Proceedings of the Standing Senate Committee on
National Finance

Issue 17 - Evidence - September 29, 2010


OTTAWA, Wednesday, September 29, 2010

The Standing Senate Committee on National Finance met this day at 6:49 p.m. to examine the costs and benefits of Canada's one-cent coin to Canadian taxpayers and the overall Canadian economy.

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

[English]

The Chair: I welcome you all here this evening. On April 27 of this year, this committee was authorized by the Senate to examine the costs and benefits of Canada's one cent coin to taxpayers and to the Canadian economy. Thus far, the committee has held meetings on the subject, hearing from government officials, academics and representatives of the business community.

In our first session this evening, we will continue to consider the question from the perspective of business. In the second session, we will consider the issue from the perspective of the consumer. Next Tuesday, we will hear from the Royal Bank of Canada, which has conducted, along with Ipsos-Reid, a survey that could be interesting to the subject.

It is also important for us to hear from charities. We are working on bringing in a charity to talk to us. Charities like the Salvation Army and some of the other charities ask the kids who go around at Halloween to collect nickels, dimes and pennies in these little boxes. What impact will there be on those charities if the penny does not exist any longer? We have been following up on these issues.

Subject to any desire expressed here, we should be able to round out the study next Wednesday with a teleconference to New Zealand. New Zealand, as we heard recently, has eliminated their one-cent piece. I believe they had a two-cent piece and a five-cent piece that was eliminated as well. They had a lot of public resistance to the earlier elimination and virtually none on the second one. We should hear that information and be able to ask questions in that regard.

Then I thought we would have a session to talk about what we want to see in the report. We will ask our Library of Parliament people to help us in reflecting whatever we decide we want to hear.

To begin this session, we are pleased to welcome our first witness for the evening Darren Hannah, Director, Banking Operations, Canadian Bankers Association. We have heard from the Canadian Bankers Association on other occasions as well, and we appreciate your being here and making yourself available to help us understand this interesting point we are looking into.

Mr. Hannah, you have a few introductory remarks.

Darren Hannah, Director, Banking Operations, Canadian Bankers Association: Thank you for the invitation to appear before the Standing Senate Committee on National Finance as part of your investigations into the merits of eliminating the penny in Canada.

Canadians have a real affinity for their coinage. Whether it is the lucky loonie at centre ice during the Olympics or the commemorative quarters, Canadians identify with their coinage as a symbol of what makes Canada great.

Coins continue to be in strong demand in Canada. According to the Royal Canadian Mint, in 2009 it produced nearly 1 billion new coins. This production is new coinage as well as that added to the stock of coins already in circulation, and these coins include pennies. In 2009, the mint pressed 456 million new pennies, and this production adds to the estimated 20 billion that are already in circulation. Clearly, there is still strong demand for coinage and there still seems to be segments of the economy that rely extensively on it.

That being said, electronic payments have begun to filter their way into the small-value payment market that has been the domain of coins. Since 1998, the average value of a debit card transaction in Canada has decreased by 20 per cent in real terms, and the number of debit card transactions in Canada has nearly tripled. Canadians are making greater use of point-of-sale electronic payments for progressively smaller transactions.

Stored-value products are also making an impact on the demand for coins. For example, Tim Hortons' annual report indicated that at the end of 2009, customers had nearly $75 million available on their Tim cards. That value represents $75 million worth of transaction value that would have been transacted almost certainly by coins in the past. The actual amount in dollar value of transactions through those same stored-value cards during the year would have been several times greater even than that amount.

To give you another example, the Ontario Ministry of Transportation projects that by 2016, the new Presto stored- value transit card being rolled out across the province will process over 200 million fare transactions, and potentially over 800 million if the Toronto Transit Commission adopts the technology. Clearly, this card will supplant many transactions that otherwise might have been made by coinage. Increasingly, technology offers effective substitutes for coinage.

The banking industry does not have a strong view on the merits of the elimination of the penny. Operationally, there will be savings to banks in reducing coin-handling costs. Coins are heavy and bulky, so shipping them to branches to meet the needs of individuals and small business customers imposes a cost. Most of the 456 million new pennies were put into circulation through financial institutions.

At the same time, there are issues that need to be resolved, particularly with respect to pricing. In addition, decisions must be made about how the existing stock of 20 billion pennies will be removed from circulation, or if they will be removed at all. We think there is value in reviewing the experiences of other countries that have eliminated their lowest value denomination coins, and the methods they used to resolve these issues.

Thank you for the opportunity to appear before the committee to provide the banking industry's perspective on this issue. I welcome any questions you have.

The Chair: Thank you very much. I will go to questions of the honourable senators in a minute.

The Library of Parliament provided us with a schedule in terms of the millions of pennies that were put into circulation each year. You gave us a figure for 2009 of 456 million new pennies in circulation, and 20 billion in total in circulation in that one year. That number seems to be about half what was put into circulation each year previous. In some years, the number is one third of what was put into circulation as recently as 2006.

Is it your view that this number is a bit of an aberration, or is it a trend that reflects what you discussed in that there are more electronic payments and therefore less need for pennies?

Mr. Hannah: That is a good question. I looked at the trend over time, and the reality is that there does not seem to be a trend. Production oscillates greatly from year to year. I have not been able to see a particular trend with respect to the amount of new mintage that takes place with pennies.

The Chair: The other point that came up yesterday was from a witness who was involved with coin-operated vending machines and that kind of thing. He indicated that he had to pay the bank to deposit; he rolled the coins, his pennies, and then he had to pay money to the bank for them to accept the coins — in particular the pennies that we are talking about. Can you confirm that is the case and tell us more about that charge?

Mr. Hannah: The price involved in this situation depends upon what his banking relationship is and what sort of package he has bought if he has bought a package. Coin handling is expensive. A number of things are involved. As a consequence, a charge may be associated with it.

However, it also depends on what sort of banking relationship he has. There are everything-inclusive prices, where consumers pay one price and that is it for the business relationship. Some packages are more limited, and then there is à la carte pricing on top of that package. It depends on exactly what he has arranged with his financial institution.

The Chair: He would need an account to deposit it in. Does a retail bank provide that service? If I have 500 pennies and I want to convert them into something larger, do I have to pay a fee to convert them?

Mr. Hannah: Typically, you do not pay as an individual, but in the case of a business, they are dealing with an exponentially larger numbers of coins and multiple deposits. Typically, an individual will not walk in with thousands of dollars of rolled coins, but a business may well do that on a regular basis. As a consequence, the expense associated with handling that coinage is more substantial for the bank.

Would it be helpful if I walked you through what is involved in handling coins?

The Chair: I think it would be. We will focus on the penny but the process will be the same for any coin presumably.

Mr. Hannah: Coin handling in Canada is provided through a coin pool. The pool involves financial institutions, armoured car carriers and the mint.

Typically, the coin is not held on site in the branch. It is held in the vaults of the armoured car carriers. The branch will make a decision, based on the amount of coin it happens to have on site, whether it has enough to meet its current needs until its next shipment or whether it has a surplus. In some areas, it may have more coinage than it thinks it needs. If it needs to order additional coinage, it will call up the armoured car carrier, who will ship the coinage to the branch. Likewise, if the bank has a surplus, it will send coinage back.

The coins then go into, and are drawn from, a coin pool. All the institutions that are part of the coin pool that is managed through the armoured car carrier will have a notional allocation in that pool. If I, as a bank, withdraw a certain amount of quarters and ship back a certain amount of nickels, I debit my holdings in the coin pool for one amount and I credit it for another.

The advantage of this pooling relationship is that it minimizes the amount of surplus mintage that needs to take place because banks can make greater use of all the coins in circulation. However, handling and transportation costs are associated with this relationship, and with moving coins back and forth.

Then, once the coins are at the branch, banks have a certain set of other costs. They have packing and handling costs. When shipping coins back and forth, the mint has standard packing systems that must be followed because they try to make it easy and safe for the armoured car carrier. We understand that. There is a handling cost there.

Then there are the costs of distributing the coin through the branch and also through — in some cases they have what I can only describe as dedicated bank machines designed for the distribution of rolled coin. There is the operation and maintenance of those machines as well, plus periodic verification that happens.

Coin comes in a rolled fashion. Periodically, branch staff verify through spot checks that the coinage is legitimate, and then there is the general branch expense associated with that verification.

The Chair: That is interesting. Those of us who grew up with a local bank in our small community think of the bank as providing a service, and a lot of the bank advertising is in that direction, but you remind us banks have a lot of expenses that must be covered in some particular manner. As expenses go up in handling something that does not have a lot of return, then the bank has to think about how to handle them.

Last evening, we were informed by a witness, the vending machine operator, that of all the banks in his area, only one bank will accept his business. The rest do not want to be bothered with handling a large volume of small coins. Does that surprise you?

Mr. Hannah: I cannot speak to this individual's circumstance. I do not know what business they are in or what institutions they are working with, so it is difficult for me to speak with any degree of granularity.

I can say, an important point here you will notice, he did end up with service. He was able to access banking services in his community to meet his needs as a merchant. I think that point is an important one. In Canada, we pride ourselves on the fact that we are one of the most extensively banked countries in the world. Ninety-six per cent of Canadians have a bank account. That percentage is one of the highest in the developed world. That important point needs to be made.

Senator Gerstein: Thank you, Mr. Hannah, for appearing before us today. It was almost 50 years ago that Great Britain removed its half penny, and probably within the last five or six years, Australia, France, Spain, Israel, the Netherlands and New Zealand have removed their penny. In fact, in New Zealand and Australia, there was a one-cent and two-cent coin.

You have made remarks about coinage in general. We are not here to talk about coinage in total such as loonies, toonies and not even nickels, although a number of people have raised the subject of nickels and the future of the nickel in Canada. Let me focus solely on the penny.

I was a little surprised to hear you say, as a representative of the Canadian Bankers Association, that you had no view on it. Is that my correct understanding? You have no view as to what the banking association or the banks feel about the handling of pennies?

Mr. Hannah: Yes, that is broadly correct, and you have partially answered in your question why that is the case.

Banks provide a service to their clients. They view handling pennies as a service they provide to their small business clients. They charge for the service because it is an expense, but nonetheless, it is a service. We provide the service as clients need it, and we likewise provide whatever coinage they need. If they need pennies, we provide pennies; if they need nickels, we provide nickels; if they need dimes, we provide dimes; and so forth.

The elimination of the penny changes that equation a little but not much. We still have to provide a service to the clients. There will still be coinage in circulation. If the government decides they want to change the denominations, we are happy to work with them to make that change, but it is not something we view as a priority from an industry perspective.

Senator Gerstein: If you were to assume it to be a priority, it would have to be in relation to something else. Again, it comes down to the actual handling of it. What do your customers tell you? Are customers happy about dealing with pennies? Surely there must be some kind of a reaction. I am surprised there is no reaction from the association. Yes, I understand you provide a service, but surely there must be some kind of feedback from your member banks and from customers as to whether the penny has a role in the coinage of Canada.

Mr. Hannah: That is a good question as well.

I know that the mint itself conducted a survey a couple of year ago — they may have mentioned it when they were here — where they asked businesses and consumers about the future of the penny: Do they want the penny eliminated; and do they want to keep it? As I recall, two thirds of small businesses said, let us eliminate the penny. Consumers seemed to be more split at the time; some were in favour and some were uncertain.

Consumer concern one way or the other about the future of the penny is not something I can say comes to our attention as an association on a regular basis. Likewise, when we addressed the question with members, it is not something members identified as a priority.

Nonetheless, we recognize that this committee is studying an important issue, so we want to be here to provide a resource to you to help you in those deliberations.

Senator Gerstein: Thank you.

Senator Marshall: I share Senator Gerstein's reaction. He was surprised and I am disappointed that you do not have a position on whether we should keep or eliminate the penny.

What impact will eliminated the penny have on the members of your association? Will there be any impact? Will there be cost savings? Will there be any advantage or disadvantage to your members? Can you speak to those issues?

Mr. Hannah: There are cost elements to handling coins, as I mentioned. There are transportation, storage, packaging and handling expenses. Yes, there are those expenses. What we do not know as an association is what it will mean with respect to pricing issues and what it will mean to how both retail and bank pricing happen. These issues will need to be resolved, and they are not things we have gone through in depth and studied.

However, bear in mind that, again, from our perspective, we view handling coins as a service to our members and we will still have to deal with coinage because there will still be a lot of coinage in circulation.

Senator Marshall: To ensure I understand you, you went through the scenario of your coin poll and everything, so if the penny is eliminated, there should be cost savings. However, you are providing services at a price. Therefore, if the penny is eliminated, you will rejig your internal processes and your internal fees. Is that right? Is this why you do not have a position on eliminating the penny? Regardless of whether the penny exists or not, you will adjust by rejigging your pricing and your services. Is that right?

Mr. Hannah: With respect to the question about pricing, clearly there are cost savings. This market is a competitive; if there are cost savings, eventually they find their way into retail prices. How that happens, the magnitude of this cost savings and how long it takes to find its way into pricing are difficult to assess. Again, the penny is one denomination involved in coin management that is one part of treasury and cash management, so it is a small slice of a broader business.

In answer to your question, the change will find its way through the marketplace and the market will re-establish itself; correct.

Senator Marshall: Based on your knowledge of the banking system and the system of your members, do you think that if we eliminate the penny, its elimination will eventually filter through to become savings for your customers as opposed to extra costs? Are cost savings anticipated? What is your gut feeling?

Mr. Hannah: As I said in my opening remarks, there will be modest cost savings associated with reducing the amount of coinage that must be shipped and handled.

As I mentioned a moment ago, in a competitive marketplace — and this is a very competitive marketplace — banks compete with each other for business, with trust companies, credit unions, ATB, Desjardins and so on. That saving will eventually find its way down into retail prices. However, how big that saving is and how we separate out that slice from all the other factors that go into pricing a complex relationship that happens between a bank and its client, and how we sort out that factor from all the other economic factors that are at play at the time is difficult.

Senator Marshall: The only thing I can say in conclusion is that it does not give us much reassurance in that we are asking you the question. I would hate to make a decision to eliminate the penny and have the members of the association, two years down the road, say they have to increase fees for their customers because we scrapped the penny.

Senator Callbeck: Thank you for coming this evening. Yesterday one of the witnesses made reference to the fact that not everyone can open a bank account. How do banks determine whether someone can open an account?

Mr. Hannah: In Canada, we have regulations under the Bank Act called Access to Basic Banking Services Regulations that require a chartered bank to open an account if someone presents two pieces of identification from a prescribed list. It is a requirement.

Senator Callbeck: I have talked to people who tell me they cannot open a bank account; the bank will not accept it.

Mr. Hannah: I do not know their specific circumstances, but there are few instances where Access to Basic Banking Services Regulations do not apply. The only exceptions I can think of are if banks suspect somehow that the identification provided is fraudulent or that something criminal is happening. Those are the only two exceptions to Access to Basic Banking Services Regulations.

That being said, bear in mind those regulations apply only to federally regulated financial institutions; they do not apply to credit unions, caisse populaire, Desjardins and ATB. Those institutions have their own rules, so I cannot speak to them.

Senator Callbeck: No, I am speaking of federally regulated banks. If people have a driver's licence and their social insurance number, they can open an account?

Mr. Hannah: They should be able to open an account. If they cannot, I recommend that they talk to the Financial Consumer Agency of Canada or talk to the bank ombudsman.

Senator Callbeck: Do you have any idea what per cent of Canadians have a bank account?

Mr. Hannah: Ninety-six.

Senator Callbeck: Ninety-six per cent?

Mr. Hannah: Yes; that information is according to a survey by the Financial Consumer Agency of Canada in, I believe, 2006.

Senator Callbeck: You have no official position on whether the government should eliminate the penny or keep it, but yesterday a witness suggested that we look not only at the penny but at the nickel as well. Do you agree?

Mr. Hannah: One would want to walk before they run.

Senator Callbeck: Yes; if the government decided to discontinue the penny, should this elimination be a gradual phasing out or should it be terminated all at once?

Mr. Hannah: That is a good and important question. Again, we have this large stock of coinage in the market. Clearly, you want to ensure that whatever decision is made is properly communicated and communicated well in advance because you do not want to give people cause for concern that somehow they will lose all this value. If they have cause for concern, then predictably retailers and financial institutions will face an immediate onslaught of pennies. That will not be good for anyone, so clearly, communication will be an important part of whatever strategy the government opts for if it moves in this direction.

Senator Callbeck: If they decided to terminate it, when you say communication, are you talking three months, six months or a year?

Mr. Hannah: I think the more time, the better because, again, you want to ensure that people understand, you want to ensure that they recognize what the process is, and you want to ensure all this change happens in an orderly fashion. Typically, you will need to tell them not once but multiple times. It takes a while for changes like this one to reach into the public consciousness, so you do not want to make it quickly.

The Chair: Let us assume two years. What happens after two years to those people who still have a few pennies at home? Is it no longer proper tender that can be used? They cannot take it to the bank and say, give me five cents for these pennies?

Mr. Hannah: That will be a public policy decision the government must make. Does the government take all pennies out of circulation and set an end date for their use? Does the government stop minting new pennies and let them slowly dissipate over time? If the government sets an end date, what happens after the fact? Is there a redemption process? Is it like when the Europeans moved to the euro? Did they have a process for migrating domestic currency to the new currency? Those questions have to be resolved in this process if the government goes down this road.

It will be helpful in that regard to look at what other jurisdictions have done in this area because they will have encountered these questions either beforehand and thought them through or after the fact if they had not thought them through before. One way or the other, their experience will provide valuable lessons in this context.

The Chair: Can you help us with respect to the $1 bill and the $2 bill? If we had one of those paper bills nowadays, can we still use it to pay for things?

Mr. Hannah: You probably can, but if you have a $1 bill and it is valid, I do not think I would sell it for $1.

Senator Dickson: Thank you for your firm opinion that you do not have any opinion. That information gives us direction.

To come back to the communication process, which you brought up, we have heard from other witnesses that this process is vital if a decision is made to eliminate the penny. Who will share the cost of that communications process. Will your organization share in the cost of that communications process? The government has been favourably inclined to assist banks with buying mortgages from the banks, and in other ways.

Do you have an opinion as to the extent to which your association will assist financially in the communications process? Other associations are giving serious consideration to it, by the way, so you know the background.

Mr. Hannah: In the hypothetical it is hard to answer that question, obviously. I will say generally that banks communicate with our clients all the time. Banking is a relationship business. The bank wants to communicate with its client to ensure its client is situated in the right product, is comfortable with the service it receives and is comfortable with the relationship. If something changes that relationship from an institutional perspective, an institution will communicate with its clients; but it is difficult for me to say more than that because the rest of it will depend on the circumstances, situation and process that is put in place to roll out this change. A discussion would have to take place at that time when that decision is made.

Senator Dickson: By checking with international associations, corresponding banks where coinage has been taken out of operation, can you please go back to your membership banks, discuss with them the extent to which they may or may not participate in such a communications process, then come back to us with an answer? I look in the paper today, and the Royal Bank has one full page at least on mortgage rates; promoting mortgages and whatever. Will they provide "X," will they cooperate with us or will they do nothing? We want to know.

Mr. Hannah: The challenge is that the question is hypothetical, and I am certain the answer will be: Can you tell me more about the specifics of how this change will take place. Absent that information, it will be difficult to give you any more of a direct answer than I have given, even if I were in their shoes. Participation would be decided at the time based on the circumstances and the plan in place to try to phase out the product. It is a difficult question for them to address as it is a difficult question for me to address.

Senator Dickson: With great respect, I prefaced the question by suggesting that you check with other jurisdictions. The Canadian banking system is big and successful. You cannot expect government to do everything. Can you check, please, and return to us with an answer? Give us scenarios, such as what action bank "X" in Australia took, et cetera, including whether certain banks did nothing. I am ready to declare you a hostile witness.

The Chair: I will declare you a hostile senator.

Senator Dickson: I am becoming concerned.

Mr. Hannah: Senator, I can ask some of the other associations in jurisdictions where they eliminated a coin what process was put in place. That is about as much as I can do. Does that address your question?

Senator Dickson: At least you are moving. Thank you.

The Chair: Thank you for your aggressive questioning, Senator Dickson.

Senator Murray: Mr. Hannah, we have before us a study of whether the country should abolish the penny. You have told us that you do not have a recommendation in that respect, and I respect that view. We are dealing at the level of principle now.

However, as one of the witnesses yesterday reminded us, as with all great initiatives, the devil is in the details. Instead of a bill before the committee proposing legislation to abolish the penny and to detail how the rounding will take place, we have this study. What would your position be if we had a bill?

As you know, merchants can continue to charge $1.59 or $1.98 or whatever, and in the final price it is indicated to us that if rounding is symmetrical, prices will be rounded down when the final price ends in 1, 2, 6 or 7 cents, and rounded up when the price ends in 3, 4, 8 and 9 cents. That rounding can take place in respect of cash transactions or all transactions, including electronic transactions with credit cards and debit cards — instruments in which your members have more than a passing interest.

If we have a bill before us that contains such detail, do you think that the Canadian Bankers Association and the chartered banks will be here to give us their opinion on the bill and the details?

Mr. Hannah: Certainly, if there is a bill related to banking, we will examine it as we examine any bill related to banking and financial services.

Senator Murray: Does the Canadian Bankers Association conduct research of any kind for the chartered banks? I presume members of the CBAare the chartered banks of Canada? Are there other members?

Mr. Hannah: No.

Senator Murray: Are there other financial institutions?

Mr. Hannah: No, they have to be a chartered bank to be a member of the CBA, whether domestic, foreign branch or full service. A member must be a chartered bank.

Senator Murray: How many members are there?

Mr. Hannah: There were 51 members at last count.

Senator Murray: Your members will want to weigh in on this subject. I asked whether your organization conducts research. I would be astonished to learn, in view of the discussion that arises more than periodically of what to do about the penny, that either you or some of your members had not conducted research as to various scenarios that the government or Parliament might follow, and the resulting effects on the banks. Perhaps the rounding one way or another will cancel itself out on electronic transactions but I am sure your members have conducted research into that area, if only in their enlightened self-interest.

Mr. Hannah: In the instance that there is a clear and present issue, we will look at it. We will make an informed decision about how we will respond to the issue, and then we will communicate the informed decision.

Senator Murray: Perhaps you do not know the answer to this question and we need to ask one of the banks. Perhaps we should ask but I would be surprised if they had not looked at it. The banks have well-equipped and well-staffed research departments so I would be surprised to learn that they had not examined various scenarios with which a government may propose legislation to eliminate the penny. Do you think it possible that they have conducted that research?

Mr. Hannah: I do not know. When I asked the question of our members, the response was reflective of what I have told you.

Senator Murray: Perhaps we should make an inquiry to them to determine whether they can help us in that respect. Perhaps they can share with us research, albeit hypothetical, that they have conducted on various hypotheses.

The Chair: Next week, we hope to talk to a witness from the Royal Bank of Canada who has been involved in survey work. We may be able to delve into that issue and, if we are not satisfied, we will expand to other witnesses.

Senator Murray: That is fine.

Senator Runciman: I have a supplementary question to Senator Marshall's question on the economic implications for the banking industry. I cannot recall if it was Desjardins Group that we heard this testimony from when we started this process in the spring. Did they indicate an estimated $20 million in savings annually for the chartered banks? I recall the witness indicating savings of that amount. Are you aware of that savings?

Mr. Hannah: I am aware of the study, but I cannot verify its authenticity. I am not in a position to either refute it or to bolster it, but I am aware of the study.

Senator Runciman: To follow up on Senator Murray's suggestion, when the government contemplates an initiative that has potentially positive or negative implications for the banks, why would an association like yours not try to assess those implications? I am curious as to why the CBA, an association representing the chartered banks, would not take a thorough look at such a study precisely in terms of those potential implications for your membership.

Mr. Hannah: As I said earlier, we view this issue as being a client service issue. As an industry, banks provide coin management services, cash management services and account management services to clients. They will continue to do so irrespective of whether the penny is maintained or eliminated.

Senator Runciman: This is futile in the sense that if there were financial implications, it would strike me that an association would want to know what they are.

The Chair: We have checked through our research from before the summer break and found that Desjardins Group indicated to the committee that they believe the cost to the financial institutions of having the penny is about $20 million. The savings if the penny is eliminated, by implication, is $20 million, given the storage, transportation, extra handling, et cetera, that will be eliminated.

Senator Marshall: Unless the banks pass that $20 million in savings on to the customer, it might not be a savings to the bank.

The Chair: It is a savings that they can do something with.

Senator Marshall: I want to go one step further. You said that the association has not taken a position on the elimination of the penny. Will the same hold true if the decision is made to eliminate the penny? Will the association be interested in providing input on the process, or is that something they have no interest in expressing an opinion on and no interest in participating in what the process will be?

Mr. Hannah: Clearly, if a decision is taken to eliminate the penny, we want to be involved or consulted on some level on how that process rolls out. Again, the process will guide how much friction will happen as we make this change. We will certainly want to be part of the process for making that happen, and we would have to be; bearing in mind that, again, most of the coinage ultimately is circulated into the economy one way or the other through financial institutions, whether through banks, credit unions, caisses populaires or what have you.

Senator Marshall: Since the association has not expressed an opinion on whether the penny be retained or whether we eliminate the penny, it seems to me the association does not anticipate any big impact on the bank other than the $20 million in savings. It seems that we can eliminate the penny and it will not be a big deal for your members.

Mr. Hannah: As I said, the main issues are around pricing. Are there systems implications? There probably are, but one way or the other the institutions still have to handle coinage. The big questions are the ones around pricing — and those questions will need to be resolved — and the ones around communication to clients on how to remove these things from circulation, if you remove them at all. Those are the big issues that need to be resolved.

Senator Marshall: This is probably an unfair question but I will ask it anyway: Do you think we should eliminate the penny soon, or do you think it is worthwhile waiting until people use electronic payments more?

Mr. Hannah: You are right; it is an unfair question.

Senator Marshall: You can answer it anyway.

Mr. Hannah: There are more electronic payment options now than ever before. People are making use of them. I highlighted a few of those options in the opening remarks. That being said, it is also fair to say that a lot of coinage is still being circulated out there because obviously, the new mintage is still happening and people still make use of it. Timing on these things is always a challenge. It is difficult to say with certainty but options are available.

Senator Marshall: If we wait long enough, the penny will take care of itself.

Mr. Hannah: That is a good question.

The Chair: I guess there will be no answer to that last question. You do not have to answer. It is your prerogative and we do not want you to feel we are cross-examining you here. We are trying to develop options on an idea that we may or may not develop into a piece of legislation. Your participation early in that study helps us in defining the best way to go.

We appreciate your being here early on in this process. We are not studying a bill here, as has been pointed out by Senator Murray. Rather this study is a policy study to determine whether this concept of the penny or penny elimination is a good idea, and if so, how do implement it.

I will leave the last question to Senator Gerstein, the deputy chair of the committee.

Senator Gerstein: Mr. Hannah, I will come back to where I started. We had representatives from the retail council and the grocery association yesterday, and both of them indicated that we should eliminate the penny. They had caveats, but that is their position.

The Canadian Bankers Association, as you mentioned, represents 51 banks. I believe the number of employees is close to 250,000. I have always viewed the CBA as a bit of an advocacy group; that they really look into whether there are effective public policies that contribute to the economy and that are good for Canadians.

Am I to walk away from this meeting with the assumption that you have no view on eliminating the penny; that you do not care, and there is no view? You have told us that the bottom line is, whatever decision is made we will continue to service customers. Is that the view of the advocacy group?

Mr. Hannah: We do not have a strong view on this issue. That much is correct.

Senator Gerstein: Is there even a weak view?

I am not trying to pressure you; I only want to be clear.

Mr. Hannah: I think my answer to Senator Marshall may provide guidance here. We want to be part of the process, were a decision made to eliminate the penny. We do not have a strong view one way or the other though on whether that decision should be taken.

Senator Gerstein: That is my concluding question.

The Chair: Thank you, and thank you very much Mr. Hannah, the representative of the Canadian Bankers Association, for appearing again before us on this subject. The Finance Committee appreciates your agreeing to be here. You may want to stay on. We will speak next to the Consumers' Association of Canada. You can witness different points of view.

On behalf of the committee, we thank you very much for being here.

We will now hear from Mel Fruitman from the Consumers' Association of Canada.

You heard the discussion we had in the previous session, Mr. Fruitman, from the Canadian Bankers Association. You know the types of questions we might ask. With that background, do you have a few introductory remarks?

Mel Fruitman, Vice-President, Consumers' Association of Canada: Thank you very much, chair. By way of brief introduction, the Consumers' Association of Canada, as many of you know, is a 63-year-old independent, not-for- profit, volunteer-based national organization. Our mandate is to inform and educate consumers about marketplace issues, to advocate for consumers with government and industry, and to work with government and industry to solve marketplace problems in beneficial ways.

To the topic at hand, I will be brief because what I have to say today is to reiterate and reinforce much of what you have already heard in your previous discussions.

As you are aware, basically, the penny no longer has any purchasing power. We cannot buy anything for a penny any more. You have heard anecdotal information. My anecdotal information is that when my parents had a variety store 50 years ago, during the 1950s, we used to sell penny candy and it really was a penny; it is now ten cents or a dollar. For a penny, consumers could buy three blackballs or a piece of bubblegum. For two pennies, they could buy a strip of paper with buds of candy on it. However, at the same time a loaf of bread was 17 cents, a quart of milk was 21 cents, a pack of cigarettes was 31 cents and a chocolate bar was 5 cents. Interestingly, even if consumers could buy that chocolate bar today for 5 cents, here in Ontario it would cost 7 cents by the time they added the HST and rounded it up, so there is a point about rounding.

Pennies are considered by most people to be a nuisance because they have so little value. We have to carry them around with us. We see so many stores now that have that little jar or dish — give a penny, take a penny — because stores do not want to deal with pennies and consumers do not want to deal with them. Interestingly, I ran into this factor at the airport on my way here. I had taken out all my coins and put them in my briefcase to go through security. Then I bought a muffin, which was priced at $2.49. By the time the tax was added in, it came to $2.61. I thought I had a penny but could not find it, so I wound up with four more. Now I have five pennies floating around. That is a nuisance, and I think most people look at it that way.

Had there been someone behind me, they would have been ticked off about the fact that I was taking time to rummage through my briefcase to see if I had that penny. It slows things down. Some organizations have attempted to put a dollar value on that time and expand it to the economy as a whole. I do not know whether their figures are right or wrong. I do know, as a consumer, that if someone standing in a lineup has a person in front of them groping for pennies trying to make that transaction, the person waiting becomes annoyed because the person in front of them is slowing everything down.

As far as we can see, there is absolutely no downside to eliminating the penny. Unequivocally, please, let us eliminate the penny.

The Chair: I am sorry that Senator Gerstein could not hear you say that.

Senator Murray: As a witness here the other day said, the devil is in the details. Suppose we were drafting a bill and you were helping us draft that bill. It would receive second reading from you because you are in favour of the principle. Now we are into the details. You agree that merchants cannot be prevented from, and should be encouraged to, continue pricing at $1.59 or $1.98, whatever it is, and therefore rounding will be needed. Do you agree that rounding up and rounding down cancel each other out over time?

Mr. Fruitman: Yes, definitely, if we are talking about purchases of multiple items.

Senator Murray: Yes, and after the tax.

Mr. Fruitman: If we purchase one item, as I purchased in that particular instance, clearly it will be biased in one direction or the other. However, by the time we add in a number of items and add on the tax, then, statistically I believe rounding does balance out.

Senator Murray: I mentioned earlier to our friend Mr. Hannah how it was supposed to work. If rounding is symmetrical, as it says here, we round down prices where they end in 1, 2, 6 or 7 cents, and up where the final price is 3, 4, 8 and 9 cents. You agree with that.

Do you believe that the rounding should apply only to cash transactions, should it apply across the board to electronic credit card or debit card transactions, or do you think it matters?

Mr. Fruitman: I think it will apply only to cash transactions. We are talking about eliminating the penny, which is a cash transaction, and eliminating it for various reasons. There is no reason to round up or down an electronic transaction where the amounts can be dealt with in the exact amounts.

Senator Murray: With one sort of transaction, the cash transaction — which according to the testimony we heard yesterday comprises a smaller and smaller proportion of transactions — as the only type to which the rounding will apply, will either the cash transaction or the electronic transaction be advantaged or disadvantaged vis-à-vis the other, by reason of that fact?

Mr. Fruitman: I do not think so. We are talking pennies, so the difference in that transaction will be small. Particularly, an electronic transaction tends to be for higher amounts than the cash transaction, so if we are talking about $10, $20, $30 or more, a penny this way or the other will not make a difference, but it should not wind up arbitrarily in the hands of someone else.

Senator Murray: It should not even wind up with the government?

Mr. Fruitman: Definitely not the government.

Senator Murray: In summary, if we have a bill before us, obviously you are in favour of the principle. Is there any item of the implementation that you think the Consumers' Association of Canada will want to be heard on, with regard to any of these details that I have mentioned?

Mr. Fruitman: Yes, I think we would want to be involved in whatever the rollout plan is.

Senator Murray: What do you mean by the rollout plan? I am talking about the details of how it will work.

Mr. Fruitman: The implementation, yes.

Senator Murray: That is, the details, the rounding up and down and whether it applies to cash.

Mr. Fruitman: How it will work, how it will happen, what the time frame is, how it will come about in the marketplace, what advance information will be given to people, what the time frames are for conversion to take place in the stores and whatever the banks must do to accommodate it. I think we would want to be involved. I am not familiar with how it was implemented in other countries, but I believe it was over an extended period of time.

Senator Murray: You would be out there, out front, supporting a government that took this initiative?

Mr. Fruitman: Yes.

Senator Murray: Would your organization play a part in the educational and communications process?

Mr. Fruitman: We do not have the mechanism to do so. We are a volunteer organization without the resources.

Senator Murray: How do you conduct your advocacy? You are able do the work you are doing now.

Mr. Fruitman: We are involved in this sort of thing.

Senator Murray: You are not involved in public advocacy?

Mr. Fruitman: How do you mean that?

Senator Murray: Do you conduct a public communications program?

Mr. Fruitman: We do not. We do not have the resources. We respond, react and try to provide our input when we can and when appropriate. We deal with the media often when they ask us questions about how things affect consumers and what consumers think.

Senator Murray: How are you financed?

Mr. Fruitman: We are not. We are financed by nominal donations by people who feel that they would like to have us, and a lot out of pocket, when it comes down to it.

The Chair: You ask people for their extra pennies to keep you going?

Senator Murray: What do you have by way of a central headquarters or organization? Do you have a full-time staff?

Mr. Fruitman: We do not. We used to have a part-time office in Ottawa. We recently closed that down. We are operating basically electronically now.

Senator Murray: You are the president.

Mr. Fruitman: I am vice-president.

Senator Murray: How did you become vice-president?

Mr. Fruitman: I was elected at an annual general meeting. We have an active board of directors and we have an annual general meeting, which anybody who has paid a membership fee can attend. We still accept memberships, but we do not solicit them anymore. We do not have a mechanism to solicit members.

Senator Murray: How many paid-up members do you have?

Mr. Fruitman: I honestly do not know.

Senator Murray: If I want to join, how much do I pay?

Mr. Fruitman: About $25 per year. We like to say we have 33 million constituents.

Senator Murray: Sure, so you do. Thank you.

The Chair: You touched nicely on a number of points, Senator Murray.

Senator Marshall: That was informative. Does the association have any views on the length of time with regard to implementation? If the decision is made to eliminate the penny, does the association prefer to see something happen quickly or does it prefer to see something like a three-year period to give people a lengthy period of time to bring in their pennies?

Mr. Fruitman: Definitely not quickly. I am not sure what the most appropriate period would be. It could easily be a couple of years. Eliminating the penny is something that needs to be done but it is not urgent that it be done now. It requires lead time, first, to work out details. The next step is for the changes to take place; any modifications that need to be made to electronic systems, cash registers and so forth for people to adapt. Clearly, there must be a good communications program associated with the rollout.

Senator Marshall: You are not thinking about a quick transition period but something longer than three months?

Mr. Fruitman: I am thinking of a minimum of nine months, probably much longer.

The Chair: Yesterday, a witness said in a normal business cycle, they repair slot machines and coin-operated equipment on a 12-month to 18-month cycle. How does that time frame fit in with what you are thinking?

Mr. Fruitman: That is probably acceptable. I presume you are talking about vending machines. I am not sure any of those machines accept pennies anymore.

The Chair: No; he was trying to convince us to eliminate nickels too.

Mr. Fruitman: I see. That is a whole different issue.

The Chair: Yes; we are not studying that issue.

Senator Marshall: I cannot recall who it was, but I think one of our witnesses yesterday talked about three years.

The Chair: The issue we are trying to determine is, what happens after three years. If we say it is to wind down over three years, after three years can the penny still be used? If someone has five of them, can that person use them for a five-cent purchase, or are they no longer legal tender? That is one of the details that we will have to work on.

Mr. Fruitman: I am not sure how that detail would work. Perhaps, after a certain period of time — during which retailers will have the opportunity to make whatever changes they need to make, the communications program has been rolled out and we know what is happening — then retailers can round up based on the formula that Senator Murray mentioned. That approach will then not take them afoul of the Competition Act because of the way they are pricing.

At the same time, if retailers do not have the capability of rounding down for whatever reason, the consumer can round down. In other words, if I buy something and my bill is $9.52 and retailers do not have the wherewithal or the wit to tell me it is $9.50, I can offer them $9.50 and they cannot refuse it.

Then sometime again after the penny is taken out of circulation, retailers should not be obliged to accept payment in pennies, but whether they are still legal tender or not, I do not know.

The Chair: I do not know either. We are asking questions at this stage.

Senator Runciman: Yesterday in the retail council's written submissions, they raised the spectre of tax-in pricing in relationship to rounding, which included eco fees as well. Does your organization have a view on tax-in pricing?

Mr. Fruitman: Eco pricing opens up a whole bunch of cans of worms. It was poorly implemented several months ago here in Ontario.

I think consumers are split on tax-in pricing. On the one hand, we like to know how much the government is raking off the top from us. On the other hand, it is easier to know what the final price is at the cash register. Again, it does not make much difference when we are talking about purchases of multiple items. Few people go through a supermarket with a calculator and total up how much they are spending so they will know what the cost will be at the cash register so we are talking about one- or two-item purchases.

I lean towards the tax-out pricing so we can see what it is, we know what it is, and we know how much is added on.

Senator Braley: Does a business have the right to price items either way? Some price one way and some price the other way. They have the right to do that.

Mr. Fruitman: I am not positive about that. That item has been up and down over the years. I am not sure where that item sits now.

Senator Braley: I have retail operations selling football tickets with taxes in, and I have operations that add the tax to the price. They have the option now, as a business, to price either way.

Mr. Fruitman: This discussion took place — I guess it was almost 20 years ago — when we converted from the Federal Sales Tax, FST, to the Goods and Services Tax, GST. Some organizations, at that time, opted for tax-in pricing while others did not. The competitive marketplace basically forced businesses to tax-out pricing, because if they used tax-in pricing and their competitor used tax-out, tax-in prices looked higher.

Senator Braley: That is the merchant's decision. We still have the right as the retailer.

Mr. Fruitman: I am not positive, I am sorry.

Senator Murray: Does it depend on the province?

Senator Braley: I have Ontario and British Columbia operations. I do not know about Alberta.

Senator Murray: I am talking about the authority. In some provinces, it may be.

Senator Braley: The federal government collects the tax now for both provincial tax and GST, which is the Harmonized Sales Tax, HST, in the various provinces, but otherwise federal and provincial governments have two sets of auditors. In both cases, they are working with whatever decision is made. In Ontario now, it is 11.5 per cent for the 13 per cent.

Senator Murray: I remember the discussion well. This point is slightly off subject, but I remember well when we brought in the GST. There was a discussion within the government as to whether we should insist on the tax being within or outside the price. I am not sure what the authority of the federal government is in that respect. Perhaps we could have legislated to have tax-in pricing.

I felt then — and I suppose in principle I still feel, since I am a small "c" conservative — that it is wise and only fair to show what the taxpayer is paying in taxes. On the other hand, since that time I have been startled by the number of people, both merchants and consumers, who vastly prefer a system like, say, with the Value Added Tax in Europe, where VAT is included.

The Chair: They know what the price is when they pick it up.

Senator Murray: Yes, and they do not have to calculate in their own mind what GST plus PST is.

Senator Braley: Merchants have to show the amount on the invoice, if there is an invoice, and whether the tax is in the calculation or not, so tax is shown.

Mr. Fruitman: Again, that issue, in part, relates to another educational problem we have these days with so many people who do not know how to calculate in their heads anymore. At 15 per cent, they had trouble, and at 13 per cent in Ontario, it is much more difficult. There is that argument but, as I said, I personally still prefer to see the tax out so that we know how much it costs.

The Chair: I may be able to bring us back on topic with this question, because I think Senator Murray might have opened it up.

We had a discussion yesterday about consumer protection legislation, and that involves advertised pricing and a number of things like that. Quebec was the province that was mentioned.

Are you familiar with consumer pricing legislation in provinces that might impact on a decision to become involved in rounding up and rounding down, such as has been discussed here?

Mr. Fruitman: Not specifically; it has been a long time since I have looked at that perspective. I recall that there was something different in Quebec, but I am sorry; I do not remember exactly what it is.

The Chair: That is another area for which we hope to have a briefing note from our researchers, to help us with whether, if the recommendation is to eliminate the penny, it can be handled without some provincial approval; whether it can be handled by the federal government solely, on its own.

Mr. Fruitman: That is something that will have to be researched. I suspect that it can be, but I am sorry; again, I do not know, without going into the details of the various provincial legislation. Some of this issue goes way back to the days of the disputes and discussions about bar-coding and showing prices on product, so it was all wrapped up in that issue.

The Chair: Are there any questions flowing from that?

Senator Callbeck: I have one question. Yesterday the Retail Council of Canada was here. They say that in considering the elimination of the penny, many believe that Canada's value-focused shoppers will be receptive to claims that the elimination of the penny will increase prices. What do you say to that view?

Mr. Fruitman: There is that fear out there, but again it is a competitive marketplace. Retailers try to make it appear as though their prices are better than their competitors' prices. There is a psychological factor in there, long established, of the 99-cent and 98-cent pricing rather than going to the even dollar; that if it is $5.99, somehow it sounds less expensive to us than $6. I think that factor will still hold and I do not think that retailers are likely to use that factor as a mechanism for bumping up all their prices. If a retailer says that an item that was $5.99 will then be priced at $6, and if a competitor comes out at $5.99, the price will look a lot cheaper, even if it is only one penny.

The Chair: Thank you, Mr. Fruitman. That seems to be all our questions. We appreciate your appearing and helping us out with the consumer point of view.

Mr. Fruitman: Again; do it.

The Chair: This meeting is now concluded. We meet again next Tuesday morning. It may well be that we will meet a half hour early if the funeral for one of our colleagues takes place at 11 a.m.

(The committee adjourned.)