STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, April 20, 1998

• 1036

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order. The order of reference, of course, is Bill C-36, an Act to implement certain provisions of the budget tabled in Parliament on February 24, 1998.

This morning's session will allow us once again to seek input from officials. Perhaps the best way to proceed would be to invite those officials who will deal with, say, parts 2 to 5 first, and then we'll deal with the other sections accordingly.

I believe Bruce Rayfuse is taking care of parts 2 to 5. Is he here?

Mr. Bruce Rayfuse (Senior Chief, International Finance and Economic Analysis Division, International Trade and Finance Branch, Department of Finance): I'm dealing with part 13.

The Chairman: Okay, we'll deal with part 13, then, and if whoever is dealing with parts 2 through 5 can make their way up, I'd appreciate it.

Prior to speaking, please identify yourselves. Introductory comments were made last meeting, so we'll begin with Q and A directed to Mr. Gagnon and Mr. Waddington, Mr. Carrière and Mr. Murphy.

Mr. Harris, if you want to begin with some questions, we've brought back the officials because members of the committee felt they required more time to question them. They are here, and I hope the questions are here as well.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Mr. Chairman, I'll let Mr. Loubier start off. You can put me on at the tail-end, please.

The Chairman: Okay.

[Translation]

Do you have a question, Mr. Loubier?

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): No, not about this part of the bill.

[English]

The Chairman: Not on this part? Okay.

[Translation]

Do you have a question, Mr. Crête?

Mr. Paul Crête (Kamouraska—Rivière-du- Loup—Témiscouata—Les Basques, BQ): No.

[English]

The Chairman: Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): I have a question relating to part 4, Mr. Chairman.

Before I begin part 4, though, I'm going to mention another point. I guess it would be more of a point of order, but I wanted to say first of all that this is not a new western whine. Monday morning meetings are particularly problematic for some MPs. I suspect that for most MPs from central Canada, an early morning flight means they're here between 8 a.m. and 10 a.m., but for those of us who are fighting two or three time zones to start with, it means we have to fly in a day earlier to be here for this type of meeting. That's fair enough, Mr. Chair, if there is flexibility. Perhaps it's something we can keep in mind in the future.

The Chairman: Duly noted, Mr. Riis.

Mr. Nelson Riis: Mr. Chairman, on part 4, relating specifically to two Indian bands, I'm curious about the implications of these provisions when it comes to casino operations. Indian bands in British Columbia are now just about to receive permission to start operating casinos. Does this again lead into that type of potential for collecting taxes on gambling?

Mr. Steve Gagnon (Senior Tax Policy Officer, Intergovernmental Tax Policy Division, Tax Policy Branch, Department of Finance): These particular provisions are related to, for example, a casino that is on a reserve and is selling tobacco, alcoholic beverages or things like that.

• 1040

Mr. Nelson Riis: Would it simply take a similar amendment to enable collection of revenues from gambling proceedings in advance? Perhaps they could also refer to part 6 of the bill.

Mr. Steve Gagnon: Part 6 deals with the administration agreements, sure.

To date, we've been dealing specifically with commodity taxes. The government has expressed flexibility, provided that the taxes are direct. I don't know that any of the first nations in question have a casino, or—

Mr. Nelson Riis: This provision obviously does not permit that. What I'm suggesting, though, would be something along these lines: in the event it is decided that, in everyone's interest, a certain amount of revenue ought to be collected from various types of gambling activities on their lands, could that be done particularly under part 6 by simply an agreement between the central government and the first nation government?

Mr. Steve Gagnon: I'll let Yvon answer that in case I get it wrong.

My own understanding is that in order for part 6 to operate, there would have to be some legislative basis for the first nation to levy the tax. At this point, I guess you're asking what future policy would be in terms of casinos. There isn't any tax power that I'm aware of in place yet, and that would come back before Parliament for statutory—

Mr. Nelson Riis: It would.

Mr. Steve Gagnon: We would require statutory ability to do that, and it doesn't exist yet; at least, it doesn't to my knowledge.

Yvon, did you want to add something?

Mr. Yvon Carrière (Counsel, Tax Counsel Division, Law Branch, Department of Finance): Part 6 allows for an agreement to administer an existing tax. It would not provide a new tax. That's right.

The Chairman: Are there any further questions? No? Any from the government side? Mr. Harris.

Mr. Dick Harris: I just have a question, Mr. Chairman.

On this provision to allow taxation on the bands, were there ever any votes taken among the band members to say yes or no to whether or not they wanted this tax? Or was it something that was imposed on them by the chiefs and councils of the band without a vote?

Mr. Steve Gagnon: I don't want to use the term “imposed.” The first nations in question did have band council resolutions, but I'm not certain as to what extent they required of their members a band membership resolution, if that's what you mean.

Mr. Nelson Riis: Mr. Chairman, I would like to rise on a point of order. Perhaps I can help Mr. Harris on that question.

Actually, I can only speak...not necessarily on behalf of or knowledgeably about the Kamloops Indian Band, but they held numerous public band meetings to inform their membership of this intention. They received, if you like, approval to proceed with this initiative perhaps even three or four years ago. I guess it has probably taken that long to negotiate. So while there wasn't a plebiscite or a formal vote taken, the band membership was aware and had indicated their support, through general public meetings, for this system.

Mr. Dick Harris: The reason I was specifically asking if there was ever a democratic vote among the band members was that a public meeting's response can be interpreted in many different ways, depending on how the organizers of the public meeting want to interpret it. In the country as a whole, we don't have much choice of whether we have taxes or not, except at election time. I would hate to see the imposition of this tax on the band members without knowing whether or not there was a formal vote or resolution put forward to the rank and file band members themselves.

Mr. Steve Gagnon: Yes, as I said, we had band council resolutions. I don't believe, however, that the government required formal membership resolutions, on the basis that the band council is responsible to the band members. They have elections fairly regularly, so I suppose they're accountable in the same way as, when the government passes a tax, the electorate gets its say at the next election. It's that kind of idea.

Mr. Dick Harris: Okay, thank you.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, earlier on, I indicated that we had no further questions, as I believed you were alluding to parts 2 and 3. Since you were also referring to Part 5, I will let my colleague Paul Crête ask a question specifically about this part of the bill.

[English]

The Chairman: Sure.

Mr. Crête.

• 1045

[Translation]

Mr. Paul Crête: Part 5 pertains to Canada Education Savings Grants. My question is twofold. First of all, could you clarify for me the link between the proposed amendments to education savings programs and the federal and provincial student loans programs? What impact will these amendments have on the program, on the method employed for loans allocation and on the amount that will be made available to students?

Who stands to benefit from these changes? At first glance, it would appear to me that students from low income families whose parents do not earn enough to contribute to an education savings plan would be deprived of a government contribution, whereas students from middle and upper income families could easily benefit from the maximum grant amount. Is my analysis correct? If so, how do you plan to compensate for this fact?

Mr. Bill Murphy (Tax Policy Officer, Personal Income Tax Division, Tax Policy Branch, Department of Finance): To answer your first question, to my knowledge, there is no direct link between the Canada Education Savings Grants and the Millennium Scholarship Fund. Perhaps one of my colleagues can give you a more detailed answer later on.

As for your second question, prior to the 1998 budget, it seems that many middle and low income families took advantage of registered education savings plans. These were families who tried to put aside each month modest sums of money to finance their children's future education. This is a fact. We want to encourage all families to save for their children's post-secondary education and training. Of course, we realize that different families have different means and abilities when it comes to savings, and that is why we have established an annual ceiling of $2,000 in respect of contributions eligible for grant funds.

Many families have trouble saving money, particularly when their children are young, and these families will be able to carry forward any unused contributions up to an annual maximum amount of $4,000. Therefore, if they are not in a position to save when their children are still young, they can try to catch up a few years down the road.

Mr. Paul Crête: Have you drawn up any tables or done any evaluations? I maintain that it is extremely difficult for a family earning $40,000 or less to sock away money in a plan like this. I'm an MP, I have three children and I earn a good income, and I know that saving money is by no means easy.

The grants provided for in this legislation are an added incentive. Existing education savings plans have many loopholes. People may have trouble determining if indeed the plans are right for them. Occasionally, they may wrongly assume that if their child does not go on to college or university, they will lose the money invested in the plan. Things can get quite complicated.

I'm concerned that in the case of families where there is no great motivation at the outset for children to pursue a higher education, this type of financial assistance will not prove attractive. How can families earning between $20,000 and $25,000 per year, and there are many families in this position, be expected to come up with the money to invest in an education savings plan when to begin with, this money is not tax exempt? Contributions to the plan are taxable; only the interest earned is tax exempt. Therefore, a person must already have a certain amount of financial flexibility in order to be able to save this kind of money. Have you drawn up any tables in an effort to assess the impact of this initiative? For instance, do we know which Canadians will benefit from this system or from these changes and what income brackets these Canadians fall into?

• 1050

Mr. Bill Murphy: You've asked several questions. First of all, as I already indicated, even though we do not have very good statistics, we do know that middle and low income families already put aside some savings, either by contributing to an education savings or some other kind of plan. By offering a grant equivalent to 20 per cent of the contributions, the federal government will be encouraging these families and increasing their savings potential. As a result of these grants, their savings will now grow faster. We don't have precise data on the impact of this measure on families in different income brackets.

You mentioned the plan's complexity. We do know that parents are currently saving money, whether through education savings plans or some other scheme, while trying at the same time to save for their own retirement. Their primary objective, however, is to ensure that their children successfully pursue a post-secondary education and often, they contribute less than they otherwise would to their own RRSP in order to save in the short-term for their children's education.

In the short-term, this means that they contribute less to their RRSP. If, when the time comes, the child chooses to do something else, parents can transfer the money from the education savings plan to their own RRSP.

Of course, the purpose of these grants and education savings plans is first and foremost to finance post-secondary education and training for children, but if the grant funds and money invested in the plan are not used for this purpose, parents can transfer the balance in the plan to their RRSP.

Mr. Paul Crête: It would be interesting to have some figures or a table indicating what percentage of families earning an income that places them below the poverty line contribute to registered education savings plans. For example, we could look at the various income brackets, break down the information for every $10,000 in income, to get some idea of the impact of this initiative. Could you provide us with this information?

Mr. Bill Murphy: To my knowledge, this kind of breakdown has not been done. When the 1997 budget was tabled, we realized that we needed substantially more information and data on these plans. Therefore, beginning this year, the companies that currently administer these plans will be required to disclose considerably more information to us.

Mr. Yvan Loubier: Mr. Murphy, you mentioned earlier that you did have some figures and information, but that they were not very precise. Nevertheless, we would like you to share them with us. You stated that low and middle income families currently redirect some of the money that they would normally invest in an RRSP into education savings plans to address the more immediate needs of their children. On what do you base this statement? We would like to know—and this brings us back to the question that my colleague asked earlier—who stands to benefit from this initiative? Even though your information may be incomplete, at least it would give us something to go on.

• 1055

I also have a question for you. In which income bracket would you put low and middle income families who sacrifice some of their retirement savings to invest in their children's future education?

Mr. Bill Murphy: The data that we have was by and large supplied to us by the companies that administer these education savings plans. We would have to consult these private companies and ask them if they could turn over that information to the committee.

Mr. Yvan Loubier: Without giving us information by company, surely you must have data from more than one company.

Mr. Bill Murphy: Yes, but it is aggregate data.

Mr. Yvan Loubier: Fine. This would provide a starting point and support your argument.

Mr. Bill Murphy: Fine.

These companies were acting on the assumption that prior to the 1998 budget, many people made modest contributions of between $10 and $15 per month, for example. These amounts are well below the ceilings currently in place. This is one other way of saving money, and this leads us to believe that not only high income families are making contributions to education savings plans.

Mr. Yvan Loubier: What exactly do you mean by low and middle income families? What is your cut-off point?

Mr. Bill Murphy: I can't say exactly. Obviously, an annual income of less than $60,000 is a modest income.

Mr. Yvan Loubier: I see.

[English]

The Chairman: Mr. Riis, and then we'll go to Mr. Harris.

Mr. Nelson Riis: On the $60,000 over the years, if you're of low income or modest income, it really flies in the face of...not that those are your figures. But I think the previous analyses that have been done around this table find that a lot of people are averaging income a whole lot less than that—like in the $16,000 range. I think it's fair to say that if a person is putting $10 or $15 a month into a registered educational saving plan, you have to save for a long time before you can cover one year's tuition.

But the reality is—and I know this is not your program, you're just here to explain the existing one—I think you've done us a service by suggesting there have been changes, so in a family where the children do not go on to post-secondary education, it does not lose that benefit and can likely transfer it into an RRSP.

Wouldn't you say, though, the existing provisions based on the track record to date...? We know the number of tax filers who use this particular provision and the levels of income and so on, but really the people who probably need support and assistance most to help provide for their children's education are really not going to take much advantage of this interest deduction. I think that's the line of questioning you're hearing this morning. Would you confirm that?

Mr. Bill Murphy: It's too early to say what the reaction to the 1998 budget will be in that respect. When we talk about saving for higher education, particularly prior to the 1998 budget, the advantage of RESPs is the ability to save relatively small amounts on a regular basis over a long period of time. Certainly starting to save from the time a child is young is very important in making RESPs a success.

Obviously a lot of people saving through RESPs will not be able to finance 100% of the education of their children for four years of university. I think we recognize that. But people are saving in various ways now for higher education for their children, and the Canada education savings grant, working together with the registered education savings plan, is attempting to to increase the success of those savings—the 20% top-up—and provide incentive for parents to contribute over a long period of time, from when their children are young until they're ready to go to higher education.

By saving relatively small amounts from an early age and benefiting from the effects of compounding, a family will be able to put aside a significant amount of money if they do it on a regular basis and start early. This Canada education savings grant will help that.

The Chairman: Thank you, Mr. Riis.

Mr. Harris.

• 1100

Mr. Dick Harris: Thank you, Mr. Chairman.

If I can get back to part 4 again, I have to assume that this is setting a precedent or could be a blueprint for band taxes across the country. I just wanted to know what kind of accountability mechanism is in place to ensure that proper records are kept and that the taxes are...I assume they go to the government first, once they're collected, and then they're distributed back to the band. That's what I read here in the instance of the Kamloops Band.

But I ask this question because the Auditor General, in his annual reports, has been very critical of the record keeping and the financial accountability. In many of the bands across the country, the record keeping, the financial accountability has been far below acceptable, and the Auditor General has pointed this out every year.

Now, I know that Revenue Canada and the federal government have tremendous powers to ensure that taxes are paid from, if I can use the term, the rest of Canada. What kind of accountability is in place that would ensure that everything that needed to be done was going to be done under this first nations taxation provision?

Mr. Steve Gagnon: I guess I can deal with this in two parts.

If I could use the Westbank Band example, Westbank now has in place a tobacco tax. That tax will be collected by Revenue Canada and periodic payments will be made to Westbank throughout the year and at the end of the year.

Mr. Dick Harris: You say collected by Revenue Canada, but Revenue Canada isn't going to be on the reserve lands to collect the tax. They're obviously going to go into a vendor—

Mr. Steve Gagnon: I'm sorry. Yes, that's true, like the GST. You're right.

Mr. Dick Harris: Okay. Then it would be submitted to Revenue Canada.

Mr. Steve Gagnon: Yes, that's right.

Mr. Dick Harris: Off the reserve, for any other business that operates that way—and they all do—if you don't pay your taxes, then Revenue Canada will have you in court as quickly as they possibly can. However, the legal aspect, as business people in the country in regards to the legal part...in many cases it doesn't apply to reserve residents. You cannot sue or seize property from a reserve. So I'm just wondering what kind of accountability is in place that would allow the proper functioning of this.

Mr. Steve Gagnon: In this case Revenue Canada will administer this tax as though it were GST, including requiring production of documents and all the enforcement mechanisms that go along with that. Because this is a band-levied tax, I think we avoid some of the kinds of things you were concerned about. I think you were referring to provisions of the Indian Act that prevent seizure of property. I think you were referring to section 89. As I recall, that is a provision that prevents the seizure of property unless at the instance of the first nation itself, the band.

So the plan is that Revenue Canada will administer this as though it were GST and as though it were GST anywhere else.

Mr. Dick Harris: But they can't apply the same pressures to a business of a band that they could apply to a business that was not part of a reserve.

Mr. Yvon Carrière: I understand that pursuant to the memo of understanding that was signed between Revenue Canada and the band, the band has agreed to give all reasonable assistance to Revenue Canada to ensure that the taxes are in fact paid and collected.

Mr. Dick Harris: And that's my point. I'm sure there are many bands in Canada that would eventually enter into this, and that have entered into it, that would be upholding the letter of accountability to the best degree. However, on many reserves the Auditor General has been very critical of the accountability, the paperwork, the financial handling of moneys, and that's what I'm concerned about.

Mr. Steve Gagnon: I'm sorry, I guess I've divided this into a question of how the tax would be administered...and then once the money goes to the first nation, is that a separate question of accountability that you're asking?

• 1105

Mr. Dick Harris: No, I'm talking about the responsibility of the vendors and the first nation council itself to ensure that the moneys were turned over to Revenue Canada and what happens if they don't.

Mr. Steve Gagnon: The vendors have the same responsibility as they would on the GST. In the case of Westbank, which is the only agreement we currently have in place, the responsibility to collect that tax is Revenue Canada's, through agreement, so the band council itself doesn't have a hands-on, day-to-day involvement with the collection of the tax. It's Revenue Canada that does that.

Mr. Dick Harris: So if a corner store vendor in the Westbank community doesn't remit their tax, does that mean that the full facilities of Revenue Canada that they can apply to businesses not on reserves would apply to that business on the reserve, the full powers that they have?

Mr. Steve Gagnon: That certainly is the intention and that's our understanding, yes.

Mr. Dick Harris: Thank you.

The Chairman: Are there any further questions? Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

Mr. Murphy, with regard to the levels of income, there was a report just done by the Government of Canada on the 1995 tax year, which reported that if you had an income of $60,000 a year or more, you were in the top 10% of income earners in Canada. Is that your understanding?

Mr. Bill Murphy: I don't have the facts. I don't have the figures in front of me. Certainly $60,000 is quite a high income for the average taxpayer, yes.

Mr. Paul Szabo: I agree. It's actually quite surprising that the figure is at that level.

Mr. Bill Murphy: The figure...?

Mr. Paul Szabo: The 10% threshold is $60,000 a year.

Mr. Bill Murphy: With regard to a couple of earlier questions, we're talking about middle and lower income. There are people saving now with incomes as low as $20,000 and right on up the scale—$20,000, $25,000, $30,000, $40,000. So I wasn't intending to imply that people were not saving at a lower level than $60,000 or that $60,000 was some kind of average.

Mr. Paul Szabo: I just want to clarify this. I saw an advertisement on television last week on...I think it was the Canadian scholarship fund, and there were graphics that depicted two piggy banks. One was labelled RESP and one was labelled RRSP. It made the bald statement that if you didn't happen to use the RESP, if the child didn't go on to education, you could roll it over—and it was just a bald “roll it over”—into an RRSP, which I think is not in fact the case.

I want to be sure I understand the details. First of all, the interest earned on an RESP is really the only element that can be rolled over, provided you have room, into an RRSP.

Mr. Bill Murphy: The capital goes back to the contributor without any tax consequences. So they can put that in their RRSP or any place else they choose.

Mr. Paul Szabo: They could choose to invest that.

Mr. Bill Murphy: Yes.

As regards the income, yes, the income can go over to the RRSP, provided a bunch of conditions are met.

First of all, the plan has to have been running for at least 10 years. The goal here is to finance higher education of a child and, indeed, to wait until it's clear that the child is not going to want higher education before going the RRSP route. So the plan has to have been running for 10 years.

All existing and previous beneficiaries have to be 21 years of age or older.

The individual in question who wants to make this rollover has to be a Canadian citizen and they have to have RRSP room.

There is also a limit on the amount that can be rolled over by a beneficiary, a lifetime limit of $50,000.

Mr. Paul Szabo: Under the program, if the moneys are not used for education, the grant reverts to the government. Any grants made under this program would revert to the government, including any attributed investment income that was earned on the grant portion.

Mr. Bill Murphy: The grant returns to the government. The investment income associated with the grant remains with the other investment income and therefore either goes with education assistance payments or, lacking a child going on to higher education, can become part of the amount that is transferred to an RRSP or ultimately can go back, subject to a number of conditions, to the individual subscriber.

• 1110

The reason for that is primarily simplicity, so that it's not necessary for the RESP provider to track the amount separately. But secondly, it's recognized that, as I mentioned earlier, RRSPs are a secondary objective of the program. It's recognized that people will save first for the child's education, and probably reduce their contributions to RRSPs in order to do so.

Finally, if it goes back directly, if the person in question, the subscriber, has already exceeded or met their RRSP contribution limits, it can go back to the subscriber, but in that case it's subject to regular inclusion of income and taxed at their ordinary marginal tax rate, plus an additional 20% penalty tax introduced in the 1997 budget to offset the effects of the tax benefits of accumulation without taxation over a period of time and to offset tax planning opportunity.

Mr. Paul Szabo: Okay. The last question I want to ask you is with regard to the age limit at which RESP contributions can be made. Is that your area?

Mr. Bill Murphy: Yes.

Mr. Paul Szabo: For 1998, if you've already attained your age of, I believe it is 17 years of age, you can't make a contribution. Is that true?

Mr. Bill Murphy: As regards RESPs, generally there is no restriction on contributions. Contribution can be made at any time.

If we're talking about the Canada education savings grant, contributions will attract a Canada education savings grant up to and including the year in which a child turns 17, with one exception. The exception is for children turning 16 or 17 years old this year—that's probably what you're referring to—and there are a couple of conditions there. Unless contributions have been made through RESPs in the past for that beneficiary, by anybody, that either total $4,000 from any subscriber on a cumulative basis up to now, or unless contributions have been made of at least $300 in any four previous years by any beneficiary or any sum of beneficiaries, then the government will not offer a Canada education savings grant to the children who are 16 and 17 years old.

The reason for that is simply that the whole benefit of saving through RESPs, the primary benefit, is the ability to save and have tax-deferred income grow over a long period of time. Essentially, if the children are already 16 or 17, the amount of accumulation that's going to take place before they're ready to go to higher education is pretty small.

Mr. Paul Szabo: Okay.

Finally, with regard to the 18 years of age to be eligible for the grant, at age 18 students are normally in about grade 12—and I understand that some could then commence college or whatever—but by and large, it seems to me that the age 18, in all cases, wouldn't allow students to have contributions made right up to and including the last year of their pre-college or pre-university schooling.

Mr. Bill Murphy: As regards RESPs generally, somebody can make contributions, everything else being the same, when the child is 18 or 19 or 20 years old, or whatever. The governing condition there is how long the plan has been running—this is RESPs generally; I'm not talking about the Canada education savings grant.

One can both make RESP contributions during those ages of the child and leave a previously accumulated Canada education savings grant in there until the child decides where they're going to go and what they're going to pursue. However, the last year in which a child can receive a Canada education savings grant is the year in which they turn age 17, and that is, in effect, the 18th year in which they could have received a grant.

Mr. Paul Szabo: Thank you, Mr. Chairman.

The Chairman: Thank you very much, Mr. Szabo.

We're going to give a couple of more questions to Mr. Harris, and then we'll move on to the next sections.

Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Mr. Gagnon, once again, you've said to me that Revenue Canada fundamentally has the same powers of enforcement on reserve as off reserve, as far as ensuring that tax is collected is concerned.

I want to ask you if you could provide to me in the next few days the section of the tax act or legislation that says that the accountability enforcement measures that Revenue Canada has would apply to reserve businesses in the same way as it would to off-reserve businesses. Maybe other members of the committee would like to see that as well, if you could provide that for me.

Mr. Steve Gagnon: Certainly.

Mr. Dick Harris: Thank you.

I have one more question, or actually two small ones. In regard to the Cowichan band, which has had this provision in place for a little while now, have there been any audits done since the inception of this? If so, what have been the results of the audits?

• 1115

Mr. Steve Gagnon: The Cowichan tribes in last year's budget were able to levy two taxes—a provincial-style tobacco tax, if you will, and a GST-style tobacco tax. They haven't implemented the GST-style tax yet, so they're not levying that one. They're levying the provincial-style one.

Mr. Dick Harris: Okay.

Finally, it says here it would affect Indian moneys or funding for the bands “not immediately”. Is it the intention of the government, through the Department of Indian Affairs and Northern Development, that eventually they would reduce the funding to these bands comparable to the 7% tax that was raised at the band level? Is that the intention?

Mr. Steve Gagnon: The government announced, in Gathering Strength—Canada's Aboriginal Action Plan, that it does desire to develop, with first nations, a new fiscal relationship. In that context, one of the things that's trying to be encouraged is generation of new sources of revenue, including taxes.

So the impact of these new sources of revenue on funding from the government will be taken into account in the context of these broader discussions on the fiscal relationship.

Mr. Dick Harris: Couldn't that be termed “offloading”, in a way, offloading the government's responsibility for band funding onto the rank and file band members? I mean, a tax is a tax. If the band is going to raise money by taxing its people and then have their band funding eventually reduced by a comparable figure from the federal government, then the federal government is doing to the bands what they've done to the provinces. They've reduced their funding to provinces and the provinces have had to raise that revenue through taxes within the province.

Isn't this the same thing?

Mr. Steve Gagnon: As I said, those decisions haven't been made, and there is going to be no immediate impact. The first nations will participate in the discussions. I shouldn't speak for first nations, but presumably they'll be looking to make sure that at the end of the day they're better off in terms of overall financial aid than they are now.

Mr. Dick Harris: It seems to me that the people who'll be better off will be the federal government, not the first nations people.

Mr. Steve Gagnon: I don't know how to respond to that except to say there are no immediate plans to do what you're concerned about. Whatever does happen will come after discussions with aboriginal groups.

Mr. Dick Harris: Okay.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Harris.

[Translation]

One final question, Mr. Crête.

Mr. Paul Crête: My question concerns part 1 where it says that the scholarship foundation, not the government, will determine the design and delivery of scholarships.

Suppose the foundation decides to award a certain percentage of scholarships to students on the basis of merit or to allocate scholarships on the basis of employment needs, for instance, by awarding more scholarships in the fields of science and engineering than in the humanities field. Under the legislation, what justification is there for such action? Does the foundation enjoy total discretion when it comes to awarding scholarships or does the government have some say in the matter?

Based on our understanding of the bill's provisions and on the information that we have received, the foundation could decide to go quite far, and the federal government, much less the provincial governments, wouldn't be able to do anything about it. Its decisions could conflict with existing programs. What would happen if a situation like this were to arise?

[English]

Mr. Andrew Treusch (General Director, Federal-Provincial Relations and Social Policy, Department of Finance): It would not be the Government of Canada that would be making some of the decisions you're referring to, sir; it would be the millennium foundation itself. Of course, it will be governed by the legislation before you, if it is passed by Parliament. Part 1 of it in particular sets out some broad aspects to govern the scholarships to be awarded, but obviously the design and delivery of it would very much be left up to the foundation itself.

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The foundation will be administered by a board of directors. The majority of the board of directors will not be representative of the federal government, they will be representative of the post-secondary education community of Canada. Those appointments will be made in consultation with the provinces and the post-secondary education community.

There's a two-step appointment process whereby the independence of the board is secured through an initial appointment of members, again with only a minority of members appointing the remaining members. This safeguards the independence and arm's length nature of the foundation itself.

The Chairman: Just as information for the members here, we're now dealing with part 1. We're going to deal with part 1 tomorrow as well, but since you've initiated questions on it, members should feel free to jump in if they want to.

[Translation]

Mr. Paul Crête: You've just confirmed to me that as the bill is now worded, the federal government must allocate a substantial sum of money to this fund. The foundation was established to award scholarships on the basis of merit. We can either support or oppose this principle, but this was the philosophy behind the establishment of this foundation. As the bill is now worded, and you yourself said so, the federal government has no control over the disbursement of the funds, other than the fact that it appoints the members of the Board of Directors. Once they have been appointed, the directors have considerable operating discretion. Their authority is not limited to administering scholarships. They can also decide in which fields scholarships will be awarded on a priority basis and make other decisions of this nature.

The bill provides for consultations between the foundation and the provinces. Could you tell me where the obligation to consult ends? Will the provinces have a veto right and will they be able to say that a foundation initiative runs counter to their programs? What does the bill say about this and what will happen if the bill is adopted in its current form?

[English]

Mr. Andrew Treusch: There are several questions there, sir. I'll try to do justice to them all, but I may not be able to.

As you know, the foundation's initial endowment is $2.5 billion, which is a considerable sum of money. It is to be expended over a ten-year period, so annual disbursements are estimated to be about $325 million.

The purposes for which Parliament is being asked to approve that expenditure are set out in subclauses 5(1) and 5(2). Those subclauses indicate the parliamentary objectives, if you like, of the scholarships. Those purpose sections do indeed make reference to both financial need and merit, the ultimate objective being “to improve access to post-secondary education so that Canadians can acquire the knowledge and skills needed to participate in a changing economy”.

There's also a reference there to the fact that scholarships should be granted “in a fair and equitable manner across Canada.” In doing so, the foundation is charged with minimizing duplication and overlap, delivering these in a cost-effective manner, and endeavouring to harmonize with existing student assistance programs. In that regard, there are a number of means built in to ensure that the foundation works closely with provincial authorities.

In particular, the legislation indicates that there will be a role in identifying members and in identifying directors. In the composition of the membership and in the composition of the board of directors, provincial authorities, as well as the post-secondary education community more broadly, will play a role. I know some consultations have been held already, and they are ongoing as well, of course.

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You also raised the question about accountability to Parliament. The last time we testified before this committee, we had an opportunity to make reference to the accountability structures that are built into the legislation on the millennium fund. In particular, an annual report will be tabled before Parliament that will include the audited financial statements and various other aspects of information that will be of interest to Parliament. There is as well a requirement in there for a broader review by the fifth year of the foundation.

The Chairman: Good.

Are there further questions? Go ahead.

[Translation]

Mr. Paul Crête: Last time, mention was made of administrative charges which have been pegged at approximately 5 per cent of the foundation's budget. Have you done an evaluation to determine how this money will be spent and can you share your findings with the committee? For example, what portion of the budget will go to finance the expenses of directors and what portion will be used to cover administrative or fixed costs? Do you have this information and if so, would you care to share it with us?

[English]

Mr. Andrew Treusch: I'm sorry, I'm not able to provide the committee with more specific information on that. The 5% figure referred to was an estimate we used in our preparations under the budget. It was seen to be a reasonable estimate for the magnitude of administrative expenses that would be incurred.

It would entail administering the scholarships, salary costs, administration costs and so on. It seemed to be reasonable. We'll know down the road, when the foundation is up and running, whether that estimate turns out to be a little too high or a little too low. But based on the information available to us, that's the best estimate we're able to make today.

The Chairman: Mr. Loubier, do you have a question?

Madam Gagnon.

[Translation]

Mrs. Christiane Gagnon (Québec, BQ): If you feel administrative charges in the order of five per cent are too high, what would you suggest as a solution?

[English]

Mr. Andrew Treusch: That will be up to the foundation. It's actually stipulated under the legislation that it is to make its best efforts to deliver the millennium scholarships in the most cost-effective manner possible. It's charged with doing that.

The only other thing I might add to the answer I gave last time about factors to be considered is that a foundation as large as this will have the benefit of some economies of scale that are not available to some of the smaller scholarship funds we've examined.

The Chairman: Are there any further questions on part 1? It seems to be a part that will raise a lot of interest.

Just to recap here, we've dealt with part 1 through part 6, I believe. We'll now move to deal with parts 7, 8, 9, 10 and perhaps 11. If we're lucky we might even get to part 12.

Who wants to go first? Mr. Harris.

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Mr. Dick Harris: Mr. Chairman, speaking to part 7, quickly, can someone tell me the difference between a cigarette and a tobacco stick, or are they the same thing?

Mr. Brian Willis (Senior Chief, Sales Tax Division, Tax Policy Branch, Department of Finance): Certainly. A tobacco stick is a relatively new product. It was brought out about 10 years ago, and it's a replacement for the traditional fine-cut, roll-your-own product. You'll remember, perhaps, that for the last hundred years people have rolled their own cigarettes. The tobacco companies tried to improve upon that. A tobacco stick is, in fact, a pre-rolled type of fine-cut product that is then inserted in a cigarette tube to form what looks very much like a tailor-made cigarette.

Mr. Dick Harris: Okay.

The Chairman: It's a major plank in his re-election campaign.

Mr. Dick Harris: I didn't know. It leads into my question, though.

I have a question regarding the excise tax increase and the numbers. I know the government has said this tax increase is to discourage Canadians, particularly youth, from starting to smoke, or to encourage them to quit smoking. I wonder where and how you arrived at the 60¢ figure and the $1.52 figure. Is there any type of research that went into saying that if we increased the cartons of cigarettes by 60¢, then we would see a decrease in youth beginning to smoke or a decrease in smoking?

It seems to me that if the government really wanted to use price as a deterrent, it would have increased it $6 a carton and not 60¢. So I wonder where the 60¢ and the $1.52 came from. Was it just dreamed up in a coffee shop, or is there any rationale behind it?

Mr. Brian Willis: This all comes out of the tax reductions of 1994. You'll recall that in the 1990, 1992, and 1993 period there had been major increases in tobacco taxes, and a significant problem of contraband tobacco had developed in Canada. So in 1994 there were reductions in tobacco taxes. Since that time what we've been doing is working with the RCMP and the provinces to try to move tobacco taxes back up in a manner that will not trigger a renewed contraband activity.

You mentioned 60¢. That 60¢ is the federal excise tax increase. The provinces in which we increased our taxes by 60¢ also increased theirs by a comparable amount. Plus, there would be the impact of the GST and the PST, the provincial sales taxes. So in total, you're looking at an increase in the range of $1.40 a carton for the total price that the consumer sees.

The whole objective in moving those up is that the government has indicated it wants to move the tobacco taxes back up for several reasons. One is revenue, obviously; and the second, as you mentioned, is health. But it wants to do that in a manner that will not result in a renewed level of contraband activity.

Since 1994 there have been a number of increases jointly with the provinces, and the amounts chosen are usually looking at all of the factors, to not set off that kind of problem again.

Mr. Dick Harris: Okay. During this discussion in the last Parliament—and I recall it very well—there were some recommendations put forth by many people, including the opposition parties, that if you wanted to fight the contraband activity on cigarettes, you could do a couple of things. Number one was to go in and address the areas in which the majority of contraband cigarettes were coming into the country. The second one was that at the same time you increase taxes significantly on cigarettes bought in Canada, you impose a comparable export duty on cigarettes leaving the country so there could be no profit gained from bringing them back into Canada through the black market or by means of smuggling.

Those two solutions seem quite reasonable to a lot of people across the country, yet the government thought it would be able to decrease the criminal activity by simply reducing the cost of cigarettes so that there wouldn't be so much profit to be made. What happened then was that we saw an increase in smoking, among youth particularly, because cigarettes were so cheap.

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I have a son in high school—and I'm thankful he doesn't smoke—who tells me that even in B.C., where the cigarettes are $5 plus for a pack of 20, the kids think the price is a joke, and they have no problem buying the cigarettes. If they cost $10 a pack it would probably would have an effect.

You could increase the price of cigarettes—and I'm a big fan of sin taxes in this case—if you were to offset the price increase on your exports by putting an export tax on so there couldn't be any profit. Has anyone thought of that?

Mr. Brian Willis: In fact, all of the things you've mentioned, plus a number of other things, have been in place for a number of years. In the 1990s, prior to the tobacco tax reductions, there were significant increases in enforcement resources in order to stem the flow of contraband, and that continued from about 1989 through to 1994. We continued to augment our enforcement resources, both in the RCMP and in customs.

With respect to an export tax, there is an export tax in place right now, and there had been for a period of time through the early 1990s.

Mr. Dick Harris: But with all due respect, it's not high enough to curtail the profit that can be made by smuggling cigarettes back into Canada from the U.S. The spread is too big, and that's where the criminals receive their profit from.

Mr. Brian Willis: In fact, if you take a look at the statistics, the levels of exports are below the threshold of 3% that has been put in place, so in fact there is not a lot of contraband coming across that is Canadian-sourced product. You have to remember that an export tax can deal only with a product that's produced in Canada, and that is not the only source of contraband.

For a few dollars of difference a carton, an export tax will be effective in discouraging the exporting of Canadian cigarettes, but once a differential between a Canadian price and the world price reaches a certain level, Canadians have clearly demonstrated that they'll smoke any cigarettes. They don't need to stick to their own brands. So you wind up with the situation where U.S. brands are being imported or even with the situation where special production not normally sold in Canada is being fabricated outside of Canada and smuggled into the country.

The other option, the other possibility that we've seen happening, is that you have illegal production, even within Canada, of products that aren't normally on the shelves.

It's a matter of the difference between the legal price and the contraband price that the market will bear. What we found in 1992, 1993 and 1994 is that when you're talking about legal, fully tax-paid cigarettes selling at $45 and $50 a carton and the cost of non-tax-paid cigarettes on the world market or in underground production at less than $10 a carton, it's virtually impossible to sustain that kind of difference. In that situation, too many Canadians have decided—or had decided at that time—that they are prepared to source their product elsewhere, not at the legal outlets.

Mr. Dick Harris: Okay. I have one last question. Why is the extra tax already being collected when the legislation is in fact before us at the committee right now?

Mr. Brian Willis: This is a long parliamentary tradition that goes back to the English model of a parliamentary system of budgets. Sales and excise taxes have long been announced in the form of a ways and means motion and put into place immediately. Part of the rationale is that if you announce significant tax changes and don't put them into force, there is a very big opportunity for individuals to profit.

And that is particularly the case for tobacco, which is one of the primary places where you will see profiting taking place. Even at 60¢ a carton, the wholesalers and retailers can reap a very significant profit by adjusting their prices and by moving stock around in advance of the effective date for an announcement, so it has always been the tradition for these taxes to come into force immediately.

What the government is seeking from Parliament is implementation of these measures retroactive to the date of the announcement.

The Chairman: Thank you, Mr. Harris.

Madame Gagnon.

[Translation]

Mrs. Christiane Gagnon: I have three questions concerning the National Child Benefit. We know that the child benefit will be calculated the same way as the current tax credit which totals $1,020 per child. How many years has the tax credit totalled this amount?

[English]

Mr. Keith Horner (Senior Chief, Social Tax Policy, Department of Finance): I'm afraid I don't quite understand the reference to $1,020—

[Translation]

Mrs. Christiane Gagnon: I was saying that the child benefit would be calculated in the same manner as the current tax credit of $1,020 per child. How long has the tax credit totalled $1,020?

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[English]

Mr. Keith Horner: Thank you. I understand now.

That's a question I can't answer. It's a technical question. The government decided, in the area of child benefits and in other areas, that the first priority in providing increased assistance was families at the low-income end. The base child benefit provides benefits to higher-income families as well, families with incomes up to $67,000 for two children and higher incomes for families with more children.

The question of when there might be an increase that would increase the benefits to all families with children is really a question of priorities and fiscal room, not only in the area of child benefits but also in the area of tax changes, such as the surtax reduction and the increase in the basic credit. Both those measures so far in this budget have all been targeted at the low end.

There is a promise in the 1998 budget to further increase child benefits by $850 million—$425 million next July and the remaining $425 million in July of 2000. The exact profile of those increases, whether they will all be devoted to families at low- and modest-income levels or whether some of that money may be used to increase the base benefit, are decisions that aren't made yet, but there are further increases in child benefits that have already been announced, or at least moneys allocated for further increases.

[Translation]

Mrs. Christiane Gagnon: I know the minister has often said that a child benefit is one way of fighting poverty. Is it true that families who receive social assistance will no longer receive additional support once the new child benefit is in place?

[English]

Mr. Keith Horner: This benefit increase and restructuring to become the Canada child tax benefit provides an enriched floor for federal and provincial benefits. The idea of the change was set out, in a booklet with the 1997 budget, as a federal-provincial initiative. One of the key goals for that idea was to try to provide a more even level of benefits between social assistance families and working poor families, or lower-income families with earnings.

So it is true that to a considerable extent, the increase in the federal child benefit will be offset by reductions to social assistance, and then provinces that have made those reductions will reinvest the moneys in further child credits, in earned income supplements, in child care initiatives, or in extending health benefits to low-income families. Any moneys saved will go back to assist low-income families.

I think it's important to note, in terms of talking about social assistance families versus lower-income working families, that there is a lot of movement back and forth. So somebody who doesn't get a benefit increase in July 1998 because the federal increase is offset by a reduction in provincial benefits may well benefit, in later months, for example, by being able to move off welfare while not losing health benefits or losing income support.

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[Translation]

Mrs. Christiane Gagnon: We know that there is a shortfall to make up. Since benefits received are not indexed, what exactly does this shortfall amount to? This is not a government measure. I am also curious about the level beyond which indexation ceases.

[English]

Mr. Keith Horner: It's hard to provide quantitative answers because the level of benefits varies with income. But the enrichments that have been provided in the last two budgets have increased benefits for people with family incomes of under about $26,000 by roughly 20%. So they've much more than compensated for inflationary increases over the last few years.

People at higher income levels have not had their benefit levels indexed to inflation, and as I said in response to your first question, as a question of priority the government has chosen to put its first moneys, as the fiscal position gets better, into assisting lower-income families.

[Translation]

Mrs. Christiane Gagnon: I don't recall where exactly I saw these figures, but it is estimated that approximately 850,000 low-income families do not receive the child tax benefit because of the non-indexation provision. Are you familiar with this figure?

[English]

Mr. Keith Horner: No. The benefit goes to all families with children. It has a very high coverage. All families with family income under $26,000 are eligible for the increases in the last two budgets.

The Chairman: Thank you, Mr. Horner. Thank you, Madame Gagnon.

Mr. Riis.

Mr. Nelson Riis: Thank you, Mr. Chairman.

I'm not sure which witness I'm directing this to, but can someone maybe explain the changes to the Bankruptcy and Insolvency Act relating to student loans and students declaring bankruptcy.

Mr. Andrew Treusch: Yes. As you know, Mr. Riis, there were a number of changes proposed in the 1998 budget to the Canada student loans program. In addition, I'd also draw your attention to the new tax credit for the interest portion of student loans. These, in conjunction with the student loans program changes that include increased interest relief and something quite new, the prospect of debt reduction, as well as extended amortization, are a series of measures that will help students cope with their debt burdens, in particular if the students are in circumstances of financial hardship.

In doing so, the government wants to provide all of the incentives to ensure that students are repaying their loans on a timely basis and to discourage students who would take too easy recourse of bankruptcy through discharge, particularly during the early years. The legislation before you would extend this period from two to ten years, in conjunction with the other changes to the student loans program.

The Chairman: What percentage of students claim bankruptcy with their student loans being the only amount of money they owe?

Mr. Andrew Treusch: I don't have a percentage in front of me here. I know that I regularly review the statistics and see that there are quite a number of bankruptcies where a student loan is part of the bankruptcy proceedings—about 10%. But we would have to get back to the committee with more exact figures if that is wanted.

The Chairman: Okay. I'll recognize Ms. Torsney first, then I'll go to Mr. Harris and then to Monsieur Crête.

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Ms. Paddy Torsney (Burlington, Lib.): We changed the system a couple of budgets ago, where you could start your payments on your student loan at 30 months rather than 18, as I think it was before. Do we also have a system where people who are paying, and then fall on some kind of hardship, can delay their payments for a while, so that we don't exacerbate a bad situation and we will still collect our money, just for a matter of six months for unemployment reasons or something?

Mr. Andrew Treusch: Yes. When students graduate, they are not required to make any payments on a student loan for the first six months after graduation. In the last budget, as you rightly point out, there was an interest relief provision. That is the provision whereby, if you fall below a particular threshold, the test, you're not required to make any interest payments on your student loan. That period was extended from 18 months to 30 months in the 1997 budget.

In this budget there are several steps. First, the threshold that relates graduates' income levels to the size of their loans has been raised by an average of about 9%, so more people will qualify for interest relief in the first place. Then a year down the road, when administrative systems can be put in place, the government will be introducing further interest relief but on a graduated basis. This means that everyone who falls below that initial threshold qualifies for a 100% of interest relief, but persons higher up the income scale will get a portion of their interest relieved as well.

In addition, after an individual in financial hardship has used interest relief and still remains in a situation of financial hardship, the student loan administrators, working with the financial institutions, can extend the period of the loan, the amortization period, from 10 to 15 years. That can reduce monthly loan payments by about 25%.

Finally, for those graduates in the most difficult circumstances.... After all of these efforts have been taken, there may still be some who are unable to meet their payments and for those, for the first time, the student loan administrators will be able to reduce the outstanding debt by as much as 50%, or $10,000.

Ms. Paddy Torsney: Can I get some figures on what kind of payments people are making and what kind of level of debt they actually have—in other words, who's falling in where? All the information you've presented is terrific, and certainly we can get a sense that things are a heck of a lot better for students graduating with debt, or will be better, but I'd like to see some dollar amounts. Are they paying $150 a month on an income of $25,000 a year, and they're left with so much debt? I mean, I'd like to see some actual models.

Secondly, I'm not talking about students who need debt relief or additional interest relief; I'm talking about five years later, when you've been working for five years, you've been making payments, and all of a sudden you hit a hard time. I've had cases from a number of years ago where they were told they'd have their loans dismissed. Then things got better and they moved along, and 20 years later, when they had additionally gone through a period of hard times, they were told “Guess what, you're going to start loan payments again”, and they've had collections move in on them. That's not a great situation.

What we should do is find some way they can ask for six months' reprieve, or something, in the middle of their payment stream. If they become unemployed five years after graduating they can have, say, two months or six months and start paying again when they have another job. Do we have that kind of system in place? Is there that much flexibility with the loan officers and the banks?

Mr. Andrew Treusch: With respect to the statistics, there are some statistics in the budget materials on the size and growth of student loan burdens. They have increased quite a bit. Many of the figures you've seen represent the average loan burden of a graduate after completing a four-year program. Those are higher than the average Canada student loan holder, because many do not complete four-year programs. So you will see two kinds of statistics there.

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With respect to the impact of these on students, I know Human Resources Development Canada is very anxious to communicate these new measures to students and graduates. They are complicated, but they intend to undertake a new communications effort in this regard. That, as well, was covered in the budget.

We certainly can provide a great many figures on how these various measures relate to individual students. The problem we have is that it depends upon an individual student's circumstances, in particular whether they have dependants, the size of their loan and their income. Knowing those three things, we can explain how all the measures will work in quite an exact way. The budget simply gives examples, but we could provide more information, if that's helpful to you.

Finally, in the circumstances you raise where a graduate finds himself in financial hardship some time after he has left college or university, the budget proposals for changes to the Canada student loan program provide increased flexibility with respect to interest relief over the period of the loan. So if there are changes in a student's financial circumstances through the period of the loan, not initially but one year, two years or three years down the road, then the student loan administrators have the prospect of providing interest relief.

Ms. Paddy Torsney: But interest relief still means they have to make a payment this month.

Mr. Andrew Treusch: No.

Ms. Paddy Torsney: Okay. I would have thought principal payments would be needed, but that's fine.

Mr. Dick Harris: I want to follow up on Ms. Torsney's question. Interest relief is one thing; principal relief or payment relief is another. Are you saying interest relief means principal relief as well?

Mr. Andrew Treusch: Well, no. There are those two types of assistance offered by the budget. I don't mean to mislead anyone. There are interest relief provisions and there's what the budget calls debt reduction, or you could choose to call it principal relief. But if you're eligible for interest relief, it means the loan just sits. You don't have to make a payment.

Mr. Dick Harris: On the principal.

Mr. Andrew Treusch: That's correct.

Mr. Dick Harris: Okay. The government pays a risk premium of 5% to the financial institutions for these loans. When this interest relief kicks in, will the government also pay that to the financial institutions?

Mr. Andrew Treusch: Yes, it will, in respect of the student.

Mr. Dick Harris: Okay. As MPs we get students or ex-students in our office all the time lamenting about how the friendly collection company has been harassing them on the phone, at work and whatever. I use that term tongue-in-cheek. Quite frankly, these people are under tremendous duress because of the collection company's persistence in collecting the loan on behalf of the bank.

Once a borrower exhausts the relief, has received the debt reduction and still isn't able to address the repayment of the loan.... This is a problem, because the numbers show that young people are dramatically underemployed in this country. There simply aren't the jobs out there that will give them a comfort zone in which to live and pay off their student loans at the same time. It's very tough out there. One could assume that with most borrowers, by the time they get into trouble, the loan reduction would be such that they could work out a monthly payment schedule that the borrower could actually live with, or in the event that the borrower is still in financial difficulty, arrangements could be made with the lenders. Well, that's sort of dreaming in technicolor, because the lenders are not that friendly toward the people who have outstanding student loans that have gone into default.

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I don't even know what my question is. I guess I just wanted to make a point. The point is that while these provisions may seem to give a measure of relief—I'm sure they will—it's still leaving a lot of young Canadians out there who have gone to school and got these student loans who are having their state of mind affected by the collection companies harassing them.

So I would say that maybe the government might put in some sort of provision that would give the defaulted borrowers a little bit of harassment protection from the collection companies that work on behalf of the banks, because they really are quite ruthless. I've talked to them myself on behalf of students, and there are some pretty nasty people at the other end of the phone.

I didn't have a question. I'm sorry, I just wanted to make my point.

The Chairman: Are there any questions or comments? Mr. Crête.

[Translation]

Mr. Paul Crête: Pursuant to clause 100 of the bill, paragraph 15 (I) of the act in question would be amended to make provision for the Governor in Council

(I), prescribing the circumstances under which a loan or a certificate of eligibility may be denied to a student, or an interest-free period referred to in subsection 7 (1) may be terminated by the minister.

In the bill, the word "new" has been deleted. Why was this change made and is there some connection or other with the high number of bankruptcies being filed? Why does the current legislation stipulate that the Governor in Council may deny a student a new loan or a new certificate of eligibility, whereas the bill refers only to denying a student a loan or a certificate of eligibility?

While you ponder the answer, I will ask my second question. Part 11 of the bill concerns employment insurance premiums paid by employers who hire people between the ages of 18 and 24. What effect does the department believe this measure will have on job creation? To find out if we share the same view, what impact will this measure have in economic terms on a small business with 10 employees that proceeds to hire two young people just starting out at a salary of $20,000 per year? What kind of tax exemption are we talking about here compared to the salaries that will be paid to these individuals?

[English]

Mr. Andrew Treusch: On the question about Canada student loans, perhaps I could refer to my colleague, Ms. Jo Anne Denis, from Human Resources Development.

Ms. Jo Anne Denis (Acting Director, Learning Programs and Policy, Department of Human Resources Development): If I understood your question correctly, you're asking about whether or not the bankruptcy provisions impact on this clause 100. I would just explain that clause 100 is going to set out some criteria whereby the government or the minister may deny actually giving a loan to a person for the first time ever. If a person had previous student loans discharged in bankruptcy, there are provisions in place in the regulations already to deny that person a loan until certain criteria have been met.

I hope I understood your question.

[Translation]

Mr. Paul Crête: I understand that there is a connection with the shift from two years to ten years during which time debts cannot be included in a bankruptcy case. The government does not want the rights that a student loses on the one hand to be recovered somewhere else. They are closing the door firmly. Isn't that the reason?

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[English]

Ms. Jo Anne Denis: No, the purpose of clause 100 is totally unrelated to bankruptcy, actually. This clause is going into effect to deal with the situation of persons who have a history of severe credit abuse. The financial institutions have been raising this as an issue because a history of credit abuse is an indicator of default. So it's unrelated to the bankruptcy provisions.

[Translation]

Mr. Paul Crête: That was true under the current provisions, because we were dealing with new student loans. I can understand that a student may be denied a new loan if in the past, he has been guilty of abusing the program. In this bill, the word "new" has been deleted. Theoretically, if I understand correctly, a student who has never before applied for a loan may have his application rejected for a reason not specified in the bill, but which would most likely be spelled out in the regulations. Am I right?

[English]

Ms. Jo Anne Denis: Yes, that's it. On the basis of a credit history, we will deny a new loan or any loan to somebody who has never applied for a student loan before.

[Translation]

Mr. Paul Crête: It might even be the student's first loan application. Are you saying that you would have the right to deny a loan to someone who has never before received one solely because of his credit history?

[English]

Ms. Jo Anne Denis: That's right.

Mr. Andrew Treusch: You could consider the circumstance of an individual with a severe history of credit abuse. Perhaps they misrepresented their financial circumstances in prior loans. Perhaps they've had several credit cards and never paid the credit cards. Currently there's nothing under the legislation that allows the administrators of the student loan program to take this into account, and I believe this is a concern of several provinces as well as of the federal government.

The Chairman: Thank you very much.

[Translation]

Mr. Paul Crête: Do you have an answer to my second question?

[English]

Mr. John Manson (Senior Policy Analyst, Social Policy Division, Department of Finance): You were asking about the impact of the premium relief for hiring additional youth and how this would create jobs. The expectation is that this will provide some incentive for a firm to hire additional youth. In the case you were citing of someone hiring an additional young person at $20,000 a year, this would mean a saving of about $750 to the employer, compared with what he would have had to pay were this provision not in place. That's the incentive.

The Chairman: Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Dealing with part 11, I was doing some numbers, and it appears that based even on a $30,000 job in this age category, in the first instance it would provide an EI premium relief of $810 per year, and then in the year 2000 that would drop to a $780 employer premium a year. While this may sound good, I can tell you that after spending 25 years in business, there's no way $810 would encourage me to hire another employee if I didn't need one anyway.

That leads to my question: what type of research went into determining that this EI premium relief would in fact create jobs? When was this research done, and exactly how many jobs does your research say it will create in this age group?

Mr. John Manson: I wouldn't say it was research so much as some consultation. The spokesmen for small business and others have said that they have been quite pleased with the impact of the new hires program that has been in place last year and this year. This is modelled similarly to that, although it goes right up the scale of employers and is not limited to small businesses. To that extent, we have been told that we can expect a positive response.

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We know we're working at the margin here. We're not saying you get an employee for free. We're saying you get an employee with some incentive attached to him or her. For an employer who is wavering on whether he should or should not hire, someone who could use them but wonders if they really could be afforded, that's the employer who's going to make this decision.

Mr. Dick Harris: If I can, Mr. Manson, if my memory is correct, small business in Canada accounts probably for about 90% of the jobs in this country. I have no doubt that the Canadian Federation of Independent Business has reacted positively to it, but I would think the positive reaction from their business members would be that if they hired someone in that age group, certainly the $800 EI premium relief or tax relief would be well received.

The point I'm making is that I cannot for a moment imagine any small businesses that would make a decision to hire another employee based on getting this tax relief. Rather, if their business demanded that they hire another employee, they would certainly be willing to take advantage of this tax relief.

What specific research was done that points to some evidence that this EI premium holiday would in fact create jobs, that it would not simply be a nice break for small business owners who would hire someone in that category because their businesses demand that they hire? The purpose behind this, as the government has stated, is that it will help to create jobs. I want to know exactly how it would help to create jobs based on the research that was done before it was put into this proposed legislation.

Mr. John Manson: I can't tell you that we have any particular economic models or anything like that to give us any figures for the numbers of jobs created or expected to be created by this, because we don't have them. This is more in the nature of a challenge to the private sector, which has said it would create jobs. The government has put in place a measure that says the private sector wanted lower EI premiums because it responded positively to new hires. We have a particular group here that we think is worthy of assistance, and we're putting a measure in place to promote that. The ball is now in the court of the employers. It's up to them to respond positively.

Mr. Dick Harris: I understand that this age group is certainly dramatic need of some help. However, I can assure you that if I were to leave this meeting and call on a hundred small businesses in the downtown area, saying that I would give them $810 to hire another employee, the response would be that they'd only hire another employee when their businesses demand it, not because of your $800 cheque.

While the intentions may sound good, it's my contention that this simply isn't going to create jobs. I don't know why it's held out as a job-creating tool. You have just said that there has been no research and that there are no numbers, so although it will be a nice break for a small business or any business that hires someone, it's not going to be an incentive to hire. If you haven't done any research, you might want to.

Mr. John Manson: As I said before, we are conditioned to think of influences at the margin. I expect that, as you say, you may talk to a hundred employers and there may be only a few for whom this will make a difference. It is to say, though, that it will be for those employers who are thinking of hiring but may have decided they couldn't afford it or decided to postpone it that this will make the difference. It's all operating at the margin.

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Mr. Dick Harris: I suggest that the $800 isn't going to do it. It'll be the demand on their business and their opportunity to increase their business through another employee that makes the decision to hire someone, not the $800.

Mr. John Manson: No argument.

Mr. Dick Harris: Thank you.

The Chairman: We're going to go to Mr. Valeri, who wants to jump into this. Then we'll go to Ms. Redman and then have a supplementary from Mr. Riis.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman. I guess one would only hope that when his colleagues are calling for a sizeable reduction in the EI premium because it creates jobs, Mr. Harris would stand up in the House and put forward the arguments that he just put forward.

To shed some light and provide a broader context of what this particular initiative was in fact attempting to address, essentially it is the fourth element of the Canadian opportunities strategy. What it was meant to do was to try to provide some additional assistance to youth because of the challenge they face when they go out for employment. After going through the educational process and all the other elements of the Canadian opportunities strategy that provide them with assistance, they go for a job and the answer is: no experience, no job; no job, no experience.

So while I would agree with Mr. Harris that it is not going to be the overriding reason why a particular employer would hire a student, it may provide some additional incentive to provide some initial experience for a young person to thereby get a job.

It is really in the context of the Canadian opportunities strategy, this being the fourth element. It's not really out there as the job creator. Really, the job creator is going to be education. We believe skills and education is the greatest tool that young people need to have in their toolbox in order to get a job. This is just one of the four strategies put in place.

Mr. Dick Harris: In response, that's exactly my point. I think this money would be better spent in training, in educating and in apprenticeship programs that would equip students and young people to go out and get jobs that would require a higher level of skill in the marketplace. I don't think the $800 is well spent in this particular instance.

Mr. Tony Valeri: I don't think we'd be able to put an apprenticeship program in place for $800. This is one element of a much broader strategy—

Mr. Dick Harris: I realize that.

Mr. Tony Valeri: —which does provide the skills so that young people can go out there and get the jobs they're looking for.

Thank you, Mr. Chairman.

The Chairman: Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): My comments are very much along the line of Mr. Valeri's.

I would agree with Mr. Harris that I don't think this is enough to make anybody run out and create a position. However, it may cause somebody to target young people, and I think that's the intent of it. In itself, it will not create jobs, but what it might do is cause employers to target young people who are in that cycle of no experience, no job.

The Chairman: Thank you, Ms. Redman.

Mr. Riis.

Mr. Nelson Riis: Mr. Chairman, the business lobby always tells us that these payroll taxes are what's hindering employment opportunities. I see this as an issue for the government to test that model. Poor Mr. Manson here has to justify this, and as he says, there's little evidence to say this will work.

Perhaps what we should do to keep this discussion in mind is, in a year from now, invite the Canadian Chamber of Commerce and the Canadian Federation of Independent Business to come before us and tell us of a member or business that actually hired three or four young people because of this provision. If we can't find a single one in Canada, then we should probably abandon this initiative. But at least it's sort of telling them to give us some evidence that this kind of a payroll tax reduction actually is helpful.

The Chairman: Are there any further questions for the officials? Mr. Harris.

Mr. Dick Harris: I have a final comment, if I may.

I agree with Mr. Riis' comments that certainly payroll taxes have been a thorn in the side of Canadian business for many years.

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In response to Mr. Valeri, my point was that I think the money could be better spent, better directed. I don't think it's going to be enough incentive to hire anyone, and if the purpose of this was to give Canadian businesses a break on EI taxes—and I do support that—then I would think the government might want to look at the some $12 billion in EI surpluses that I understand are sitting in the form of an IOU right now. They might have given the employers overall EI payroll tax relief, rather than this little crumb that won't accomplish much.

The Chairman: Before we adjourn here, are there any questions in reference to part 13 I gather we have officials here who can deal with part 13. So there are no questions.

On behalf of the committee, I'd like to thank the officials. You've really been helpful in providing us with valuable information about Bill C-36.

Members of the committee, as you know, we will adjourn until Tuesday, at 9 a.m., in room 237-C, and the issues we will be discussing from witnesses will be part 1 and part 13—for your nightly reading.

The meeting is adjourned.