TAXATION, ACCOUNTING RULES AND FACILITATION OF ELECTRONIC COMMERCE
1. Regulated Financial Sector
Taxation Levels
2. Accounting for Business
Combinations
3. Facilitation of Electronic Commerce
SECTION I
TAXATION, ACCOUNTING RULES AND FACILITATION OF ELECTRONIC COMMERCE
1. Regulated Financial Sector Taxation Levels
Background
The Task Force recognised that taxation is complex. The level, structure and overall impact of taxation is determined by many factors including governments’ revenue objectives, particular characteristics of the sector being taxed, and the interaction of uncoordinated tax measures levied by provincial and federal governments. The Task Force, having reviewed the submissions of many groups as well as the research report, felt compelled to comment on a number of important tax issues that it believed governments should address as quickly as possible. (Task Force Report, Background Paper #1, pp 133-136)
The overall tax burden on the financial sector has been increasing rapidly and is substantially higher than the tax burden on the non-financial sector. For example, The Conference Board of Canada reports:
Despite strong overall corporate performance in 1994, 1995 and 1996, financial institutions continue to pay a substantially higher proportion of the income tax payments made by the corporate sector (over 19 percent) than would be expected based on their proportion of either revenues (almost 6 percent) or profits (slightly more than 17 percent).
Similarly, a recent study by Statistics Canada indicates that the financial sector accounted for 25 per cent of all corporate taxes paid in 1994 (compared with 14 per cent in 1988) and only 12.5 per cent of total operating revenues. From 1988 to 1994, the financial sector’s contribution to total corporate taxes roughly doubled, whereas the contribution of the non-financial sector increased by 5 per cent.
The major factors leading to the relatively high level of taxation in the financial services sector are the imposition of special taxes on capital by the federal and provincial governments, taxes that do not apply to other sectors, and the imposition of premium taxes on insurance companies by provincial governments.
At the federal level, the Part I.3 large corporations tax applies to all corporations with capital in excess of $10 million. The current rate is 0.225 per cent, having been increased in 1995 from 0.2 per cent. Virtually all financial institutions are liable for Part I. 3 tax.
The second federal capital tax, Part VI tax, is levied on regulated financial institutions only, and only on their capital in excess of $200 million. The rates are 1.0 per cent on capital between $200 million and $300 million, plus 1.25 per cent of capital in excess of $300 million. The Part VI tax was introduced for deposit-taking institutions in 1986 and extended to life insurers in 1990. In 1992, life insurers were subjected to an additional Part VI tax. The effect is to make the tax progressive for life insurers, with Part VI rates ranging from 0.5 per cent on capital over $10 million to 1.5 per cent on capital over $300 million.
In 1995, the federal government introduced a temporary surtax of 12 per cent of Part VI capital tax. Originally scheduled to be in effect until October 1996, it has been extended until October 1999.
Both of the federal capital taxes can be reduced by income tax paid; the "temporary" 12 per cent surtax, however, cannot be so reduced. The capital taxes ¾ and particularly the Part VI tax ¾ are designed to act as a minimum tax on financial institutions. The effect of this can be seen in the revenue flows:
Since 1990, all provinces have levied capital taxes. The definitions of the bases vary, as do the rates, and some provinces have introduced surtaxes as well. Rates tend to be in the range of 2 to 4 per cent. This translates into total provincial capital tax revenues of $522 million in 1996, up from $375 million in 1991. Provincial capital taxes are deductible from federal corporate income tax.
There are a number of issues related to the structure and level of capital taxation in the industry.
Capital is important for the financial stability of the enterprise. Because the capital tax applies at the margin (that is, to every additional dollar of capital raised), it increases the cost of adding to capital. The capital tax thus creates an incentive for an institution to hold less capital or to hold capital offshore so that it will not be subject to tax. In either case, the tax can lead to behaviour that prejudices the safety and soundness of the institution. Capital taxes increase the cost of doing business.
The Task Force believes that capital taxes levied on financial institutions make the institutions less competitive and create risks to their safety and soundness.
Task Force Recommendations
44)Governments in Canada should recognise the importance of financial institutions to the Canadian economy, both as strong domestic industries with significant international potential and as vital contributors to the health of other Canadian enterprises. Because the level of taxation of Canadian financial institutions is damaging to the competitive position of Canadian companies and is increasing costs to Canadian users of financial services:
(a) As fiscal conditions permit, governments should take steps to reduce the level of taxation so that the financial services industry is equitably treated vis-à-vis other sectors in the Canadian economy, and competitively taxed vis-à-vis financial institutions in other countries.
(b) In particular, steps should be taken both at the federal and provincial level as soon as possible to address the burden which special capital taxes place on financial institutions:
(i) Special capital taxes on financial institutions should be eliminated. If this is not possible, the recommendations in (ii), (iii) and (iv) should be pursued.
(ii) To the greatest extent possible, the tax burden should be shifted from capital and toward profits.
(iii) The federal government should work with the provinces to define a common tax base related to capital.
(iv) Efforts should be made to define a capital tax base that would tax capital in excess of that required for regulatory purposes very lightly or not at all, so as to encourage Canadian financial institutions to be well capitalised.
(c) The Task Force urges provincial governments to be sensitive to the double taxation consequences of transaction taxes on insurance premiums (such as the GST, sales taxes and premium taxes) and their impacts on consumers and, over time, to take measures to alleviate those impacts.
Views of Witnesses
There was widespread agreement among witnesses addressing this issue that capital taxes are a serious problem for the financial services sector.
The CEO of the Royal Bank indicated that:
With regard to taxation, when you compare Canadian banks, there was a study done by KPMG that compared Canada with the United States and Britain. When you added all taxes and levies, we were at about 68 per cent, the U.S. banks were at almost 50 per cent, and Britain was at 45 per cent. A study done by the University of Toronto indicated that financial services is the highest taxed sector in Canada and banks within that sector are the highest taxed. I think there is evidence to support what MacKay has said there as well.
There is a sense that the banks are making enough profits so they are fair game for taxation. Ultimately, however, it is a cost structure. Capital taxes are perverse because we are trying to build capital. We are required to do so by our regulators, both domestic and international, and we compete for credit ratings and strengths of our institutions.
The stronger we make ourselves, the more tax we attract in the capital tax. It is not shown as a net income item, it shows as part of our cost structure. When we compare our efficiency ratios with U.S. and British banks, we have a much higher proportion of levies and taxes such as capital taxes. Our deposit insurance premiums are a lot higher than they are in the United States for comparable players and our capital taxes are included in our cost line. That is one of the reasons why Canadian banks are more expensive in terms of cost revenue comparisons with U.S. and U.K. banks.
While people look at our earnings and say, "They are good enough; it is fair game to extract a high level of taxation," remember that some of the banks did not make any money in 1992-93. You must take a look at earnings over a full cycle, and the recent years have been the good part of the cycle. (John Cleghorn, September 19, 1998)
The CEO of the Canadian Western Bank gave the perspective of a small bank.
… because we are one of the only small banks that started up in Canada, I thought it would be useful for your committee to hear some of the impediments that we felt we have experienced over the term of 14 years since our inception. They are just in random order. But capital tax is certainly a major component and a hindrance in growing and developing a bank. If you raise capital and you start paying tax on it immediately, and I realise most of it is provincial, it is a huge impediment. It not only eats up your tier one capital, it eats your potential to raise tier two capital because you can only have half as such tier two as tier one. To start up small institutions that have to pay capital tax immediately is a huge impediment.
To keep this in perspective for you, we run business forecasts. In the years 2002, 20 per cent of our net income will be capital tax. Twenty per cent is huge. That is primarily because we operate in Manitoba, at 3.25 per cent capital tax, Saskatchewan which is 3.25 per cent on tier one capital and 3.25 on tier two capital as well, Alberta at 2 per cent and British Columbia at 1 per cent. It is huge and you have to make an awful large spread.
To keep it in perspective as well, we raised some tier two capital in Saskatchewan and paid 6.75 per cent on the capital and then we are taxed at 3.25 per cent. Our cost was 10 per cent.
Access to capital is a concern for small institutions. If they are going to start up how are they going to access the capital markets? That question will have to be dealt with. When you start a new financial institution and you start growing a bank you have to set up reserves. Those reserves are the stripping down of your tier one capital. You are taking funds out of your retained earnings or your tier one capital as a direct charge and putting it into reserves. Those are not tax deductible initially until you use them, so they are parked. That is a big issue. (Larry Pollock, October 28, 1998)
In addition, Mr. Pollock argued that:
Capital tax is very counterproductive when you consider you are trying to find means and methods to finance medium and small businesses and the government turns around and taxes the very capital you need. You need a high level of capital to finance businesses, 10 per cent is the minimum regulatory limit. To do mortgages or CMHC mortgages you need very little capital. If you want business financing to take place in the country do not tax the capital that is needed to do it. It is very discouraging. It also discourages safety and prudence. If you have less capital tax you will carry more capital. Therefore, there will be higher reserves and it will be a safer institution for people to deposit with.
One of the problems with taxation is all provinces are different and that should be standardised. It certainly discourages from the highly taxed areas for lending. Why would you lend in an area where you have to pay four per cent capital tax? You would rather lend in a market where you pay one per cent. You will see banks shifting their focus. (Larry Pollock, October 28, 1998)
The CEO of the Hongkong Bank Canada questioned the effectiveness of a policy of encouraging entry of foreign financial institutions as long as there is a capital tax.
I have some doubts about it being successful because of the barriers to entry, primarily because of the capital taxes, discourage the formation of new financial institutions. (Youssef A. Nasr, October 29, 1998)
This view was supported by witnesses from the Schedule II banks:
What is different in this country is that, if we need more capital to finance our assets, we can import more capital from our parent, but we are taxed on the capital tax.
So that is the dichotomy where we are trapped. We want to do more business, but in terms of what we do in other countries, but the more capital we put, the more tax we pay. (Gennaro Stammati, November 3, 1998)
The CEO of Deutsche Bank Canada agreed and added:
Resolution of tax issues was another matter we brought up in our submission "Same Business, Same Risk, Same Rule." We agree with the MacKay report to say that the capital tax regime makes banks less competitive. We believe it is an anomaly for an entity to bring in more capital into Canada with a view to generating more business in Canada, therefore, benefiting Canadian clients and yet be required to pay a capital tax before that capital can be put to work. In our view, this is punitive and it discourages growth. (Nicholas Zelenczuk, November 3, 1998)
Similar views were heard from insurance industry executives. For example, the CEO of Manulife stated:
Specifically, capital taxes create incentives that are inconsistent with sound prudential management; the competitive position of Canadian companies is damaged; and costs to customers increase.
Our industry agrees strongly with the Task Force that the public interest is damaged by the current level and structure of taxation. We therefore urge this committee call on federal and provincial governments to implement the Task Force's recommendations. (Dominic D’Alessandro, November 4, 1998)
The CEO of Mutual Life concurred:
We strongly endorse the recommendation that capital taxes on financial institutions should be eliminated. Financial institutions account for 20 per cent of federal income and capital taxes but account for less than 6 per cent of total corporate profits.
I might say as one little anecdote, Confederation Life, when it was in difficulty, indeed after it had gone into receivership, continued to pay capital taxes. That is an indication of how silly capital taxes can be for a company that is not earning a decent profit.
We believe that the current capital tax system increases the costs of product and services for consumers and importantly, provided disincentives for companies to retain capital and increases the cost of raising new capital. (Robert Astley, November 4, 1998)
Conclusions
It is the view of the Committee that capital taxes on regulated financial service providers are counterproductive. They discourage new entrants from allocating capital to the sector, and act as a disincentive, to existing firms, to build up capital. Consequently, these institutions have fewer resources to allocate to consumers and small businesses, and less to serve as a cushion should problems arise.
Consequently, the Committee supports the recommendations of the Task Force with respect to taxation of the financial services sector.
2. Accounting for Business Combinations
Background
The Task Force views international competitiveness as an important issue. It believes that altering the following three aspects of the policy environment would enhance the international competitiveness of the Canadian financial services sector.: accounting issues, taxation and merger reviews. (Task Force Report, Background Paper #1, p. 128). This section deals with the Task Force recommendations relating to accounting for business combinations.
In Background Paper #1, the Task Force noted that it received many submissions that outlined concerns arising from the different accounting treatment of business combinations in Canada and the United States. The Task Force documents describe two methods of accounting for a business combination (mergers and acquisitions): the pooling of interest method and the purchase method. Under the pooling method, no goodwill is recognised when a merger or acquisition takes place. However, under the purchase method, goodwill associated with the business combination is valued and set up as an asset on the balance sheet of the purchaser or, where an amalgamations has taken place, on the balance sheet of the ongoing business. (Task Force Report, Background Paper #1, p. 128)
Canadian Generally Accepted Accounting Principles (GAAP) usually follow the purchase method of accounting goodwill arising from a business combination, while U.S. GAAP allow for pooling of interest transactions where no goodwill is recognised.
In its brief, the Canadian Life and Health Insurance Association (CLHIA) pointed out that under the purchase method "any part of the purchase price that cannot be allocated to identifiable assets must be set up as a separate asset and written off against income in future years." (CLHIA Brief p. 31). Writing off goodwill has a negative effect on a company’s earnings which, in turn, reduced share values.
The Task Force firmly believes that the Canadian accounting rules place Canadian firms at a competitive disadvantage.
The share values of Canadian public companies are determined, at least in part, by market perceptions of their earnings and the trend lines of those earnings. Reduced earnings arising out of acquisition goodwill will constrain share values, which in turn will stifle the growth of Canadian based financial institutions by increasing their cost of capital. In addition, decreased market values will make it cheaper for others to successfully acquire Canadian companies in takeover bids, and will diminish the value of the shares of Canadian companies as acquisition currency. In a period of industry consolidation, these accounting rules can also inhibit consolidations among smaller institutions which might produce vibrant competitors in the Canadian financial services marketplace. (Task Force Report, Background Paper #1, p. 130)
Moreover, there is a serious competitive imbalance arising from differences between Canadian and U. S. accounting practices. The Task Force felt that delay in moving toward a harmonised standard with the United States "could compromise efforts of Canadian firms to maintain and improve their international competitiveness" and "could also jeopardise Canadian business combinations which would significantly improve competition in the domestic marketplace." (Task Force Report, Background Paper # 1, p. 131)
The Task Force therefore urged the Canadian Institute of Chartered Accountants (CICA) to develop an interim solution to be applicable until Canadian and U.S. accounting rules relating to business combinations are harmonised. It went on to state that in the event that the CICA was not able to find a solution, OSFI should use its power to specify accounting principles to allow Canadian companies to pursue acquisition opportunities on a competitive basis.
Task Force Recommendations
42)Canadian accounting principles relating to the creation and amortisation of goodwill in business combinations should be revised to eliminate their present negative impacts on financial sector restructuring in Canada and on the ability of Canadian financial institutions to successfully compete for acquisitions outside Canada. To that end:
- The Task Force urges the Canadian Institute of Chartered Accountants, working with OSFI and the financial institutions, to develop a mutually acceptable interim solution, to be applicable until such time as Canadian and U. S. accounting principles in respect of business combinations are harmonised.
- If the Canadian Institute of Chartered Accountants is not able to determine a solution, OSFI should use its power to specify principles for business combinations and goodwill accounting so as to (i) facilitate consolidations of small and mid-sized Canadian financial services companies into stronger competitors in the Canadian marketplace, and (ii) permit Canadian companies to participate on a competitive basis in pursuing acquisition opportunities.
43) The Canadian Institute of Chartered Accountants, in its ongoing work, should be sensitive to changes, and the timing of changes, in Canadian accounting principles and practices that might negatively affect the international competitiveness of Canadian financial institutions or impede the start- up and growth of new Canadian financial institutions.
Views of Witnesses
The witnesses who commented on these recommendations favoured a quick harmonisation of Canadian and U.S. accounting practices. The Canadian Bankers Association was of the view that the CICA should move expeditiously to correct the imbalance between accounting treatment in Canada and the U.S. it also supported the recommendation that OFSI use its authority to specify accounting principles if the CICA cannot arrive at a solution.
The Investment Dealers Association of Canada (IDA) pointed out to the Committee that:
While the IDA did not make specific reference to accounting rules in its submission to the Task Force, in other representations to federal and provincial governments the Association has suggested that, in recognition of the rapidly integrating capital markets in North America, the CICA should conform Canadian accounting rules as much as possible to US GAAP, particularly in respect of business combinations.... (Brief, p. 4)
Before the Committee, the CEO of the IDA directly addressed the accounting rules.
The Task Force recommended more flexible accounting rules to facilitate acquisitions in both domestic markets and abroad. In our view, the rapidly integrating capital markets in North America necessitate that the Canadian Institute of Chartered Accountants should conform Canadian accounting rules as much as possible to U.S. GAAP, particularly in respect of business combinations. Also, we believe that the provincial securities commissions should permit listed Canadian companies a certain amount of flexibility in applying Canadian and U.S. accounting rules. The goal is to give listed Canadian companies more scope to undertake mergers and acquisitions to facilitate expansion. It would also put Canadian companies on an equal footing with their U.S. competitors.
We do not believe that investor protection would be compromised by this move. Often they are distinctions without a difference, or differences without a policy rationale, and so conformity or harmonisation is in the interests of the Canadian capital markets.
There is no doubt that the American rules have an influence because of the size and the dynamism of the U.S. capital market. So what we are looking for is sort of an accounting Esperanto, a common language that people can understand, a numerical language that they can understand around the world. So when they pick up a prospectus or an annual report or a quarterly statement from a company in Germany, it has the same meaning as it would if they were reporting under Canadian or U.S. rules. That is not the case.
There is Daimler-Benz example where they were showing a profit in Germany, but under U.S. rules they would have shown a loss.
So what is an investor to think of that? So while that whole effort is going on, we, in Canada, have to decide where we will position ourselves. They are ten times our size. We should not be compromising on matters of principle. We should not see our basic values eroded but I have to say, on a matter of an accounting rule, does it really matter? I think the key thing is that we sort of eliminate the differences where, as I say, there is no distinction, and let us get on with it. There is a little bit of pride. There may be a bit of proprietorship on the part of our accountants. But the bigger interest in the capital market surely is served by rules that are more similar. We cannot get the elephant necessarily to go our way and you have to distinguish, it seems to me when it is important and when it is not… it could well be that the Canadian approach is sounder. It also happens to be the approach taken by more countries around the world. But the fact is it is the U.S. that is the most important, and from a competitive point of view, like our banks dealing with it, the competition is really U.S. and they are put at a disadvantage. Should they really be put at a disadvantage for accounting rules, for the purity of an accounting rule? I think not. (Joseph Oliver, November 2, 1998)
In addition, the Senior Vice-President of the IDA added:
In Canada, we are in the middle of a North American trading block under the free trade agreement.
As a consequence, increased integrated capital flows between all three countries. Our capital markets are integrating dramatically over the last four or five years. It seems to make common sense that accounting rules, whatever they are, have to be the same. They have to be harmonised to promote efficient markets in the free flow of goods and services and efficient capital markets in that process and, unfortunately, markets do not wait for accountants.
That is why we are suggesting that if the U.S. GAAP does not look like it is changing to international GAAP, which may be a higher standard, then perhaps, in the interim, we should go to U.S. GAAP in the interest of harmonisation. (Ian Russell, November 2, 1998)
The Superintendent of Financial Institutions told the Committee:
Recommendation 42 proposes that OSFI work with the Canadian Institute of Chartered Accountants to eliminate competitive disadvantages caused by inconsistent treatment of goodwill in business combinations. We support this recommendation, and are pleased to advise that action has already been taken along the lines recommended. (John Palmer, November 3, 1998)
The CICA made the following observations before the Committee about accounting standards for business combinations:
The Accounting Standards Board is acutely aware of concerns over accounting for business combinations. There are several complex issues, and we would like to make a few observations in that regard. We offer these observations to illustrate some of the complexities and why there is no easy answer here.
In Canada, business combinations are accounted for using the purchase method, except in rare circumstances where an acquirer cannot be identified. In that case, pooling of interest would be used. Under the purchase method of accounting, the acquiring company is accountable for the price paid to make the acquisition. That is the market value of the transaction.
This accountability is lost under the pooling of interest method. The U.S. criteria for which business combinations are treated as poolings are very different. The result is that many U.S. acquisitions in which one party acquires another are recorded as poolings of interest in the United States, with little or no accountability for the value of the transaction.
The Accounting Standards Board believes that accountability to the stakeholders for the value of the transaction is very important. A number of CFOs of Canadian companies have come forth to support that view. The purchase versus pooling of interest question may sound very technical, but accounting to stakeholders is what is at issue.
The Financial Accounting Standards Board sets accounting standards in the United States, and it also recognises that there are flaws in the U.S. approach to pooling. They have a project well under way to change the U.S. standard. We expect, based on close co-operation, that proposed changes will be issued for public comment in the U.S. in the second quarter of 1999.
The FASB is supported in this initiative by the Securities and Exchange Commission. Representatives from the SEC have indicated just how difficult the U.S. standard is to regulate. The former chief accountant of the SEC has gone on record referring to U.S. pooling standards as broken and in need of rethinking.
Recent developments in accounting for business combinations in the U.K. are also worth noting. The U.K. uses a similar approach to ours for determining those rare business combinations that will be accounted for as poolings of interest. This approach has not changed. However, the U.K. standard for accounting for goodwill and intangible assets was changed last year. The new standard in the U.K. requires that goodwill and intangibles be capitalised and amortised over their useful lives if determinable. This change eliminated what many in other jurisdictions were referring to as the U.K. advantage, since U.K. standards used to allow goodwill to be written off in the year of acquisition.
In addition, the new standard allows goodwill and intangibles to be amortised over a period of longer than 20 years or perhaps not at all, if the longer or indeterminate life can be justified. Goodwill and intangibles amortised over a period longer than 20 years, or not amortised at all, will be subject to annual impairment tests.
Another international development worth noting is the G4+1 initiative on business combinations. That is a working group on accounting standards from Canada, the United States, the U.K., Australia and New Zealand, and is joined by the International Accounting Standards Committee. The G4+1 is currently developing a position paper which is expected to be issued in December of 1998, and which will propose a single method of accounting for business combinations.
The goal of this initiative, which is being led by the FASB, is to develop internationally harmonised standards on the method to be used for accounting for business combinations. We believe the FASB leadership in the G4+1 project is a concrete sign of their commitment to changing accounting for business combinations. In addition, being part of an international effort should help with the adoption of change in the domestic market in each of the jurisdictions. (Graeme Rutledge, October 6, 1998)
The CICA suggested that, in the interim, there are two ways to deal with the problem of accounting for goodwill in the case of a business combination. One is to adopt the U.S. Criteria; the other is to make some changes to amortisation so that reported earnings will be closer to what can be achieved under a pooling of interests scenario.
According to the CICA, there are a number of problems associated with moving to the U.S. GAAP. These include restrictions on business activity associated with meeting the 12 criteria necessary to obtain pooling treatment and the inability of companies that have been subsidiaries in the two years prior to the business combination to qualify for pooling treatment.
The Accounting Standards Board believes that the best way to remedy the concerns about accounting for business combinations is to develop harmonised North American standards.
The CICA also expressed concern with the possibility of OSFI using its powers to specify accounting principles. Because the OSFI override would apply only to federally regulated financial institutions, the CICA felt that it could create imbalances in the market place.
Conclusions
The Committee agrees that differences between the Canadian and U.S. accounting standards for business combinations creates competitive inequities and imbalances between Canadian and American financial institutions, the net effect of which is to place Canadian institutions at a disadvantage. At a time when Canadian institutions hope to position themselves to be more competitive, particularly against financial institutions based in the U.S., and during a period when the financial services sector is facing increasing numbers of mergers and acquisitions, Canadian institutions should not have to face impediments stemming from accounting practices.
The Committee is of the view that these imbalances and inequities should be remedied as soon as possible. Harmonised North American standards would be the ideal solution and the Canadian and U.S. Accounting standards board should continue to work towards that goal. The Committee recognises however, that it may take some time to achieve harmonised standards. It is therefore appropriate to consider and develop an interim solution. We urge the CICA to meet its recently announced timetable for action on this issue, including the release of an exposure draft for public comment in May 1999 and the release of final standards in the fall of 1999. With this recent announcement, OSFI has agreed to forego using its override powers in order for the CICA to meet its target dates.
The Committee, therefore agrees with and supports the Task Force recommendations relating to accounting principles, which the Committee believes will serve to enhance the international competitiveness of Canadian financial institutions.
The Committee further urges the Canadian Institute of Chartered Accountants to move forward on a timely basis to release new accounting standards for business combinations by the fall of 1999.
3. Facilitation of Electronic Commerce
Background
The OECD, in its report on Electronic Commerce (Opportunities and Challenges for Government) has suggested that:
As a matter of urgency, governments need to clarify the legal definitions, practices and structures that pertain to commercial activities in an electronic environment, and to seek multilateral agreements on critical legal matters, especially the laws regarding residency, agency, liability, auditability, control of databases, unauthorised use of databases and data protection.
Where appropriate, governments should adjust existing laws and regulations so that they apply to "intangible" as well as "material" product environments. They should ensure that all future actions regarding consumer protection laws and regulations are closely co-ordinated with developments in Electronic Commerce.
Recognising the special characteristics of the commercial environment provided by the Internet, an internationally agreed legal definition is urgently required as to where commercial transactions on the Internet are deemed to have taken place. (Task Force Report, Background Paper #5, pp. 103-104)
It recognises that most of the legal and regulatory mechanisms currently being applied by governments to commercial activity were conceived in an era before the advent of advanced electronic communication systems. Moreover, frameworks of commercial policy, law and regulation are still oriented overwhelmingly to trade in tangible goods. Specifically, the OECD Report recommends that governments play a positive role in, inter alia, facilitating the development of Electronic Commerce through the provision of a legal, regulatory and infrastructural environment that encourages the development of Electronic Commerce.
In order to keep pace with international developments, Canada must ensure that its legal and regulatory framework is conducive to new and innovative technologies that facilitate the ways in which commerce will be conducted in the future. This means walking a fine line between ensuring certainty in commercial transactions while avoiding unnecessary restrictions on the evolution of Electronic Commerce.
Regulatory or legal factors have not been, in our view, significant impediments to the adoption of technologies by Canadian financial institutions thus far. However, given the direction and pace of technology evolution, the absence of a regulatory and legal framework in Electronic Commerce could become a major impediment to the further evolution and deployment of new and existing technologies.
Implementation of a regulatory and legal framework in Electronic Commerce will increase the confidence of both customers and financial institutions, thereby increasing the volume of electronic transactions and, therefore, the rate of adoption of advanced technologies.
Task Force Recommendations
11) To facilitate the early adoption in Canada of electronic commerce in financial services and the added competition it will bring, governments at all levels should make it a priority to ensure that all legislation is compatible with an electronic commerce market environment.
Views of Witnesses
There were no views expressed by witnesses on this issue and recommendation.
Conclusions
The Committee made no comment on these as it heard no evidence.
This is a new field and one that the Committee may well decide to look at in detail in 1999, both with respect to financial institutions and other industries as well.
As a result of the recent OECD conference in Ottawa, there are several public policy issues related to a wide variety of industries (eg. telecommunications, retail, financial services) that the Committee may decide to study.