Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 11 - Evidence - October 28, 2010
OTTAWA, Thursday, October 28, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to undertake the 10- year statutory review of the Business Development Bank of Canada as required by the Business Development Bank of Canada Act; and to examine the Department of Industry User Fee Proposal for Services under the Canada Not-for- Profit Corporations Act, pursuant to the User Fees Act, S.C. 2004, c. 6, sbs. 4(2).
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Good morning and welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
I have a short statement to make. This is not a declaration of private interest for the simple reason that there is no private interest, but rather it is a statement outlining a connection that I wish to make public. On Monday, October 25, a senior partner in the Montreal office of Ogilvy Renault telephoned me to advise that he had just become aware that one of his partners was acting on behalf of the BDC and, more specifically, was advising the Bank with respect to the decennial review of the BDC Act. While I am counsel to Ogilvy Renault and located in the Toronto office, I am not remunerated by the firm and have no financial interest in it. When BDC appeared before this committee on October 20, I was completely unaware that the Bank had retained the services of a lawyer at Ogilvy Renault in Montreal. Not only am I unaware of the identity of this lawyer, but I have not discussed BDC's presentation with any lawyer at Ogilvy Renault, nor do I intend to do so.
I make this public statement solely in the interests of full and complete transparency.
[Translation]
On October 5, 2010, the Standing Senate Committee on Banking, Trade and Commerce, was authorized to undertake a 10-year statutory review of the Business Development Bank of Canada as required by Section 36 of the Business Development Bank of Canada Act.
This review includes an examination of BDC's activities pursuant to the provisions of the Business Development Bank of Canada Act.
The last review of this kind, which dates back to the year 2000, mainly involved the trends and evolution of financial markets for small and medium enterprises from 1995 to 2000 as well as the tools available to the Business Development Bank of Canada to meet their requirements.
[English]
For the first hour of today's meeting, we will hear from a panel of witnesses from both the Canadian Bankers Association and the Credit Union Central of Canada. Joining us from the Canadian Bankers Association is Mr. Terry Campbell, Vice President, Policy; and Mr. Marion Wrobel, Director, Market & Regulatory Developments. He is not unknown to us as he is formerly from the Library of Parliament, if I am not mistaken.
Representing the Credit Union Central of Canada is Mr. Robert Martin, Senior Policy Analyst.
[Translation]
We also have Marc-André Pigeon who has unfortunately left us but who is now director in charge of the financial sector policy at the Credit Union Central of Canada. Welcome to all of you. I think Mr. Campbell has a presentation.
[English]
Mr. Campbell, please proceed. We hope that you and your colleagues will welcome our questions afterwards.
One thing I might say to all: You may or may not have read the presentation of the BDC. Essentially, the BDC has raised five issues that it wants addressed in one way or another and has made recommendations to us in terms of broadened powers to give SMEs a broader range of financial tools and access to a wider range of non-financial services; of enhanced powers in supporting SMEs to expand beyond the domestic market; of the removal of the ceiling that exists for paid-in capital; and of the modernization of BDC's governance structure. Those are the areas where BDC has asked for some changes. If you and your colleagues would address some or all of them, we would be most grateful to know what your opinion is, and more.
Terry Campbell, Vice President, Policy, Canadian Bankers Association: We will comment on some of the specifics. Thank you for this opportunity.
[Translation]
I would like to thank the members of the committee for the opportunity to provide our perspectives on the 10-year review of the Business Development Bank of Canada legislation.
While the formal reason for the committee's deliberations is the 10-year timeline in the statute, the review is also timely in light of the experiences of the last few years, that is, the financial crisis which began outside of Canada's borders in 2007 and the economic disruption that it caused.
[English]
Throughout this period, Canadian banks have had a positive and cooperative relationship with BDC in working together to help Canadian businesses through the global financial crisis. Although Canada's economy and our financial sector fared much better than the economies of many other countries, we were certainly not immune to the impact of the severe disruption experienced around the world. In the fall of 2008 at the height of the crisis, we saw tremendous disruption in the financing marketplace. Finance providers that relied on securitization to fund their lending or leasing activities found that they could no longer raise funds and either left the market or severely curtailed their activities. Many foreign institutions pulled out of the country, leaving many of their business clients high and dry. During this difficult period, banks in Canada stood by their clients and aimed to continue to make credit available.
As you know, the government established the Business Credit Availability Program in Budget 2009 as an emergency measure to strengthen the ability of BDC to help address financing gaps resulting from the extraordinary conditions of the crisis. In our view, BCAP was very well calibrated to the needs at the time.
The key lesson from BCAP and BDC's role during the crisis is that BDC is most successful when it works in coordination with the private sector lenders, such as banks, and when it adopts a complementary role to the private sector rather than competing with it. This complementary approach maximized the strength both of the banks and the BDC during the crisis and helped to maintain the flow of credit to Canadian businesses. We commend the management of BDC for their strong performance and their collaborative relationship with the banks over that period.
As the chair mentioned, we know that BDC has made a number of recommendations for changes to the legislation. The agency did reach out to the CBA to outline what they were proposing, which we appreciated. In our view, however, it is difficult to assess these individual proposals for change without some principles against which these changes to BDC's mandate could be judged. With my comments about BDC's role during the financial crisis as a backdrop, we are suggesting the following principles for the committee's consideration.
The first principle is that BDC should continue to undertake its activities in a way that complements the services that the private sector offers. We fully support Mr. Jean-René Halde's recommendation to the committee last week that ``the act reconfirm BDC's special focus on SMEs and keep the concept of complementarity as a way BDC does business.'' That is important for three reasons: First, Crown agencies should exist to serve very clearly defined public policy goals that do not aim to replicate what the private sector provides. Second, engaging in other activities could detract from BDC's main purpose, which is to assume risks that may not be appropriate for the private sector to assume due to prudential considerations. Third, as a core principle and one that we have held for some time, it is not appropriate for Crown agencies to use the advantages of the Crown, including the ability to borrow at lower interest rates, to compete directly with the private sector.
Given the lack of detail about some of BDC's proposals, it is difficult for us to determine at this time whether they meet the complementarity test or whether they would result in BDC competing directly with the private sector. For example, it is not clear whether the proposed bonding service is filling a gap or whether it is competing directly with a comparable bank service. Some banks, for instance, offer performance standby letters of credit, which perform essentially the same function. Rather than acquiring a new power, it may be more appropriate for BDC to consider using its existing powers to offer guarantees to the banks, which in turn would allow banks to offer products to the customers.
As a general rule, it is our view that BDC should undertake its activities in partnership with the private sector to the greatest extent possible since working in partnership with a business's primary provider is the best way to ensure complementarity.
The second principle that should serve as a guide and a test is that the parameters within which BDC operates should be precisely defined. BDC's scope and role as a government agency should not be open ended, and its powers should be sufficiently clear so as not to cause confusion in the market. There has been a positive relationship between the banking industry and the BDC in the last few years, which has not always been the case. There have been times in the past when we felt that BDC moved out of the realm of complementarity and was competing head-to-head with the private sector. As such, we recommend that the scope of BDC's role and activities be clearly defined in legislation and not be left open to changing interpretations that could shift over time.
For example, we have concerns about the proposal to replace the paid-in capital limit with the broad notion of unspecified additional government investment. A paid-in capital limit helps to set a ceiling on the amount of risk to which the agency, and ultimately the government and the Canadian taxpayer, will be exposed. A key lesson from the financial crisis that we have all lived through is the critical importance for all financial institutions to have strong controls and limits on the risks that they take. If there is a need for greater capital, there should be an opportunity for Parliament and parliamentarians to debate the matter.
BDC's proposals also refer to a broader range of financial services and the facilitation of a fuller range of non-financial services. BDC has provided some examples, and those are useful, but, in our view, the changes are not precisely defined and could be construed as very broad in nature. Even if this is not the intent, the concern is that, without clarity and further definition, changes in powers could result in activities that are not complementary in nature.
A further concern here is the potential for confusion in the market. BDC proposes to get involved in financing foreign direct investment activities abroad, which, at least on the surface, could result in a duplication of activities between BDC and EDC, or certainly the appearance of that. Also, given that some banks are active in supporting their customers internationally, the question arises of whether these proposed powers would result in BDC offering services that are already available.
In the interests of getting to the discussion, let me conclude by saying we very much appreciate the opportunity to contribute to your discussions this morning by recommending some principles and some criteria that may help guide the committee's deliberations, and we look forward to discussing these with you throughout the hour.
The Chair: We will proceed directly to the Credit Union Central of Canada's statement.
[Translation]
Marc-André Pigeon, Director, Financial Sector Policy, Credit Union Central of Canada: Mr. Chair, I want to thank the committee for the opportunity to talk to you about the Business Development Bank of Canada Act. It is a great pleasure for me to be back with you. This committee has done an excellent job.
[English]
Canadian Central has reviewed BDC's submission to the 2010 review of the BDC Act and last week received a briefing from the BDC on its contents. Based on this initial review, we would like to focus our remarks on two issues. The first issue concerns a proposal for ensuring that BDC continues to act in a manner that complements activities in the private sector. The second issue we want to address concerns possible operational overlap among Crown corporations. Before addressing these two issues, I would like to make a few preliminary remarks concerning the role of Canadian Central and, more generally, the credit union system in Canada.
Canadian Central is a federally regulated, financial institution that operates as a national trade association and finance facility for its owners. Our owners are the provincial credit union centrals and, through them, we provide services for approximately 406 affiliated credit unions across Canada. As you may know, credit unions represent an important component of the Canadian economy. There are currently more than 1,700 credit union branches serving some 5 million members, holding more than $124 billion in assets and employing some 21,000 employees.
Although the global economic slowdown continues to present some challenges to the credit unions and their members, we are pleased to report that our performance throughout the crisis has been consistently strong, with 2008 being one of the most successful years ever for the credit union system and 2009 seeing strong asset and loan growth. Our financial position remains strong, and we have maintained our share of the market in step with growth in the Canadian population.
There is a common misconception in some parts of Canada that credit unions are small, only operate in rural areas and are reserved for employee groups or other interest or affinity groups. Nothing could be further from the facts. In fact, credit unions come in all shapes and sizes and operate in almost every community in Canada. Actually, in more than 380 communities in Canada, we are the only financial institution, and credit unions are the first choice of a significant percentage of the population. In fact, one in three Canadians are members of credit unions and caisse populaires. We believe these numbers reflect the strong cooperative values of the system and Canadians and the commitment of the system to the economic development of their communities. Charitable donations, employee participation in worthwhile causes and scholarships and bursaries are all part of the contributions that Canadian credit unions make every day. In 2009, for example, Canadian credit unions contributed more than $37 million to their communities.
Canadian Central appreciates the opportunity to speak to you today about the review of the BDC's legislation and powers. In general, credit union's interest in activities of the Crown corporations has increased in recent years. In 2008, for example, Export Development Canada, recognizing the increasing role that credit unions are playing in the SME market, rolled out a strategy to cultivate a closer relationship with credit unions that have members engaged in the export market. The rapid expansion of Farm Credit Canada's market share is a significant concern to the credit unions engaged in agricultural lending. Also, with the SME market now the fastest growing segment of credit union business, credit unions have become increasingly aware of the BDC's presence in that respect. The BDC, to its credit, has also started working with Canadian Central to find ways of collaborating and developing mechanisms to deal with any conflicts in our relationship.
Canadian Central often receives feedback from credit unions in regard to the BDC and, in general, it is quite positive. Many credit unions value their relationship with the BDC and are generally satisfied that the BDC plays a role in the market that complements their activities. There have been instances, however, in which credit unions find themselves in direct competition with the BDC, but these do not appear to originate from BDC policy. Canadian Central and BDC are working to address these issues as they arise.
Turning to the substance of the BDC Act review, we would like to focus on two issues. The first will be the complementary mandate. On that issue, we have a favourable impression of the BDC, at least to the current state of things. This impression derives in large part from the fact that credit unions see the BDC playing a role in the market that complements their own. From time to time, credit unions are able to assist their members on particular transactions by collaborating with the BDC. This cooperation is possible because the BDC offers products and services not necessarily offered by credit unions and because it is not perceived to be a competitor in the market.
The BDC's complementary focus derives from section 14(4) of the act, which states that BDC's loans, investments and guarantees are to fill out or complete services available from commercial financial institutions. Canadian Central is pleased that the BDC has said that it wants to retain or remain a complementary lender. However, as the BDC seeks to expand its powers, it is important to ensure there are mechanisms in place to maintain this focus on complementary lending. As things stand now, it appears that the BDC is left to its own discretion to interpret and carry out its complementary mandate as it sees fit through internal guidelines. There are no attendant regulations that further define how the section 14(4) is to be understood, and the Auditor General's 2009 special examination report of the BDC is silent on this matter as well.
In short, and I repeat, there does not appear to be any external mechanism to examine the BDC's activities and ensure that BDC is interpreting its complementary mandate in an appropriate manner. Also, there are currently no suitable recourse mechanisms if problems do arise.
When the Government of Canada drafted the BDC Act, it believed it was important for this complementary focus to be in there, and the BDC continues to believe this is an important part of its mandate, as do credit unions and the banks, of course. Given this importance, Canadian Central believes that the complementary clause needs to be supported in some manner. Possibly, this could be done by undertaking periodic external audits to ensure that the BDC is maintaining a disciplined focus on providing complementary services. This would increase the transparency of the BDC's operations and provide the government and parliamentarians with a better understanding of its activities. We believe that such a mechanism is of particular importance in a context where the BDC is acquiring broader powers, including notably its request to lift the $3 billion limit on paid-in capital and enshrine its cost recovery mandate in the act.
The second issue we want to address is the operational overlap among Crowns. In April 1996, this committee issued a report on Crown financial institutions that observed operational overlap emerging among the Crown financial institutions. It highlighted the FCC's move, for example, into financing off—farm activities, rural SMEs and agri business. The report also noted that the BDC was finding mechanisms to support export-oriented businesses, while the EDC was seeking to support SMEs. In response to this dynamic, the committee recommended merging the FCC and the BDC, while also merging the EDC and the Canadian Commercial Corporation.
Fourteen years later, the scale and scope of activities undertaken by the Crowns has expanded and overlap continues, to a certain extent. Canadian Central receives reports from the field from time to time of the BDC and the FCC competing for business. In its mandate review, the BDC is asking for expanded powers to serve businesses in export markets and to serve supply chains more effectively. At the same time, the EDC is seeking to make permanent some of the domestic powers it received in 2009 so that it may better serve Canadian exporters and businesses participating in internationally oriented supply chains. The EDC is also continuing to focus on SMEs. Meanwhile, the FCC's legislation, while not under the review, also gives it the power to serve SMEs in the rural areas if it wishes to do so. In short, the problem of overlap still exists, and Canadian Central is of the view that it warrants attention by the Government of Canada, perhaps this committee.
The 1996 recommendation that some of the Crowns be merged may not be appropriate. However, as the Crowns grow and their powers expand, it is important that the government ensure that duplication of effort is avoided and that Crown financial institutions do not find themselves competing for similar business down the road.
To conclude, Canadian Central would like to thank the committee for this opportunity to say a few words about the BDC Act. We are continuing to review the BDC submission, and if warranted we will provide the committee with further comments in the coming weeks.
We look forward to your questions.
The Chair: Might I just ask you one question? There are caisse populaire — such as Desjardins — that are not a part of your group, is that correct?
Mr. Pigeon: Yes.
The Chair: Are there any other major credit unions which are not?
Robert Martin, Senior Policy Analyst, Credit Union Central of Canada: There are some credit unions in Ontario that are not affiliated in any way with Canadian Central, but there are very few of them.
Senator Hervieux-Payette: What about the New Brunswick one?
Mr. Martin: And in New Brunswick, I am sorry. Yes, of course.
The Chair: If you take X Caisse populaire Desjardins out of the equation, roughly speaking, what do you represent — would it be 80, 85 or 90 per cent? I suppose it depends on how you measure it.
Mr. Martin: In terms of asset size, we are close to equivalent. They are slightly larger.
The Chair: Do you represent the vast majority of the others?
Mr. Martin: By far. We represent maybe 95 per cent.
The Chair: We have 35 minutes and I have eight questioners, so please keep your questions as crisp as you can. We have another set of witnesses at 11:30.
Senator Oliver: My question is to Mr. Campbell and Mr. Pigeon. That question really deals with two words, ``complementary'' and ``competing.'' I would like you to help me draw a line as to when the BDC would start to be competing with the banks or other cooperatives and when it is doing its job of being a complementary lender.
It seems to me that there are times that, if the weather looks good outside, the banks will want to take that risk. As soon as some clouds start to appear, the banks will say ``Maybe we better push this off to BDC or, if BDC does not want to do it, maybe they should give us one of their good guarantees. If we are 100 per cent guaranteed, we would love to take that risk.''
Where do you draw that line?
The other part of the same question is foreign direct investment abroad. There are times when our banks get scared; they say ``You are a wonderful client and we will fund you all across Canada. However, if you want to go to Mexico and open a plant there, we are a little bit dubious. Get BDC to do it or have them give us a guarantee for 100 per cent because we do not want to take that risk.''
I do not know when they competing and when they are complementary. I need your advice because I think the banks are a little afraid to take a risk.
Mr. Campbell: That comes down to the key question of what that bright defining line is. We have discussed this internally and we have discussed it with BDC quite extensively. There is probably no clear defining line. Let me help you as best I can.
I think it all comes down to the area of risk as pointed out somewhat in your question. This goes to one of the strengths of our system. It was a strength coming into the financial crisis and was certainly a strength throughout the recession period. It is widely recognized.
We have a very strong track record at managing risks. We are lenders at the lower end of the risk spectrum, and we do that because our regulators and shareholders demand it. We take individual's money on deposit and we have a fiduciary responsibility to lend appropriately.
I think our track record in the sense of loans being paid back and loans in default shows that we manage that very carefully. There are, however, obviously credit demands out there that are higher up the risk scale, and I think that is where that defining line comes in.
We canvass our members and bankers very carefully and look at the statistics and the lending trends. During the ``cloudy days,'' banks were standing by their customers and were actually increasing authorizations. However, we were seeing that many businesses, particularly smaller businesses, were being very careful. They were not drawing those lines down. They were very cautious about going further into debt and were waiting until they could see the skies brighten again.
In terms of the complementary nature versus direct competition, if we see a Crown agency coming into the territory of offering services and products available in the marketplace and from lenders on terms that are widely accessible, we have to ask ourselves what the public policy reason is for that. I really must say that over the course of the recession, the degree of cooperation from BDC — their openness and their absolute willingness to sit down and discuss concerns that we have — is admirable; they have done a very good job.
They tend to focus on those higher risks of a lending package. An individual bank, a lender or an account officer might say they can go up to X level but not into that extra, either because of internal capital allocation or because of risk. The BDC is tremendously useful there. Though we have not seen much of it lately, there have been instances in the past where we look at deals and say the banks could have solved and addressed that. Why is BDC in that space?
It tends to be a little bit more case by case, but I would say, senator, that the variable is on the risk. Perhaps my colleagues from the credit unions can help.
Mr. Pigeon: We are generally supportive of what our colleague just said.
The other thing to emphasize, at least from our perspective, is that we are not seeing a lot of problems right now. Things are generally good. It is a case-by-case kind of situation. Our concern about the proposals is the potential dynamic that could be unleashed that we are not aware of and which we cannot fully anticipate going forward.
I do not know if Mr. Martin has anything else to add.
Mr. Martin: Overall, we have not seen much out there in terms of credit unions and the BDC bumping into one another. Usually, if that does happen, it tends to be very locally based and maybe the product of a particular dynamic at a BDC office. A lot of cooperation does happen at the local level, too.
We are careful, as the banks are, with how we lend. In some instances, you could say we might be a bit afraid of risk, but that is another person's prudence. We came through the last crisis with very few difficulties, and we are very proud of that. We can see there is definitely a role for the BDC in the market. We think they are actually addressing higher- risk lending in quite a reasonable fashion right now.
The issue is as Mr. Pigeon was saying: What happens down the road if they have expanded powers, and what if the EDC gets these domestic powers too? They might start bumping into one another more, and there might be pressure to move into less complementary lending.
Senator Gerstein: Mr. Campbell, on page 2 of your statement, you indicate as a core principle that:
It is not appropriate for Crown agencies to use the advantages of the Crown, including the ability to borrow at lower interest rates, to compete directly with the private sector.
In your remarks just a moment ago, you also talked about public policy. Therefore, as a matter of public policy, to what extent do you think BDC should step into the breach to extend credit to Canadian entrepreneurs and SMEs when the chartered banks might be reluctant to do so, particularly in difficult times?
Mr. Campbell: I think as a matter of public policy, BDC has an important role to play in the marketplace. We have no concern with BDC, per se. We think it is a useful organization. As I say, their utility has been clearly demonstrated over the course of the crisis.
In terms of public policy, we need to have a clear sense of what their role is and what the boundaries are.
Entrepreneurs in the early stages of their business or their dreams do not need the kinds of financing that create debt because they do not have a cash flow to manage that debt. They need angel investors; they need venture capital. Banks typically do not get into that because of our role and risk management limits. Therefore, it is a very good role for BDC. Certainly banks have a role in advising.
Senator Gerstein: Mr. Campbell, with all respect, that good role includes stepping into the breach when chartered banks do not do so.
Mr. Campbell: What is the breach?
Senator Gerstein: I cannot get a loan from the chartered bank.
Mr. Campbell: You have to analyze breaches on a case-by-case basis. We have been monitoring our banks closely on this. The facts are clear, as they have told us that they will stand by their customers and continue to provide credit. Furthermore, the amount of authorization has actually increased. There will always be cases where, after reviewing the balance sheet and the prospects, we find the risk to be high. If it is past our risk tolerance, we can call upon and work with the BDC. That is entirely an appropriate role for the BDC.
Senator Massicotte: I largely agree with your presentation and that the BDC should be complementary in nature. Crown corporations should not exist unless there is a benefit to Canada and unless the marketplace cannot satisfy that competitive environment.
Having said that, I do not agree with your answer that you examine issues transaction by transaction because that is ``foreverland;'' and the government should not be involved in that debate.
BDC basically would agree that they should get involved only if there is a market failure or a void in the marketplace. My definition of ``a void in the marketplace'' is an environment that is not competitive enough to allow customers to receive a reasonably priced service; and there must be many suppliers of the service from which to choose.
Having said that, let us have the debate. Where is there a void in the marketplace? Are the big corporations being satisfied? They probably have access to international funds so I suspect they are being satisfied. There is a great deal of competition among credit card companies. Some people would suggest a void in venture capital. Some people would say that rural clients and small enterprises are not being satisfied. In your world, where is the void? Where is the market failure that prompts the discussion to create a Crown corporation to compete against this marketplace? Where is the void?
Mr. Campbell: Many commentators have pointed this out. A particular weakness — a void, a market failure, a gap — in the Canadian marketplace, is in venture capital. I do not think we have a sufficiently mature, broad and deep venture capital market. Many start-ups, whose assets are their ideas and nowhere else, who do not have an existing client base and, therefore, no regular cash flow to support debt, turn to venture capital.
Venture capital is pretty thin in Canada. We know that BDC has a smallish venture capital role. There is also a venture capital industry association in Canada that would merit a conversation with this committee. There is a gap.
In respect of another gap, we saw the government charge BDC with playing a role during the financial crisis. In the fall of 2008, as I mentioned in my remarks, market securitization dried up. Many non-bank lenders get their funding from the marketplace. That market froze and they were unable to extend new lending, to lease or to roll over their commitments, so they basically exited.
We are beginning to see some normalization in that area, but securitization still has not come back from the highs before the crisis. When it does come back, it will look very different. That is the second gap.
The third gap occurred in the bond market. During the recession we saw funding in the bond market basically tanked. Banks stepped in when people said they needed funding. Over time we have seen the bond market come up, and there has been equalization. However, is it back to where it was in 2007? I do not think so. We are approaching normalization, but we are not quite there yet.
I would point to Senator Gerstein's point about entrepreneurs, venture capital markets and angel investors. They are out there, but that market is not as mature as we have seen elsewhere in the world.
Senator Massicotte: You do not mention expansion capital, growth capital and public capital. Is it only in start-ups?
Marion Wrobel, Director, Market & Regulatory Developments, Canadian Bankers Association: If I may elaborate, it is important to distinguish the role of BDC in the marketplace over the long term and the role of BDC and the kinds of things it was doing during the financial crisis. In many respects we remember the extraordinary things that BDC did over the crisis because we had unique pressures that we hope we never see again. In the longer term, as we return to the normal situation that Mr. Campbell talked about, we are focussing on that complementarity in terms of an identifiable system- wide gap, which the senator was talking about, that meets a public policy rationale. Every business that wants financing does not necessarily deserve it. I am referring to areas where the government thinks that the private sector cannot do it, and I would not even go so far as to say because of market failure but more because of the risks involved, the government would like to see a government agency or a collective supply of capital to certain kinds of firms that would not otherwise find financing. A perfect example is young firms that find it difficult to obtain financing traditionally through bank products. They normally rely on family, friends and other angel investors. Sometimes governments would like to be able to provide an alternative.
Senator Massicotte: We can talk about exceptions. We had a unique situation over the last couple of years, and we all support BDC's role in that. The problem we have going forward, securitization by example and bonds, is that when the government uses its money, which does not bear the same capital cost, it might simply be delaying the market response to a new normal environment. That is tough to judge. Securitization is difficult because when you put public money into it, it might adjust and return more slowly than it should otherwise adjust. There is a reason that the market is not buying into those things: They got shafted in the past and it is complicated; so they need to make changes to adjust to that new normal.
Let us talk about SMEs, an area we are sensitive to. You did not mention SMEs when you talked about where the voids lie. Desjardins has a significant presence in that area. Is there an inadequacy of capital and competition there?
Mr. Campbell: The perennial debate in an emergency is usually about what to do. Do you help out immediately with longer term effects? Do you let the cards fall where they may? There is no easy answer to that. We think that BDC played an appropriate role during the crisis.
To your specific question on SMEs, we have been looking at a number of hard and soft indicators. We monitor what the CFIB says on a monthly basis; they put out a barometer. We monitored throughout the crisis. It was quite remarkable in contrast to previous crises of 20 to 30 years ago. The top concerns reported by CFIB did not include access to capital, which was well down the list. Rather, they were worried about regulatory costs, tax costs, insufficient domestic demand and lack of skilled labour. We were not hearing those reports from that particular sector.
We canvass our members constantly. The information coming back to us was about authorizations. The amount of credit that we make available to SMEs in particular was either constant or up. What was not there was that the amount being drawn down was actually in something of a decline. As I was saying earlier, though the credit was available to them, businesses were being extraordinarily conservative in drawing it down. They were basically hunkering down and waiting the crisis out.
There are always individual cases and individual pockets here and there, but, overall, we are making that credit available to the portion of the marketplace that we serve. Remember, banks are only half the market in terms of lending and that kind of credit.
Mr. Martin: Part of this issue is contextual. Industry Canada came out with a report around 2007, just before the downturn, so maybe the data was collected in 2006, where they surveyed availability of financing to small business, and their conclusion was that there was not much of a gap and that much of the demand was being met. Of course, that changes in the context of a downturn, and that raises the question of whether the BDC has a counter-cyclical role. As you say, it is probably not amenable to a precise definition of when they should intervene and how far they should go, and also the question is when they should pull back. They are getting deeper and deeper into the market now. When do they start pulling back on some of these measures? It is the same questions being faced by the government that is engaged in counter-cyclical spending.
Senator Harb: Mr. Campbell, in your presentation, you mentioned that you have a concern about the BDC proposal to get involved in financing foreign direct investment activities because banks are already involved in this particular venture, and furthermore, because EDC is also involved. Ten years ago, maybe, that was not the case. We did not have a lot of Canadian banks involved internationally, but now it is the case because not a month goes by without an announcement from one bank or another that is purchasing or undertaking a joint international venture.
However, when BDC appeared before us, they made a pretty compelling case about why they wanted to follow the customer. In a sense, one can say that when they have this customer here and they have financed this customer here, one would assume it was done on a complementary basis because the bank did not want that customer. Logically, one could say that maybe it makes sense for BDC to follow their customers if they go to Mexico or elsewhere.
You are saying that this can create confusion because EDC is already involved in those kinds of ventures. In light of that, what would you suggest? Should there be some sort of a conference call with the BDC and the banks to determine how far each one player should go, and that will be the end of it? Frankly, we see a role for each one. EDC has a role, you have a role, and BDC has a role. As a committee, we want to determine what the win-win situation is and how we can achieve that.
Mr. Campbell: I can certainly understand that if BDC has a long-term client and the client is seeking to expand, there would be a natural tendency to say, ``We wish to help you, because you are a long-term client.''
We are talking here about the entrenchment in legislation, which therefore is forever, of a new power and a new role. Where does that lead going forward? Our point at this stage, because we have not seen really a lot of precision, although we have a general sense, is that we are raising questions and cautions. On the one hand, you can understand why they would want to help their existing customers, but for a wholly de novo kind of activity that BDC would want to continue to service, there would have to be some clear, bright lines so there is not confusion. For instance, potential customers come to us all the time, and even if we cannot provide them help, we advise them, ``You should go to this agency or that agency.'' At this stage, I wish I could give you a very precise answer, but it is more a question of raising the concern that if this is to be entrenched, it must be thought through carefully so you avoid those questions of confusion and duplication.
Mr. Pigeon: Our proposal speaks to the fact that there is a lot of grey area out there that we would suggest is in the audit realm, where you would at least report to Parliament so that Parliament could help make that assessment of where that line is as the situation evolves. I would refer you back to our proposal to help address that issue.
Senator Ringuette: There is at least one good thing about this committee, and it is that there is institutional memory.
Mr. Campbell, on page 1 of your statement, you say that during this difficult period, in reference to the last three years, banks in Canada continued to make credit available, and then further, in certain responses to questions, you said you have increased your authorization during that period. At the same time, this committee has had requests to provide billions of dollars to BDC to provide liquidity. Now I am referring to your comment on page 2 that Senator Gerstein referred to earlier.
As a core principle, it is not appropriate for Crown agencies to use the advantages of the Crown, including the ability to borrow at lower interest rates, to compete directly with the private sector.
That is not what we were told a year ago, Mr. Campbell. It seems that the taxpayers borrowed over $40 billion to provide you liquidity, and today you are telling us that you had more than enough and you had actually increased your authorization. I have serious doubts as far as your issue of core principles in regard to the BDC.
Furthermore, you say in regard to letters of credit for SMEs that are similar or equal to bonds for SMEs, how many bonds or letters of credit to SMEs would you have provided in the last two years compared to what the Business Development Bank provided using their own capital?
Mr. Campbell: I would like to raise three points, Mr. Chair, if I may. First, in terms of increasing credit, in 2008 and 2009, there was a big problem of accessibility to credit in Canada. There was a big hole. A big chunk of the marketplace was simply vacated. That was not the banks. That was non-bank financial institutions and foreign institutions. Suddenly and dramatically and abruptly, there was a big hole in the marketplace. Banks did what they could do step into that gap. They increased their lending. The statistics will show that in October and November 2008, the amount of credit authorized increased by double digits to take up the slack. However, we were not able to take up all the slack and that is why there was a role for the BDC.
Second, I will speak to your point about liquidity. I think you are referring to the insured mortgage purchase program, which was not an issue with the banks. That was an issue with some failures in the marketplace. There was not any kind of liquidity funding going on.
The government put that in there, and we thought that was a good thing to do. However, those transactions were done on market terms and the government actually made a fair amount of money on them. It was not done at less- than-market terms; it was done on an auction-type basis.
Last, it was not lines of credits I was speaking to specifically but rather performance stand-by lines of credit, which is a particular kind of product. It acts in effect like an equivalent of bonding. This is the power that the BDC is seeking. A bank will issue a performance stand-by line of credit on behalf of their customer to a third party. In effect, it is a kind of guarantee on performance of contract; the bank is saying to the third party that the bank will guarantee their customers' performance.
I guess the question we are raising, senator, is that if it looks, walks, talks and smells like a bonding exercise, you would have to think carefully as to whether changes to the rules would be getting into that competing kind of space.
Senator Ringuette: As a follow up to your answer in regard to bonding, you have not provided me with any kind of percentage on bonding or letters of credit that you provide specifically to the marketplace for SMEs.
Mr. Campbell: I do not have that at hand. I will see if I can get that and provide it to the committee.
Senator Ringuette: That would be very nice.
Regarding the $40 billion and the mortgage purchase back, I think many of your members were participants in that exercise.
Mr. Campbell: Indeed they were.
Senator Ringuette: Absolutely. I think it goes back to the issue that you sometimes come here and tell us that you need BDC to supply you with some liquidity, and other times you tell us they absolutely cannot intervene in your marketplace.
If you want us to determine what BDC's marketplace would be, perhaps you could provide with us with the guidelines for your marketplace?
Mr. Campbell: BDC does not provide the banks' liquidity. BDC will work on parts of the marketplace where, either because of risk issues or in partnership with financial institutions, it makes sense that they can service a part of a lending deal. It is certainly their role in the marketplace, in contrast to our role. As I was saying, we are not in the venture capital space. Our risk guidelines would not allow that. Theirs do, and I think that is entirely appropriate.
[Translation]
Senator Hervieux-Payette: First, a word of explanation about EDC and BDC. I know EDC mainly through SNC- Lavalin and the big companies that get huge amounts of money to undertake international projects that create employment here. When you do business with SMEs wishing to have foreign operations — Banks are not present in all countries and all foreign markets. Thus, I would like you to clarify this. You cannot have that kind of vacuum in a global market. You are all anxious to see government do the right thing. You are no doubt aware that there are 60 analysts at EDC and 600 at BDC. You cannot rebuild the same structure since EDC followed it from the beginning. They helped finance the growth of that business and they have an extensive knowledge of its operations. We cannot see on what grounds the number of people in the other institution should be increased.
The role should be defined. This is what you want in relation to your organizations and also in relation to our two Crown corporations. I think your insight will be important. We will need to know what you think when EDC appears before the committee. You should think about it and get prepared. That would be good.
My question is about venture capital. While you can say that you are here as bankers, everyone knows that all our banks own brokerage firms that appear on their consolidated financial statements.
Like you, we can see there is a vacuum and we wonder how to close this gap in the system. If we make recommendations to BDC and the minister on how to organize this contribution with private funds, what kind of model would you favour? Should BDC get another $200 or $300 million from the government and ask private interests to join them in a partnership? We would then have a ratio of one to one, one to two or one to three depending on the kind of agreement that can be made.
However, given your brokerage expertise, that would be important because you have money. I am talking about the consolidated banking business. We know the money would not come from your bank but from a subsidiary or from the brokerage firm. Our SMEs need money to expand. Often, after five years, they are ready to go on the global market but they do not have the money to market an outstanding product. Then we get to the end of the story: a foreign investor acquires the company, the knowledge and the patent, and we are left with nothing after investing $10 or $20 million.
It is important for us to know your views. Even though Mr. Halde did not ask us for an increase in BDC's capital, we may have to decide on an authorized ceiling so it is not open-ended and, at the same time, require that a certain amount be reserved for venture capital to be invested in specific things.
You are financial experts and these are your clients. You would not have to contribute directly, only indirectly. It is important that BDC — I cannot think of any other federal institution — help our businesses grow so that eventually, they may one day become your clients when they are big enough.
[English]
Mr. Campbell: There is a lot in that question, senator. First, we would be delighted to come back when you are studying EDC, because we have some views and we have a good working relationship with that agency as well.
To address one part of your question in terms of the banks and their profiles internationally, it is true that banks do not have a presence in every single country in the world. Of course individual banks will target different areas according to their own business plan.
I will turn to my colleague to respond more fully.
Mr. Wrobel: A Canadian bank does not need to have a physical presence in another country in the world to support its Canadian customer who might be operating there.
Mr. Campbell: I was going to say that.
Mr. Wrobel: I think it is important to distinguish between the expansion of Canadian banks internationally and the expansion of Canadian companies internationally, and the way in which we support them.
When we are asking the question about what BDC should be doing with respect to foreign activities of Canadian companies, the discussion about whether the company is a BDC client or a bank client really matters. We were concerned that there was a feeling that Canadian banks were supporting their customers here but were not supporting them internationally. That is not the case.
It is not a matter of BDC versus the banks, but rather the role of BDC and the role of EDC and the appropriate and most efficient division of powers between the two institutions. There is a case to be made — as was made by the senator — that if BDC has a customer, they understand the customer and they understand the balance sheet of the customer, there may be is a good justification for having BDC do that directly. Otherwise, it might be a matter of having BDC work closely with EDC.
Ultimately, that is something that this committee will have to decide: What are the efficient roles and the appropriate roles of the various Crown corporations?
Mr. Campbell: I would like to speak on the venture capital issue, if I may. We do not hold ourselves out to be experts in that particular area, and it is not generally the role of the banks. However, I would say as a general principle that we know there is a private sector venture capital organization, and we know that it has a relationship with BDC. We would think that the same principles would apply in the sense that BDC would fill gaps where the private sector private venture capital funds are not able to fill it.
The question for this committee and for public policy makers is: What impediments stand in the way of a more robust venture capital marketplace in Canada? We know that the industry has in the past had some issues about the tax system. The governments have changed some tax rules now. However, I think there will be other impediments out there that the venture capital industry is probably better placed to address than we are.
The Chair: I remind witnesses that should some inspired thought come to you after the hearing, you are quite free to make and we would welcome any comment by letter.
Senator Kochhar: BDC has made a profit in each year of their existence, and they have paid many dividends back to the government. Their main mandate is to be a lender of last resort. When medium- and small-sized businesses cannot get loans, then they go to BDC. Also new enterprises banks do not want to handle can get help from BDC.
They become customers of BDC and they do well. They make a lot of money, and BDC wants to retain them as a customer because the risk is lower and they are making more money and more profit. However, that is not really their mandate. Once their customer is standing on their own feet, they should kick them out and let them go to the chartered banks to do the business and free up their capital so they can help newcomers who cannot get a loan.
What would your comments be on that?
Mr. Campbell: Broadly, sir, we would agree with that. It is like graduating from primary school into high school and, further, into university. You are graduating into the big leagues. That is an entirely appropriate approach. It is an entirely legitimate role to help entrepreneurs and businesses start. However, as their needs become broader, more complex and more sophisticated, there is the wider world out there, and they should take advantage of that. Therefore, I would agree.
Senator Greene: One of the things that the BDC would like is the ability to make loans to corporations that are expanding into foreign countries with a subsidiary or a plant or what have you. While Mexico was mentioned, I assume they would like that authority for any country.
In general terms, do you view that as complementary to what you do or is that in competition? What would the elements of that be?
Mr. Campbell: Being brief and mindful of the chair's direction, it is hard to say as a blanket rule, ''Is it complementary or is it competing?'' It would be competing with the industry in the sense that the banks do want to follow their customers abroad; they do want to support them going abroad. Therefore, if we were seeing from BDC a broad range of activities that are normally within the realm of banks in terms of financing foreign activities on a substantive or broad basis, that would raise some questions.
On the other hand, you talk about Mexico, but there is a range of jurisdictions out there.
Senator Greene: Yes.
Mr. Campbell: You would have to look at the risk of individual cases. With different kinds of legal systems, rules of law and business environments, there could be riskier kinds of environments.
That is typically what EDC has done in the past. However, they have done it for the bigger end of things. BDC has told us that if they got into that, they would want to do it at the lower, smaller end.
I guess the question would be where that dividing line is. They can help their customers now go abroad. It is not that they cannot do that. As they see it, the problem is that they have to give the parent company much more debt — too much leverage. They would like to be able to lend to that foreign subsidiary.
It is not a question that offers an easy answer. We are raising questions now because we are not satisfied that the answers are clear.
The Chair: I am afraid we will have to bring this very interesting discussion to a close. I am sorry there is not more time, but I think it has been a very useful exchange.
Mr. Campbell: We appreciate the opportunity.
The Chair: We were glad to hear from you. We hope your voice recovers, Mr. Campbell. To your colleagues, Mr. Pigeon, Mr. Martin and Mr. Wrobel, thank you very much for being here.
Honourable senators, for the second hour, we will be discussing, pursuant to the User Fees Act, the Department of Industry user fee proposal for services under the Canada Not-for-profit Corporations Act. To assist us in this undertaking, we will be hearing from Cheryl Ringor, Director of the Compliance and Policy Directorate of Industry Canada's Corporations Canada Division. There must be an acronym for that.
Ms. Ringor, welcome to our meeting. If you have any opening remarks, we would be glad to receive them, and then perhaps you would entertain a few questions.
Cheryl Ringor, Director, Compliance and Policy Directorate, Corporations Canada, Industry Canada: I am at Corporations Canada, their Director of Compliance and Policy.
[Translation]
Corporations Canada is an Industry Canada branch responsible for administering federal statutes governing corporations, which include companies, non-profit corporations, cooperative organizations and boards of trade. We receive applications from companies and non-profit organizations wishing to incorporate under federal law.
[English]
Corporations Canada will be responsible for the administration of the new Canada Not-for-profit Corporations Act once it comes into force. We are targeting to bring the new act into force by next spring. The act, which received Royal Assent on June 23, 2009, provides a modern corporate governance regime for federal not-for-profit corporations, and it will replace the legislation that we have right now, which has been in existence since 1917. It is an old piece of legislation. The not-for-profit sector has waited quite a while for this new act, and they will be happy once it is in force because it provides the sector with a statutory framework that offers flexibility to meet the needs of both large and small organizations, as well as providing accountability and transparency.
In order to bring the new act into force, we are working to put into place the necessary elements, including the regulations. The user fees for services at Corporations Canada we will be delivering under the new act will be set out in these regulations as a fee schedule.
One of the main services for which a fee will be charged, of course, is incorporation. The process is by application. We would receive an application for incorporation from an organization, review it to ensure that it meets the statutory requirements, and, if it does, issue a certificate of incorporation that essentially creates that corporation. Other services that we provide during the life cycle of a corporation include providing certificates of amalgamation and certificates of amendments to effect transactions that a not-for-profit corporation wants to bring into effect.
The proposed user fees for these services are being set in accordance with the User fees Act, and also in accordance with the Treasury Board Secretariat guidelines on user fees. In establishing the user fees, the first step we took was to determine the full cost of administering the new act. The full cost not only includes program costs but all corporate overhead and other costs paid by other government departments, such as accommodation or employee benefit plan.
Once we had the full estimate of the costs, the next step was determining the level of the fees to charge. We had to take into account the full estimate as well as other pricing factors such as what the effect on the demand for these services would be given a certain fee level. We proceeded on the principle of cost recovery but determined that if we wanted to set the fees to recover the full costs of administering the act, the fees would be rather prohibitively high. They would be much higher than the fees charged in other jurisdictions and also higher than the fees that we charge under the for-profit legislation, which is the Canada Business Corporations Act.
Consequently, we decided to set the fees to be the same level as the fees under the Canada Business Corporations Act. Another driver in the considerations was the fact that the new act was modelled on the Canada Business Corporations Act. The services are the same and the process we will be using will be more or less the same.
As well, the service standards will also be the same as the Canada Business Corporations service standards, which are much faster than those under the current legislation. Once the act is in force, an organization could be incorporated within five business days as opposed to twenty business days, which is the service standard under the current regime.
Once we established our fee strategy, we sought consultation. We asked stakeholders for their views on the proposal in January and February of this year, and we received two responses, both of which supported the fee strategy and the service standards, stating that they were fair and reasonable.
Subsequently, in May, we published an official notice of the fee proposal in the Canada Gazette, and this period of publication meets the requirement of the User Fees Act. It is considered the complaint period during which we invite third parties to lodge complaints. During that period and since, we have not received a complaint on the proposed fees.
The final step in the User Fees Act is the tabling of the fees with both houses in Parliament for consideration by committee, and I am here before you today because of that.
Once the user fees process is completed, we will proceed with a regulatory process to bring the act into force so that the not-for-profits corporations could start benefiting from it.
I welcome any questions you may have regarding this proposal.
The Chair: Thank you, Ms. Ringor. Could you repeat whether the end result is that the fees proposed are higher or lower or the same as the CCA or the CBCA?
Ms. Ringor: They are the same as the Canada Business Corporations Act, CBCA.
The Chair: I presume that for provincial incorporations the fees vary from province to province? Where do your fees sit in relation to those?
Ms. Ringor: If we compared the not-for-profit legislation by the provinces, we are actually higher because some provinces charge, for instance, $50 for incorporation, whereas we charge $200. When we analyzed that aspect, we determined that the federal legislation was not quite comparable to the not-for-profit legislation of the provinces. They usually operate on letters patent, which are different from the Canada Business Corporations Act, and also the fees really were not set in the provinces with an eye to cost recovery, so they are artificially low.
However, when we compare it to what the provinces charge for for-profit corporations, we are fairly competitive. In fact, we would be amongst the lowest. Also we do charge a fee currently for incorporation under the existing not-for- profit legislation, and that is $200. That rate has been in existence for quite a while.
With the new act, we are proposing $250 for a paper application, and once we have the online system in place, we will be charging $200 for an online incorporation.
Senator Harb: How many corporations do you have in the system?
Ms. Ringor: For active corporations, we estimate about 19,000, and there is a fair number of inactive. Before we transition into the new act, we will be cleaning up our database, but we expect there to be about 19,000 active.
Senator Harb: When you say ``active,'' what does that mean?
Ms. Ringor: Operating.
Senator Harb: That have renewed on an annual basis or been active in the last five years? Some corporations may not have renewed yet are still active, so what do you mean by ``active''?
Ms. Ringor: ``Active'' means still in existence and still operating. There are those that have done annual filings. I think we are at about 13,000 corporations that have made their annual filings, but we do recognize that a number of active corporations are not generally aware of some of their compliance obligations for filing.
Senator Harb: How long does it take before you drop a corporation from the active list?
Ms. Ringor: When clearing out inactive firms, we follow a process that dissolves the corporation, but we have not been really doing that under the current legislation. Unlike the CBCA, where if we dissolve a firm inadvertently they could revive again and continue their operations, if we dissolve under the CCA, they would be dissolved for good and could not revive again because the legislation does not allow that. Therefore, we have been cautious in dissolving corporations.
Once the new act comes into force, corporations that we dissolve under the old act will have the ability to revive under the new act, so we will go through a process of cleanup prior to the new one.
We have not been really active in clearing out our database, because it is not a level playing field as between for- profit and not-for-profit corporations.
Senator Harb: In your communication with stakeholders you talk about the reasonable measures that were taken to notify a client, and you specifically state that, between January 4, 2010 and February 5, 2010, you did consultation, you sent out the notification. I presume you sent out notifications to 19,000 corporations?
Ms. Ringor: No, not all 19,000 of them. We posted it on our website.
Senator Harb: How many would you say?
Ms. Ringor: I believe for our email account, because we sent it for those who have signed up to get our emails, about 3,000, and then 300 by letter. Those were primarily stakeholders that were involved during the development of the not- for-profit legislation.
Senator Harb: They were participants in the development of the legislation?
Ms. Ringor: Yes. They were on the mailing list for when the bill was tabled. These are people who were consulted during the development of the bill, as well as those people who expressed an interest to be notified.
Senator Harb: However, you have said that only two comments were received.
Ms. Ringor: Yes.
Senator Harb: So out of the 3,300, only 2?
Ms. Ringor: Yes.
Senator Harb: Both of them were supportive of what you have proposed?
Ms. Ringor: Yes.
Senator Harb: Did you notify those people about the fees, the $200 using Industry Canada online incorporation features? Did you give them the list of charges?
Ms. Ringor: Yes, that was part of our consultation documents.
Senator Harb: Would it be possible for you to table the documents with the committee, if you do not mind?
Ms. Ringor: The consultation documents?
Senator Harb: Yes, the consultation letter as well as confirmation of the number of corporations communicated with and the fact that only two have responded, both positively.
What I find interesting here is that, for something so important, the community did not seem to get involved. They did not seem to question the charge of $200 for the service. That is what I would question. There is no implication on you. You did your job.
However, it is really intriguing that the not-for-profit sector in Canada would be so disconnected from the system that when a schedule for fees and the proposal for possible changes to the act came out, they were completely oblivious and did not participate at all.
Ms. Ringor: I cannot speculate, but the fee for incorporation under the current legislation is $200. What we are proposing is not much different, although we do offer more services, but, yes, we only received two.
Senator Harb: Nonetheless, you were seeking input and basically it was not there.
Senator Oliver: I have a question about the process. This bill got Royal Assent on June 23, 2009, a year and a half ago, and you said in your remarks that you hope that you might have everything ready to go into effect next spring.
Ms. Ringor: Yes.
Senator Oliver: After Parliament finishes with these user fees, what is the next step? Are there more regulations that you have to draw up and get approved?
Ms. Ringor: The next step is the regulatory process, which means going to the Treasury Board to get prepublication of the proposed regulations, which are then pre-published for 30 days in the Canada Gazette, Part I. After that, the regulations go again for final approval.
Senator Oliver: Do you think this could be up and running before the beginning of the next fiscal year?
Ms. Ringor: No, given the regulatory process, we would probably need about five or six months.
Senator Oliver: Instead of being spring then, it might be summer. You said in your remarks that we hope to have it ready by spring.
Ms. Ringor: Spring being from March to June.
One of the considerations, too, is the IT system we are building.
Senator Oliver: That was my next question.
Ms. Ringor: It does take time. We are in the development phase, and we will be testing, so we have to allow sufficient time for that.
The other issue is that under the current act, annual summaries, which are annual filings for not-for-profit corporations, have to be filed between April 1 to June 1. We have to ensure we do not disrupt that process as well while bringing the new act into force.
Senator Oliver: There are a number of not-for-profit corporations that are eager to get going under the new legislation.
Ms. Ringor: Yes.
Senator Oliver: It just seems like it is a long time, and it will take a lot more time yet, so it is disappointing.
Ms. Ringor: It is, but there are a lot of operational matters, as well as putting together the support documents. I think one of the witnesses expressed, during the development of the bill, expressed the need for corporations documents. We will be putting forward a step-by-step transition kit well in advance of the coming-into-force date so that the not-for- profit corporations that exist currently under the act can start thinking about what changes they require to their constituting documents to fall under the new act.
We will catch their spring meeting, because there normally has to be a meeting of members. They will have the materials before then. Once the act comes into force, they can make an application for a transition certificate right away.
Senator Oliver: You have already alluded to the IT process. I know that some of these fees were paid before but, once you get new regulations, it will mean much more work. Will the new IT system that you put in place mean that you will have to hire many more men and women to carry out these new regulations? Can you do it through digitization and new technologies to reduce the PYs required?
Ms. Ringor: This act is more streamlined than the current legislation which involves more manual effort. This will allow us to piggyback onto existing processes for the CBCA. We will be able to take advantage of the more streamlined enhancements that we have put in the system. This will not require more resources; in fact, it should require fewer resources.
Senator Oliver: You will not have to hire more people.
Ms. Ringor: No. The idea was to streamline it more and integrate it into our current system so that there is no additional demand.
Senator Hervieux-Payette: I have the same concern. Is the same IT system used by for-profit corporations as the one used by not-for-profit corporations? Why would they be different? As far as I am concerned, the files have to go through the same process. Why does it have to be in a bill and not in regulation? Normally, fees are found in the regulations that support the legislation so there is some flexibility. We would have to introduce another bill just to propose an increase or a decrease in future fees.
Ms. Ringor: The fee schedule will be in the regulations.
Senator Hervieux-Payette: The law will enable the regulations to deal with this table.
Ms. Ringor: Yes.
Senator Hervieux-Payette: I have a question about the IT system. I do not know how many for-profit corporations you have — probably more than 19,000. Why would that system not be available now? Why do you have to make special computer changes?
Ms. Ringor: That is what we are struggling with our CIO about. There are different changes. For instance, the residency of directors is not an issue with not-for-profit corporations, where it is an issue with for-profits. We have to make these cosmetic changes, as we see them. CIO sees it as major coding changes because they have to ensure that the application goes in the right direction. It is quite complicated. We had a process to detail all the business requirements, and some enhancements must be made to the existing system. They will constitute enhancements to the system, not a whole separate system. These enhancements must be made because we are dealing with not-for-profits.
Senator Hervieux-Payette: You present this document to the committee and say ``when it is available.'' After 12 months they have not managed to modify the computer program according to the new approach. This part of the bill was adopted over a year ago.
Ms. Ringor: This is a new system. The CIO and IT resources were developing the new system for the CBCA. Until it was complete, they could not start working on this new system. Some pieces are still being implemented into the new system.
It was a matter of focussing resources on replacing the old system. They were not freed up until the summer, when we went through the project management process of identifying the requirements and starting the development.
Senator Hervieux-Payette: What is your time line for designing the new system and training the employee who will work on it? You mentioned that it could take until next June.
Ms. Ringor: We are targeting a specific date in June.
Senator Hervieux-Payette: The system is one thing and the training is another, because you need the system in place before you train the employees to use it.
Ms. Ringor: Yes. We are developing the pieces as we go along. By January, we will have developed the incorporation and the continuance, which is the transition piece. The employees will test it out. These are the same processes as those that exist for the for-profits so employees are familiar with it already. There will be a training period of about one week or so before the release of the system.
Senator Ringuette: I am looking at your statement on page 2 of revenues and costs. Maybe you can explain this quickly. I am looking at the year over year differences with regard to 2011 and 2012 revenues. Is the difference in revenues between 2011 and 2012 the figure of $13,000 or $130,000?
Ms. Ringor: It is $1.3 million.
Senator Ringuette: There does not seem to be a direct relationship between your revenue and your cost. I assume that your revenue will increase with the increased demand for incorporation, letters patent and various other services. However, according to these figures, your cost will increase three times more than your revenues.
Ms. Ringor: Yes. We do not anticipate huge demands, so our revenues will increase only marginally. Our costs will increase because they include the salary increases and the IT increases. These are part of the estimates. We do not anticipate generating revenues that will meet our costs because we cannot set fee levels. If we set fee levels, they would be prohibitively high, and the not-for-profit sector would not be pleased, especially since for-profits are paying a lower fee. Those are the pricing factors that we took into consideration.
These costs are full costs, not just costs to the program. They are costs of corporate overhead including accommodation, employee benefits, et cetera. These are not simply costs that the organization pays out of pocket. Generally, they are paid by either a separate authority or by general tax revenues.
Senator Ringuette: Within your costing, have you included the cost for the method of payment?
Ms. Ringor: By method of payment are you referring to credit cards?
Senator Ringuette: Yes.
Ms. Ringor: Corporations could pay by credit card or by cheque. We have administrative support to deal with finances, which is included in the costing.
Senator Ringuette: Likely, about 2 per cent of these costs is attributed to transaction fees costs from Visa or MasterCard.
Ms. Ringor: Yes. We worked with our comptroller's office to determine the estimates.
Senator Ringuette: Going on line will increase your costing because of the greater use of the new modes of payment.
Ms. Ringor: That is right.
[Translation]
Senator Massicotte: You clearly indicated that the proposed user fees will not cover your costs. I am not making a big issue of this but, as a matter of principle, this upsets me because someone else will be paying. It is easy for you to say that it would be too costly. This is why I am making this comment. It is not too costly when someone else has to pay. Why should Canadian taxpayers fund services provided to a third party? What is your rationale for subsidizing people who require services?
[English]
Ms. Ringor: Services for the incorporation amount to a private benefit, and that justifies a user fee.
Senator Massicotte: Why are they not paying the full cost of receiving that service? The shortfall is being funded by the taxpayer. Why is the taxpayer being asked to subsidize a private service?
Ms. Ringor: It is not completely private. We still have some obligations. The information is posted on our online database, which is for the public interest. It is in the interest of the public to know who the directors are and where this corporation is located. We do provide copies on the structure of the corporation.
The incorporation serves a public benefit in the sense that it contributes to the economy, and there is the social aspect. We do other things that are not necessarily a private benefit type activity. For instance, our compliance activities and our policies are also to the benefit of public interest because it creates more certainty in the marketplace, which helps contribute to social and economic situations.
Senator Massicotte: I will not make a big deal about it because the amount is not significant, but as a concept it offends me. Everyone says that, which means that you are stuck with a deficit. In principle, that should not occur. They get benefit far in excess of their costs. That is my only point.
Senator Moore: Ms. Ringor, am I correct that this statute and the fees that we are talking about do not apply to charities?
Ms. Ringor: This is the act under which not-for-profit corporations incorporate, and those corporations could also apply for charitable status. In fact, about 8,000 of our current not-for-profit corporations are registered charities as well.
Senator Moore: Does a charity have to register under this act?
Ms. Ringor: They incorporate under this act, so this act creates them. Registration for charitable status is with the Canada Revenue Agency. It is an additional step they must take to become a registered charity.
The Chair: There are two stages in the process for a charity.
Ms. Ringor: Yes.
Senator Moore: Do the charities have to pay an annual fee to you?
Ms. Ringor: There is an annual filing fee, which is $40 if made by paper and $20 if made online. They have to file whatever is required with the Canada Revenue Agency.
Senator Harb: Every year these corporations have to file with Industry Canada, and every year they have to pay $40 or $20 whether or not you provide them with a service?
Ms. Ringor: The service we are providing is registration with our system, and it is supported by a system. There is a fee charged, but it is also to cover free services that we offer to such corporations. We bundle it into one filing fee. If they update their director information or change their registered office, they would have to file that information with us and we process it. The costing takes into account our cost of processing these changes.
Senator Harb: This is really not a fee for service; it is a tax, in a way. A corporation that has done nothing new, that still has the same board and everything, nonetheless has to pay $20 or $40. It is not a fee for service because you are not servicing anything if nothing has changed with the corporation.
Ms. Ringor: Right.
Senator Harb: Thank you.
Ms. Ringor: In our experience, not-for-profits usually change their boards of directors, so they do at least one of those filings a year.
The Chair: Presumably you have to verify whether or not they have changed.
There being no further questions, honourable senators, is it agreed that I report to the Senate that the committee has examined the user fee proposal of the Department of Industry and, in accordance with section 5 of the User Fees Act, recommends that it be approved?
Hon. Senators: Agreed.
The Chair: Thank you, Ms. Ringor, for appearing before us.
(The committee adjourned.)