Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 1 - Evidence of October 24, 2002
OTTAWA, Thursday, October 24, 2002
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-2, to implement an agreement, conventions and protocols concluded between Canada and Kuwait, Mongolia, the United Arab Emirates, Moldova, Norway, Belgium and Italy for the avoidance of double taxation and the prevention of fiscal evasion and to amend the enacted text of three tax treaties, met this day at 11:00 a.m. to give consideration to the bill; and to examine and report upon the present state of the domestic and international financial system.
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: Honourable senators, we are here to examine Bill S-2. We have before us this morning Mr. Bryon Wilfert, Parliamentary Secretary to the Minister of Finance, and witnesses from the Department of Finance and the Department of Foreign Affairs and International Trade.
Mr. Wilfert, please proceed.
Mr. Bryon Wilfert, Parliamentary Secretary to the Minister of Finance: Honourable senators, I appreciate the opportunity to appear before the committee today to discuss Bill S-2, the proposed Tax Conventions Implementation Act, 2002. I will make brief opening remarks, following which we will be pleased to answer any questions.
Honourable senators, this bill implements tax treaties that Canada has signed recently with seven countries. Through this bill, Canada's existing tax treaty arrangements with Belgium, Italy and Norway are updated, and tax conventions with Kuwait, Mongolia, Moldova and the United Arab Emirates will be approved for the first time.
As the world economy becomes increasingly intertwined, the importance of eliminating tax impediments to international trade and investment has grown in importance. These new treaties, therefore, are designed to facilitate cross-border trade, investment and other activities between Canada and each of its treaty partners.
Tax treaties do not impose tax, nor do they generally restrict the right of countries to tax their own residents as they see fit under their domestic tax laws. Rather, tax treaties are primarily agreements that are largely concerned with setting out the degree to which a particular country can tax the income of a resident of another country.
Canada's tax treaties give us assurances of how Canadians will be taxed abroad. Our treaties give our treaty partners assurances of how their residents will be treated in Canada.
Honourable senators, Canada's tax treaties are all designed with two general aims in mind: first, to remove barriers to cross-border trade and investment; and second, to prevent fiscal evasion by encouraging cooperation between Canada's tax authorities and those in other countries. It is this first objective — trade and investment promotion — that I want to talk about for the next few minutes.
Honourable senators, risk and uncertainty are a part of everyday life. However, as we know, they can have a dampening effect on commercial activity. Investors, traders and others with international dealings want to know the tax implications associated with their activities both in Canada and abroad; in other words, they want to know the rules of the game and they seek to be assured that they will be treated fairly.
Tax treaties remove uncertainty about tax implications associated with doing business, working or visiting abroad, by establishing a mutual understanding of how the tax regime of one country will interface with that of another. This understanding not only allocates the right to tax between the two countries, but also encompasses undertakings to resolve disputes, obligations to eliminate double taxation, pledges of non-discrimination and commitments to give advance notice of any desire to terminate the agreement. All these facets promote certainty and stability and help to produce a better business climate.
While I will not dwell on these benefits, honourable senators, I do feel it is incumbent upon me to discuss double taxation in more detail. One of the most frightening things to a taxpayer is unrelieved double taxation — in other words, to have income taxed twice when the taxpayer lives in one country and earns income in another. Without a tax treaty, both countries could claim tax on the income without providing the taxpayer with any measure of relief for tax paid in the other country.
To alleviate the potential for double taxation, tax treaties resort to two general methods. In some cases, the exclusive right to tax particular income is granted to the country where the taxpayer resides. In other cases, the taxing right is shared but the state where the taxpayer resides is obliged to eliminate double taxation by providing relief for the tax paid in the other country.
For example, if a Canadian resident employed by a Canadian company were sent on a short-term assignment — for three months, say — to any one of the seven treaty countries in this bill, Canada has the exclusive right to tax that person's employment income. If, on the other hand, that same person were employed abroad for a longer period of time — for one year, say — then the country where that person works can also tax the employment income and Canada must credit the tax paid in that other country against the Canadian tax otherwise payable on the income.
Put another way, the tax treaties in this bill reduce the frequency with which taxpayers of one country are burdened by the requirement to file returns and pay tax in another country when they are not meaningful participants in the economic life of that country, or where it would be a nuisance for them to do so.
At this time, honourable senators, I should like to say a few words about the importance of withholding taxes. As honourable senators may be aware, withholding taxes are a common feature in international taxation. In Canada's case, they are applied on certain income — for example, interest, dividends and royalty payments — that Canadian residents pay to non-residents. Withholding taxes are levied on the gross amounts paid to non-residents and represent their final obligations with respect to Canadian income tax.
Without tax treaties, Canada usually taxes this income at a rate of 25 per cent, which is the rate set out under our domestic law, more precisely, under the Income Tax Act. Canada's tax treaties establish limits on the amount of withholding tax that can be levied by Canada and its treaty partners in respect of certain income. In all cases where maximum rates of withholding tax are set out in Canadian tax treaties, they are always lower than the 25 per cent rate provided under our domestic law.
Let me provide a few examples of some of the withholding rate reductions included in this bill. Each treaty in this bill provides for a maximum withholding tax rate of 15 per cent on portfolio dividends paid to non-residents. For dividends paid by subsidiaries to their parent companies, the maximum withholding rate is reduced to 5 per cent. Withholding rate reductions also apply to royalty, interest and pension payments. Each treaty in this bill caps the maximum withholding rate on interest and royalty payments at 10 per cent.
It is also worth mentioning that the reduced rates or complete exemptions from withholding tax exist for royalties paid for the right to use certain copyright royalties, computer software, patents and know-how in tax treaties with Mongolia, the United Arab Emirates, Norway, Belgium and Italy.
With respect to periodic pension payments, the maximum rate of withholding tax is set at 15 per cent of all countries, except that in the case of Belgium and the United Arab Emirates no cap has been established.
I now wish to turn to the second objective of tax treaties, namely, that of preventing fiscal evasion by encouraging cooperation between Canadian tax authorities and those in other countries. Tax treaties are an important tool in protecting Canada's tax base, in that they allow consultations and information to be exchanged between our revenue authorities and their counterparts in countries with which we have tax treaties. What this means is that the tax authorities can deal directly with each other to solve international transfer-pricing issues. They can mutually agree to satisfactory solutions involving concerns raised by taxpayers. They can conduct complete audits and offer encouragement in other discussions aimed at improving tax administration.
Honourable senators, this bill represents a part of Canada's ongoing efforts to expand its network of tax treaties with other countries, a network that now numbers over 75 treaties and which is one of the most extensive of any country in the world.
Canada's economy relies significantly on international trade. Canadian exports account for more than 40 per cent of our annual GDP. What is more, Canada's economic wealth depends on direct foreign investment to Canada, as well as inflows of information, capital and technology. Canada's tax treaties help promote the international linkages upon which we rely. In other words, by eliminating tax impediments and by creating more predicable tax results for traders, investors and other taxpayers with international dealings, our tax treaties promote opportunities at home, in international trade and investment abroad.
Honourable senators, this brings me to the end of my prepared remarks. Together with the officials present today, I would be pleased to answer any of your questions.
Senator Tkachuk: I understand there were some errors in tax treaties with Vietnam, Portugal and Senegal that were corrected in this bill in the English version. Could you specifically address those errors and explain them to us?
Mr. David Sénécal, Acting Chief, Tax Treaties, Tax Legislation Division, Department of Finance: Honourable senators, the errors in question are very minor. They occur mostly with respect to differences between the English and the French versions.
In the case of Portugal, in the English version of the discrimination article I believe we referred in one of the provisions to a person. We negotiated the treaty in French. We meant to deal with only physical persons, individuals. However, in the English translation of the French text, the word ``person'' was used, so we are correcting that.
In relation to the Vietnam tax treaty, there is another error. If memory serves me correctly, in the Vietnam treaty, within the definition of ``royalties,'' we had a reference to other tangible property that does not exist in the French or Vietnamese versions of the text. After consultations with the Vietnamese authorities, it was agreed that those words should not have appeared in the English text, so we are removing them from the English version.
Senator Tkachuk: Did this problem cause any difficulties, or was it just discovered by people reviewing the bill?
Mr. Sénécal: It was just discovered by people.
Senator Tkachuk: As you know, on our side we have an interest in some of the human rights issues raised by the issue of us doing treaties with countries that may not have exemplary, and in some cases less than exemplary, human rights records. In regard to Kuwait, how can the government talk about Kuwait's humanitarian record as no longer egregious if it still denies political rights for women, about one-half of their population? In Canada, would this not be seen as an egregious human rights violation?
Mr. Wilfert: Honourable senators, with regard to Kuwait, as you know, all countries are governed by the national interest. Canada is no different. The fact that Kuwait denies, as Saudi Arabia does, as some other states in the Middle East do, political rights for women is something which, from a political standpoint, Canada clearly has concerns about. However, through various channels and obviously through various forums, we continue to engage those particular countries on those issues.
Kuwait has, however, acceded to all of the major six human rights instruments. The fact is that Canadians, for various reasons, do business in that particular part of the world. In order to protect Canadians who are dealing in those particular states, including Kuwait, and vice versa, we want to make sure that our Canadian nationals are protected in terms of tax treaty law.
If we were to carry that argument further, I would dare say that we would probably be doing business with far fewer countries around the world where Canadian companies may do business, whether they are in Burma, Indonesia or wherever they happen to be. Your point is well taken. Again, the essence of this bill is to protect Canadians who, in reality, are doing business.
Senator Tkachuk: What is the difference between gender and race with respect to human rights? What if the same violations were being made in Kuwait or some other country that we had a tax treaty with and that one-half of the population were denied political rights and they were black?
Mr. Wilfert: Honourable senators, Canada deals with states, whether it is the People's Republic of China, states in Africa, including the Congo, where we note and certainly lodge concerns with regard to human rights. There are Canadian companies or Canadians who are doing business in those countries, for whatever reason. We want to protect them, in this particular case, in terms of this issue on taxation.
However, on a different level, we continue through the Department of Foreign Affairs and International Trade to make our views known. It is an issue that, again, I think is on two different planes, and one where I respect your comments. However, the reality is that we are not preventing — and I do not know how we would necessarily prevent — Canadians or Canadian companies from doing legitimate business there, unless we were to bar them — and if we bar them there, I would suggest that we have to bar them from a lot of places.
Senator Tkachuk: In regard to South Africa, the black population was denied political rights, and we supported sanctions through the brave efforts of John Diefenbaker and Brian Mulroney. I do not understand the difference, outside of the fact that one is race and one is gender.
Mr. Wilfert: In the case of South Africa, honourable senators, with all due respect, some of those sanctions were more symbolic than real, in terms of the fact that we had very little specific economic activity. In some cases we did; for instance, the issue of flights to South Africa or barring wine.
The issue to me is not race or gender. In this case, the issue is the reality of companies, and Canadians in particular, who are doing business. We want to ensure that we have agreements that are in our interests, as we now have with 75 other states.
The fact is that, from time to time, Canada does take actions. The current case of Zimbabwe would be an excellent example. Canada looks at each case individually. One of the things we are doing is engagement. Engagement is extremely important in terms of changing. We have seen some of those changes in a case that I am more familiar with, which would be the People's Republic of China.
Senator Tkachuk: I have two more questions. To follow up on this subject, would it not be a disincentive for people to do business with these countries if they knew they would be double taxed? You say people do business, but part of the reason that we do business is because we have tax treaties. What would happen if we did not have a tax treaty? There would be double taxation issues and financial issues, so businesses would not go there. Would that not put pressure on a country to improve its human rights record? You cannot use one argument and automatically say that the other argument will not work.
Mr. Wilfert: I would say again that we are engaging and we are engaging whether it is on a political, economic or social level. To suggest to Canadians that we should not do business —
Senator Tkachuk: We do not say that, though.
Mr. Wilfert: I may not understand you correctly.
Senator Tkachuk: There would just not be a treaty. In other words, people could do business; they would just pay double taxation.
Mr. Wilfert: As you say, it would be obviously be a disincentive.
Senator Tkachuk: Yes, it would be. So they would spend their money somewhere else.
Mr. Wilfert: I am sure that other states would fill that vacuum. In Cuba, we have had a policy of engagement for 40 years and Canadian companies have been there. The Americans, until very recently, have not.
Canada has promoted human rights, and continues to do so. It is the centrepiece of Canadian foreign policy. Either you engage or you disengage. If you were to tell people not to go to a particular country because we do not have a tax treaty with that country, they may go elsewhere. However, there may be strategic reasons why companies go to those particular states. If this legislation comes into effect, we will recognize something that is currently ongoing. It will protect Canadians; it is in our interests to do so. At the same time, it does not prohibit us in any way from pushing, say, gender issues in places such as Kuwait and Saudi Arabia, et cetera.
Senator Tkachuk: We hear the Cuban example often. Cuba is still run by a dictator who abuses human rights, jails political prisoners, a dictator who is probably as bad as you can get. In these developing states, what evidence do we have of countries all of a sudden becoming powerful examples of treating people in a proper way and not violating human rights? What countries have we had a direct influence on changing?
Mr. Wilfert: Again, senator, I would suggest to you that in the People's Republic of China and in Cuba we have seen, both because of our contacts and because of others, gradual changes, both in terms of human rights and economic liberalization. There are many factors in the Cuban situation, senator, but recently, because of the collapse of the Soviet Bloc, the Cubans have had to look elsewhere. Who would have thought even five years ago that we would have former U.S. president Jimmy Carter engaging in Cuba? We have recently had a major trade delegation in Cuba, and many other illustrations. Castro has released some political prisoners. The pressure must be there.
Let me conclude with the following thought. In the case of North Korea, the fact that there has not been engagement until recently has been a major problem vis-à-vis North Korea being one of the major players on the international scene in terms of its terrorist and nuclear capabilities. Induced by famine and other reasons, Kim Jong II is now engaging. I do not believe that he would have been engaging were it not for those pressures, but he is engaging. It must be a situation where we say that if you want this, you must do that. The same thing has happened in the PRC, as well as Cuba and other places.
Senator Prud'homme: I am prompted by the question of Senator Tkachuk. I believe you have answered in a highly satisfactory way by talking about the word ``engagement.'' However, there are many misconceptions at play here, especially when you refer to Kuwait. Kuwait is on its way, because of engagement with other countries. Senator Meighen and others may wish to know that Senator Kolber, who last night was elected our able chairman, would have had to go through a secret ballot in Kuwait. Members of the committees on finance and foreign affairs in Kuwait are elected by their members by secret ballot.
The Chairman: Senator, I would like you to ask the question.
Senator Prud'homme: Mr. Wilfert, you are aware that an election took place in Kuwait to give the right to vote to women, and they lost by one vote in the Parliament. This would never have taken place without that engagement. I would like for the record to ask you if you are aware that there was that election in the Parliament of 50 people and they lost by only one vote? That means eventually they will meet the requirements of Senator Tkachuk.
Mr. Wilfert: I am aware of that. In fact, that is not the first vote of this nature that has taken place in the Parliament of Kuwait. I would agree with the senator's comments that an evolution is taking place, as is the case in Bahrain and Jordan. I believe this is the result of engagement.
Senator Lynch-Staunton: In your presentation, you said that the tax treaties allow consultations and information to be exchanged between revenue authorities and our counterparts. What kind of information is that? Is personal information exchanged, or information of a general nature that has no privacy component?
Mr. Wilfert: That is an excellent question, Mr. Chairman. You are correct in terms of the personal aspects, senator. However, there are issues. If you have no objections, Mr. Chairman, I would ask my colleague to outline that.
Mr. Brian J. Ernewein, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance: Mr. Chairman, in general response, the exchange-of-information provisions in the treaties found in this bill parallel the exchange-of-information provisions found in other income tax conventions already in force and allow the exchange of information relating to taxation by the other country for the purpose of taxation.
I am not certain of the meaning you ascribe to ``personal information''; it can include tax information concerning a particular individual or corporation, for example. However, again, it can only be tax information and only be used for the purpose of taxation in the other jurisdiction.
Senator Lynch-Staunton: Therefore, an individual Canadian doing business in any country where there is a tax treaty could have what is considered confidential information on his tax status given to another country that may or may not release it or that may misuse it.
Mr. Ernewein: First, there would not be any information provided if the Canada Customs and Revenue Agency were not confident of it being used and only used for the purposes of tax assessment in the other jurisdiction. If there were any doubt on that score, the information simply would not be provided.
Second, in terms of a Canadian resident and information going to the other jurisdiction, the relevance of that would be limited. Generally, it is the resident state, the country where the taxpayer lives, that is interested or more often has reason to be interested in income earned in other jurisdictions and thus seeks information. In the case that you have described, senator, it would seem to me a more rare case, a more rare situation that there would be a cause for the other jurisdiction to be looking for information from the so-called resident state.
Senator Lynch-Staunton: I am on unfamiliar ground here; however, I will provide a hypothetical example, which I hope makes sense.
Let us suppose that a Canadian declares certain income to country ``X'', that the same income is declared in a different fashion to Canada and that country ``X'' has suspicions on the declaration to it. Would it have the right to ask CCRA for the equivalent information, to ensure that the two reports are similar?
Mr. Erne win: Mr. Chairman, I just want to ensure that I understand correctly. Are you speaking of a resident of country ``X'' or a resident of Canada?
Senator Lynch-Staunton: A Canadian.
Mr. Ernewein: The only income that the other country would have the scope to tax under our tax treaty would be income arising in that country. It is almost certain to be the case that that other country would have better information about that than would we.
However, to be as helpful as I can, in the circumstances where our tax authorities possessed or might possess some information as to the receipt of such income about which that other country had no information, it is possible that that could form the basis of a request for such information. In that case, the earlier comments I made about guarding the confidentiality of that information would apply. However, there is the possibility at least for it to be provided.
Senator Lynch-Staunton: Getting closer to home, is there an exchange of information, say, between the United States tax authorities or the tax authorities of the United Kingdom and the Canadian tax authorities? As I understand it, Canada requires that worldwide income be declared. Assuming that that Canadian also has to declare in either or both of those other countries, do those countries get together and exchange information on the same taxpayer?
Mr. Erne win: Yes, there is authority to do that, and that authority is exercised in particular in the case of countries with whom our taxpayers have a good deal of interaction. The U.S. and the U.K. are leading examples.
Senator Lynch-Staunton: Do the tax treaties provide for similar information to be exchanged?
Mr. Ernewein: They do.
Senator Lynch-Staunton: Thank you for that.
Mr. Wilfert, can the flavour of the answer that you gave to Senator Tkachuk be summarized as follows: When it comes to a choice between human rights and trade, trade will win out, if there is such a choice? It appears to me — and I do not want to answer my own question — that at one time Canada's commitment to human rights was exercised in more than just a passive fashion internationally. South Africa was mentioned. I will not argue whether the sanctions were symbolic or not, but at least there were sanctions and there was political pressure, both internally and externally. I think in the case of South Africa Canada's role in seeing that apartheid finally gave way to a democratic system was considerable, and I think Mr. Mandela would be the first to acknowledge that.
I do not see your government today making the same sort of commitment. What I have been hearing so far is that the protection of Canadian citizens, their investments and the removal of double taxation is of priority importance, and let us hope that those countries where we do business and have an appalling human rights record will eventually come onside and honour their obligations with all the treaties they have signed and so forth. Basically, which is it? If you had to choose between human rights and trade and making an international commitment, which one would win out?
Mr. Wilfert: Mr. Chairman, first, this is not on the same plane as a butter versus bullets issue. You cannot weigh trade against human rights.
We cannot forget that it was a Canadian who wrote the Universal Declaration of Human Rights. How you engage countries on human rights, with all due respect, is on many fronts. It may be through business or social contacts or through interpersonal or political relations.
For example, there are some pretty unsavoury individuals in the Francophonie, as there are in the Commonwealth. Should the Prime Minister not have attended the Francophonie summit in Beirut because we do not like these individuals? Perhaps.
The Prime Minister took a leading role on the issue of Zimbabwe. He has certainly spoken out with regard to concerns in Togo, the Congo and other African states. The fact is we need to be there. Concerning the states that have been raised so far, I have indicated that they have acceded to the six major human rights instruments.
Senator, in my view, there is never a choice between trade and human rights. The instrument by which one engages to promote and to see, hopefully, the development of — and going back to Senator Prud'homme's comments. It is because of engaging in the promotion and development of these instruments that, in my view, we have demonstrated just that. The same is true in other international forums, whether they be APEC or the ASEAN regimes. Those are examples of where, by engagement, we do that. It is a paramount issue. Again, it may simply be a view. I certainly do not think I indicated that on the issue of South Africa that all of them were symbolic; some of them were real. I congratulate both Prime Ministers Mulroney and Diefenbaker for the roles they played in that regard, just as I congratulate our Prime Minister concerning issues around Nigeria, which, of course, led to the eventual development of a democratic government in that country.
Again, it is not a butter versus bullets issue or a trade versus human rights issue. With all due respect, senator, what is important is how we engage and the force with which we engage.
Senator Lynch-Staunton: This is a debate that will be continued here and elsewhere. Thus, I will not prolong it. I thank you for your answer.
I have one last comment, which will include a question, to reassure my colleague, Senator Tkachuk. I notice that on the list of countries with which we have treaties Cuba is not included. I thought you would be pleased to see that, Senator Tkachuk.
Senator Tkachuk: I am pleased.
Senator Lynch-Staunton: Perhaps the human rights record has played a role in that. If not, why do we not have a tax treaty with Cuba?
You did mention it and it is a country in which Canadians have significant investments, et cetera. Therefore, it stands out as not being on the list.
Mr. Ernewein: That question has been raised before. The answer is necessarily an incomplete one, that being that we do not have a tax treaty with Cuba. Currently, there are no negotiations underway with Cuba to have a tax treaty, but I do not think that rules out the possibility of having a treaty in the future.
Senator Fraser: Further on the very important topic raised by Senator Tkachuk, I do not think Kuwait is the best example. In recent years, I have had quite a lot of fairly intensive contact with parliamentarians from around the world, including women parliamentarians. My friends in Kuwait tell me that they do in fact, as Senator Prud'homme suggests, expect that women will get the vote there quite soon. The United Arab Emirates is a much tougher case. They have not even ratified CEDAW, the Convention on the Elimination of All Forms of Discrimination Against Women.
Nonetheless, my contacts have suggested to me that Mr. Wilfert is correct, that human rights advocates in all but the most severe cases — and South Africa in the last years of the apartheid regime would have been such a severe case — want engagement from us. They want us to be there, in part so that we can set an example, and the case of women is an example. They want us to send women ministers, lawyers and accountants to demonstrate that the world does not come to an end when women hold positions of responsibility.
However, they do want the engagement to be constructive. They do not want us only to send them dollars. I think there is a certain tendency in matters of this nature to say that this is just a tax treaty and really has nothing to do with human rights. However, as I believe you were suggesting, in the end everything does have to do with human rights.
Mr. Wilfert: Yes.
Senator Fraser: Would it be possible for the Government of Canada, assuming that this bill is passed, to then convey courteously to the governments of the countries concerned that the Senate of Canada, and probably the Parliament of Canada, is delighted to build relations and, in particular, has expressed its wish that these closer relations will contribute to the advancement of human rights in general and particularly of women in those countries?
Mr. Wilfert: Your point is well-taken and has been noted. I will certainly convey that message, which I think is a fair message and one that, as I indicated, we convey through many different fora. In this particular case, I have no difficulty conveying the message to the minister and to others.
Senator Meighen: Gentlemen, thank you for attending here.
This argument has been ongoing for many years. I tend to come down on the side of having relationships with states with which we have pretty severe disagreements rather than severing them. I think the adage in French, les absents ont toujours tort, has some sense. That being said, I am looking at the process. How is the decision ultimately made? Presumably, it is made by the minister.
Mr. Norfolk, at what point does your input come to bear? If, for some reason, the government of Zimbabwe wanted to enter into a treaty with Canada similar to the ones we are looking at today, would you provide a report to the minister on the human rights situation? If not you, would anyone? Would you make a recommendation for or against based on the human rights record of Zimbabwe or, for that matter, any other applicant state?
Mr. Wilfert: Thank you for the question. I would indicate —
The Chairman: Excuse me, I believe the question was put to Mr. Norfolk.
Senator Meighen: I am interested in Mr. Norfolk's role, or his division's role, but I am quite happy to listen to the parliamentary secretary as well.
Mr. Wilfert: I will certainly have Mr. Norfolk answer. I was just going to say that that would indeed be the case, although sometimes I feel that I am more the parliamentary secretary to the Minister of Foreign Affairs than to the Minister of Finance. However, there is a clear correlation between these two issues, as you have outlined.
There are other circumstances, particularly with regard to Zimbabwe, on which Canada is already on record, which would certainly come into play and on which DFAIT would certainly report to the minister. I have had the opportunity, with the current Minister of Finance, to input regularly. That is the type of thing that I would personally do and that I know the department would do. I will have Mr. Norfolk confirm that.
Mr. Adrian Norfolk, Deputy Director, Human Rights, Humanitarian Affairs, International Women's Equality Division, Department of Foreign Affairs and International Trade: Yes, indeed, and I would like to say that Mr. Wilfert is doing a very good job as the parliamentary secretary for our ministry as well, and I would like to endorse all that he said earlier.
There is ongoing communication between the departments on these kinds of issues, and of course there is an awareness of where there are major concerns. We would provide reports, probably from our geographic desks, the desks that are specifically concerned with country situations, to the ministry upon request. Our own division would be involved in coordinating where there are a large number of countries concerned at one point, such as in this case where there are several countries. We provided feedback to the ministry on the range of countries after consultation with the specialists in the geographic desks, which often also involves consultation with the missions.
Senator Meighen: Do I understand correctly that you do not make a recommendation?
Mr. Norfolk: We would say whether we have concerns or not about a double taxation agreement being entered into. We have said in these cases that we do not have concerns.
Senator Meighen: If you expressed concern, it would be up to the political powers that be to make the decision as to whether those concerns were sufficient to negate entering into a treaty?
Mr. Norfolk: If we said we have concerns, there would be a process of negotiation and discussion between the Department of Finance and ourselves. I would not like to say what level it would go up to in terms of the final decision. Presumably, it could eventually reach a political level. However, we have no concerns here.
Senator Meighen: Presumably, it could reach a political level? I would have thought it would have to reach a political level in all cases. Is that not so?
Mr. Wilfert: When we are presenting bills, we obviously look at many aspects. I would be remiss if I did not thank DFAIT for the work it has done with regard to this legislation in conjunction with the Department of Finance.
These issues come up regularly. In my experience with the minister, these issues are discussed. They arrive in many ways, but I can assure you that ultimately those considerations are taken into account. I would suggest that if any department — in this case DFAIT — were to provide information that was of concern, the politicians would take careful note and respond accordingly.
Senator Meighen: I am fishing for a case upon which we could all agree, and I am sure there are some. Ceausescu's Romania may be an example, or Stalinist Russia. Who would say that we are not going to enter into a treaty, that we are not going to propose this to the Parliament of Canada?
Would it be the Minister of Finance? Would it be someone in your division, Mr. Norfolk?
Mr. Wilfert: Ultimately, Mr. Chairman, the buck has to stop with the political individual. I would suggest that would be the minister.
Senator Meighen: I am glad to hear that. Can we assume that, when a bill such as this comes before us, the minister has signed off on the political and human rights considerations?
Mr. Wilfert: I would suggest, again, Mr. Chairman, through you to the senator, that, as the Parliamentary Secretary to the Finance Minister, I would not be here unless he okayed it.
Senator Meighen: What about the Minister of Foreign Affairs? Is there any involvement on his or her part?
Mr. Wilfert: As I think I indicated, Mr. Chairman, the department has been very helpful in the information it has provided, particularly in regard to this treaty.
Mr. Norfolk: There are no concerns with regard to this treaty.
Senator Meighen: There are no concerns, you said?
Mr. Norfolk: There are no concerns with regard to this treaty.
Senator Lynch-Staunton: Yes. We have all asked about this before when treaties have come before us. The briefing books, by the way, are excellent. They are by Finance and include a summary of the Department of Foreign Affairs and International Trade's assessment of those countries, no matter which ones they are, so that we have a background of the political system, human rights records and so forth. You have already done that, I think, in answer to some comments made yesterday, which was confirmed by what we just heard. However, it would be helpful to have that information in the briefing book as well.
The Chairman: I would echo that suggestion, although we did circulate a little something about your comments.
Mr. Wilfert: Mr. Chairman, it is an excellent point. I will definitely recommend that that be done in the future as a matter of course.
Senator Kelleher: We have heard many pious hopes put forward this morning that entering into these treaties may lead to an enlargement of human rights.
Government is very good at doing studies. I am wondering whether anybody in these two departments that are concerned with this type of legislation has ever been assigned to do a study to see if there is any evidence that there is substance to these pious hopes?
Mr. Wilfert: Mr. Chairman, I do not know that I would take your editorial comment or characterization as ``pious.'' However, I would suggest to you, senator, that a great deal of care and effort is attached in terms of on-the-ground experience and consultation with allies and others in doing evaluations.
In fact, through non-governmental agencies we know that various human rights organizations will compile documentation, both on this country and on other countries around the world. Therefore, it is not just government-to- government information or a government analysis. That is an important factor.
I will certainly ask my colleague to comment, but from my understanding of the workings of the Department of Foreign Affairs, analyses are done all the time. We could, for example, use comments from the great international theorist Hans Morgenthau, who has said that those who do not engage wind up looking from the outside. If you engage, you will obviously get an analysis. What you do with that analysis is, of course, up to you.
We are now seeing companies with much more social consciousness. Certain rules of the game are clearly subscribed to now, and the public is demanding that as well. These are all very important changes.
Mr. Norfolk: I would like to add several things, one of which was just touched on. A concept that we have not mentioned at any length here is the issue of economic, social and cultural rights, and how more and more NGOs and states are looking at the issue of economic rights as opposed to civil and political rights. Of course, when it comes to promoting the economic rights of those individuals, then the whole business of trade is very important.
Many studies have been done about the relationship between trade and human rights. I will have to verify the findings of the latest one that was specifically done by our department. I will get back to the honourable senator on specific reports or studies that have been done.
Generally speaking, the observation is that, as countries advance socio-economically, the human rights situation generally does improve. I would cite the example of Malaysia in that regard. When the economic downturn happened, the human rights situation became more difficult. As things improved, the human rights situation improved. There was almost a direct relationship.
The other area that was touched on by my colleague was that of corporate social responsibility. You mentioned the hope that these agreements will improve the human rights situation. I suppose our position on that is that they may improve. We certainly do not see them as being an impediment to the improvement of human rights. The question is how to maximize that effect and how to ensure, as much as possible, that this engagement does result in an improvement in human rights. We are trying to do that through corporate social responsibility. Our department is very active, along with a number of other departments, in the area of corporate social responsibility, and in developing a Canadian strategy for encouraging companies that operate in these countries where there are concerns to look at their own practices and to promote human rights.
Senator Kelleher: If I may, Mr. Chairman, I have one final question.
I get the feeling that, since your respective departments have known about this concern with regard to human rights, which has been raised here on a number of occasions, and the fact that you are not giving us any studies or concrete evidence with respect to this area, that you have not done any studies yet.
I might suggest to you that, when you come before us again with a tax convention treaty, you try to give us some written material of some kind of a study that has been done in this area to prove the pious assertions — I keep using the word ``pious'' — that are being made here.
Mr. Wilfert: Mr. Chairman, a final comment from me to the senator would be that I have indicated we will undertake to provide it, in conjunction with the DFAIT background information, as was asked for earlier. Senator Lynch-Staunton and I again will convey that message.
If I heard the answer correctly, the answer was not that there were none. The department will get back to you specifically with regard to any studies that have been done.
There is no question that ongoing analysis is done of these particular countries, but I think it is useful and instructive for all members of the committee to have background information on those countries and, of course, any conclusions that you may or may not reach will be based on the information you will receive.
The Chairman: That brings an end to the questioning.
Senator Tkachuk: I have a request.
The Chairman: Please.
Senator Tkachuk: With regard to my first question, about Vietnam, Portugal and Senegal, could you provide a written submission on those three countries and why those changes are in this bill? I think you addressed two countries, but not the third one. I would like that in writing. I was wondering, as it is not in the briefing book, if you will be making changes to past treaties and amendments to the bill. If you include that information in the briefing book so that we will be alerted to it, that would be helpful.
Mr. Wilfert: That is not a problem, senator.
Senator Tkachuk: Send it to the Chairman.
Senator Lynch-Staunton: He will summarize it for you.
Senator Prud'homme: Since it appears that we will often be asked to deal with kind of treaty, may I suggest that you pass along the following message to your Minister of Finance and the Minister of Foreign Affairs: that they organize a seminar entitled, ``Trade or Human Rights versus Trade and Human Rights.'' I would be more than happy to be a volunteer for the second part.
The Chairman: Gentlemen, thank you for your attendance.
Honourable senators, is it agreed that we move to clause-by-clause consideration of Bill S-2?
Hon. Senators: Agreed.
The Chairman: Bill S-2 is entitled, ``Tax Conventions Implementation Act, 2002.'' Is it the intention of any honourable senator to propose an amendment?
Hon. Senators: No.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall clause 1, the short title, stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall Part 1, clause 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 2, clause 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 3, clause 4 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 4, clause 5 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 5, clauses 6 and 7 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 6, clause 8 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 7, clause 9, carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 8, clause 10 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 9, clause 11 carry?
Hon. Senators: Agreed.
The Chairman: Shall Part 10, clause 12 carry?
Hon. Senators: Agreed.
The Chairman: Shall schedules 1 to 7 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 1, the short title, carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall the bill carry?
Hon. Senators: Agreed.
The Chairman: Shall I report the bill?
Hon. Senators: Agreed.
The Chairman: We will now turn to our examination on the present state of the domestic and international financial system or, if you like, the Canadian perspective to the Enron collapse, not Enron specifically, but to the general subject.
I welcome with pleasure from the Department of Finance, Mr. Maurizio Bevilacqua, Secretary of State (International Financial Institutions). Witnesses from the Department of Finance are Mr. Bob Hamilton, Assistant Deputy Minister, Financial Policy Branch; and Mr. Charles Seeto, Director, Financial Sector Division, Financial Sector Policy Branch. We will adjourn at 1:20 p.m. so that we can be in the Senate chamber by 1:30 p.m.
Mr. Maurizio Bevilacqua, Secretary of State (International and Financial Institutions): Thank you very much, Mr. Chairman, members of the committee for the invitation to address the Standing Senate Committee on Banking, Trade and Commerce today on the importance of strengthening investor confidence in Canadian capital markets.
I would like to congratulate, of course, the chairman on his re-election, as well as the committee members. It was a very tough campaign, I understand. I know from personal experience, as you know, Mr. Chairman, the rewarding contribution that committee work can, in fact, make; and I can tell you as a former chairman of the Finance Committee in the other place, that I reviewed the work of your committee because you had good ideas. I am not ashamed to say I even borrowed some of them, and they worked quite well.
Let me say, also, how I welcome your committee's examination of the issue on how we best foster investor confidence in the wake of the Enron and WorldCom debacles in the United States of America.
By its very nature, investor confidence must be sustained by a wide range of capital market participants: CEOs; boards of directors; stock exchanges; the accounting profession; rating agencies; analysts; regulators; governments; and the list goes on. Having a national forum like this committee examining all of the critical issues and the linkages across issues is absolutely vital.
Mr. Chairman, why such a focus on investor confidence? Whether it is competitive taxes, regulatory reform or demands for good corporate conduct, government has a responsibility to do what is necessary to support the growth of an economy in a way that works for all Canadians. These areas, which establish the environment for commerce, continue to evolve, and there is no question that we must adapt with them.
In this reality, we either continually transform our Canadian system into a competitive advantage, or we fall behind world-leading nations. Let me be clear. We must, and we will act. Standing still is not an option for Canada. Investor confidence is crucial to efficient capital markets, which themselves are crucial to a more prosperous economy for all of us.
Efficient capital markets allow our nation to realize its full economic potential, our businesses to expand and innovate, and our fellow citizens to achieve their personal dreams. They are a vital lifeline for companies, large and small, to grow at all stages of their development, particularly in their start-up phase.
The effectiveness of our capital markets is anchored on the trust and integrity of all participants. Undermining this trust, as Enron and WorldCom have done, hurts all capital market participants, not just the United States of America, but participants around the world.
Canada has a strong tradition of fostering sound corporate governance. With TSX leadership, we were among the first countries to systematically study ways to improve governance and to implement comprehensive governance guidelines. We have required the timely and continuous disclosure of material information to markets for many years, well in advance of similar initiatives in the United States. We have had a clear and determined focus on assuring board independence, in particular, by emphasizing the key role in governance that can be played by an empowered, non- executive board chair or lead director.
In this context, our government's view is that, while our system of corporate governance and financial reporting has real strengths, it can be improved. It must adequately reflect the new standards that investors are demanding.
Recent U.S. corporate scandals have made it all the more urgent for us to review our standards and practices and to question our assumptions. Our standards must not only stand up to investor scrutiny here in Canada, but also around the world. The U.S. response to its corporate scandals was the passage of Sarbanes-Oxley Act of 2002. It is sweeping legislation intended to promote confidence in U.S. capital markets.
Many countries are now reviewing their own standards and practices in order to prevent an Enron-type scandal from occurring within their borders. International bodies, such as the International Organization of Securities Commissions and the Financial Stability Forum, are also focused on this issue.
In Canada, much work is underway. The federal government, as announced in the Speech from the Throne, is working with regulators, business leaders and market participants to bolster investor confidence and improve the efficiency and integrity of Canadian capital markets.
As part of that effort, I am here today to do the following: first, provide a framework of what the government believes are the key areas that must be addressed; second, set out the progress to date by Canadian market participants in these areas; and third, pose some fundamental questions that must be considered as we move forward.
Let us be clear about our ultimate objective. It is a Canadian corporate governance solution that suits our needs while simultaneously meeting the highest international investor and market standards.
At the outset, let me state the five elements that are, in the government's view, essential to strengthening investor trust and confidence. First, companies must have strong corporate governance. A core element must be that a company's board of directors is independent from management.
Second, management must be accountable. Chief executive officers and chief financial officers must certify their firm's financial statements.
Third, financial reporting must be improved. The bottom line is that disclosure must be complete, transparent and timely.
Fourth, there must be a credible audit process. This is a complex area, but the basic principle is clear — auditors must be independent of the firms they audit, and there must be effective oversight of the auditors' work.
Fifth, there must be stronger enforcement. Effective laws and effective enforcement of those laws are essential to provide a genuine deterrent to actions that undermine the trust and integrity of capital markets.
I want to address the issue of recent progress now.
I want to say to you that substantial progress and strengthening investor confidence is being made here in Canada. It reflects the cooperation among capital market participants as they work together towards solutions in key areas.
An important step to help ensure a credible audit process was the creation of the Canadian Public Accountability Board this summer. This cooperative effort of regulators, including the federal regulator — the Office of the Superintendent of Financial Institutions — and the accounting profession, should ensure that Canadian standards will be met through effective enforcement.
The Canadian Institute of Chartered Accountants is building on this. It has now released draft auditor independence rules for comment, rules that are intended to enhance the quality of the audit process. The rules are due to be finalized by the end of 2002 and implemented by 2003.
To improve reporting, the accounting standards board has just issued new guidelines for comment on special purpose entities and special guarantees, accounting topics that are under renewed scrutiny in the wake of the Enron scandal. The board also announced that it plans to require the expensing of stock options granted to company employees.
The Canadian Council of Chief Executives recently released action plans for their CEOs and board of directors. The Canadian coalition for good governance, a group of major institutional investors, plans to take a collective approach to improve governance practices at Canadian public companies.
The TSX has announced new measures to enhance corporate governance practices at TSX-listed companies. The federal government, of course, has committed, in the Speech from the Throne, to work with provinces, regulators, business leaders and market participants to foster an effective securities regulation system that will respond to the needs of regional capital markets and emerging public companies.
As part of that commitment, the Honourable John Manley, Deputy Prime Minister and Minister of Finance, appointed Harold MacKay as special representative of Canadian Securities Regulation. Mr. MacKay is charged with recommending, by November 15, the best process that will lead to improved securities regulation as well as the issues this process should address.
On the enforcement front, the Crawford committee, as part of a five-year review of Ontario securities legislation, stressed the importance of better enforcement and recommended increased powers for the Ontario securities regulator, new securities offences and increased penalties.
The Ontario government recently announced that it would adopt many of these recommendations on enforcement by proposing greater powers for the regulator and increased penalties for securities law violations. The Quebec government has also proposed increased penalties for security law violations.
Finally, to provide investors and capital market participants with a real-time record of these developments to strengthen investor confidence, the Department of Finance has created a comprehensive progress report on its Web site, called, ``Fostering Confidence in Canada's Capital Markets.''
Mr. Chairman, I have a hard copy of this report available here. Perhaps we can distribute it to the members of the committee, because it does bring to light that there are many issues being dealt with by an array of stakeholders. This is part of the way the country is set up because of the various regulators, exchanges and all the concerned parties. In fact, action is being taken on several fronts. It is one of the responsibilities of our government, as well as this committee, to also tell Canadian investors that all this work is taking place.
Mr. Chairman, while progress is being made, more is required. To move ahead, we are going to have to deal with a number of questions.
First, to what extent are the measures in U.S. Sarbanes-Oxley legislation and new stock exchange rules relevant in Canada? Given our close economic and financial ties to the United States of America, we are clearly influenced by that nation's capital market developments. This is certainly the case with respect to its response to recent scandals.
The Ontario Securities Commission has written to capital market participants asking whether recent U.S. measures would be appropriate in Canada. The Alberta Securities Commission has initiated its own consultation.
We need to look at these new U.S. rules carefully. We need to ask ourselves if the United States rules are based on sound public policy, and if they are, how they should best be reflected in Canada.
Your committee, Mr. Chairman, can play a key role, a vital role, in answering this question. To assist you in this regard, I will be sending you, tomorrow, a template identifying key policy changes in the Sarbanes-Oxley legislation.
Second, to what extent should corporate governance practices be legislated, regulatory or voluntary?
The U.S. has clearly taken the legislative route. Corporate governance rules in Canada are currently a mixture of voluntary guidelines and mandatory rules.
Capital markets can provide an impetus for Canadian public companies to move to higher standards of corporate conduct. On their own, however, can they provide the universality of coverage and insurance that investors want, or are additional regulatory and legislated measures required to ensure that good corporate governance practices are adopted consistently by Canadian public companies?
Third, should we differentiate between the corporate governance requirements of small and large firms in Canada? New corporate governance rules may place a different degree of burden on smaller companies. Should accommodations therefore be made in the application of such rules to smaller companies, while maintaining the overall investor confidence principles? For example, in the case of the composition of audit committees, is some flexibility in application appropriate, where it may not be in the case of a CEO/CFO certification? This is an important question on which the committee can provide the government with advice.
Fourth, should we differentiate between the corporate governance requirements of widely held companies and those with controlling shareholders? Canada has many public companies that are controlled by one or few shareholders. Should their requirements be different in application, while still maintaining common principles?
Here you may wish to consider whether some flexibility is needed to account for public corporations with large shareholders. For instance, defining the ``independence'' of board and committee members needs to be carefully reviewed. Do we simply want independence from management, or are we also seeking independence from all parties with a significant stake in the company? If so, why and on what issues?
Finally, Mr. Chairman, as the government indicated in the Speech from the Throne, we will review and, where necessary, change laws and strengthen enforcement to ensure that governance standards for federally incorporated companies and financial institutions remain of the highest order.
In this context, our government is reviewing the Canada Business Corporations Act and legislation related to federally regulated financial institutions. As well, we are examining the whole enforcement area and how we can create as effective a deterrent as possible.
Before I conclude, Mr. Chairman, I would stress that our business people are overwhelmingly honest, hard-working citizens. In no way should the successes of the many be weighed down by the sins of the few.
Members of the committee, I am well aware of the powerful contribution committees can make in the creation of new and innovative policy. Let me assure you that both the Minister of Finance and I appreciate the work you are doing. We look forward to your report by the end of the year. It will be the focal point for a national debate on this important economic issue. We believe a national effort is required to meet this national challenge. To be effective, we need a coordinated approach between the federal government, other governments, regulators and private sector participants.
Let us be very clear, this is an urgent issue. Although much progress has been and will continue to be made, all of the participants need to move quickly to strengthen investor confidence. For the government's part, we will use all the levers at our disposal, whenever necessary, to strengthen the confidence of investors in Canadian capital markets.
What is at stake today is not just maintaining and enhancing confidence in our capital markets, but also building a stronger, more competitive and prosperous future for generations to come. Thank you, Mr. Chairman.
The Chairman: Thank you. Senators, we have roughly 25 minutes for questions, so I will limit everybody to five minutes.
Senator Meighen: I think this is an excellent start to our deliberations. It will give us some parameters within which to work. Hopefully, we will not have to work 24 hours a day, seven days a week, in order to meet your deadline, but we will do our best to have something by the end of the year. This is obviously an area of great interest to many people.
I want to be sure that I understand your statement on page 1, the second paragraph under ``Capital Markets and the Economy,'' where you state:
These areas, which establish the environment for commerce, continue to evolve, and we must adapt with them. In this reality, we either continually transform our Canadian system into a competitive advantage, or we fall behind world-leading nations.
Many people think that we are at a competitive disadvantage right now but would support the view that we have to transform our Canadian system in order to maintain a competitive advantage. Is that what you are saying here?
Mr. Bevilacqua: Exactly.
Senator Meighen: In what respects would you say we are at a competitive disadvantage because of our system?
Mr. Bevilacqua: I think that there is no question about that fact when you look even at the issue of securities commissions and having to file in different provinces. This is something I heard not just here in Canada, but I also heard it abroad. There is no question that you must have flexible, adaptable systems in place. They also make doing business a lot easier.
Generally speaking, any barrier that discourages investment, that discourage capital flows to Canada, that discourages the creation of a more effective business environment is something that we collectively need to work on. We have made a great deal of progress over the years, but there is much more work to be done.
We must listen very carefully to the market players, to those who are actually participating in the business of our country, and indeed the business of the world. I think that government could be given very important signals from them in a number of areas.
This is just a part of a large picture that needs to be addressed. Ultimately, the question is: How can we create a more competitive economy? How can we ensure that it is structured in such a way that we develop a Canadian advantage? This particular area offers a great deal of opportunity for key stakeholders, like regulators, government, CEOs, firms and securities commissions. All these players need to appreciate that we have some work to do. That is the reason we are engaged in this particular process.
I want to stress — and that is why I asked that the hard copy of the Web site be delivered — that many groups and stakeholders in this country are already doing a lot of work in this area. The challenge we face collectively as individual Canadians is making sure that all this work is well-advertised to prospective investors. How do we tell Canadian investors that this is happening, that there are measures being taken like the Canadian Public Accountability Board? That is a very important element of our strategy, and it will be a challenge.
I hope that we continue to be proactive in our efforts to let Canadians know that we are working very diligently to deal with this issue.
Senator Meighen: Thank you, Mr. Bevilacqua. I find your remarks to be most encouraging. I hope we can all help you translate them into action. The federal government, with the best of intentions, is nonetheless faced with some limitations as to where it can legislate. I am thinking of the Canada Business Corporations Act and, of course, federally regulated financial institutions. However, there is a whole other area that does not fall under federal jurisdiction.
One problem that leaves Canada at somewhat of a competitive disadvantage, is, as you have alluded to, the fragmentation of regulation in the financial industry. You mentioned specifically the plethora of securities commissions across the country, which is the number one problem. Does anything lead you to believe that we are any closer to achieving a national securities commission or two securities commissions or something different from the duplication of regulation that investors, both from Canada and abroad, are now faced with when coming to this country?
Mr. Bevilacqua: As you know, Mr. Harold MacKay has been appointed. He will report to us on November 15 as to what process would be best to achieve what you are talking about. However, there is no question about the nature of our country. You have the provinces and you have a federal government. The only way to achieve a model that would speak to the concerns raised by investors would be through cooperation. That is the reason the federal government cannot simply impose its own will on the provinces. We must appreciate that we must look at the involvement of all stakeholders, because this issue is complicated. I am hopeful that, when Canadians are shown the cost of having a fragmented system, they will also push for a model that is more efficient.
I use this same logic to deal with a number of issues in this country that are of concern to me, including things like interprovincial trade barriers. If Canadians are clearly told what are the costs of this system, they will support initiatives that speak to a different securities regulation system.
Senator Meighen: Mr. Bevilacqua, by way of closing comment, I agree with you. Everyone agrees with you. However, if you can do that, you should be an entrant in the Liberal Party leadership race because no one has yet succeeded in doing what you have talked about. Nobody has been able to demonstrate to Canadians the cost of duplication. We have talked about it, we have identified it, but nobody has been able to demonstrate it to the extent that Canadians come up with a solution, so good luck to you.
Senator Prud'homme: Be aware of the temptation.
Mr. Bevilacqua: Senator, I can guarantee you I will not be seeking the leadership this time.
Senator Fitzpatrick: Mr. Bevilacqua, you will let us know if you will be running next time for the leadership.
Senator Meighen: You have your fundraiser here, a young fellow. He is already doing it.
Senator Fitzpatrick: I, and others, I am sure, agree with the principles you have laid out. I think you are asking good questions.
However, we still have a major problem. Part of our problem relates to the fact that corporations have been going through the process of globalization. Businesses are becoming larger and larger to the point that they are now huge. However, that may be appropriate. You spoke about competitiveness, which I agree is important. I do not think the trend will stop.
With respect to audits, my question is this: How can an auditor perform a full, accurate and effective audit on some of these huge companies? If it can, my next question is this: How can an audit committee prepare itself to understand the audit report and the complexities of these very large companies? Perhaps large companies can afford to provide expert advice to an audit committee or to directors. I am not sure that small and medium-sized companies can do that. We know that a significant part of the growth of our economy is from the development of small and medium-sized companies.
I do, however, have one suggestion to make and that is: You could offer a tax credit for effective audits. If companies are required to do these in-depth audits and to hire expert advice to assist auditors, maybe there should be some form of compensation, if the real issue is to get at the accuracy of the financial reporting of these companies. That might be something that could be addressed. You might wish to comment on that.
The same situation comes into play with respect to a compensation committee, although it is fairly standard now that companies pay for the independent compensation analysis that is required in information circulars. However, advice is needed from time to time just on the due diligence of companies, which is the responsibility of the directors.
Coming from the resource industry, I recognize the problems that independent directors have with respect to being confident about the reserves that are published, either in oil and gas or in mining. I know that they have tightened the rules in that regard. Certainly, after Bre-X, it has been very important to do that.
There are still many other considerations such as the price of the commodity or the hedging possibility. It is difficult for outside, independent directors to understand all of these things. As I say, the reason for business, obviously, is to build the economy and to encourage small and medium-sized businesses.
I know you cannot answer these questions specifically, but I should like to have your impressions.
Mr. Bevilacqua: In regard to globalization, there are benefits and risks. You have the emergence of international global bodies to deal with auditing practices. As we go down the road with globalization, we will find that more and more international bodies will come into being in response to, particularly, the issues that you have raised.
You also raised the issue of tax credits for effective audits. I made a note of that, however, I do not know what we will do with it. That is an idea that you could raise in your work here in committee.
The issue of small and large companies was also raised during the presentation. Small and large companies face challenges in different degrees. That issue also needs to be addressed. We would like some feedback on that subject.
In this discussion we are having amongst members of the House of Commons and honourable senators, let us not forget that the key stakeholder in this discussion will be the auditing profession and what its members have to say. As honourable senators will probably invite members of the auditing profession to appear before you, that question needs to be asked.
I do not know if I have covered all of your points. The bottom line is that the reason I am here today is to set the framework. However, I will need the help of honourable senators in answering some of your questions as well as from the stakeholders involved in this issue. That is fundamental.
The Chairman: Senators may ask whatever questions they want. However, I am slightly hesitant to get into the minutia of the various problems we have raised.
I would like a statement from you. We have the corporate community telling us that they do not want to be regulated, that they can look after themselves. Then you have the whole community saying that, if they are so good at regulating themselves, how did we get into this mess to start with? I do not have the answer, and I am not saying that this committee will do what you want it to do, although, perhaps it will. However, I am only one member of this committee.
Can you make a general statement as to whether you lean toward the position that the government should actually have some form of legislation to assure investors, or should we let business regulate itself? This may not be a fair question, but I would like to hear your reaction.
Mr. Bevilacqua: It is a very fair question. Regulation is necessary, but we do not necessarily need to regulate.
As the government we have a responsibility to ensure that the public interest is protected. When you speak to business, they do not want regulation. It is not so much that they do not want regulations; they want good regulations, ones that make sense. At the same time, we must weigh that with what some investors have told us as well. They are concerned.
With regard to certification of financial statements, for example, should CEOs and CFOs sign on? What does it say about the credibility of the document if the chief executive officer is not willing to sign on? Is that fair regulation, or is it a question of saying, ``I believe enough in my company to put my name to it''?
You do not want to go to the opposite end where no one wants to become a chief executive officer and no one wants to sit on boards of directors because it is too onerous.
On top of that, we must remember that we live in a market-based economy. The market still has to function. You cannot have obstacles preventing business activity. If we had such obstacles we would be going against the intention of what we are trying to do, which is to build an efficient market system that is regulated in some ways, but which does not impede business from carrying on its activities.
Does that respond to your question, Mr. Chairman?
The Chairman: No.
Mr. Bevilacqua: Then I was successful.
The Chairman: You were successful, that is true. However, you are really highlighting the complexity of the challenge.
Mr. Bevilacqua: It is a balancing act.
The Chairman: Everything is a balancing act.
Senator Prud'homme: I am very happy that Senator Meighen asked my questions.
Senator Tkachuk: We have a problem with confidence in the marketplace right now, not so much because of what has happened in Canadian companies, although some significant Canadian companies that have had problems, but mostly because of all the publicity from the United States.
There are a couple of things the Canadian government can do to restore investor confidence. First, it can continue its reduction in capital gains. That would send a strong signal that the Canadian government believes that the marketplace and the stock market are safe places in which to invest. Second, the government can also eliminate the deemed tax on options, which is a big bugbear of mine. The present system gives incentives to CEOs and board members to sell their stock immediately because they have to pay tax on it at a 50 per cent tax rate. There should be no tax charged on options until they are actually sold by the person who takes the option. Those are two things about which the government could send signals to the marketplace.
In your remarks you talk about strong enforcement. The other day I was watching a television show about telemarketing scams, especially of senior citizens. Americans say that Canada is the perfect place to carry out telemarketing scams because the penalties for fraud are so lenient. Therefore, they all operate out of Canada, which is bad economic development, that is, to scam all of North America and the world. They would not operate out of the United States because the penalties for fraud there are so harsh.
Are you working with Department of Justice officials and officials in provincial departments of justice to ensure that the penalties for fraud are made tougher? After all, bilking pensioners through dishonesty in a pension fund is just as bad as bilking them over the phone. Do you have effective resources to combat fraud? Another problem that was illuminated in that television show on telemarketing fraud was that we do not allocate enough resources to fraud investigation.
Mr. Bevilacqua: In regard to capital gains and the point you made about stock options, I will take these issues under advisement. We will talk about them as we deal with the pre-budget consultation phase.
Senator Tkachuk: Do not say where it came from. Tell them it was your idea.
Mr. Bevilacqua: I will speak to the Minister of Finance about that issue.
On the question of enforcement, officials from the Department of Justice are involved in this process. The committee is free to ask representatives of the department to appear before you to ask questions of them. Another department that will be working closely with us is the Department of Industry.
There is a multi-departmental approach, which is the best way to do it. It is not just in society that you must bring in stakeholders, you must also bring in stakeholders within government itself to get the best possible solutions to the particular challenge that we face.
Senator Kelleher: Mr. Bevilacqua, I should like to bring to your attention an area that I believe is somewhat of a problem. I am chairman of the board of a financial institution that is wholly owned by an overseas parent. There are great difficulties in serving on a board of that nature, and in carrying out the duties that are expected of you when you are in that kind of a situation. You really do not have the same type of independence to do the things directors are normally expected to do.
We are now living in an era where people are setting up companies and institutions in Canada. We want to do that. At the same time, you should look to see how practical some of the responsibilities are with respect to boards in those situations. I do not know if you have looked at that. Believe me, it can be a problem.
Mr. Bevilacqua: This is another issue that perhaps this committee could address. I will certainly have an opinion by the end of the process, but I do not want to prejudge the consultation process.
This goes back to the earlier question on globalization. As global entities emerge, we will be faced with more and more such issues. International institutions must evolve to ensure that safeguards are in place and that measures to enhance economic activity can be facilitated rather than putting up barriers.
One of the challenges you may face is that, if the firm is located abroad, it will not get the support that the parent company gives its own board. This is the reality of a globalized society, and we must equip ourselves to face some of these issues.
Senator Setlakwe: Mr. Bevilacqua, before we even thought of studying this issue there was a presumption that there was a certain degree of morality or ethics prevalent in the capital markets area, which has now pretty well dissipated. Senator Tkachuk touched on that when he questioned whether we would have to legislate morality. The distinction that we must now make is whether to intervene and ask for sanctions for those who will misbehave in the capital markets, or to let things flow as they have in the past. There is a lack of confidence in the capital markets today that was caused by certain things that have happened recently, which was not so before.
Mr. Bevilacqua: That is absolutely right. However, if I may speak philosophically, rules and legislation, when enforced, will put people in jail. That is the reality of what will happen. However, as well, the market will kill you, if you know what I mean by that. That is where the balance lies.
I believe that business people are fundamentally honest. However, I also know that human nature dictates that people are driven by self-interest, and sometimes self-interest gets in the way of honesty. That is the challenge we face. This is a philosophical discussion.
Senator Setlakwe: It was a philosophical question.
Mr. Bevilacqua: That is a discussion that will take more than five minutes. I have definite opinions about that. This is why I am one of those who advocates that business schools should dedicate more resources to the study of ethics. That must happen.
The Chairman: I have one question to leave with Mr. Seeto for which I am not asking an answer at present.
What is the criterion for reliability? Is it reasonable care, et cetera? Do not answer now, but perhaps you could respond in writing to the committee.
Senator Fitzpatrick: I have a comment rather than a question. What has not been covered in your remarks, which, as I said earlier, were very good, is the area of how communication and shareholder reporting is done. There have been instances recently in which chief executive officers have obviously known what was happening but have not made full disclosure to shareholders. Perhaps you could add that to your list of things to be considered, because it is important.
The committee adjourned.