THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, May 17, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:16 p.m. [ET] to study the subject matter of those elements contained in clauses 118 to 122 concerning cryptoasset mining in Part 2, and Divisions 1, 2, 6, 7, 26, 33 and 37 of Part 4 of Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023; and, in camera, for the consideration of a draft agenda (future business).
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I’m the chair of this committee.
I’ll introduce the members of the committee: Senator Deacon, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Marwah, Senator Massicotte, Senator Martin, Senator Smith and Senator Yussuff. We also have with us Senator Cardozo and Senator Galvez, who are replacing colleagues.
We will continue our examination of the subject matter of Bill C-47, the budget implementation act, and we have many witnesses; so I will remind everyone that we’re doing follow-up here. We need precise questions and brief and precise answers.
For our first panel, we’ll examine Part 4, Division 7, legislation to establish the Canada innovation corporation act, and we have the pleasure of welcoming virtually, representing the Canadian Council of Innovators, Nick Schiavo, Director of Federal Affairs. Thank you for joining us.
Nick Schiavo, Director, Federal Affairs, Council of Canadian Innovators: Good afternoon to the chair, deputy chair and members of the Standing Committee on Banking, Commerce and the Economy. Thank you for the opportunity to present on Bill C-47 and the budget implementation bill in regards to the Canada innovation corporation, or CIC.
My name is Nick Schiavo, and I’m appearing as the Director of Federal Affairs on behalf of the Council of Canadian Innovators, or CCI.
CCI is a national business council representing 150 of Canada’s fastest-growing tech companies. Our member companies are headquartered here in Canada and employ north of 52,000 Canadians. They’re market leaders in health tech, clean tech, financial technology, cybersecurity, AI and more.
As you know, I’m here today to speak to Part 4, Division 7 of Bill C-47, the Canada innovation corporation act. However, before I take your questions on the CIC, I’d like to begin by offering some general remarks about Budget 2023.
At a time when Canada’s economy urgently needs growth and prosperity, it was disappointing to see the federal budget miss the mark. While investments in Canadian clean tech and clean tax credits are welcome news to support Canada’s sustainability, overall Budget 2023 failed to implement some of the most basic updates to kick-start our broader innovation economy. Simply put, in an uncertain time, the federal budget did very little to help Canadian businesses navigate the challenging economic environment.
Budget 2023’s failure on innovation wasn’t the result of a lack of investment, but rather a lack of concrete measures to spur freedom to operate. Despite calls from CCI and other Canadian business leaders, there was very little movement on most of the commitments previously made by the government. For example, we did not see a real update to the reform, the Scientific Research and Experimental Development tax incentives, also known as SR&ED.
We did not see follow-through on a commitment to implement open banking by early this year. We did not see a council of economic advisors; we did not see a patent box regime; we did not see a clear renewal of the innovation asset collective; and we did not even see a mention of a semiconductor strategy despite this being a key area of interest to the government.
Despite these missed opportunities, we hope that the government can chart a new course for entrepreneurship, innovation and intellectual property with the Canada innovation corporation. Since it was first announced, CCI has been engaged in the progress of this new organization to ensure that it is aligned with the speed of business, makes strategic investments to drive the key metrics proven to propel the innovation economy and has a leadership team that reflects the best of Canadian industry.
To conclude, should the CIC repeat the mistakes of Canada’s past attempts at innovation policy, we’ll continue to see our most prosperous companies and technology fail to scale up and create the wealth that Canadians deserve. Thank you, and I look forward to your questions.
The Chair: Thank you very much, Mr. Schiavo. Appreciate your brevity.
Senator C. Deacon: Thank you, Mr. Schiavo, for being with us today. With regard to CIC, help us, if we were to put an observation in the budget implementation act, or BIA, that identifies perhaps some things that haven’t gone right in the past that this model helps to solve and where you see the need for real focus and attention going forward. Because what we want to make sure is it’s not rearranging deck chairs, that there’s really something fundamental that has changed here. So your advice specifically, what not to do and what to do.
Mr. Schiavo: Thank you for that question, senator. I wish I had an hour to respond to that.
I’ll say this: I think historically Canada has struggled with business expenditure on research and development. Just today, actually, Statistics Canada released some preliminary findings from its survey on R&D, and it found that R&D spending grew just 0.5% in 2022, and that’s for the private sector. When you consider that inflation was about 7%, that represents a considerable decline in R&D in real terms. While the survey also anticipates that will go up slightly in 2023, again, inflation is going to remain quite stubbornly high.
So Business Expenditures on Research and Development, or BERD, is a huge challenge. I think it has plagued Canadian economies and Canadian governments of all stripes for many decades. There’s no magic bullet, but I think the Canada innovation corporation acknowledges that problem and tries to address it by making strategic investments.
I think in order for it to be successful it needs to have the right leadership. There needs to be the right people at the helm who come from industry, who understand the needs of industry, as well as the machinations of government, and who can move at the speed of industry, but who can also make decisions about investments that are based on key metrics, instead of spreading the peanut butter too thin. We can’t be everything to everyone all at once. We need to be smart. We need to be strategic.
Finally, I’ll just say, I think there needs to be a clear focus on intellectual property — not just how we generate IP, but how we protect it and ensure it stays here in Canada. Based on what we’ve seen in the blueprint, it looks like the government has woken up to these realities, and so I, like many of our members, am optimistic about the future of this organization.
Senator C. Deacon: Thank you very much.
Mr. Schiavo: Thank you.
Senator Smith: Senator Deacon asked my question, but if I could follow up with Mr. Schiavo. If you had to do a top three recommendations, right now, that you would implement or that your group would implement or recommend to the government, what would be those top three recommendations to get this moving in the direction you think it should be?
Mr. Schiavo: That’s a great question, senator. Off the top, I think I would focus on governance, and I would focus on leadership. We know that the job postings for the chair and for the CEO are now up online. We, of course, at CCI have provided a list of recommendations in terms of folks who we think could serve on the board or serve as CCI, but I think it is of the utmost importance that the CEO and the chair and the board are made up of industry leaders with proven success here in Canada and the Canadian economy.
The second one, I think, would be around independence. We know that this is an independent agency of the government, which is great, and we also know that there is still going to be ministerial oversight, as there should be, and the minister would then report its findings back to Parliament, as they should. And that’s all well and good. But I think it will also be very important once the CIC is up and running for those annual reports to take the form of a portfolio. I say that because I worry that if every single company and every single project is laid bare in terms of gaining valuation or losing valuation, this is going to become an exercise in partisanship very quickly, and it will fail.
The reality is we need a little bit of risk in order to get the return on the investments we want to make, and that return is about creating economic wealth and prosperity for Canadians. I think we have a lot of risk aversion in our government, and so far, it hasn’t produced the results we want.
The third is around IP. One of the things we were very pleased to see, which we have been calling for, is this idea of an IP return-on-investment mechanism, or IP clawback. The idea is if you are going to receive investment from Canada and Canadians and then sell that investment and move overseas, you should be responsible for paying it back, often in multiples of two or three. This is common practice in other innovation economies, for example, in Israel. I think it’s a good opportunity to try to keep some of that IP here.
But in addition to that, I think we can be proactive. What I would love to see is any company that is receiving funding from the CIC should be mandated to have some form of a strategic IP plan. So that we’re actually being proactive at the start, by saying you need to be thinking about how you’re going to protect this intellectual property and safeguard it.
So those are a few of the suggestions I would offer to the government as they go forward.
Senator Smith: Excellent.
The Chair: Thank you very much.
Senator Marshall: Thank you very much, Mr. Schiavo, for being here. When you look at the legislation for the corporation, it’s very general in what the objectives are. It talks about maximizing business investment in research and development. The legislation lays out $3 billion in funding over four years, but there’s nothing in the legislation that indicates what we should be looking for after those three or four years. How would you say the government should measure its success? At the end of two or three years, I would expect we would be able to look at something and see that the investment has increased or whatever, but it’s not laid out in the legislation. I would appreciate your views on that. What should we be looking for?
Mr. Schiavo: Absolutely. Thank you for that question, senator. I would start on the note about funding. I’ve heard some folks say this isn’t enough funding. I’ve heard others who say it’s too much. The answer is probably somewhere in the middle. But, ultimately, what we want to see is the CIC succeed and continue to be funded and grow and succeed. So that’s great.
To your question about what we should be looking for, I think we need to look at it from a systemic kind of portfolio view. Are the investments, as a whole, that the CIC is making growing? Is there return on those investments? Because we know that some companies and some ventures may not succeed. But much in the same way that Canadians will put some money away for their retirement or their children’s education, typically they’re going to look at that TFSA or that investment vehicle as a whole. They’re not concerned about the minutiae within it.
I think as the government is analyzing this, and future governments are analyzing this institution, they need to look at whether exports are increasing from these companies. Are they able to create more jobs? Are they able to file more patents and build their portfolio of intellectual property? There are a lot of different metrics that we can use, and I think that will be something for the chair and the CEO and the board to develop alongside industry.
But ultimately I think if we take that portfolio kind of systemic view, and we can analyze whether or not this is growing, that would be the right approach.
Senator Marshall: Do you think that information should be provided in the annual report or provided in some manner publicly?
Mr. Schiavo: I do. Again, I think if we’re looking at it as an institution, at that institutional level, then, yes, I think that should be in the annual report, and I think parliamentarians and Canadians would do well to see where those investments are going.
Senator Marshall: Thank you.
Senator Loffreda: Thank you, Mr. Schiavo, for being here with us. Based on your vast industry experience, do you feel the Canada innovation corporation, as put forward in the budget implementation act, will improve and increase investments in Canada. Do other jurisdictions across the world have similar corporations? Is there any learning you can bring forward or bring to the table here today? Furthermore, if you have some time, could you expand on the key metrics and your smart strategic investments and plan that we should put forward with this corporation, not to repeat past errors that have been made with similar start-ups?
Mr. Schiavo: Sure. A few questions in there. I’ll try to remember them and respond as best I can, senator, but please correct me if I go off topic here.
I’m optimistic that the CIC can begin to solve some of the most pressing challenges facing Canada’s innovation economy, that being we can’t be reliant on a branch plant strategy and simply rely on foreign direct investment, or FDI, to try to create jobs.
The government in this blueprint, and in the BIA, is acknowledging that we need to focus on intellectual property and intangible assets. It is through those that we are going to accelerate business expenditure and research and development.
I am optimistic. There are many question marks still, naturally. I’m hopeful that by the fall we will have a board, a CEO, a chair and we can begin to iron those out.
Could you just remind me of the other question, senator?
Senator Loffreda: Whether other jurisdictions have similar corporations, and if there are any learning and key metrics you can bring forward. You discussed key metrics and a smart strategic plan that you can share with us, if you can further elaborate on that.
Mr. Schiavo: Sure. In terms of other jurisdictions, I’ll say this: We know that the CIC was designed looking at both Israel and Finland and similar institutions they have there. We know that those are two very strong innovation economies. I don’t have much in the way of depth on those right now. I’m happy to follow up with your office and get back to you on that.
If you look at those economies and other leading innovation jurisdictions, there’s a certain amount of government engagement. That’s really where the conversation around industrial policy begins to happen.
This idea of being completely hands-off and having a complete focus on FDI and jobs, to the detriment of innovation, is what’s gotten us sort of dismal results up until now.
When you look at those economies, as well as economies of similar stature to Canada — like Denmark, or the Netherlands — what you see is that government engagement to shape the economy and support scale ups to find new markets.
In terms of the metrics, as I said, exports, patents, other forms of intellectual property and the size of the company in terms of talent as well could be a factor. Ultimately, there’s a lot of question marks still. We’re going to have to work through some of this as it’s up and running in the fall.
The Chair: Thank you very much.
Senator Massicotte: Thank you for being with us.
Here is the dilemma I have, and I’ve had this for decades: it’s whether it is appropriate for the government and whether it is the most efficient way to spend our money for the government to choose what they perceive to be the winner or superior class of investment. Meanwhile, you have many senior economists saying, “No, that’s a waste.”
If you look at the history, including the American history of recent times, solar panels and so on, they lost billions of dollars. What are your thoughts? I think I know your thoughts on the matter. How do you reconcile both of those in the interests of our taxpayer?
Mr. Schiavo: Thank you for that question, senator.
I would say one of the reasons I am hopeful that the CIC will succeed is that it’s not a product of government. I do not want individual companies or individual projects to end up on the minister’s desk for approval or for sign-off. That would be a failure. We have been told this will be industry-led. It will be designed for industry, and it will be arm’s length. My hope is that that is sincere.
The other thing that is very interesting about the CIC is the teams that are being developed in terms of foresight and experimental functions, these strategy teams that the blueprint talks about in terms of looking at what emerging sectors are, what is emerging tech and where it makes sense for Canada to play.
I don’t want this to be a partisan activity. I want investments that are made by Canadian taxpayers to be smart and strategic. If we are spreading the peanut butter too thin, and we are investing in companies in vote-rich regions across the country, that would be a failure, right? That’s what we’ve seen with other programs, unfortunately.
I hope that this isn’t just the Industrial Research Assistance Program, or IRAP, 2.0, but an evolution of looking at the most promising firms and how they can create that economic wealth.
Senator Massicotte: You realize that response, that speech, is essentially the thing they said three, four years ago relative to the grouping of the ministry, that they can work off each other and they would benefit. It’s been a failure. They have a good excuse for why it failed. Why would it not be the case again? Why even take the risk?
Mr. Schiavo: That’s a good question. What we have right now isn’t working; I’ll be honest.
If I look at other innovation programs, like the SR&ED tax credit, a nearly $4 billion program, what we see is that roughly 50% of that goes to multinationals. That is what we’ve heard from folks inside government. Unfortunately, we don’t have access to that information.
What we also know about SR&ED is that this is a very costly program for Canadian companies to apply to. Applying to that program typically takes about 10% of the total funding that they’re going to receive. The Strategic Innovation Fund maybe a bit better, but we also hear that SIF can be quite bureaucratic, and the limits aren’t very high. I am optimistic that the CCI, with a renewed focus on BERD and IP can deliver results. Ultimately, we’ll have to wait and see.
Senator Massicotte: Thank you.
Senator Gignac: Thank you to our witnesses.
If I understood correctly, IRAP will be integrating the CIC.
Would it be smart to integrate other innovation programs at the federal level to have one stop for the entrepreneurs? Any thoughts regarding that?
Mr. Schiavo: Thank you for that question. That’s an interesting proposition.
IRAP is a program that is well received by our members. They tend to have good things to say about it. It is time for an update, considering this is nearly 76 years old. It makes sense to roll IRAP into the CIC.
In terms of the other innovation programs, potentially down the road. I don’t think that that would be a smart move right now. There are too many question marks in terms of this organization. Once it’s up and running, even if it is successful, then that might be very helpful for entrepreneurs.
One of the constant barriers that our members face in Canada is the red tape, bureaucracy and, ultimately, the lack of freedom to operate. Anything that can simplify that process is welcome news. For now, I think one thing at a time.
Senator Gignac: Back to my previous life, at some point I was a Quebec minister responsible for innovation. I remember they had a case where a company had been eligible for IRAP at the federal level. They had a program at the provincial level. From time to time, the deputy ministers would talk to one other, Ottawa and Quebec, and say, “It will work.” That didn’t mean that provinces had to follow the path of Ottawa, create a Crown corporation. We see the collaboration between the provinces and Ottawa.
Mr. Schiavo: A great question. I don’t have the answer today. The CIC will have to demonstrate that it’s successful if they want buy-in from the provinces and territories to follow suit. I think this can be a very effective example to implement at the provincial level. At the end of the day, we have to wait and see.
Senator Gignac: Thank you.
Senator Galvez: Thank you to our witness.
I agree that you want this corporation not to be a product of the government. You want it to be industry-led. To come to the question of Senator Massicotte, in French we say, “grappe industrielle.” The reason that fails is because the contributions were coming mainly from the government. The private sector was not contributing much. It was like a gift.
How much is the funding that you are expecting? How will the contributions be distributed? Will it be one-to-one? How will the benefits be distributed?
Thank you.
Mr. Schiavo: Sure. Well, I’ll start off by speaking to what I know. I know the total funding for the CIC is $2.6 billion over four years. That starts in 2023, this year. That includes $1 billion that was already budgeted in 2022, as well as IRAP funding.
I also know that the CIC will fund research commercialization and R&D projects in a range of $50,000 up to $5 million. There will also be some flexibility to support a small number of projects up to $20 million. Clearly, it is a lot of money. I take your comment about potential, private sector buy-in.
I will say, not knowing too much about the Canada Infrastructure Bank, but similar initiatives at the federal level have not returned the result we wanted to see.
I don’t see this as charity. We are investing in smart companies with the metrics that have proven they are successful and can scale up and create new jobs and build their IP portfolio. We know that if they are to sell off or move those operations, they will be paying that investment back to Canadians. That’s that clawback mechanism that I spoke about earlier.
I do think there are some protections to ensure we are making the right investments and ultimately getting that return for Canadians.
Senator Marwah: Thank you, Mr. Schiavo, for being here. One of the dilemmas that Canada faces that we all know about is low private sector investment and low R&D investment as a whole. The government, in its infinite wisdom, has been trying to correct that by creating vehicles such as the Infrastructure Bank or the cluster program or the growth fund and now the Canadian innovation corporation. Everyone is critical of that, saying it will not work. If you had to correct private sector investment and low R&D investment, specifically in your sphere of interest, which is innovators, what would you do?
Mr. Schiavo: A simple and tangible recommendation that we called for in our budget submission is to introduce a patent box regime. There is an opportunity to spur intellectual property amongst Canadian companies and encourage it at a lower tax rate.
There are a number of areas the government can look to try to correct this problem. Again, it is an issue that has plagued governments for some time. I don’t know if there is a quick fix, and I don’t know if I am getting to your question.
Senator Marwah: You’re talking about a patent box, which is a tax incentive. You recommend they encourage private sector investment through tax incentives.
Mr. Schiavo: To generate and protect intellectual property, yes. This is something other innovation economies have developed. If I haven’t addressed your question, I am happy to take another stab at it.
Senator Marwah: The other point you made in your opening comments is that the BIA does not go far enough. In fact, you said it missed the mark when it comes to the innovation front, and you mentioned the SR&ED program as not being adequate, notwithstanding the substantial investment they are making in SR&ED. Can you be specific on where you think it misses the mark, and what would you do?
Mr. Schiavo: I will make a slight correction there. In my opening statement, when I talked about missing the mark, I was talking about Budget 2023 as a whole.
The CIC can be a very important tool in our innovation economy, but we also need to temper expectations. If we don’t create the marketplace frameworks elsewhere, it’s not going to succeed.
For example, in the blueprint, it talks about supporting companies to do business with the government and increase procurement. I’m happy to see that, but the reality is procurement in Canada doesn’t work. It hasn’t worked for a long time.
If we don’t have buy-in from the Treasury Board, Public Services and Procurement Canada and Shared Services to fundamentally rethink procurement, the Canada innovation corporation isn’t going to break through and solve that.
In my opening statement, I talk about how SR&ED is too burdensome and complex to apply for, how it doesn’t take into consideration technology and how iterative technology is. I talked about open banking, how we don’t have that flexibility in our financial system. We don’t have a council of economic advisors.
These are some other recommendations I would make to government to complement the CIC and the investment of nearly $3 billion.
Senator Cardozo: A quick question on the state of innovation these days. We have been talking about creating CIC. This will take a while. We will take a while before it happens. Earlier this year comes along GPT, and we will get GPT-4 in the next while. Are we already behind the eight ball on this? How much does GPT change the world of innovation?
Mr. Schiavo: Canada is a leader in some aspects of innovation. We have top talent that is recognized around the world. We spend and develop world-leading research, and we should be proud of that.
When it comes to development and commercialization and the intellectual property that comes from that, not so much.
You mentioned ChatGPT and other forms of AI that are taking hold, I think that is a cause for concern. Because we had a world‑leading AI strategy released several years ago, and we have not seen the jobs materialize. We have not seen the intellectual property materialize. And the most disappointing, we don’t have a concrete regulatory framework to respond to things like ChatGPT.
CCI is engaged in Bill C-27. We are working with government, opposition and industry. We want to get this bill right and get it passed.
Even if it is passed before the summer, or in the fall, we know it will take up to two years to develop regulations. You leave businesses and Canadians in limbo for two years while we are waiting on that. We need to be quick, but we also need to get these pieces right.
Senator Yussuff: Briefly, if I may pick up on my colleague’s question earlier. It has been a number of decades that we have been trying to spur private sector investment in research and development, and it was not the success we were hoping as a country. Here we are again with a new initiative. I’m optimistic this will change the rubrics, but is there any certainty this will not just be another government spend that will not change the overall commitment of private sector investors to the degree to match other countries? When we look at research and development in other countries, we are lagging in what companies in Canada spend on research and development.
Mr. Schiavo: There is never certainty with any government program or legislation or policy. I’m optimistic that if the CIC is based on what’s worked elsewhere — again, coming back to Israel, Finland and Korea — then there is hope. If it works elsewhere, we can have that economy as well.
To be honest, a lot of it is a mindset and paradigm shift. As a country, we need to focus more on intangibles and digital assets. If we can lead by example with federal policy and programming, that can trickle down to the private sector and hopefully encourage that business expenditure in R&D, but to your point, senator, we never know for sure.
We’re cautiously optimistic and happy to work with the government, as well as the Senate, to get this right. We want to see it be successful.
Senator Yussuff: I remain optimistic like you, and hopefully we will get it right this time.
The Chair: Our thanks to Nick Schiavo, Director, Federal Affairs, Director of Federal Affairs for the Canadian Council of Innovators.
On our second panel, we have the Canada Deposit Insurance Corporation. The questions for the next part of a half hour will be on that.
We have a series of government officials returning to follow up on the questions we had last week that were not answered, and we need to keep time at the end for an in-camera session.
As we look at Part 4, Division 37 of the deposit insurance corporation act, representing the CDIC, we have the pleasure of welcoming Leah Anderson, President and CEO.
[Translation]
Leah Anderson, President and Chief Executive Officer, Canada Deposit Insurance Corporation: Good afternoon, Madam Chair and members of the committee.
[English]
Thank you for the opportunity to speak to you about the proposed amendments in Bill C-47 pertaining to deposit insurance.
Canada’s financial system is sound and resilient. We have a world-class regulatory and supervisory framework for federally regulated financial institutions.
[Translation]
As a result, our banks are well-capitalized and have adequate liquidity and strong risk management practices.
[English]
Canada’s deposit protection framework, implemented by CDIC, reinforces the stability of our financial system.
CDIC has two roles. Our first role is to protect Canadians’ savings and provide peace of mind that their deposits are safe if a bank faces financial difficulty.
CDIC’s second role is to be the resolution authority for our member institutions, which means we’re responsible for handling their failure in the rare event that this should occur.
[Translation]
CDIC has a range of tools and powers to draw on under the CDIC Act, depending on the scenario.
[English]
For example, we can sell, merge or restructure a failing institution while ensuring the continuity of banking operations and minimizing disruption to the wider system.
[Translation]
The Department of Finance has a range of other contingency powers and tools to support financial stability.
[English]
Notably, section 60.2 of the Financial Administration Act, or the FAA, provides the Minister of Finance with authorities to take extraordinary measures when circumstances warrant.
While the U.S. has a different regulatory and supervisory context than Canada, the recent banking failures in the U.S. demonstrate how quickly a bank can deteriorate in today’s environment once faced with financial difficulty. They also highlight that a bank’s distress may have systemic consequences, even if it’s not considered systemically important.
The proposed amendments related to deposit insurance in Bill C-47 would help mitigate these risks. They expand the minister’s tool kit to promote or maintain the stability and efficiency of Canada’s financial system by giving the minister temporary authority to increase the deposit insurance limit. They also allow the CDIC to administer the minister’s crisis management powers under the FAA.
[Translation]
I want to close by reiterating that Canada’s financial institutions are well-regulated, well-capitalized, and backed by a robust regulatory framework.
[English]
However, in the event that unexpected risks arise and negatively impact the financial system, Bill C-47 bolsters our tool kit to protect depositors and promote financial stability. Thank you.
The Chair: Thank you, Ms. Anderson. We’ll begin our questioning with Senator Deacon.
Senator C. Deacon: It’s great to see you here, Ms. Anderson. Thank you for coming today.
We can move money and get information in a second. Bank runs can happen a lot more quickly based on false information, deepfakes, than ever before. This is a short-term measure. We haven’t heard a lot of debate against this measure.
Are you looking over the horizon — and it’s a horizon that’s coming upon us faster and faster — in terms of how we manage this issue, which your organization is central to managing in our country, in this remarkably and rapidly changing world of digital communications and digital funds transfers?
Ms. Anderson: Absolutely. The recent events in the U.S. showed us that the implications for financial stability are very different, given the speed of deposit flight. You referred to the fact that, with technology, we can move funds very quickly, and that is depositor flight. Information spreads much more rapidly these days with social media. This can be information, but it can also be disinformation.
The critical importance behind deposit insurance is to provide Canadians the confidence that no matter what information or risks are out there — which the retail average depositor cannot predict or assess for themselves — they can have the peace of mind that their deposits are safe, so they will not feel they need to quickly move their money and then foster a bank run and greater instability in the financial system.
Senator C. Deacon: I take from that that you are spending time thinking about other measures and other ways we can protect depositors — from themselves, almost — and about disinformation, which could be a challenge in the future.
Ms. Anderson: A key focus for the CDIC is public awareness. Research has shown that the more Canadians are aware and the greater their understanding of the application of deposit insurance to their savings, the more confident they are in the financial system. The good news is that we keep a pulse on this, because we want to stay ahead of the curve. Our results at the end of this year showed that public awareness was at record levels in Canada. That’s good news for financial stability.
[Translation]
Senator Gignac: Welcome, Ms. Anderson. I have two questions for you.
In Quebec, the most important financial institution is Desjardins; the caisses populaires are protected by the Autorité des marchés financiers. If there’s ever a crisis, the Province of Quebec will have to move as fast as you do, otherwise people will switch from the Caisse populaire Desjardins to a bank to make their deposits.
Is there a protocol planned? Have there been discussions so that Quebec and Ottawa can move at the same time?
[English]
Ms. Anderson: We have strong collaboration with the Quebec government — and the Autorité des marchés financiers, or AMF, in particular. You may have seen our joint advertising campaign with the AMF throughout last year to make depositors — both in Quebec and across Canada — aware of deposit insurance. We collaborate closely with them as well through the International Association of Deposit Insurers in terms of developing and adhering to the key principles of not just deposit insurance but also resolution readiness. This includes tools like having bail-in available, which they do for their systemic —
Senator Gignac: They will have a mechanism to move the same day, Quebec and Ottawa? Otherwise, people will shift from Desjardins to a bank if a crisis happens. Do they have a protocol or has that not been discussed yet?
Ms. Anderson: The government collaborates with all provinces through a range of fora. In my previous role at the Department of Finance, there was strong collaboration among the finance ministries to promote financial stability. There are coordination protocols and understandings about information sharing during a crisis. The backbone of the Canadian system is that within the federal system, across the federal financial sector agencies, there is close cooperation and coordination to get things done quickly if there is a crisis — to ensure we are ready to act — but also to have that coordination with our provincial counterparts.
Senator Smith: It’s great to have you with us. Communication is incredibly important, especially in the wake of the large U.S. bank failures. The government-proposed amendments in Bill C-47 have definitely raised concerns about potential stability risk. It is your role as CDIC to maintain Canadians’ confidence about their savings in our financial institutions.
In what way is CDIC ensuring that Canadians are receiving timely, factual and unambiguous information about the stability of their savings? You had mentioned that public awareness is at a high. I’m thinking that public awareness is one thing, but to get public awareness to higher levels, you have to have great communication. I’m not saying that I don’t see a lot of ads from the CDIC.
In what ways are you working to ensure that you instill confidence in Canadians in our financial institutions?
Ms. Anderson: Thank you for that question. It is very important. You mentioned our advertising. We advertise in a variety of fora. I mentioned the advertising campaign we did with the AMF to demonstrate the cooperation and alignment we have with other deposit insurers across Canada.
It is key for Canadian consumers to get information at source. At any bank branch you go into, or ATM, there is the CDIC logo, which I am wearing. At the point of sale, consumers must have sufficient disclosure. We work very hard at CDIC on our disclosure bylaws to ensure that the right information is presented to consumers at the right time, when they are purchasing their products, so that they are aware.
More broadly, we work on financial literacy — in cooperation with the Financial Consumer Agency of Canada, as an example — to get the word out and to increase understanding and awareness of the importance of making sure your deposits are insured.
As well, we have a great website that we direct consumers to. We have a call line, which received quite a bit of attention during the instability in the U.S. in March. We had a number of hits on our website and a lot of commentary about the useful information on it to navigate.
The Chair: Is there anything more proactive? If a bank collapses in the States, other than just letting people go to your website, do you do anything more proactive? You don’t turn around an ad campaign that quickly.
Ms. Anderson: We were lucky. Well, not lucky, because it’s foresight. Given the importance of public awareness, it’s important during good times to have that baseline awareness. When the crisis hit in the U.S., in a minute we were able to switch the intensity of our advertising and go through social media as well, and that was very successful in getting the word out. We had a lot of commentary on how Canadians appreciated that intensity and the information that they were directed to through that outreach.
Senator Smith: Do you have any statistics on that so you can take the next step after you assimilate all this data and then go back, proactively, to the market?
Ms. Anderson: Absolutely. We are agile to respond.
Senator Smith: There’s a difference between selling and trying to collect data and saying, “Go to our website,” if you know what I’m saying.
The Chair: I’m going to ask questions and answers to be contained in a minute if you can.
Senator Yussuff: Thank you for being here. My mom thanks you because when I take her to the bank, she always asks if the deposit insured, and I say, “Don’t trust me; look at the sign.” But her next question is why she has to break down her deposit to $100,000. I notice here in the amendments, it might increase. Do we know what it will increase to, or is that still a secret in regard to what the department is trying to think through?
Ms. Anderson: I will answer that question in two parts. We’ve done a lot of research on the limit, and it was last increased in 2005, but we reviewed it following the global financial crisis, and what we found was that that limit covers the vast majority of retail deposits. The measure in the act does give the ability, though, to increase it to a higher limit on a temporary basis, in the case that there’s financial instability, where you might want to insure, for example, a broader range of deposits, rather than the ones traditionally held by your mother and other retail investors.
Senator Yussuff: Given the fact that we have an aging population who are going to be more stressed, that number is increasing significantly. They’re always worried about their money in the bank. The prudent thing is to consider how to deal with the challenge they face. A week doesn’t go by where my mom doesn’t ask me the same question about her deposit, and I don’t have an answer other than to tell her to call the bank.
Ms. Anderson: We are doing evidence-based analysis on that. Before the crisis hit in February, we launched a study to gather the data, the evidence-based analysis, to validate that the limit still sufficiently covers the vast majority of retail deposits. We’ll provide the findings of that analysis to the minister, who will then consider that for policy development and future consideration of the limit.
The Chair: Thank you.
Senator Loffreda: You mentioned, and we do agree, many experts and myself, that Canada has one of the most stable and healthy financial industries in the world. Do you feel that these amendments were necessary? As for the recent developments in the U.S., do they result in any risk to the stability of the Canadian financial system? Do you feel in Canada, as you mentioned, there’s any financial institution that is not systematically important, that may cause a similar stress in our system? Are you bringing all the financial institutions across Canada to the table when you’re discussing mitigating factors to these risks — for example, Senator Gignac mentioned the co-op in Quebec, Desjardins — and co-ops across Canada? Because some of those co-ops do have substantial market share.
Ms. Anderson: That’s a very big question and I’m mindful of the chair’s advice on time.
To the broader point of what happened in the U.S. and pressure on our institutions: the risks faced in the U.S., interest rate risk and liquidity risk, those are risk drivers which we all face, but I think the root causes there were very different. They were a result of two factors. One — and this is straight from the Federal Reserve itself — was poor governance and oversight by the board of those banks and their management. But, as well, there was supervision, so the urgency and forcefulness of action.
In Canada, we do have very strong credential standards and regulation and a very strong supervisor, who is agile and ready to act. I know you’ve heard from the superintendent. We’re not complacent. That’s the one thing we can do further. Despite our sound regulation, we can always be aware that there are novel and unprecedented risks, as we all know, even just over the past three years, before the current turmoil in the U.S. occurred. We can focus on being prepared and being vigilant and thinking about scenarios and adjusting standards incrementally in Canada. We have very strong standards to begin with, as being ready to respond is important. Working in collaboration with our partners across Canada is also important, both with the other financial sector agencies, such as the superintendent, the governor and the Minister of Finance, but also with our provincial counterparts. Because different parts of the financial system do impact one another, it’s important to have that close collaboration.
Senator Loffreda: Thank you.
Senator Marshall: Ms. Anderson, when we saw this amendment we were quite surprised. I would expect that the corporation must be on high alert now seeing that, you know, this amendment is there. You were talking about your public awareness campaign and your advertising campaign, but what else is the corporation doing to prepare? I know you said you’re thinking about different scenarios, et cetera, but what exactly is happening in the corporation in case something does happen to our financial system?
Ms. Anderson: I’ll answer that question in two parts. Firstly, with respect to the amendments specifically, we’re working on operationalizing how we would execute if the deposit insurance limit were raised. That goes even to pricing and what that would entail for the industry and other terms and conditions and other operational details.
Secondly is our resolution planning. People have spoken, other senators, about the speed at which failures can occur. That affects our resolution planning. It’s a very important part of our mandate to promote the financial stability of the system and to protect depositors, to have effective resolution. We are looking into the development of those resolution plans. We have a line of sight into the fact that we might have a very short runway to use our tool kit. We’ll need to act quite promptly, so we need a live assessment of what the triggers might be and what the appropriate tool might be, depending on the type of failure, whether it be idiosyncratic or a more systemic event, which calls for more creativity and tools which we can deploy.
Senator Marshall: Are you ready now, or are you getting ready?
Ms. Anderson: We’re ready. We’re ready. In this case for the current amendment, as it’s not yet in force, we’re planning how we would operationalize that.
The Chair: Great, thank you.
Senator Marwah: Thank you Ms. Anderson for being here.
I must admit that I applaud the proposed legislation that gives the minister authority to increase the limit temporarily. It’s smart, and it’s good planning. I hope it never happens, but should it happen, who pays for the increased limit? Does the taxpayer pay — let’s say it’s increased to $250,000 — or is it paid by the financial institutions? If it is paid by the financial institutions, is it going to be the same prescribed rate that exists today or a higher rate be charged for the weaker ones that don’t have deposit ratios as strong as some of the others? How do you assess that cost, and who pays?
Ms. Anderson: Thank you for the question.
It is the industry that pays the deposit insurance. The costs of that are paid by premiums on the industry. For the current deposit insurance, we have what’s called a differential premium system. In short, it differentiates the cost of the premium based on the risk that the member presents to the system.
This new measure, we are working to operationalize it and costing is a factor that we’re considering in how we would implement that.
Senator Marwah: It’s just based on risk.
Ms. Anderson: The current system is based on risk. And the future one is under development.
Senator Galvez: At this point, the issue is prevention, just to be ready. And as my colleague said, right now it remains at $100,000, but depending on the risks, depending on your analysis, it could go up. I am interested in knowing, what are these novel and unprecedented risks? What are these emerging risks that you are forecasting or using in your scenarios? Are they related to cybersecurity, reputational risk or climate change and extreme weather events? Because I think they are very different. The risks that will come out of that analysis will be very different. The amount that you will need to put there will be very different. Can you please tell us, how are you approaching that?
Ms. Anderson: Yes. On member risk assessment or just a risk assessment for the financial sector more generally, we work very closely with the Office of the Superintendent of Financial Institutions, OSFI. We’re a member of a committee called FISC, which is the Financial Institutions Supervisory Committee. Together, we closely monitor risk. Because our premiums system is risk-based, risk is very core to what we do. All those risks you mentioned factor in there and into our considerations. Some of it is quantitative, but as events have revealed, there’s much uncertainty in the environment, so it also requires a lot of judgment and discussion and assessment. Those judgment factors are ever more critical in our planning.
Senator Galvez: Do you have expertise in all these areas in order to model this risk?
Ms. Anderson: We do.
Senator Galvez: Thank you.
Senator Cardozo: I have another question on foresight, flowing from a number of others that have been put forward. Looking at the major shocks to the economy that we’ve had through COVID and the Russian invasion of Ukraine, are you looking at what might happen with artificial intelligence and the growth of ChatGPT? What effect might that have on the economy? There are estimates that 400 to 800 million jobs could be affected worldwide. Could that affect jobs in the economy at large? How do you think AI will affect the banking sector itself, the jobs and how we do banking?
Ms. Anderson: Those are all very interesting and important questions. The impact of technology on the banking sector is something that we, with our agency partners, look at collectively, both from an opportunities perspective, in terms of the growth and choice it can offer consumers in the financial sector, and also from a risk perspective.
The Office of the Superintendent of Financial Institutions has provided some guidelines in terms of cyber risk and other technology risks. It’s something that, again, we need to keep at the forefront in terms of risks to be ready for, in terms of our preparedness. In the event that those risks do manifest, for CDIC in particular, we look at what that might mean for our resolution strategies and tools to manage that situation, to maintain the protection of depositors and financial stability.
Senator Cardozo: Do you anticipate a lot of jobs being lost or becoming redundant in the banking sector?
Ms. Anderson: I wouldn’t opine on job losses.
The Chair: Thank you very much for your comments and for your willingness to be to the point here. Our thanks to Leah Anderson, President and CEO of CDIC.
For our final panel today, we have the pleasure of welcoming back some senior officials from the Department of Finance. We have with us in person, in no particular order, Anne Loosen, Senior Project Leader, Financial Services Division; Amanda Riddell, Director, Real Property and Financial Institutions; Warren Light, Expert Advisor, Sales Tax Division; Mark Radley, Acting Director, Consumer Affairs; Gillian Sullivan, Analyst/Economist with the Financial Services Division; and Neil MacKinnon, Senior Advisor, Pensions Policy, Financial Crimes and Security Division.
We have had some follow-up questions. You were given testimony from last week where there were some outstanding questions. Thank you for coming back. You have no opening statements, so we’ll jump right into the questions from senators.
Senator C. Deacon: Thank you for coming back to see us and help us understand this issue a bit more. Last week, John Ivison, in the National Post, claimed that the purpose of this change, this GST change regarding crypto, was political versus economic.
I would just like to have a clear statement as to the purpose of the change. We got some great testimony — thanks, I think, to a question from Senator Marwah — from Ms. Riddell and Mr. Light. Maybe just clarify the underlying purpose.
Amanda Riddell, Director, Real Property and Financial Institutions, Department of Finance Canada: Thank you. I am actually really glad you asked this question because we get this question all the time. We talk to tax practitioners. We read the news. We’re constantly seeing linkages between what we’re doing here in the GST changes and the broader effort at either monitoring or regulating crypto. It’s simply not the case.
Crypto mining, because of the way it’s structured, is digital, borderless and anonymous. It just doesn’t fit well into the existing GST rules. So we’ve developed rules using sound policy principles in order to find a way to appropriately bring this emerging industry into the GST tax base.
If you’d like, I can walk you through our thinking, if there’s time for that.
Senator C. Deacon: You want to make sure that the activity in Canada is captured in Canada?
Ms. Riddell: Right. Exactly.
Senator C. Deacon: Can you name another sector that provides an intangible service where how they bill their clients automatically causes them to be treated as though they were a partner in the client’s business? Because that’s what this seems to do.
A Canadian service provider providing computing services has a payment regime with someone doing transactions in the crypto business outside of Canada — they’re not resident in Canada — but the deal that you have with them all of a sudden assumes that you’re a partner in that business.
If I look at it in the tangible sector, you’ve got real estate landlords who have tenants, who may have a retail business, and the landlords will take a percentage of sales. However, from a tax standpoint, the landlord is not a partner in that business.
Help me understand the choices made here, because it just doesn’t seem to add up.
Ms. Riddell: The best way to help people understand where we were coming from in this is to give you a basic explanation of how the GST is structured.
The GST rules are based on there being a supplier and a recipient — the seller and the buyer — and there would be consideration for that.
The second basic principle around the GST is that normally the burden of the GST falls on the final consumer. You go to a store and the final consumer pays it, but the business doesn’t incur GST because it can claim input tax credits to recover the GST that it pays on its business inputs. But in cases where tax can’t be imposed in the normal way, what we always do, almost without exception, is we apply it to the supplier. This occurs, for example, with financial services, residential rent, even health care services. Although tax doesn’t apply to the final consumer, the inputs to those products and services are subject to GST/HST, and the supplier can’t recover those costs. This is called input taxing.
It is in this way that we’re able to bring in all of the industries in the economy, even the ones that are difficult to apply tax to at the final stage of consumption.
The other important aspect of the GST/HST — I think this is where the Digital Asset Mining Coalition is trying to make their point — is we generally don’t tax exports. There are two good reasons for this.
One, the GST is meant to be a tax on consumption in Canada. If something is being exported and is not being consumed in Canada, we generally don’t charge tax on it. The corollary to that is we tax imports.
Warren gave me a great example the other day. If Canada produces an engine for a car, when we export it, we don’t charge GST. It’s tax-free. It makes us competitive in the marketplace, and it’s not being consumed in Canada, so that’s appropriate. It goes to another country, and, let’s say, it gets put into a car. When that car comes back to Canada for importation, it’s subject to GST/HST. So somewhere in that export-import cycle, GST sticks, and the consumption of that product or service is taxed in Canada.
With crypto mining that breaks down, because if we were to give tax-free exports on crypto mining services, when those services are imported back into Canada, a Canadian user is transacting in crypto. It is not subject to tax. So the entire industry is completely outside the GST/HST system.
This is important, because our economy is changing, and our GST/HST rules need to change with it. Otherwise, there are going to be entire sections of the economy that are no longer subject to GST/HST. The tax base will narrow, we’ll have to increase the rate to generate the same amount of tax and it will put more burden on the existing older industries that are easier to tax with the existing rules that we have.
I know that it doesn’t answer the question explicitly.
Senator C. Deacon: It doesn’t get at the question at all. What I’m still struggling with is that crypto miners are dealing with the world. They may have some Canadian individuals, but for the most part, it’s all occurring outside of Canada, and it’s not the business of the computing service provider.
I think it’s a dangerous precedent to charge an intangible service provider and treat them in a way that they’re responsible for their customers’ activities, potentially, in another country.
The worry is that this is going to drive high-end computing capacity and capabilities out of Quebec and Atlantic Canada to potentially lower GST jurisdictions like Alberta, but also probably out of the country. I don’t think that’s the intention, but it’s probably going to be the effect because of how you’re going at this. Is that appreciated?
Ms. Riddell: It is appreciated. We’re not out of step with the direction of the rest of the world. This is a challenge for every Value Added Tax, or VAT, country, not just Canada. We’re following the examples that are already being set in Germany, the U.K. and Ireland, just to name a few.
The world is moving in this general direction. If everyone were to take the same approach, then you’ve got an even playing field. But if we were to accept the amendments proposed by the coalition, we would be out of step with the general direction that the rest of the VAT countries are moving in on this.
The Chair: Even with your description of what you’re trying to do, you’re trying to capture this in case some of it comes back in Canada. That’s an anticipatory tax. It’s not actually a tax on a transaction. It’s something you think might happen.
Ms. Riddell: It does happen. We do the same thing with financial services. With financial services, you can’t tax at the final stage, so you tax at the next level up.
We’re not pretending that this is a perfect solution. We see the flaws in it as well. We tried to find a number of different ways to come at this, and this is the best of not-ideal solutions.
We’re hoping that eventually the technology will get to a point where we can have a better set of rules and have more information to be able to apply it in a different way, but at the moment, this is the best we can do for the situation we find ourselves in.
I would mention as well that there were two articles in the Canadian Tax Journal recently on crypto mining and these particular amendments. The first article was by David Robertson and Selena Ing, and it presents the coalition’s position. The second article was by a different GST tax specialist, and they said that Finance is doing the best they possibly can with this solution.
The tax experts who are representing the miners, of course, are doing the best they possibly can to get the best possible result for their clients.
Senator Gignac: Welcome back, in some cases. My question is regarding Part 4, Division 33, so probably it is for Ms. Riddell.
The Canadian Life and Health Insurance Association mentioned that there is no necessity to give additional power of OSFI. They have other mechanisms, such as the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC, if you have any concerns about foreign interference. They ask basically to just remove the section.
Do you or your colleague have any thoughts regarding that? I’m curious about the consultation process. Are they being consulted or has no one been consulted regarding that part?
Ms. Riddell: I’m sorry. That’s not a topic I can speak to. I’m just here for Part 2.
Senator Gignac: My second question is regarding my favourite topic so far in the bill: the retroactivity aspect that we have talked about.
I asked you the question the last time you came. Now it’s not only the Canadian Bankers Association, it’s The Canadian Bar Association that mentioned we have never seen 26 months between a court decision and the government’s reaction. It’s unprecedented, according to them.
Do you agree with that? Have you ever had another example where that the government waited 26 months after the decision of the court to finally implement legislation?
Warren Light, Expert Advisor, Sales Tax Division, Department of Finance Canada: An example is roughly two years. In 2003, there was a case dealing with the import supply rules for institutions. I think the case was in 2003, and we announced a draft proposal in 2005. We had draft legislation in 2007. We’ve had other cases where there has been retroactive legislation coming in about a year or two after a court case.
Senator Gignac: We have Revenue Canada that has sent money to the people, and now we have to think about reversing that process. Why would Revenue Canada send money to the financial institution if, at the end of the day, you have in mind to challenge that and change the legislation? I’m trying to understand why Revenue Canada has proceeded if you have the intention to go with this legislation.
Ms. Riddell: As I watched the testimony yesterday, the first thing I wanted to say is that the time it took is not unprecedented. It does occur from time to time, but it is unusual. I think we explained that it was due to COVID. We were doing our best to make sure that we could get things processed as quickly as possible, but given the volume the department was dealing with at that time, it was just really difficult to get things done in normal timelines.
There are a couple of things I wanted to mention. People keep talking about these being retroactive. Tax had been charged on these from 1991 all the way up to the Federal Court of Appeal decision in 2021. In 2018, the Tax Court of Canada agreed with the government’s position, so this was a well-understood policy. That is not to say they agreed with it, but they understood it.
Tax was being charged in a normal fashion right up until 2021. When that Federal Court of Appeal case came out, it also had a retroactive application. What happened was supplies that were previously thought to be taxable were recharacterized as not taxable. It allowed the large banks, mostly, to go and claim rebate claims to claim tax they had already paid in the past based on contracts that had been negotiated based on it being taxable. So it was undoing history. What we’re trying to do with the retroactive application of this amendment is to allow those contracts that were negotiated based on tax applying to apply as they were originally intended to.
Senator Loffreda: Thank you all for being here. It’s appreciated.
I have two quick questions. With respect to the crypto‑currency GST, the argument is that they are selling to the Toronto Stock Exchange, or the TSX, not to all the companies listed on the TSX. That’s the rationale they are using to say it isn’t justified. I don’t know if you have any comments on that.
I’m glad Senator Gignac brought up the main concern, which is the GST in relation to payment card clearing services, which we are studying on the Finance Committee. Quickly, do you have any concluding arguments? We discussed the retroactivity, the independent jurisdiction — our courts must remain independent — and the delay. So if you have concluding remarks on that, that would be great.
Why was there no communication with the banks? I’ve been in the banking industry for almost four decades, and when there was a concern, they would communicate with us and tell us to stop doing that or this is not permissible going forward. We always collaborated. Why was there no communication with the banks with respect to this court judgment? Why do we have this concern at this point in creating this precedent, this dangerous precedent, in Canada?
Ms. Riddell: We actually do have regular communications. Often, it’s with the Canadian Bankers Association rather than individual banks, but we have regular ongoing communications with them.
We also have regular ongoing communications with the Tax Executives Institute and other professional tax organizations. At every opportunity, when this topic came up — and it did, because every time there is a court decision proceeding through, they always ask for our views — we always made it clear that this court decision was inconsistent with our policy position.
The problem with being an official is that unless you have a decision from the Minister of Finance, you can’t commit the department to anything, so you have to walk this fine line between saying, “This is not our policy position,” which any tax professional who has been in business for any length of time will understand to mean that we’re briefing for a retroactive amendment. So we sent those signals at every opportunity we had when we were speaking to tax professionals and the Canadian Bankers Association.
But that’s as far as we can go as officials.
Mr. Light: In regard to your first question about supplying computer services and the stock exchange, you’re dealing with the Intercontinental Exchange, which owns the stock exchange. For bitcoin, there is no bitcoin corporation; it’s simply a software protocol. There’s no person you’re dealing with.
That is the issue the Canada Revenue Agency, or CRA, has with the existing legislation. Where there is no person who is actually engaged with the person mining, you don’t meet the test for claiming input tax credits. In fact, under the existing legislation, CRA said there is no right to input tax credits. It would depend upon what the person is receiving. If they were receiving a crypto-currency like bitcoin, they would not be entitled to input tax credits.
Senator Marwah: Thank you, Ms. Riddell and Mr. Light. My question is along the same lines.
Thank you for your explanation. It goes a long way in explaining what you are trying to do. I agree the situation isn’t perfect but it never is in tax.
What is adding to confusion for companies and tax practitioners is this introduction of the idea of sharing in mining payments. It would help a lot to elaborate upon what you mean by sharing in mining payments. Does it mean that if a Canadian company is providing services to a non-resident mining pool and is getting paid in bitcoin, they are deemed to be sharing in the mining process and hence not eligible for input tax credits?
Ms. Riddell: There are contracts you can sign up with as a miner with the pool operators, and it is never unclear whether you’re sharing in the rewards. You have an option to choose to share in the rewards or not based on the type of contract you have with the mining pool operator.
We try to provide clarification in the explanatory notes. In the explanatory note, we said the following:
For example, a mining pool would not be a mining group if it were agreed among members of the mining pool that members provide computer services for the performance of mining activities in respect of the mining pool; and the compensation members receive for the computer services is based solely on the amount of computer services that they provide and members have no right directly or indirectly to any mining payment received by the mining pool (i.e., the members receive neither a direct share of the mining payment nor a payment or adjustment determined based on the mining payment).
Senator Marwah: That doesn’t work in the bitcoin-mining world. The way bitcoin mining works is that you use computing power, enormous computing power, and you only have a chance of hitting a bitcoin; you might not be able to get one. But you are providing the service, and it is unfair to link it to a bitcoin payment.
Ms. Riddell: Miners fall into one of three buckets, generally speaking. There are solo miners, and it’s clear to everyone, including the coalition, that the regular GST rules don’t work in those cases. They aren’t providing anything to it. At the other end of the spectrum, in bucket 3, you have computer services providers. I think everyone agrees, and we’re on the same page with the coalition, that if you are just providing computer services, then you should, of course, be considered an exported service and should be entitled to your input tax credits.
In the middle, you have these mining pools. The reason we make the distinction between sharing mining pools and non‑sharing mining pools is that, in the case of a sharing mining pool, if we didn’t group those with solo miners and treat them to these special rules we’re introducing, it would be very easy for a solo miner to get together with a couple other miners and have an offshore pool operator. Then they’re instantly outside the rules, and they’d be able to avoid them altogether.
Our rules would be completely ineffectual if we didn’t draw a circle around miners and miners mining together and sharing all the rewards. They are effectively like one big miner, so we treat them similarly for the purpose of the rules.
That’s a principal distinction we make between a sharing mining pool and a non-sharing mining pool. Where a minor is providing computer services, they are getting paid for the amount of computer services they are providing and it is a non‑sharing arrangement. In that case, they are exporting their computer services, so they get their input tax credits.
The coalition argues that there is not a principled distinction between those two things, and it shouldn’t matter. But it does, because if we don’t make that distinction, it leads to tax avoidance.
Senator Marwah: The challenge is to define it very clearly in the contract.
The Chair: Again, that is anticipatory. You’re assuming that behaviour will follow that a lone miner will then —
Mark Radley, Acting Director, Consumer Affairs, Department of Finance Canada: Mining operators can enter into a wide variety of different contractual arrangements. You can choose where you want to be. You can share in rewards or simply be paid for the computer services you provide.
Senator Marshall: Thank you Ms. Riddell for your explanations.
You were talking about the positives of the change and the flaws and other jurisdictions. For this amendment, you must have had some kind of assessment or evaluation. Was there one carried out for this, or is this just an amendment that was sort of pulled out of the air? There must have been a process that you went through to come to this conclusion.
Ms. Riddell: When you say “assessment,” do you mean we did policy analysis, briefings? Okay, yes, we go through the normal procedures. We spend an enormous amount of time. Officials are not here for the money; I will tell you that much. We’re trying to get to the right result, so we take a lot of time to try to come up with principled reasons to do things. This is very much us trying to arrive at the best possible policy answer when there is no really good policy answer. We could simply zero-rate all these services but, as I was saying, the tax base is changing. If we fail to somehow incorporate these new industries into our tax base it will narrow, and to raise the equivalent amount of revenues we have now, we will have to increase the rate. That’s not fair on older, traditional industries whose products and services are subject to the GST.
Senator Marshall: It would be very helpful to the committee if we could get a copy of that. There seems to be some confusion or we’re not quite sure how you got from the existing situation to the proposal in Bill C-47. Is that something that you could provide to us?
Ms. Riddell: I’m not sure if we can, but I will inquire and see what I can do.
Senator Marshall: It would be helpful. There are certain parts that are confusing. I’m not interested in a lot of the details, but I’d like to see what process you went through to get from where we are now to where you want to go in the BIA.
Ms. Riddell: On crypto mining? Yes, okay.
Senator Yussuff: I would like to go back to the crypto mining. They use a lot of electricity to run these computers. What we know now is that they are in Quebec, which is, for the most part, is clean energy. The advantage of moving to Alberta is that you have a lower tax rate, but you will use a different kind of energy that’s not helping the environment. Is there not a balance to ensure the equality among the provinces is not skewed in a way that will cause more harm than good? Ultimately, we’re trying to get to our 2030 and 2050 goals, and this might exacerbate it. A small amount of shift in the tax rate might make a difference as to where a company is located.
Ms. Riddell: As a federal government, the goods and services tax is a 5% in every jurisdiction. I know that sounds like a cheap answer, but the provinces get to decide their own tax policy rate. We have not heard from any of the jurisdictions that have the higher HST rate that they are concerned about crypto‑mining businesses leaving their jurisdictions or job losses or anything along those lines.
The crypto-mining business is based on a lot of different important factors beyond just the GST. They are worried about access to electricity at reasonable rates, and they’re worried about the regulatory environment. Those two factors, I would argue, are more important than the GST part of it. Although GST is a consideration in determining where you want to have your business, it’s not the leading factor as to whether they are going to choose one place over another, I would argue.
Senator Yussuff: [Technical difficulties] to Alberta, but I can’t speak for them; they speak for themselves.
I want to come back to the retroactivity that the bankers are raising. Is it unprecedented in the context of tax policy to — does this send a bad message to investors or potential investors about how this is applied? Given that the government did go to the court lose a court case — except you are the people who can write the law, so you write a law to suit your needs.
I’m not criticizing what could be the future policy decision. The bankers say they accept the policy decision going forward; they just do not accept it going backward. But I hear what you are saying in terms of an explanation. They were aware that this might be a possibility.
Ms. Riddell: They were aware it might be a possibility, but more than that, it is to prevent windfall gains. When this court decision came out, it had retroactive effect itself. Had we not gone retroactively, there would have been a long period of four or five years where tax wouldn’t apply to that service and people who had paid tax on that service in the past based on contracts negotiated with the understanding that tax would apply to those services would be able to get their tax back.
I will use two parties as examples. Visa is typically the kind of provider. Visa and Interac charge GST/HST on their services and they can claim input tax credits to recover the GST they pay on their costs. The contracts they negotiate with a bank — let’s say CIBC because that was the bank in the court case — are based on the fact that CIBC will pay GST, Visa will claim its input tax credits to lower its costs, and the prices are based on that arrangement. What happened when the court decision came out is that it allowed the banks to not only get the benefit of a lower rate from Visa, because Visa can claim input tax credits, but they would also get the tax back. So it was a pure windfall gain for the banks, retroactively speaking. We need to do retroactive legislation to prevent those windfall gains. If the banks get money they weren’t expecting to get, then every other taxpayer has to pay more to make up for the windfall gains going into the pockets of the banks.
I know this has been raised about the Electronic Transactions Association. There are some situations after the court decision where there are some suppliers who had passed along those savings to their consumers. I’m not talking about prior to court decision, because in that case it’s windfall gains in all cases, but after the court decision. Because Visa and other providers of this service expected that an amendment would come, they continued to charge GST/HST well after the court decision. After a certain amount of time, there is pressure from clients to change the way it’s done, so they stopped charging GST/HST. For people that had contracts where they just passed costs along, those cost savings — like an acquirer like Moneris, for example, is a type of business that might just pass on those cost savings. It’s not paying GST to Visa; therefore it can pass those cost savings along to its customers. A supplier like that would be in a difficult position because they passed it along already, and now they have to somehow make up those GST costs for that two-year period.
We understand it’s not perfect, but on balance, the windfall gains that could have gone to the larger banks far outweighs the two-year period of GST that suppliers are going to have to maybe make up. I’m sorry, I don’t think that was very clear.
The Chair: We will have to keep going here unless you have something very —
Senator Smith: Continue on, Ms. Riddell. I have a follow-up question on the crypto mining. You suggested in your testimony that you had evaluated the situation and had come to your decision that this was the best you could do at this particular time. It seems to me that crypto is rebounding at this particular time. Where it goes is uncertain to a certain extent, but it looks like it is potentially here to stay in some form.
Having said that, the decision you made with suppliers, where will this go in your mind? Will there be more consultation and discussion as this thing evolves in terms of the industry? The government wants to collect taxes in terms of money in its coffers, but at the same time there needs to be some balance between the two if this is going to be a major part of the economic landscape of our country. What are you thinking about that? How do you create that next move, or is that something you will worry about down the road?
Ms. Riddell: It’s something I have already started to think about. I know it sounds ridiculous to say, but you can imagine a potential system off in the distance where money is just traded that way. How are we going to deal with that from a GST/HST perspective? These are really big questions, and we’re grappling with them as officials. At this moment in time, given the technology that we have and that we are presented with, we had a variety of policy options, and this was the best of the options that we had.
Mr. Light: I would add to changes in crypto currency. Ethereum, the second-biggest crypto currency, has moved to something called “proof of stake,” which is usually about 1% of the — it has reduced its energy use by about 99%, and so it changes both the energy cost and GST cost. It also makes it less likely that there will be a need for mining pools, so the industry is changing. That doesn’t mean that there will be necessarily be more GST at stake.
Senator Smith: The next potential discussion point is what type of regulations can you create to have a system that may be the system that could lead us into the next two decades?
Ms. Riddell: Luckily, I don’t have to speak to that. That’s for other colleagues of mine in the department.
Senator C. Deacon: I want to try to sum up. The choice the government has made is to view sharing in the mining process as basically being a partner in that business. We’re not treating it like we would a landlord with a tenant property where they’re taking a percentage of sales from a retail store. My concern around that is the assumption that perhaps even some of, or the majority of, the benefits will come back into Canada at that end, so we have to find a way to tax that. As long as they’re not sharing, as long as they’re not in a process where the Canadian computing-power-selling company is sharing in the mining process as part of their contract, they will be exempt from this change. There is no grey line there. It’s black and white. They are exempt as long as they are not sharing. That’s good to have that clarity.
I am concerned, though, with an industry that’s changing so dramatically that we risk pushing what we have of the industry in Canada offshore by being aggressive on an issue like this early on, rather than working with them to see if there are other creative ways to address the issue. Did you reach out to these companies and work with these companies in your consultation process to come up with this? Did you reach out to the Canadian computing-power-selling companies?
Mr. Light: We did consult with the members of the coalition since 2022-23 after the amendments came out.
Senator C. Deacon: Once the amendments came out.
Mr. Light: There is no industry coalition, so there is not an industry association to consult with.
Senator C. Deacon: Once there was already a draft on the table and they saw that, you started consulting with them. The key is to try to get upstream on that in future because they could have very good ideas about how to come up with alternatives. Once something is already written down as a draft, it seems it comes out the other end pretty close to that. Anyway, I’m glad to have clarity that as long as they are not sharing, they are exempt.
Ms. Riddell: Exempt from the rules.
Senator C. Deacon: This new rule. And they will get their input tax credits.
Ms. Riddell: They will be treated like any other business.
Senator C. Deacon: As a former exporter of intangible assets who very much appreciated those input tax credits, I am glad to hear that on their behalf.
Senator Marshall: I wanted to clarify something, Ms. Riddell, that you said about retroactive taxes on the banks. You were following the money for us, and you were saying some of the banks got the GST back, and it was a windfall so now they have to pay it back again. But then you said there were other organizations that passed it on to consumers or whoever. Are you able to split it out? Because we were told that the tax would be about $300 million. Do you have knowledge as to what the split is? How much of that is going to be windfall and how much — Do you know what I’m saying?
Ms. Riddell: I could get the numbers. Anecdotally, my understanding is that the vast majority of it is windfall gains in comparison, the vast majority. The amount going forward, had we not done anything, we estimated what the cost would be, and it’s some money but it’s not hugely material. But it’s the retroactive rebate claims, the windfall gains, that far outweighed, and that’s what we were concerned about.
Senator Marshall: Who would have passed the benefit on to consumers or whatever? I get the impression the big banks kept the money but the smaller banks passed —
Mr. Light: [Technical difficulties] people who connect the merchants to the credit card system. In some cases they have a fee which is based purely on costs, so when the tax went down, their costs would automatically go down.
Ms. Riddell: They have a contract.
Mr. Light: This is normally just in the case of contracts with large merchants, not usually with small merchants.
Senator Marshall: Would you have access to the information that could really come up with dollar values for the two categories? Not that I’m going to ask for them. I’m just wondering if you have that information within your department.
Ms. Riddell: We don’t have the information for any specific taxpayer so it would be difficult to estimate. We would have to know all the particular taxpayers and what sorts of contracts they have and then estimate based on that. So it would be difficult to come up with a number. We did some estimates of the rebate claims. We knew what those were. We also knew that globally everyone included what the costs would be going forward, and it was the rebate claims that were much larger.
Senator Marshall: You’re aware of the rebate. That’s how you know. That’s very interesting and informative.
The Chair: Thank you very much. Any last very specific amendments that you want to talk to?
I really appreciate you coming back again and answering. I know there was a lot of activity over here but we appreciate you being here as well, all of you, because we can never anticipate what the questions will be.
We will bring the meeting to an end and then have an in camera session very briefly. Thank you.
(The committee continued in camera.)