have any future ideas as to how we address the infrastructure deficit, vis-à-vis municipalities?

Mr. Flaherty: If you can build anything in Canada now and you do not have work, I do not know what is wrong with you. We are spending so much money on infrastructure, and so are the provinces. I give the provinces and territories total credit for participating in our G20 commitment, which was to spend 4 per cent of GDP over four years to stimulate the economy. We could not have done it without our partners. They have all stepped up to the plate on that.

The 2 per cent gas tax, as you know, was made permanent. I know some municipalities are making use of this opportunity, though some are not, unfortunately. They can lever that money; they have a permanent cash flow from the Government of Canada forever at 2 per cent. It is a tremendous opportunity for them to become engaged in public- private partnerships and in good relationships with their bankers because of that cash flow and lever that money.

The Chair: Honourable senators, unfortunately, we have run out of time, so I will not be able to go on to a second round. I had two people on my list, Senator Ringuette and Senator Poulin, but the minister has made available one hour, and we have used up our hour.

On behalf of the Standing Senate Committee on National Finance, all of whom are working diligently on your Bill C-9, I can assure you, we thank you very much for being here. If we have follow-up questions once we finish our study toward the end, when we thought we would be bringing you in around mid-July, Mr. Menzies might be able to help us in that regard.

Mr. Flaherty: Thank you, Mr. Chair and senators.

The Chair: Thank you.

(The committee adjourned.)