PARLIAMENT of CANADA

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Publications - October 31, 2002
 

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance


EVIDENCE

CONTENTS

Thursday, October 31, 2002




¿ 0935
V         The Chair (Mrs. Sue Barnes (London West, Lib.))
V         Ms. Carrol Lambert (First Vice-President, Canadian Association of Mutual Insurance Companies)

¿ 0940
V         Mr. Normand Lafrenière (President, Canadian Association of Mutual Insurance Companies)
V         The Chair
V         Mr. Peter Currie (Vice-Chairman and Chief Financial Officer, RBC Financial Group; Chair, Financial Affairs Committee, Canadian Bankers Association)

¿ 0945

¿ 0950
V         The Chair
V         Mr. Mark Daniels (President, Canadian Life and Health Insurance Association Inc.)

¿ 0955
V         The Chair
V         Mr. Everett Colby (Chair, Taxation Policy Committee, Certified General Accountants Association of Canada)

À 1000

À 1005
V         The Chair
V         Mr. Stanley Griffin (President and CEO, Insurance Bureau of Canada)

À 1010
V         Mr. Paul Kovacs (Senior Vice-President and Chief Economist, Policy Development, Insurance Bureau of Canada)
V         Mr. Stanley Griffin
V         The Chair
V         Ms. Francesca Iacurto (Director, Public Affairs, Insurance Brokers Association of Canada)

À 1015
V         Ms. Ginny Bannerman (Chair of the Board, Insurance Brokers Association of Canada)

À 1020
V         The Chair
V         Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance)

À 1025
V         Ms. Ginny Bannerman
V         Mr. Richard Harris
V         Mr. Everett Colby
V         Mr. Richard Harris

À 1030
V         Mr. Everett Colby
V         Mr. Richard Harris
V         Mr. Everett Colby
V         Mr. Richard Harris
V         Mr. Everett Colby
V         Mr. Peter Currie
V         The Chair
V         Mr. Scott Brison (Kings—Hants, PC)

À 1035
V         Mr. Peter Currie
V         Mr. Scott Brison

À 1040
V         Mr. Peter Currie
V         Mr. Scott Brison
V         Mr. Everett Colby
V         Mr. Scott Brison
V         The Chair
V         Mr. Scott Brison
V         Mr. Mark Daniels

À 1045
V         The Chair
V         Mr. Kelly Shaughnessy (Vice-President, Banking Operations, Canadian Bankers Association)
V         The Chair
V         Mr. Roy Cullen (Etobicoke North, Lib.)
V         Mr. Normand Lafrenière
V         Mr. Roy Cullen

À 1050
V         Mr. Peter Currie
V         Mr. Roy Cullen
V         Mr. Peter Currie
V         Mr. Roy Cullen
V         Ms. Francesca Iacurto
V         Mr. Roy Cullen
V         Mr. Everett Colby

À 1055
V         Mr. Roy Cullen
V         Mr. Everett Colby
V         Mr. Roy Cullen
V         Mr. Mark Daniels
V         The Chair
V         Mr. Kelly Shaughnessy
V         The Chair
V         The Chair
V         Mr. Shawn Murphy (Hillsborough, Lib.)
V         Mr. Normand Lafrenière
V         Mr. Shawn Murphy
V         Mr. Everett Colby
V         Mr. Shawn Murphy

Á 1120
V         Mr. Everett Colby
V         Mr. Shawn Murphy
V         Mr. Mark Daniels
V         Mr. Shawn Murphy
V         Mr. Peter Currie

Á 1125
V         The Chair
V         Mr. Everett Colby
V         The Chair
V         Ms. Maria Minna (Beaches—East York, Lib.)

Á 1130
V         Mr. Kelly Shaughnessy
V         The Chair
V         Mr. Normand Lafrenière
V         Ms. Maria Minna
V         The Chair
V         Ms. Carrol Lambert

Á 1135
V         Ms. Maria Minna
V         Ms. Carrol Lambert
V         Ms. Maria Minna
V         The Chair
V         Ms. Ginny Bannerman
V         The Chair
V         Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Á 1140
V         Mr. Everett Colby

Á 1145
V         Mr. Nick Discepola
V         Mr. Everett Colby
V         Mr. Nick Discepola
V         Mr. Everett Colby
V         Mr. Nick Discepola
V         The Chair
V         Mr. Richard Harris
V         Mr. Mark Daniels

Á 1150
V         Mr. Richard Harris
V         Mr. Mark Daniels
V         The Chair
V         Mr. Kelly Shaughnessy
V         Mr. Richard Harris
V         Mr. Peter Currie

Á 1155
V         The Chair
V         Mr. Bryon Wilfert (Oak Ridges, Lib.)
V         The Chair
V         Mr. Kelly Shaughnessy

 1200
V         Mr. Bryon Wilfert
V         The Chair
V         Mr. Everett Colby
V         The Chair
V         Mr. James Witol (Vice-President, Taxation and Research, Canadian Life and Health Insurance Association Inc.)
V         The Chair
V         Mr. James Witol
V         The Chair
V         Mr. James Witol
V         The Chair










CANADA

Standing Committee on Finance


NUMBER 011 
l
2nd SESSION 
l
37th PARLIAMENT 

EVIDENCE

Thursday, October 31, 2002

[Recorded by Electronic Apparatus]

¿  +(0935)  

[English]

+

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning. Bienvenue à tous. Welcome to Ottawa for this day of hearings. Pursuant to Standing Order 83(1), these are our pre-budget discussions, after the economic update yesterday.

    With us today are, from the Canadian Association of Mutual Insurance Companies, Normand Lafrenière, president, and Carrol Lambert, first vice-chair; from the Canadian Bankers Association, Kelly Shaughnessy, vice-president of banking operations, and Peter Currie, vice-chairman and chief financial officer of RBC Financial Group; from the Canadian Life and Health Insurance Association Inc., Mark Daniels, president, and James Witol, vice-president for taxation and research; from the Certified General Accountants Association of Canada, Everett Colby, chair of the taxation policy committee; from the Insurance Bureau of Canada, Stanley Griffin, president and chief executive officer, and Paul Kovacs, chief economist and senior vice-president for policy development; and from the Insurance Brokers Association of Canada, Francesca Iacurto, director of public affairs, and Ginny Bannerman, chair of the board.

    Welcome, all. Your briefs have been submitted to the clerk ahead of time. They've been translated and circulated amongst the members who have had them and read them. We'll be joined later on, in and out, by other members as they finish off with their meetings. We'll ask you to take eight minutes for your presentation, and we'll go in the order of the agenda, leaving time for questioning.

    We're going for two hours this morning, until 11:30 a.m., and I would invite the Canadian Association of Mutual Insurance Companies to commence.

    Who will start? Carrol Lambert, go ahead.

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    Ms. Carrol Lambert (First Vice-President, Canadian Association of Mutual Insurance Companies): Good morning, Madam Chair and ladies and gentlemen of the committee. We certainly appreciate the opportunity to speak at this hearing this morning. I am the new chair of the Canadian Association of Mutual Insurance Companies.

    It is imperative that our efforts be clearly focused on our owning members, all of whom are small rural Canadian mutual companies from coast to coast across Canada. Because our membership is purely Canadian-owned, -managed, and -governed, with any profits and results at the end of the year going back to those owning members, it is imperative that we make right choices in our business decisions. Any surplus funds or profits that our companies earn are either returned to our policyholders, they are used to purchase additional reinsurance coverages to make our companies stronger in rural Canada, or they are used for charitable purposes in our rural communities.

    There are two wholly owned reinsurance corporations located in Canada, one of which we own, Farm Mutual Reinsurance Plan, in Cambridge, Ontario. The other is Groupe Promutuel, in the province of Quebec. We have a total membership of 100 companies, with 10 in the eastern provinces, 32 in Quebec, 52 in Ontario, and 6 in the western provinces. Our total gross premium written for these 100 companies is in excess of $2.1 billion dollars. Our mutual companies across this country employ over 8,000 people in the rural communities, and that is very important to those of us who are outside of the city centres.

    Almost every one of our mutual companies has been in business for over a century, with some of them achieving the 160-year mark. Back in the old days, in the 1800s, stock companies did not want to insure rural properties because we were deemed to be high risk in nature. We didn't have the protective devices, the fire departments, etc., that were available in the city centres.

    Approximately 90% of Canadians as a whole live within a hundred-mile radius of the U.S. border. There are climatic and geographical changes occurring in the more populated areas. Historically, damage from hurricanes has been rare since 1954; however, weather patterns are changing as we continue to see climate changes throughout. You know we have had some severe storms in Canada in the last three years. In 1991, there was a hailstorm in Alberta that effectively caused $0.3 billion in damages. In 1996, the flooding in Saguenay, Quebec, cost in excess of $0.2 billion. Most recently, in January 1988, the ice storms that affected Ontario, Quebec, and the Atlantic provinces of Canada, cost in excess of $1.6 billion.

    Reinsurance is an important item in the recipe for success for property and casualty companies in Canada. Both Canadian and primary reinsurance markets posted dismal financial results in 2001. The combined ratio of the Canadian reinsurance market, according to the research council, went from 113% to over 119%. There are concerns about stability and the future. Losses from the terrorist activities of September 11, 2001, came amid the renewal season for reinsurance treaties. That struck just one more blow to the insurance industry and the capital requirements.

¿  +-(0940)  

    Rate increases are expected to continue in 2003 and possibly beyond. Multi-year programs are expected to be eliminated entirely in the marketplace in 2003. The ability to manage terrorism exposure was a major focus in 2002 and will remain so in 2003.

    We're here today to ask you to consider the opportunity for you to assist mutual companies and other Canadian-owned companies and reinsurance companies to become stronger in the future.

    As a mutual company, we purchase reinsurance protection through our own reinsurance corporation. They, in turn, purchase it on world markets. Ultimately, the bulk of the reinsurance premiums that are paid wind up in offshore jurisdictions such as Switzerland, where it is accumulated in a tax-free claims reserve that recognizes the need to fund these infrequent losses over time.

    Our goal is to develop a mechanism to allow these funds to accumulate in Canada, making the Canadian property and casualty industry stronger and the Canadian reinsurance corporations stronger as well, which will then benefit Canadian citizens. The benefits will be to provide income to Canadian governments; substantially strengthen Canadian insurers, and certainly mutual insurers; and inhibit the leakage of capital from Canada.

    With that, I will turn the rest of the presentation to Normand.

+-

    Mr. Normand Lafrenière (President, Canadian Association of Mutual Insurance Companies): As Mrs. Lambert said, the frequency and severity of catastrophic losses has increased significantly over recent years. In order to address them, the property and casualty insurers and reinsurers have a combination of reserve reinsurance and surplus to meet their obligations.

    The small risks are spread over a large number of insurers. Basically, a small risk is covered during the year when the catastrophe or loss appears. However, we don't spread the large risk out over a large number of insurers; we spread it out over time. A large risk is expected to pay for itself over a 30-, 40-, or 50-year period.

    Of course, this is a yearly contract, but we expect our client to renew their contract over a 40- or 50-year period, so we will recover the money that will be spent to cover our loss, if ever a loss occurs. That is the way it works for large risks.

    However, the tax system does not recognize that. The tax system taxes profit, which is revenue less expenditure on a yearly basis. So whenever a loss occurs, the money is not completely there to pay for that catastrophe.

    We buy reinsurance from other countries, and it is completely deductible. When that reinsurance is purchased from other countries, they put it into tax-free reserves. Countries like Switzerland and other European countries have them.

    That is where the money goes, and that money is used for investment purposes. If we had that money in Canada, it would allow us to build those reserves and basically build a surplus, as opposed to buying reinsurance from offshore countries. If we had that catastrophe reserve in Canada, it would be revenue-neutral. That is what we talk about in our document.

+-

    The Chair: Thank you.

    Next from the Canadian Bankers Association is Mr. Currie. Go ahead, sir.

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    Mr. Peter Currie (Vice-Chairman and Chief Financial Officer, RBC Financial Group; Chair, Financial Affairs Committee, Canadian Bankers Association): Thank you, Madam Chair and members of the committee, for providing the Canadian Bankers Association the opportunity to participate again in the pre-budget consultation process.

    My name is Peter Currie. I'm the vice-chairman and chief financial officer for RBC Financial Group and the chair of the CBA's financial affairs committee. I'm here with Kelly Shaughnessy, vice-president of banking operations for the CBA.

    The CBA is pleased to offer our industry's views on the two themes set out by the committee. We will also be discussing the impact of the current tax regime on the financial services sector in particular. Last, we want to highlight budget recommendations that have been set out in our written submission and that, we believe, will help ensure that Canadians can achieve the future they envision.

    By way of background, I'd like to state that Canada's banks take very seriously our commitment to Canadians, to our local communities, and to our national economy. The banks employ over 235,000 Canadians, with an annual payroll of about $15.8 billion. We have over 8,300 branches and more than 16,800 ABMs, in almost every community across this country.

    Canada's banks provide crucial financing and credit to Canadians and to Canadian businesses. At the end of last year, Canada's banks had over $296 billion in outstanding residential mortgages and more than $133 billion in personal loans. The banks are also the leading source of all business credit provided to Canadian companies, totalling more than $600 billion authorized last year.

    Finally, the six largest banks paid over $4.8 billion in taxes at all levels of government in Canada last year, including over $700 million in federal and provincial capital tax.

    In terms of the first theme, which is how Canada can best assure greater levels of economic prosperity to be widely shared by all Canadians, we agree with the committee that Canada needs to foster innovation, productivity, and a favourable business environment. We also wholeheartedly support the concept expressed by Minister Manley of making Canada a “northern tiger” in order to attract investment, skilled workers, research, and innovation.

    The CBA believes Canada's innovation policy must not only promote the production of R and D, but must also focus on commercialization of innovation. In order to succeed in this objective, the CBA believes the government needs to make the strategic investment of eliminating capital taxes, which penalize corporations for making the very investments in innovation that Canada is in fact seeking. Business leaders and economists across Canada agree that capital taxes work against innovation and ultimately against the nation's economic prosperity and quality of life.

    Similarly, the capital tax negatively affects productivity. Capital taxes discourage investments in technology and equipment, thus lowering productivity, as well as job creation and living standards. A 2002 report prepared by Ernst & Young notes that “This low level of investment has been identified as the single most significant cause of the low productivity of Canadian enterprises relative to their U.S. counterparts”.

    The CBA also believes Canada needs to take a page from other countries, such as Ireland, and develop a business taxation system that will not only keep jobs in Canada, but entice companies to come to Canada. In this regard, it's our position that Canada's business taxes need to be lower than the U.S.'s in order to level the playing field in our favour, as generally businesses will tend to locate where there's a larger market.

    Capital taxes are especially problematic, as no other major economy in the world levels an annual capital tax on its corporate sector. A tax on capital impairs both domestic and international competitiveness. This committee, in its report last year, recommended that the federal government encourage the elimination of the capital tax in recognition of the fact that capital taxes reduce investment, which leads to lower productivity, which, in turn, lowers our standard of living. Capital tax is not an effective way to collect tax revenue, as it impedes economic growth and lowers the economic welfare of society.

    In terms of the second theme, how the government can best assure the highest quality of life for all, the CBA believes the creation of an environment that encourages innovation and competitive employers such as financial institutions to locate in Canada will contribute to the prosperity and quality of life for all Canadians. The CBA agrees with the committee that ensuring a continuing high quality of life for Canadians means making decisions that positively address environmental concerns, the needs of vulnerable Canadians, and the sustainability of our communities.

¿  +-(0945)  

    Implementing a tax structure that would improve Canada's strength and competitiveness works hand in hand with such an agenda. Eliminating a tax that thwarts productivity and is especially costly to our economy would promote innovation and the growth necessary to produce the wealth that will support such government programs and services.

    With respect to the financial services sector in particular, I think it's important to remember that this industry operates in a globally competitive marketplace where capital is extremely mobile. Canada has the talent and expertise to be an industry leader--in fact a world leader. We're pleased with recent initiatives by the federal government to reduce the corporate tax burden and to make the tax system more neutral.

    We strongly encourage the government to forge ahead with planned corporate tax cuts. It's important to ensure certainty in order to encourage growth. Any delay in these tax cuts could hurt Canada's competitiveness and impede economic growth.

    Furthermore, such hurdles as the capital tax on financial institutions substantially weakens the case for maintaining and growing financial services in Canada. It's important to recognize the risk of a continued migration of financial investment and high-quality jobs to jurisdictions with more favourable tax treatments. We're therefore recommending that the government eliminate the remaining federal capital taxes; work with the provinces to reform their capital tax regimes; and accelerate the corporate income tax reductions.

    If Canada were to have a more favourable tax regime, conditions would be improved for maintaining existing investments and encouraging new investments by all businesses, including banks, in Canada. The net result will be an environment that will encourage growth in the economy, provide even more Canadians with opportunities to succeed, and ensure our collective standard of living.

    In conclusion, the CBA would like to reiterate that the elimination of capital tax would be beneficial for all industries and would foster the innovation and productivity necessary for Canada to succeed in the global economy. Both government and business, including Canada's banks, want to ensure greater levels of economic prosperity and the highest quality of life for all. We believe continued progress on tax reform is necessary to achieve these goals.

    Madam Chair, committee members, thank you again for providing the CBA with the opportunity to meet with you today. We'd be pleased to answer any questions you may have at the appropriate time.

    Thank you.

¿  +-(0950)  

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    The Chair: Thank you very much.

    We'll now move to the Canadian Life and Health Insurance Association.

    Mr. Daniels, commencez, s'il vous plaît.

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    Mr. Mark Daniels (President, Canadian Life and Health Insurance Association Inc.): Thank you, Madam Chair. With me is my colleague Jim Witol, who is vice-president of taxation and research at the CLHIA, and we very much appreciate the opportunity to be here.

    We've organized these brief remarks rather along the lines of those of our colleagues from the banks, and that is by working with the committee's two key objectives: how we can best ensure greater levels of economic prosperity to be shared by all Canadians, and how the government can best assure the highest quality of life for all. To that end, we've provided for the committee a submission identifying several government initiatives that we believe would contribute to attaining the committee's objectives.

    Turning first to the question of tax fairness—and on this item, I realize you've heard it from the CBA and you've heard it from us; this has happened for a number of years in a row, but I think it points to the importance of the issue—the committee, in a previous report, concluded that:

the level of taxation of Canadian financial institutions is damaging to their competitive position and is increasing costs to Canadian users of financial services. It is urgent that the government introduce a method of taxing financial institution that is fair, appropriate and reflects the real economic activity.

    Pursuant to these conclusions, the Minister of Finance, in his February 2000 budget, reconfirmed the government's commitment to review financial institutions' capital taxes. As part of this review, Madam Chair, the government has announced that the temporary additional capital taxes on banks and insurance companies will expire. In this context, we would like to commend the committee for having previously supported action on this front.

    One significant, remaining tax concern of ours, however, is the way the large corporations tax, or LCT, applies to the industry. First of all, although the part I surtax is creditable against the LCT, under normal circumstances the surtax is not nearly high enough to fully offset the large corporations tax, so the LCT becomes a permanent capital tax burden on life insurers.

    Second, the LCT includes real estate in its base for financial institutions. This means capital invested in real estate gets taxed twice, which is a significant disincentive to invest in real estate.

    In this context, Madam Chair, to foster more competition and to avoid penalizing solvency in the financial services industry, we would encourage the committee to again recommend that the large corporations tax be eliminated or, if that's not possible in the short run, that the rate be reduced so that corporations can fully benefit from reduced income tax rates. Also, to eliminate the double taxation of financial institutions' capital, tangible properties should be excluded from the LCT base.

    Turning to another objective, Madam Chair, access to post-secondary education is an essential component in meeting the committee's objective of providing Canadians with the highest quality of life. Indeed, post-secondary education is an area in which this committee has made important recommendations to enhance access, provide tax support, and encourage education-related savings.

    In line with the committee's recommendations, Madam Chair, the federal government has taken a number of steps in this critically important area, including creating the Canada education savings grant, in connection with registered education savings plans, or RESPs.

    An initiative that would further improve access to post-secondary education would be to broaden the range of financial institutions permitted to offer RESPs directly. The current legislation is outdated in that the Income Tax Act requires that RESPs be legally structured as trusts. The continuing requirement that RESPs take the legal form of trusts is inappropriate for today's plans that do not pool investments and benefits beyond the family.

    The current trust structure precludes life insurers from offering RESPs. The industry therefore urges the committee to recommend that the legislation relating to RESPs be amended by broadening it to permit non-trusteed contracts, in a manner quite consistent with other savings vehicles like RRSPs and RRIFs. It should be noted, Madam Chair, that this proposal would not result in any new government tax expenditures.

¿  +-(0955)  

    With respect to the committee's goal of providing an environment where all Canadians can enjoy the best quality of life and standard of living, we would recommend two measures. The first deals with the ability to fund an adequate level of retirement income on a tax-effective basis, which again has been a familiar theme around this committee over the years. RRSP contribution limits in Canada remain significantly below those of nations with which we compete. Plans to keep Canada's RRSP contribution limits fixed until 2004 will mean further erosion in real tax incentives.

    Similarly, pension benefit limits for defined benefit plans have been frozen since 1976 and are not scheduled to increase until 2005. In order to better serve the retirement goals of Canadians, the industry urges the government to increase the RRSP contribution limit to $17,000 immediately, and ultimately to $27,000. The RPP defined benefit limit should be increased to $3,000 per year of service over a five-year period.

    The second quality of life issue I would like to address, which again this has come up before at this council, is attendant care medical expenses for the elderly and disabled. At present, attendant care costs qualify for medical tax expense credit, but only up to $10,000 annually. This limit has not been adjusted for a number of years and is now unrealistically low. We would recommend a substantial increase in the limit or, preferably, elimination of the limit altogether.

    That concludes my prepared remarks. Once again, let me thank you very much for the opportunity to appear before you and your colleagues.

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    The Chair: Thank you very much.

    Next, from the Certified General Accountants Association of Canada, is Mr. Colby. Go ahead.

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    Mr. Everett Colby (Chair, Taxation Policy Committee, Certified General Accountants Association of Canada): Thank you, Madam Chair.

    Once again it's a pleasure for CGA-Canada to participate in the committee pre-budget consultations. I'd like to congratulate you on your re-election.

    Over the course of the next few weeks, you will hear a lot of concerns and priorities of Canadians. The task of steering the course for the next federal budget is not an easy one. It is, however, made easier as Canada's economic and fiscal indicators remain strong. Canada is the leader in real economic growth among the G-7 countries and, more recently, in job creation rates. A budgetary surplus, coupled with the reduction of net debt, places Canada in an enviable position.

    I would like to talk today about the priorities of certified general accountants. The Speech from the Throne makes a firm commitment to balance budgets, discipline spending, a declining ratio of debt to GDP, and fair and competitive taxes. Our members support this approach. Yet the speech also sets out an ambitious list of priorities. It addresses climate change in the environment, health care, foreign aid, poverty, childhood development, and aboriginal issues. Of specific interest to CGA-Canada and its members are the issues related to urban infrastructure, skills and learning, regulation, and trade.

    CGA-Canada's written brief sets out 10 specific recommendations. I would like to highlight four issues for you here today. First, there has been much speculation about the possibility the federal government may be considering a number of special levies to pay for certain specific new programs. Programs would include the possibility of a new health tax, an urban infrastructure tax, an energy tax, and so on. CGA-Canada is fundamentally opposed to the introduction of any new special levies or earmarked taxes. The concern relates to the issue of accountability.

    Our concern, which we believe is shared by many Canadians, is that the funds are collected based on a new and perceived need and then just turned into general revenues. There is no clear relationship between the funds collected and how they are actually spent.

    A good example of this is the air travellers security levy that came into effect on April 1. No one can dispute the importance of making air travel more secure. There is, however, no traceable connection between the $24 tax on return flights and improved airport security. We believe the practice of earmarking taxes should be avoided unless a clear and transparent connection can be made between the money raised and related improvements or dedicated expenditures.

    The second point I would like to bring to the committee's attention this morning relates to lifelong learning. Lifelong learning is a necessity if Canada is to prosper in the world economy. Learning is a key component for progress, productivity and innovation, terms you've heard many of the witnesses here use, which are priorities to all Canadians. The education tax credit provides a much-needed incentive for individuals to improve their knowledge and skills.

    However, the Canada Customs and Revenue Agency has ruled that some students are ineligible for this credit. Their position states that students are ineligible if the education program is directly connected to their employment. The interpretation discriminates against students who are trying to improve their skills while working, by disqualifying them as soon as they acquire employment related to their studies. At the same time, it provides benefits to some who may be merely studying for personal interest. Students like those in the CGAA program of professional studies, and possibly others, are at a major disadvantage here. This could not have been what Parliament intended.

    CGA-Canada also believes that the government should support mid-career individuals in their personal efforts to maintain a higher level of skills and competence that will help them remain competitive in an increasingly complex world.

    We recommend that, as a promising way to support Canadians in their personal efforts to engage in lifelong learning, the government consider the development of a registered individual learning account. An individual would be able to receive a tax deduction for contributed money to the plan to help fund the cost of their own future education and skills development. In addition, corporate contributions to such a plan could be seen as a promising employment incentive.

À  +-(1000)  

    Madam Chair, I would now like to turn to an area that remains a high priority for our members and indeed Canadians from coast to coast--namely, the issue of health care. Medicare is Canada's most cherished institution, and Canadians deserve to have clear answers to their questions on how to preserve and enhance the health care system. Senator Kirby's recommendations issued last week, as well as Mr. Romanow's report, expected shortly, are helpful contributions to the public debate.

    In her recent report, the Auditor General noted that the federal contribution to health care is still unclear. She said that any “meaningful participation in the current debate on health care depends on a better appreciation of the federal contribution” to medicare.

    We agree. It's an issue of accountability.

    On one side of the issue, the provinces are saying that federal support under the Canada health and social transfer amounts to only 14% of health care costs. Conversely, the federal government says the figure is really 36%. Canadians are understandably confused.

    The Department of Finance says it will transfer some $35.6 billion to the provinces and territories this year under the CHST. Of this amount, approximately 46%, or $16.5 billion, is in the form of tax. A tax transfer in this context is a reduction in federal income tax and a corresponding increase in provincial and territorial income taxes. But this committee is quite familiar with the funding mechanisms of the CHST. We believe the so-called tax transfer should not be regarded as a federal contribution to the provinces and territories. In reality, it is simply a 25-year-old federal tax cut. Moreover, the tax transfer is not a federal budgetary outlay.

    CGA-Canada believes Canadians would be better served if federal-provincial-territorial disagreements were speedily resolved. What passes for a debate about health care is really a dispute about revenue sharing.

    Finally, Madam Chair, our presentation would not be complete if I did not address the very serious events of the recent years that have significantly undermined investors' confidence in capital markets. Policy-makers and legislators, market participants and securities regulators, accounting organizations--all have been grappling with the effects of the post-Enron world. We welcome the government's commitment to continue working with all stakeholders to bolster investor confidence and improve the efficiency and integrity of Canadian capital markets. The core value underscoring our position is that as a profession we need to examine the Enron fallout and propose remedies that serve the public interest. That must be our highest priority.

    We acknowledge the important work of your colleagues in the other House, yet we hope to have the opportunity in the near future to discuss with this committee how such remedies could be implemented. The right policy responses are crucial to restoring public confidence.

    On that note, as a closing comment, I would like to point out that we're very concerned about investor confidence in the capital markets. Likewise, the government should consider corporate governance a high priority as well, as the members of your investing public are the taxpayers.

    Madam Chair, our recommendations are straightforward. We'd like the Minister of Finance to make a clear and unequivocal commitment to a balanced budget, paying down the debt, and not increasing taxes. Earmarked taxes are not acceptable to us. The federal government should extend the education tax credit to all students registered in qualifying programs and introduce registered individual learning accounts for mid-career individuals. Finally, in order to improve transparency, the tax transfer under the CHST should no longer be treated as a federal contribution to the provinces and territories.

    I would like to thank this committee for this opportunity and look forward to your questions.

    Thank you.

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    The Chair: Thank you very much.

    From the Insurance Bureau of Canada, Mr. Griffin. Go ahead, sir.

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    Mr. Stanley Griffin (President and CEO, Insurance Bureau of Canada): Thank you, Madam Chair, ladies and gentlemen, and good morning. My name is Stan Griffin, and I am president and chief executive officer of the Insurance Bureau of Canada, the voice of Canada's private insurance companies. With me today is Paul Kovacs, IBC's senior vice-president and chief economist.

    IBC member companies account for more than 90% of the car, home, and business insurance sold in Canada. This year, our industry will spend $20 billion to help Canadians repair their homes and vehicles, replace stolen goods, and secure the medical rehabilitation that they require following motor vehicle collisions. Our industry provides jobs to over 100,000 people in communities, large and small, right across this country.

    IBC commends the government for restoring the nation's finances. Sound finances are essential, as they provide the foundation for innovation and growth. Equally important is the fact that they provide the base for the public and private investments that we need. A blend of tax relief, debt reduction, and targeted program spending can maintain a state of balance in the nation's finances, even while governments of many other G-8 nations struggle with budget deficits. Fiscal actions taken over the past ten years have been an important support as Canada has enjoyed its longest period of economic expansion since the 1960s, while inflation and interest rates have remained low. It is important that Canada stay the course.

    Canada's finances are at their healthiest in many years, but the property and casualty insurance industry is not. In fact, we experienced our weakest earnings on record last year, and this year may prove to be even worse. Declining investment markets, combined with an alarming increase in insurance claims, have been a great challenge for our industry. In addition, the cost and availability of reinsurance to the Canadian insurance industry, largely the result of events of September 11, 2001, remain an issue.

    The industry is active on a number of fronts as we seek to restore our financial health. Today, we'd like to highlight two issues that are detailed in our submission to this committee: injury prevention and disaster loss prevention. I will speak briefly about the injury prevention initiatives, and Mr. Kovacs will speak about disaster loss prevention.

    Injuries are the leading cause of death for Canadians under 45. Our roads and playgrounds need to be safer and can be safer. Canadian and international research demonstrates that injury prevention programs can be very effective in reducing fatalities, injuries, and health care costs. IBC is calling upon the federal government to lead a national initiative to prevent injuries.

    The scope of a national injury prevention program should be injuries from all sources, including falls, motor vehicles, sports, and consumer product use. The program should enlist the participation of the provincial governments, workplace safety organizations, health agencies, insurers, consumer product manufacturers, academics, and the general public.

    SMARTRISK, an internationally recognized authority on injury prevention, has found that the majority of injury fatalities are preventable. The federal government is well positioned to lead an assault on injuries in Canada. The payoff for reducing injuries, in terms of lower health care and other costs, is potentially enormous. One example from the recent history of road safety will serve to illustrate the size of the potential savings. Following its introduction of graduated driver licensing, the Ontario government reported that fatalities and severe injuries involving novice drivers were reduced by 27%, and overall savings were estimated at $59 million.

    The insurance industry continues to do its part. We have been leaders in the battle to reduce drinking and driving, increase the use of seat belts, and introduce graduated licensing. IBC's current road safety program highlights simple actions that drivers can take to reduce the impact of collisions, such as the proper use of headrests. Very recently, IBC also provided financial support to SMARTRISK to support development of a detailed proposal for a national injury prevention program.

    Industry actions alone, however, are not enough. That is why we invite the committee's support in urging the government to invest in a national injury prevention program. Injury prevention can be a critical element to help preserve the universality and affordability of Canada's health care system.

    Paul Kovacs will now briefly describe our ideas about disaster prevention.

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    Mr. Paul Kovacs (Senior Vice-President and Chief Economist, Policy Development, Insurance Bureau of Canada): Canadians are at risk to the threat of natural hazards, including earthquakes, floods, and severe weather. Hazards do not need to become disasters if we're prepared, but Canadians need to do much more to be prepared.

    In the 1990s, disasters killed more than 650,000 people around the world and caused more than a trillion dollars of losses. Disaster losses have been doubling every five to ten years since at least the 1950s. Losses are rising because of rapid growth in our major urban centres, our aging infrastructure, and our changing weather. The discussions about the Kyoto accord show the scientific consensus that we are going to experience an increase in the frequency and severity of extreme weather events. Indeed, this is already happening.

    The Insurance Bureau of Canada and the members of this committee have been leaders for a number of years in advocating actions that can be taken to better manage extreme events. IBC's Canadian strategy for disaster prevention, for example, sets out three priority issues.

    First, Canada needs to establish a culture of preparedness. This is where we embrace the many actions that we, as individuals and communities, can take to be better prepared for these sorts of hazards.

    Second, we need to actively invest in protective infrastructure. We can adapt our society so we can live with these hazards.

    Finally, there needs to be a national commitment that as Canadians go abroad in our many activities to help around the world, we are bringing these thoughts about disaster prevention into our international efforts.

    The insurance industry remains a leader in this field. We pay disaster losses, sometimes many hundreds of millions of dollars. We've been advocating improvements in public policy, and we've been investing in disaster loss prevention research. The industry, for example, has established the Institute for Catastrophic Loss Reduction at the University of Western Ontario, where we've published a large number of research papers and hosted a number of workshops and public education initiatives.

    Industry-supported research and education are not enough. We urge the federal government to direct dedicated funds to projects that will reduce the vulnerability of Canadian communities, their citizens, and infrastructure. In the past, this committee has been outspoken in its support for investment in disaster prevention. This helped secure the federal government's 2001 commitment that is moving toward the establishment of a national disaster mitigation strategy. We welcome the committee's continued support in urging the government to turn this commitment into action.

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    Mr. Stanley Griffin: Madam Chair, this ends our formal remarks. We're happy to have the opportunity to participate in these consultations, and we look forward to any questions you may have.

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    The Chair: Thank you very much.

    Next are representatives from the Insurance Brokers Association of Canada.

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    Ms. Francesca Iacurto (Director, Public Affairs, Insurance Brokers Association of Canada): Good morning, Madam Chair and committee members. On behalf of the Insurance Brokers Association of Canada, we thank you for the opportunity to present our views on what we believe should be included in the next federal budget.

[Translation]

    My name is Francesca Iacurto and I am the Director of Public Affairs for the Insurance Brokers Association of Canada. I am accompanied by Ginny Bannerman, the Chair of the Board. She is also a property and casualty insurance broker from the Calgary area.

    ABAC is the national trade organization that brings together the 11 regional members' associations of property and casualty insurances brokers in Canada. These associations represent approximately 25,000 insurances brokers in every community across the country. Most insurances brokerages have about 10 employees. Insurances brokers are the principal distribution channel for property and casualty insurance companies. This insurance primarily covers real estate, automobiles and other non-life assets.

    Brokers provide an array of risk management services to their clients. Among other services, they arrange contracts of insurance with various insurers. They interpret the legal complexities of insurance policies for them, provide them with unbiased advice and assist them in dealing with the insurance company in the event of a claim.

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[English]

    The client base of brokers is very diverse, ranging from individual clients to large commercial accounts. Approximately 70% of personal and commercial insurance policies in the country are purchased through brokers. This represents about $17 billion of written premium.

    I will now turn to Ginny, who will complete our presentation.

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    Ms. Ginny Bannerman (Chair of the Board, Insurance Brokers Association of Canada): Thank you.

    I'll open my remarks by giving IBAC's views on the overall fiscal agenda before turning to specific matters of concern to insurance brokers.

    At the outset, IBAC commends the federal government for its conviction and performance in soundly managing the economy in recent years. We recognize that this was not an easy task, particularly in light of last year's economic slowdown and the challenges presented by the events of September 11. There's a lot of great news in Canada's five consecutive budget surpluses, most recently with the announcement of an $8.9 billion surplus for the last fiscal year. The tangible progress made in the reduction of both income taxes and the national debt are also accomplishments of which to be proud.

    However, to the extent that there can be bad news about all of this economic good news, it is that the federal government is facing increasing pressures to spend Canada's hard-earned gains. One of our chief messages to you today is that the federal government should not give in to these pressures to spend. Rather, we believe the best way to ensure Canada's prosperity and a higher standard of living for all of us is to assign top priority to further reductions in our tax and debt burdens.

    It follows from this that we would not be in favour of proposals to increase the overall tax burden of Canadians, for whatever the cost. Specifically, we strongly urge this committee to endorse Minister Manley's position that there will be no increase in the GST rate to finance any new spending initiative. We believe Canada has come too far to veer off the path of fiscal prudence we've been in for the past few years. We can't give up on all our hard work now.

    Now I'll turn briefly to four specific issues of concern to insurance brokers.

    The first is the $200,000 small business income tax threshold. As Francesca mentioned, most insurance brokerages in Canada have about 10 employees and most have taxable earnings of less than $200,000. We are grateful that the federal government supports some of the challenges faced by small businesses through special fiscal measures. However, we are increasingly concerned that this threshold, which has not been increased since 1982, is an incentive to keep taxable income low and deters brokerages from getting bigger. We therefore recommend an increase in that threshold and, in keeping with the spirit of making Canada a more prosperous nation, a decrease in the applicable taxation rate.

    The second item on our wish list would be for the federal government to provide members of the SME community, such as insurance brokers, with improved means to save for retirement. RRSPs are the major retirement planning vehicle for the vast majority of insurance brokers. Unfortunately, however, at a time when Canadians should be encouraged to invest in private retirement savings, it is becoming increasingly difficult for them to do so. We see two factors as being responsible for this. One is the contribution limit, which has been frozen since 1996, and the other is the absence of inflation indexation. We therefore recommend that RRSP contribution limits be increased to correspond to the new threshold of the top income tax bracket and be fully indexed to inflation.

    IBAC's third area of concern relates to EI premiums. While we are pleased that premiums have been in a downward trend in recent years, we believe there is further scope for accelerating this movement because of the growing size of the surplus in the account. Moreover, because there have been considerable changes to the types of benefits paid to claimants over the years, we would also like to see a gradual reduction in the EI multiplier in order to reach a 50-50 split between employee and employer contributions.

À  +-(1020)  

    Last, I'll take the opportunity to make you aware of a growing concern for our industry: labour shortages. Many insurance brokers are currently experiencing serious difficulties in finding qualified staff. There are many factors responsible for this shortage, including provincial occupational restrictions and the wages that brokerages can afford to pay, particularly in relation to larger employers that vie for the same staff.

    We understand that the federal government is limited in its ability to assist in these respects. That said, there is a way in which the federal government could be helpful by fully taking into account the realities of the SME sector when devising labour and employment policies.

    To cite one example, the recent increase in EI parental benefits has been quite difficult for insurance brokerages to cope with. While the loss of the key employee can result in a hardship for any business, the effects on a small business are just that much greater. A brokerage can rarely recruit from within to fill the vacant position. Similarly, it has very little flexibility to reorganize its internal operations to deal with the staff shortage. The licensing requirements of the profession add to the difficulty in finding short-term replacement staff, especially for positions that are not permanent. This problem is particularly acute in small towns, where many brokerages are located and where the pool of available labour is restricted right from the outset. As you can imagine, any further expansion of EI benefits would aggravate the already tenuous situation insurance brokerages face in recruiting and retaining qualified staff.

    As you consider the various measures that should be included in the next budget, we urge you to pay special consideration to the realities that insurance brokers and other small businesses face.

    Madam Chair and committee members, we thank you for the opportunity to appear before you today, and we will be pleased to answer any questions you may have.

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    The Chair: Thank you very much.

    We're going to do one round of ten minutes. The order will be Mr. Harris, Mr. Brison, Mr. Cullen, Mr. Murphy, Ms. Minna, and Mr. Discepola.

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    Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, all, for your presentations. Your literature is excellent. I'll talk to Ms. Iacurto and Ms. Bannerman first, because their presentation is fresh in my mind.

    I note your comments somewhat praising the government for its balancing of the budget over the last five years. Ms. Bannerman also had some comments about the EI fund. I think it's important to point out that, from 1993 to 1996, and until the government did finally balance its budget, there were tax increases in a significant number of areas that increased the tax burden on Canadians. Tax cuts were then announced in the 2000 or 2001 budget and they gave a lot of that tax back, but the fact is that, in the way we look at it, the government was just giving back what they had assessed in the early years of their reign.

    The one thing the government has really been dragging its heels on is the EI surplus. I think it's estimated at around $30 billion right now. That money has gone into general revenues and has certainly helped the government, in a big way, to balance their books and, incidentally, to find money for new spending programs that have been in their budget ever since they came to power.

    Experts, economists, and actuaries say a rainy day fund of about $15 billion would be fine. I see in your numbers that you talk a little bit about $5 billion to $10 billion, but let's give them the benefit of the doubt and say about $15 billion. They say that about perhaps $1.90 or $1.85 would be enough to maintain that rainy day fund while also maintaining the government's current obligations, but the government has refused to go down that low. I suppose the extra revenue coming in every year is kind of attractive for them.

    Payroll taxes are a huge part of running a business in this country, so I wonder if you might just comment on the EI surplus, the payroll taxes, and what the actuaries have said about maintaining the obligations and the rainy day fund, just so that we can get the message out again and once more on the record.

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    Ms. Ginny Bannerman: We covered that in our brief, so I'll take some excerpts from it. For small business people the multiplier is the concern. It currently stands at 1.4 times more for employers than what it is for employees.

    It's our understanding that EI was originally established for employees who find themselves out of work for reasons brought about by the employer, such as layoffs or a shortage of work. In recent years, though, EI has been accessed more by employees taking time off from work through measures that weren't employer driven--maternity leave and that sort of thing. For that reason I infer that employers are paying the bulk of the fund, being 60%, when maybe the original intention of the pool has changed over the years.

    Our finding is that a $5 billion to $10 billion surplus would be sufficient to operate the program through a recession. So I think we would happily concede $15 billion. I would just urge that the dollars going into the program more closely reflect the dollars being paid out.

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    Mr. Richard Harris: Thank you.

    I'd like to direct a question to Mr. Colby. You talked about corporate governance in your presentation. Recently, the industry itself set up an accountability board with the chartered accountants and the securities people. That announcement was welcomed, I think, by Canadians who put money away in whatever way they can, particularly in the markets. The Deputy Prime Minister said he was pleased the board had been established, and he provided a wish list of what he would like to see the board address to ensure that we have safety in our investment process. He also said that if the board didn't achieve what he and his government believed to be a good goal, he would not hesitate to form an arm of the government to ensure that good governance was prevalent.

    How do you think this accountability board is doing at this time? Do you think that what they've laid out as what they want to achieve is enough, without having the government getting involved in overseeing corporate governance?

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    Mr. Everett Colby: The board hasn't actually done much yet. It's still in its formation stage. So, unfortunately, I can't comment on its performance.

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    Mr. Richard Harris: I was referring to what they want to accomplish. Do you think it's going to achieve the goals the government is looking for?

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    Mr. Everett Colby: I think it's a good first step. I think there's more we need to do. We need to look at the harmonization of international accounting standards. I think there's an issue, which we have addressed here, of having more stakeholders involved in the standards-setting process, including members of the general public. These are concepts that are currently being envisioned by this board. As it moves ahead, we'll see whether that's enough. I don't think it will be. I think it will take more than that. I think the federal government has a duty to step in, just as other governments have done, to ensure that the investing public is protected.

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    Mr. Richard Harris: Have you looked at the Sarbanes-Oxley bill in the U.S.?

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    Mr. Everett Colby: I've seen some parts of it.

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    Mr. Richard Harris: Maybe you or someone else might comment on whether you think a lot of elements of that bill could be tailored to be applicable to Canada.

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    Mr. Everett Colby: I like the fact that there is more responsibility placed on corporate Canada, not just on the auditors. The whole focus post-Enron was initially on auditors, and quite frankly, there was a lot of management fraud involved, and corporate governance goes beyond the auditors' responsibility to corporate Canada as well. I think corporate Canada is addressing that, but it has not received a lot of attention in our media and public debate over this yet, and it should.

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    Mr. Peter Currie: In relation to your question, Mr. Harris, on Sarbanes-Oxley, speaking as the CFO of RBC, I've looked at it extensively because we are listed in both Canada and the U.S.A. on the capital markets. We issue our statements according to both Canadian and U.S. generally accepted accounting principles. Our company's view is that Sarbanes-Oxley is an interesting piece of legislation. It introduces and formalizes some elements of governance that, quite frankly, top-tier companies have been adhering to for years. I think it's a good reminder of what's necessary. I think there is some interesting direction there regarding the qualifications of board members, the segregation of responsibility of chairman from that of CEO, the definition of the role of an audit committee, the alignment of the role of auditors with the audit committee as an extension of the shareholders interests.

    The one thing I would encourage, though, when the Government of Canada and official Ottawa are looking at this, is this. The real essence of Sarbanes-Oxley, in my view, is to find a way to assign blame and to embed that in legislation. Again in my view, you can't legislate ethics, and that's what it boils down to. I think there are some elements of Sarbanes that are useful, I think there are some elements in it that are very restrictive and will make consultants, such as accountants and lawyers, lots of money in consulting fees, and I don't think that's the intent. Certainly there should be more explicit governance. Should the senior officers of public companies be held accountable for the reliability of their results? Absolutely. But my view is that you don't do that through embedding it in a series of legislative steps; you do it through strong enforcement. In the United States I've encouraged the SEC to focus more on enforcement than on rule-making, and in Canada I would do the same thing.

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    The Chair: Thank you very much.

    Mr. Brison, ten minutes.

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    Mr. Scott Brison (Kings—Hants, PC): Thank you, Madam Chair.

    Thank you to each of our witnesses today for their assistance in providing us with better information that can help us when we're putting together our recommendations for the minister.

    My first question concerns the regulatory framework in the financial services sector. In 1993 Canada was actually ahead of the U.S. in competitive regulatory framework for the financial services sector. We actually had a less onerous burden for the financial services sector in 1993 than that in the U.S. Since then, particularly with the last vestiges of Glass-Steagall gone in the U.S., it is one more area of competitive policy where the U.S. has gone ahead. Canada has actually become less competitive, and the clarity in the financial services sector in respect of the regulatory framework has disappeared. From 1994 to 1997 nothing was done to further deregulate the financial services sector. The MacKay report, I believe in 1998, was a great report that, in my opinion, was butchered by those of us on the political side, not all of us on the political side, but by the government, which chose to draw from that report the politically palatable and ignore the positive public policy steps forward.

    But then with Bill C-8 we responded, and I thought we had achieved a little bit of clarity with regard to, for instance, the bank merger process. It was a step in the right direction, with at least some level of clarity. Yet we still have such a remarkable level of confusion about this whole issue in Canada. More than in any other sector, there's absolutely no clarity on this.

    Last week the finance minister sought a greater level of clarity, asking our committee to recommend some changes on the regulatory burden of the financial services sector. Would you agree with the finance minister that there needs to be some greater clarity on that whole issue of merger?

À  +-(1035)  

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    Mr. Peter Currie: I'm going to answer your question in two ways, on behalf of the CBA and on behalf of RBC.

    First, on behalf of the CBA, we believe combinations, be they mergers or acquisitions, are a viable business strategy. All our members would subscribe to that, and we would also subscribe to the theory that there needs to be more clarity and more precision about the process forward.

    On behalf of RBC, we've gone on record as saying we not only agree with the theory of bank combinations in this country, we believe they're actually quite advantageous to the development of a national financial services policy and will be essential for Canadian financial services companies to prosper over the next decade or two, as we see more consolidation, not just globally, but particularly continentally.

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    Mr. Scott Brison: When the finance minister found religion last week and determined that there should be greater clarity in the regulatory system, it had a significant impact on the capital market's treatment of bank stocks. There was a 3% jump in bank stocks in one day. Subsequent to that, when the capital markets learned of the Prime Minister's edict against bank mergers just prior to Thanksgiving, bank stocks dropped about 3%. Given the degree to which Canadian investors, whether they're mutual fund investors or employees whose union funds invest in the Canadian equities markets, with bank stocks inherent in that, would you agree that this level of confusion about this government's policy on banks is threatening and reducing the retirement incomes of Canadians?

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    Mr. Peter Currie: That may be a conclusion some people could reach. It's not the conclusion I would reach at the moment. I think there are volatility elements in the market that drive stocks of every company up and down. Some of it is based on speculation, some of it is based on rumour. In the course of the past year we've seen the relative value of stocks of Canadian banks both increase and decrease for a variety of reasons, including loan loss reserve's exposure to foreign markets and all that sort of thing.

    I think people investing in Canadian banks are doing it for the longer term, and I would encourage folks who are investing in Canadian banks to look at the longer reach and not focus so much on traders.

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    Mr. Scott Brison: Perhaps after the next election.

    With Sarbanes-Oxley and the appropriate response in Canada, Mr. Colby mentioned specifically the importance of governments setting a standard in corporate governance. Would you agree that activities with regard to advertising contracts going to cronies and the Prime Minister's involvement with the Business Development Bank at the Auberge Grand-Mère have reduced this government's ability to enforce any code of ethics on corporate Canada to some extent?

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    Mr. Everett Colby: I don't believe I said the government should necessarily be setting accounting standards alone, and I concur with the Bankers Association's comments, in that I don't think you can legislate ethics, which is what you're talking about with these advertising contracts. We all have to guide ourselves with our own moral beliefs when it comes to ethics, and I believe corporate Canada has been doing a good job.

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    But as a professional accountant, I don't believe the focus in this whole issue should just be on accountants. Good corporate governance includes corporate Canada, and although the public accountability board that Mr. Harris mentioned is a good start, corporate Canada and the accounting profession getting together as a group on things like accounting standards and ethical issues leaves a lot of room for public debate. And it's yet to be seen what the final method for enforcement or legislation will be.

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    Mr. Scott Brison: One of the issues that has been around Canadian public policy for probably 30 years now is the idea of moving toward a national securities commission. That idea has largely been one that capital market participants, institutional investors, and companies trying to raise capital have been promoting. But the corporate governance crisis and the impact on the capital markets actually make this idea relevant to the retail investor in many ways, whether that retail investor is in Quebec, Alberta, Ontario, or Nova Scotia.

    Shouldn't that be one of the public policy items that we ought to be revisiting now, not just from the traditional perspective of a national securities commission making it easier for Canadian companies to raise capital in Canada? We have tiny capital markets to begin with, 1.5% of the global capital markets. When we segregate it with, I believe, eleven securities commissions, it doesn't make sense from a public policy perspective.

    This issue, the corporate governance crisis, makes it relevant to the retail investor who is looking at his RRSP statements every month and probably doesn't want to open the envelope. Would that be a good issue for this committee to consider in its recommendations to the minister, that the government work more seriously with the provinces to move toward that approach?

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    The Chair: Mr. Brison, I think Mr. Daniels had wanted to give a position also. I realize you didn't see him, but perhaps I'll give him a minute before we go to Mr. Shaughnessy.

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    Mr. Scott Brison: Yes, of course. I'm sorry about that.

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    Mr. Mark Daniels: As a matter of fact, Madam Chair, perhaps I'll just pick up on this latest question.

    Mr. Brison began with what I think is an important statement about the state of the regulatory environment overall for the financial services industry in Canada. That subject alone could occupy most of the people sitting here, for indeed it does occupy us most of the time for most days in the week.

    The point I want to make, and it's relevant to the discussion about a national securities regulator, is that most of the regulatory issues that confront the main players in the business--and I don't have to remind this committee, but I'm going to do it anyway--are federal and provincial. There's a huge amount in that interplay between the federal and provincial governments. It is true that the banks are regulated entirely by the federal government, but a dominant feature in the financial services business these days is consolidation and integration.

    The fact is, since the legislative reforms of the 1990s at the federal level, most of the big financial services companies are in every one of the businesses around. So what we have, I think, is a regulatory environment that used to be quite reasonably serving the old pillars, and now the regulators--I don't fault them for it--are finding the same pressures in trying to pull together an integrated regulatory system that they can administer on a functional level as opposed to an institutional level. Right to the heart of that goes the very point you made, or what your point implied, about a more complex and indeed less competitive regulatory environment.

    I certainly wouldn't make the statement that it's any easier in the United States. The fact of the matter is, we used to enjoy a relative advantage, and that advantage in some respects is eroding. But if you want to focus on an issue that matters to the financial services business, I think it would be the fact that the various levels of government have not collectively looked at this question of the regulatory issues facing the financial services industry.

À  +-(1045)  

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    The Chair: We're over our time on this, but I'm going to allow a very short answer from Mr. Shaughnessy.

    The bells are ringing for a procedure vote in the House, so we will take one more ten-minute round. It's a half-hour bell and it's to get on with government business of the day, so we will do that. I will ask the witnesses to remain and we will come back and finish the meeting.

    Go ahead, sir.

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    Mr. Kelly Shaughnessy (Vice-President, Banking Operations, Canadian Bankers Association): I certainly agree with Mr. Daniels. From the point of view of the banks, we do have one federal prudential regulator, but that's the prudential regulator. In all the other activities that we do--wealth management activities, capital market activities, etc.--we have to work with the various provincial regulators, and I do believe that is affecting the competitiveness of capital markets in Canada.

    I think there's a role for this committee to play. There's a constitutional challenge out there for the committee, there's a constitutional challenge out there for the government and the provinces, but this committee can certainly play a leadership role with the provinces in an attempt to achieve some form of harmonization, if not to bring regulation under the federal domain. I don't think that is practical from a constitutional point of view, but there is certainly a need to harmonize across Canada to make our capital markets more competitive.

    As I say, this committee has an ideal opportunity to play a leadership role in that.

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    The Chair: Thank you very much.

    Mr. Cullen, ten minutes.

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    Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair, and thank you to all the presenters.

    Mr. Lafrenière and Mr. Witol, your notion has a certain attraction to me. As a young rookie CA I spent two years in Bermuda and saw a lot of reinsurance money moving there at a very low or no tax rate. So the idea of retaining more of that business in Canada is appealing.

    One of the things that really gives the Department of Finance or the revenue agency the heebie-geebies is reserves where there is a lot of discretion or subjectivity, for obvious reasons. You say, equal to the retention deductible reserve. Could you expand on that? How firm and quantifiable is it, etc.?

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    Mr. Normand Lafrenière: We're saying we would like to add a reserve for catastrophe in Canada to the reserve required by the regulatory offices. The tax-free reserve we would like to see for catastrophe would be based on the deduction we have on the deductible--what you call the retention--equal to that retention. We would build that over a certain number of years. There would be some kind of criteria to meet. The need is there.

    We're a small insurance company, so we cannot go out and set up our own offshore company, and we don't. But we know others do that, and we are at a tax disadvantage compared to them. We buy in Canada and we get the tax deduction, but we'd like to build a reserve in Canada and buy that, instead of insurance outside the country.

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    Mr. Roy Cullen: Sure. I can understand the additional need now for catastrophe reserves. If it's quantifiable and not subject to a lot of subjectivity, that would probably make more sense.

    I'd like to go now to the Canadian Bankers Association, Mr. Shaughnessy and Mr. Currie. Eliminating the federal capital tax or phasing it out is something this committee has supported. The provinces have started to make more moves in this area.

    You talk about accelerating the corporate income tax reductions. Once our corporate tax reductions are implemented fully in the next couple of years, our corporate tax combined rate will be about 5% lower than most of the big U.S. states.

    I guess I have a couple of questions. One is a concern that we'll get into a corporate tax competition with the big bear to our south and just kind of rush to the bottom in a tax competition. Our personal income taxes are still out of line with the OECD, whereas our corporate income taxes are now coming into line, and in fact are very aggressive.

    I wonder if you could comment on that. Income taxes must affect your ability to retain and attract people, as well.

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    Mr. Peter Currie: Thank you for the question, Mr. Cullen. Let me respond to it in two ways.

    First, from a corporate perspective, I think our brief is attempting to convey the need to get on with the elimination of the capital tax at both the federal and provincial levels. We commend this committee for its leadership in that regard, so we're reinforcing that position. We're also suggesting there needs to be tenacity in terms of making sure the ongoing reductions that have been committed in corporate income taxes in fact materialize.

    I don't know that we've taken an official position on personal income taxes, but my view on that is we have a fundamentally different social structure in Canada. For us to aspire to a nominal rate the same as the United States may not be appropriate, but there are a number of levers that as Canadians we should be prepared to pull. Not the least is melding in the cost of our social fabric, and the points Mr. Daniels raised relative to saving for retirement, which is going to put an increasing burden on our social structure prospectively. So there's undoubtedly a way that we can craft a Canadian solution that makes us relatively more competitive.

    It is true, as you raise, that we face an ongoing challenge in recruiting and retaining good people, in our industry in particular, but in certainly every other industry I've been associated with--and that's several. However, I think getting into a competition with low-tax jurisdictions is a mugs game. It's one that Canada wants to resist strongly. We need to be competitive, but I don't think we have to be the lowest.

    I think your point is a good one that we'll always be able to find a jurisdiction in the U.S. where the corporate taxes are lower, because there are always incentives put in place in various less-developed states, such as in the southern U.S. Canada doesn't necessarily want to compete on that basis. We do need to be competitive though; we need to be in the same ballpark.

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    Mr. Roy Cullen: Yes, there seems to me to be a bit of a risk when we bring in the Ireland model in trying to compete with a jurisdiction on corporate taxes that is going to be tough to beat, but I do take your point.

    I'd like to ask a question on mergers again. I presume, notwithstanding the events of the last week or so, the bankers would still like to see more clarity in the public interest guidelines. Would that be a fair statement?

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    Mr. Peter Currie: That's a fair assumption, yes. We applauded Mr. Manley's move last week to inject more clarity into the process. We thought Bill C-8 was constructive in defining the process, and we would just like to understand what all the rules of the game are.

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    Mr. Roy Cullen: Okay, thank you.

    Ms. Iacurto, in your brief you talk about the throne speech and increased pressures to spend, but then you go on and request a number of tax expenditures. You're basically saying we should not heed the expenditure pressures and the throne speech, which, by the way, included some health care expenditure, which seems to be top of the mind with Canadians. Is it that you don't see tax expenditures as expenditure, or do you just think those are a higher priority?

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    Ms. Francesca Iacurto: Increased spending is fine as long as it accounts for population growth and inflation. We were actually fully supportive of what Minister Manley said yesterday, that he's in full support of the initiatives announced in the throne speech, but at the same time, he will request the departments to reorder their priorities to eliminate programs that no longer serve their purpose. Obviously, we need a lot more detail on a lot of the things he mentioned, but we were very pleased with what he said yesterday, and perhaps that will do it for us.

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    Mr. Roy Cullen: Okay, thank you.

    I'd like to go now to the CGAs. You note that you've done some surveys, and 45% of respondents identified government as the primary body responsible for instituting reforms to avoid a sort of Enron. Sometimes, though, Canadians will say government should fix everything. I assume that by quoting that, you're not suggesting that the CGAs are washing their hands of corporate governance?

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    Mr. Everett Colby: No, sir, absolutely not. We want to be active participants in the ongoing debate, certainly at the federal level, on what we can do to resolve the issue.

À  +-(1055)  

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    Mr. Roy Cullen: Okay.

    Mr. Harris talked about this new board that's been formed. I don't think you're formally part of that, but as a CGA, have you formulated any views in the following areas? Should auditors also do management consulting? Should audit companies be rotated? What about the appointment of members of the board, more independent directors? What about this whole debate on the chairman and CEO split? Has your organization developed views, or will you be?

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    Mr. Everett Colby: We have expressed views. As a matter of fact, members of our association have appeared before a number of different committees. We have a task force struck on that. We could talk for hours about the various issues you've mentioned specifically, a lot of which I think come back to the ethical question, many dealing with conflict of interest, which, again, I don't know that we can legislate. I would just reiterate our position, that there's obviously some work to be done, and we look forward to being a part of that work in getting this resolved, because it affects our profession, many other professions, and the general investing public.

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    Mr. Roy Cullen: Yes.

    I think the role of the private sector is going to be very important in this. There's a careful balance between legislative responses, regulatory, and private sector, and frankly, if the private sector can take a high degree of ownership of this and people can see results, we may not have to react legislatively and in a regulatory way, as they've done in the United States. But in the absence of that, I think Canadians who have invested in the market, either directly or indirectly, are going to be looking for the kind of corporate governance models they deserve.

    I don't know if any others would like to comment on the corporate governance and maybe some of the issues I've thrown around the table. I know they are fairly complicated.

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    Mr. Mark Daniels: I have lots of views, Madam Chair.

    I don't know that I can add too much to Mr. Cullen's general charge. I will say, though, just talking from a personal point of view, I see that when we run into a crisis--and I think the word “crisis” is well applied to the post-Enron environment; it's certainly a crisis of confidence--there's a great propensity to rush to process and structural solutions and not enough effort to look at enforcement of the existing rules. I've seen this happen again and again over time. The point was made here that you don't legislate ethics or morality, but you can certainly enforce the rules you have in place. I think it would be just folly to run and hide behind some new, extensive structure of rules on the ground that it's going to fix the kind of mentality that led to these debacles we've seen south of the border, and a few here as well. We have a good governance structure. There are things that are going to be done. There are things we're going to have to do as a result of Sarbanes-Oxley in the big corporations, but most of them already do it.

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    The Chair: Thank you.

    Mr. Shaughnessy, a brief comment.

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    Mr. Kelly Shaughnessy: To reinforce what Mr. Daniels said, Canada has had a very successful, in my mind, principle-based governance structure, whether it's accounting standards or corporate governance in general. As we move forward, as we consider some of these changes, I think what we should strive to do is avoid a very prescriptive, rules-based framework. What happens there, and what we might have seen in some cases south of the border, is that people tend to work to the rule, or in some cases work around the rule, as opposed to dealing with the principle, with the ethics, as Mr. Currie said earlier.

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    The Chair: Excuse me. We are going to suspend for 15 minutes. We'll take a vote. We have 30 minutes' worth of questioning. I invite you to have some coffee, and we'll be back as soon as we can.

Á  +-(1100)  


Á  +-(1116)  

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    The Chair: We will recommence our meeting. Thank you very much for your patience.

    I will start with Mr. Murphy on a 10-minute round.

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    Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chairperson.

    I want to continue the discussion Mr. Cullen started on the proposal to further reduce corporate taxes.

    But before I do that, there are a couple of other points I want to raise. First of all, to Mr. Lafrenière, I, like Mr. Cullen, find quite a bit of merit in your proposal. As he said, it's a complicated issue, and Finance will be looking at it very closely. If your association is able to, I'd appreciate, and I think the other members of this committee would also appreciate, having a much more detailed breakdown of the cost and the timing of the cost. You did give us some indication that it was going to cost $175 million, but there would be income tax recoveries. I think that whole recommendation has an awful lot of merit in keeping these matters in Canada, and that goes to the whole issue of insurance premiums.

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    Mr. Normand Lafrenière: Absolutely. It will be a pleasure to do so.

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    Mr. Shawn Murphy: Thank you.

    My next question has to do with the recommendation in the CGA report, Mr. Colby, that the tax transfers no longer be treated as a federal contribution.

    There's no question, I believe, in anyone's mind that the federal government has to put more resources into health care. It is a partnership between the provincial governments and the federal government, and we want to work together on behalf of all Canadians.

    But every time I pick up a paper I read in an ad paid for by the provincial governments that the contribution of the federal government has gone from 50% to 14%. It doesn't take into account equalization payments and the federal tax transfers. It was never 50% in the first place, and it's not 14% now. There's no other way to call it but a blatant misrepresentation of the facts. In the jurisdiction I come from, when I've done the analysis, it's not 14%. When you factor in the whole equation, it's 68% that the federal government contributes to health care.

    If we were to adopt this recommendation, we'd be more or less losing any ability to present the facts to the provincial governments. You've seen these advertisements in the paper. What are we as federal politicians to do in light of that?

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    Mr. Everett Colby: Our comments are not intended to come down on one side or the other between the provinces and the federal government. That's a debate you will have to work out with them.

    What we're basically saying is that it's an issue of accountability and that there's just no clarity in the way it's presently being funded for the average Canadian to be able to say you're correct or they're correct.

    The ads in all of the media that are trying to persuade people one way or another are, in my opinion, nothing more than smoke and mirrors. If you're going to adopt a principle of good corporate governance for yourselves, you need to be more accountable and to have a basis to support what you say. I think you have the power with this committee to do that by clarifying exactly how these types of payments are made and how they're handled with the provinces.

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    Mr. Shawn Murphy: The point I'm making is if we do not treat the federal transfers as part of the federal contribution, we cannot make that point.

Á  +-(1120)  

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    Mr. Everett Colby: I don't know that I would agree with that. This is a 25-year-old tax cut, and it's not just regarding health care. This is part of the EPF program, I believe. All kinds of revenues are mixed in with that, and they all go into the general revenue. It's a source of revenue for the provinces.

    Here again I'm not proposing to enter into a debate with you on what the level of funding should be or how you should determine that funding level. What we're saying is that it's an issue of accountability, and the present formula for doing this does not leave room for the Canadian public to clearly see who is doing what.

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    Mr. Shawn Murphy: Well, perhaps we'll agree to disagree and I'll move on.

    I want to talk about the whole issue of corporate tax cuts. I think it's in three recommendations, from the Insurance Brokers Association, the Insurance Bureau, and the Canadian Bankers Association--which you've already spoken about, Mr. Currie. But I think we all have either heard the presentation by Minister Manley yesterday or certainly picked it up in the media, and from every way of looking at it, my position is that the economy over certainly the first half of this year and the last couple of years has been performing relatively well, and certainly relatively well compared to other G-7 countries.

    It's also my position that the correct fiscal and monetary policies have been implemented, the low inflation, low interest rate, declining debt-to-GDP ratios, and they've worked. We have announced--we haven't implemented, and I think we have to implement it--the $100 billion worth of tax cuts, which as Mr. Cullen has indicated, will make our taxes, corporate taxes, lower than those of a lot of the larger northern United States.

    First of all, I should interject and say that I agree 100% with the recommendation that we can't eliminate it, but we should gradually start the process of eliminating capital taxes, for all the reasons that have been enunciated by this committee and your organizations. This committee is going across Canada. We've had a lot of associations come before us, and there are tremendous demands upon the public purse. It starts with health care and goes to Kyoto, to post-secondary education, to affordable housing, the innovation agenda, the skills training agenda, and that's just the first part of the list; there's another 100 on top of that.

    I believe, as does everyone here, that we have to be very vigilant that the disciplined spending continue. We cannot go into a deficit. We have to keep the policies that we have and continue forward.

    But having said all that, in light of all these demands out there, some extremely legitimate, that this government will have to respond to, number one being health care, is it reasonable to expect at this point in time further corporate tax cuts in light of the ones we've already announced? Is that a reasonable recommendation to put before this committee?

    The Chair: Mr. Daniels.

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    Mr. Mark Daniels: Madam Chair, I'll only respond very simply. It's reasonable if the particular taxes are extracting a price that goes well beyond.... I mean, it's not an equity issue. What we've been trying to say, certainly about the large corporations taxes, is that it's punitive and certainly discourages investment. We've heard that again and again. It has been said before this committee, from rooftops all over the country. This is not, at the end of the day, a matter of equity at all. It's punitive. It's costing the country. It's nothing less than that.

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    Mr. Shawn Murphy: No, but on the issue of..., I agree with you 100%. You're talking about the capital tax, the large corporation capital tax.

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    Mr. Peter Currie: I think Mr. Daniels was referring to the large corporations tax. I think the case of the capital tax is even more egregious. The capital tax is absolutely perverse. We have deposit-taking companies in this country that are regulated federally, that were required and encouraged to build a capital base and were penalized on that capital base through a tax system that makes us uncompetitive internationally.

    To your point earlier, I think ongoing rationalization of the tax burden is not only prudent, but absolutely necessary at this stage in the game. I think Canada is at a crossroads. We can decide as a country that we want to maintain a very rich social fabric, which we've built over generations, and I think that's terrific, and we can do it by continuing to tax the engines that we have to fund that, through capital tax regimes or suspending income tax reductions or whatever, or we can decide that we are going to invest in the country and in fact increase the capacity of the engine. That's exactly what we're recommending.

    It's not a function of just realigning the existing taxes; it's aligning the taxes in a way that encourages reinvestment in the country and an expansion of the economic capacity of this country.

Á  +-(1125)  

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    The Chair: Thank you very much.

    We're out of time, but I'll allow Mr. Colby to give a brief answer.

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    Mr. Everett Colby: Thank you.

    Just a brief comment. I'm not sure if you were on this committee last year or not, but our position paper last year pointed out a study that showed there was an economic cost to every type of taxation. For every dollar of corporate tax, the economic cost was approximately $1.47. It was the highest level of actual economic cost to taxation.

    Reducing corporate taxes in whatever way, whether through capital tax or other types of corporate taxes that businesses pay--and let's not forget it's not just large corporations, but small and medium-sized enterprises that make up a large majority of businesses here--will increase their productivity and economic activity, which may actually help bring in more tax revenue to the government, which I think is the government's concern over reducing these corporate taxes. It's good fiscal policy.

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    The Chair: Thank you.

    Ms. Minna is next for ten minutes.

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    Ms. Maria Minna (Beaches—East York, Lib.): Thank you.

    I would like to go into post-secondary education, skills, skills training, skills development, and flexibility of the labour force.

    I've heard here this morning, and in many of the other panels, the constant refrain about cutting taxes. I'm not suggesting that's something we don't have to do at some point. But I haven't heard a great deal--although this morning Mr. Currie and Mr. Shaughnessy did refer to it, as well as some others--about the economic impact of our not having enough trained, skilled workers who are flexible, mobile, and adaptable to the new innovation industry. I haven't heard from business about the economic impact of children who cannot function at their potential, which goes to early learning, the same as education. This is interesting because I'd like to hear from the other side.

    I haven't heard about the fact that the universities are telling us they have a major deficit in terms of their labs and their infrastructure. The universities are falling apart, and 40,000 or so university professors are going to be retiring some time soon, so we'll have a shortage. That will have a very fundamental economic impact, which will be negative as well, in terms of our labour force and the skills in our industries. Productivity, as I understand it, is greatly affected by the lack of proper skills, flexibility, mobility, and so on, within our economic picture.

    So I would like to hear a little bit about where you would go and where you would spend money in terms of both universities and skills.

    I applaud the CBA, Mr. Currie, for the investment you make in your employees, but unfortunately that's not the case with all corporations in Canada. Actually, I think our corporations favour a bit to the negative when it comes to other countries and how corporations deal with retraining their own staff.

    So I'm looking at a number of levels here in education and maintaining a fully competent labour force in our country, starting with children because that's where education starts. It doesn't start with post-secondary education; it starts very early in life, and not necessarily in grade one either.

    So I'd like to just hear from you a little bit about what sorts of expenses you would see in this whole area of investment--economic investment, in my view.

Á  +-(1130)  

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    Mr. Kelly Shaughnessy: Madam Chair, I don't think I can quantify for you. I'm not prepared to do that today. If you wish, I will attempt to get those types of statistics to you and deliver them to the clerk of the committee.

    On training in general, though, as opposed to attempting to quantify a dollar amount, I agree with you that it is vitally important. Personally, as part of the community work that I do, I'm the director of an organization called ABC CANADA Literacy Foundation. We're looking at literacy and numeracy skills, and we talk right through the entire spectrum of people. It's sitting down with your children once a day and reading a story to them, or something of that nature.

    More importantly, as the world is changing—we talk about innovation, we talk about productivity—the workplace is changing for more and more people, and those people do need skills, whether they be literacy skills or numeracy skills. They need them just to work in the environment that exists today, whether they're using technology to do it or not. So it's vitally important, and that's why our industry...if you look at the expenditures our industry is making on its own employees, they're being made because the world has changed.

    The world has changed dramatically in financial services. When I started, desktop computers and things of that nature were unheard of. Today, an employee in the financial services industry—in banking, insurance, or whatever—cannot operate without very complex technological software or hardware. The skills have changed.

    You've seen that our industry has quantified what we require. I think it would be very difficult—maybe we'd have to go to the C.D. Howe Institute or an organization of that nature—to see what the quantification would be for all Canadian industries, but it's enormous. If we don't keep up with learning and if we don't keep up with the other skills, though, we won't achieve the productivity and innovation goals we have set.

[Translation]

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    The Chair: Mr. Lafrenière, please.

[English]

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    Mr. Normand Lafrenière: In our case, as mutual insurance companies, our philosophy is to pay for our expenses first, but the leftovers are either returned to the policyholders or we give it back to the community we live in.

    We're not necessarily associated with learning, but our point of view is that learning is really very linked to how rich the population is, to the wealth of the population. Learning doesn't just start at maybe grade one. It starts much earlier than that. In fact, we are of the opinion that it starts before the child is born. The better fed the mother, the better the child's chance to survive and learn more quickly afterwards.

    So in our case, we don't give to learning necessarily, but we give to the local community. We hope this is used for better enrichment of that population, thus giving everybody a chance to learn well in their life.

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    Ms. Maria Minna: What I'm hearing is that you would agree with the government investing in those areas. The governments, both provincial and federal, have to invest in early learning, which goes to your point, Mr. Lafrenière, with respect to starting at even the zero-to-six discussion, as well as from then on in terms of skills training.

    Can I add another piece to that with respect to skills? One of the labour groups that presented to us suggested that when it comes to EI premiums, instead of reducing to the next level, whatever that reduction would be—a dollar or whatever—that reduction should instead be dedicated to the retraining and upgrading of the skills of the labour force, especially for those smaller companies that wouldn't necessarily have the ability or the scope to be able to do their own apprenticeships and their own retraining programs.

    How does that strike you? Not everyone, not every company, can afford to do in-house retraining and apprenticeship programs. Just give me your reaction to that.

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    The Chair: Ms. Lambert.

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    Ms. Carrol Lambert: I will use the member mutual companies in the province of Ontario as my example for your question.

    In our particular case, the Ontario Mutual Insurance Association is headquartered in Cambridge, Ontario. There are about 17 staff members in attendance there on a regular basis. Their goal, their mission, is one of educational purposes only. We offer to the staff of mutual companies—and they don't have to be domiciled in Ontario, they can come from across Canada—52 to 56 different courses each and every year, and that agenda is expanding.

    In addition to understanding the insurance business and reinsurance business, we are now training our people in identifying fraud, in an attempt to help control insurance premiums. It's estimated that about $1.5 billion in losses paid out in any given year in this country are fraudulent losses that are paid for. It therefore behooves insurance companies and the personnel who work for them to try to identify those issues and reduce those losses wherever possible. If we were able to eliminate fraud entirely, that would mean our policyholders' premiums would be significantly reduced.

    We sponsor fraud arson courses and investigative techniques on how to identify new criminal activity that is occurring in the rural communities. They're called pot grow operations. In the wintertime, if all the homes in the area are covered with snow and you see one that is clear, it is a flag to you that there is possibly something illegal occurring in that dwelling. If you see there is little or no action about that property—that is to say, the homeowner is not there on a regular basis—it could mean something else. So we're trying to identify all of those areas. What happens in those fraud operations is that the people in the dwelling destroy the inside of it.

Á  +-(1135)  

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    Ms. Maria Minna: I appreciate what you're saying, but I would like to have an answer to that question with respect to the overall training approach. I appreciate that you do training. That's what you're trying to tell me: that you do a lot of training of rural employees.

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    Ms. Carrol Lambert: It's continuous. Every employee on our staff is engaged in that.

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    Ms. Maria Minna: I appreciate it. That's what I'd like to see across the board, but there are some smaller companies that tell me they can't do that.

    I had a question with respect to the premiums. I wonder if I could get an answer to that.

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    The Chair: Ms. Bannerman, go ahead.

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    Ms. Ginny Bannerman: In our brief, we addressed both the EI premiums and the shortage of labour that small businesses and insurance brokerages face. From our standpoint, that would certainly be a reasonable way to deploy the surplus in the EI premiums to create more skills in the workforce. It is something we've also worked on in high schools in trying to bring talent into our industry.

    Just to touch on something you mentioned earlier, insurance brokers are provincially regulated. As we go across the country from province to province, we find big differences in regulation and licensing. Someone here suggested this morning that a role the federal government could play is in harmonizing regulations between the provinces. We would certainly support that as well.

    Thank you.

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    The Chair: Thank you, Ms. Minna. Your time is up.

    We'll go to Mr. Discepola, for ten minutes.

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    Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

    I would like to thank our presenters for an awful lot of food for thought, and first of all tell them that the ones I agree with are evident. Our committee has been recommending the abolition of the capital tax for many years. Also, on some of the thresholds that date back to 1976 or 1982, I have no problem with recommending their revision, especially when you talk about the $250,000 small-business deduction, which has been in place for eternity. I think it would be a great stimulus for small business people to reinvest in their own businesses. I have no question about that.

    Before asking for comments, though, I'd first like to take the opportunity to dispel some of what I consider to be myths, and I'd like to start with the EI myth.

    Read my lips. There is no $45 billion sitting around somewhere in an account. Therefore, when you say we had better return the money to either the employers or the employees, you had better be prepared to tell us where we're going to tax or get additional revenues to offset that income. So let's dispel that myth right away, even though I know it's great for opposition members to dwell upon it.

    Since I've been on the finance committee—since 1993—we have consistently dropped the rates. We now find ourselves at a point at which we don't have a $10 billion or $12 billion surplus. The projections for next year are for $2.3 billion. So I think we're well within the actuarial thresholds, and there's a nice cushion in case there is a downturn in the economy.

    So that's myth number one that I think we should dispel. As a government, we have made an effort to continually reduce the impact on small business, as well as on employees.

    For Mr. Colby, myth number two is that EPF is not a transfer to the provinces that they could use and put in their general revenues. I'm sorry. The whole debate around 1995 was to substitute EPF because it was a direct program for education, health care, and social programs. There was one point when every dollar in social spending was matched by the federal government. So if provinces have put that money into their general revenues, and if some provinces like Alberta or Ontario have decided to give tax cuts, to the detriment of closing hospitals, I'm sorry, but that's not the federal government's fault.

    You come in and you say we should ignore the fact that in 1995 the provinces clamoured to have tax transfer points reduced. Why? It was because they knew darn well that the poorer provinces that had less access to revenues would be hit doubly hard.

    I can use your rationalization or the CGA's—I don't want to pick on you personally—and say we should maybe forget equalization payments, because that money should just be given to the provinces. But don't forget that I come from a province with a government that would love dearly for the federal government to be obliterated from the map, because it serves their political ambitions in Quebec. They would love nothing more than for us to transfer all tax points to them, but the dilemma we would then have as a country is to provide that quality level of services from coast to coast to coast.

    Last night, our provincial Minister of Finance again called for the federal Minster of Finance to just give Quebec the money and shut up. So I can't agree with the CGA when they make those kinds of recommendations. Again, the thing we are hearing as a committee, from coast to coast, is that the federal government has to have a key, responsible role in health care and education. We can't just transfer all that money to the provinces.

    What we're also hearing is that we have to have accountability. In other words, if the federal government takes responsibility in health care and injects $4 billion, $5 billion, or whatever the figure is—as we are going to do; the Minister of Finance has reiterated it many times—then Canadians want accountability. Otherwise, we risk having 11 health care systems, 11 education systems, 11 social programs, and those provinces that have high tax revenues will be better off than the other provinces. So I can't agree with the CGA's recommendation, but I do agree with some of the other comments.

    Now that I've made my speech, I'll leave that open for comments.

    On the question of taxation, my colleague Roy Cullen has put it very clearly, in my opinion. We've done a substantial amount for corporations in terms of the tax rate. We are within the OECD average, as Mr. Shaughnessy pointed out. I don't think we have to go any further.

    Because of the additional revenues, we are going to be faced with increasing pressures in terms of what to do with those projected surpluses. My personal request is that we start attacking the debt, because the $40 billion that we've taken in from EI has given us probably $7 billion or $8 billion annually in savings, and that's a good investment for sure. But I think the key priority area that would help everybody, including businesses, would be a continuation of doing more in the way of reducing personal income taxes. To me, that issue is key. It affects everybody. It affects business in terms of the fact that we can't maintain our professionals, whether they be in hospitals or elsewhere.

    I had to put that on the table because it was getting to me, Madam Chair.

    Maybe I'll ask Mr. Colby outright. What would have prompted the CGA to make those recommendations? Is it just a clear, black-and-white accounting issue?

Á  +-(1140)  

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    Mr. Everett Colby: Actually, no. In part, it was based on a report produced by the Auditor General dealing with Health Canada that was released in September 2002. I note specifically one of their points.

No distinction is made in the CHST to indicate how much is intended for each of the social programs it funds. The federal transfer is a combination of cash contributions and tax points for the delivery of health care, post-secondary education, and social assistance. There is no agreed-upon estimate that captures the federal contribution to health care.

    As I mentioned earlier in my comments to one of your colleagues, we're not here to say you should do this, the provinces should do that, or who's actually contributing what amount. We're saying there is no clarity. We're concurring with what the Auditor General has said.

Á  +-(1145)  

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    Mr. Nick Discepola: I'm sorry to interrupt, but your recommendation says clearly that this transfer should no longer be treated as a federal contribution to the provinces. What you're saying is, give them the money without asking for accountability, which the Auditor General and Canadians are asking for. The Auditor General is saying, take the CHST and maybe divide it up, as some members said yesterday, as to how much goes for health care, how much is going for social programs, etc., as opposed to maybe lumping it all in one. That's why I don't understand your recommendation at all.

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    Mr. Everett Colby: To try to clarify it a little, and not to take up too much of your time, allowing for answers to other questions other witnesses may want to provide, this is a 25-year-old tax cut, and some of the statistics as to what percentage is being spent are based on old estimates. There have been changes, both provincially and federally, in the tax rates used, and you'd have to agree that as time progresses, perhaps old models and old ways of doing things need to be adjusted to keep up with modern times. We're not saying the federal government is not contributing, but to actually classify it as a budgetary outlay is not accurate. This is an accounting issue. It's an issue of accountability, and it could be misleading, as it appears it is, to the general public, which is confused as to what money the federal government is actually taking and giving to the provinces. We're not here to plead the provinces' case--

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    Mr. Nick Discepola: But you are. By recommending that, you're falling prey to what their demands are. The provinces would like nothing better than for the federal government just to give them money, and then they can spend it on roads, on pavement, on anything but what it's directed for, which is priority areas.

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    Mr. Everett Colby: I would fundamentally agree with you that this should not be done.

    Mr. Nick Discepola: Okay.

    Mr. Everett Colby: But what we're saying is that you need to be accountable to the general public in Canada, so that when you say we're providing $36 billion, you can point to that money as an actual expenditure and say, this is what we have provided, under whatever mechanism you may choose to do that.

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    Mr. Nick Discepola: I agree totally, and I think the accountability should come from all levels of government, not just--

    Mr. Everett Colby: Absolutely.

    Mr. Nick Discepola: Thank you.

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    The Chair: Thank you.

    I'm just going to have a quick second round. Mr. Harris, two questions, then Mr. Wilfert, two questions, and that'll be the end.

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    Mr. Richard Harris: Thank you.

    For clarity, I certainly will affirm that there is not a $30 billion pot of money sitting in the EI surplus fund. As we all know, that money has gone into general revenue for the government. They've used it to balance the books, which is nice, but they've also used it to fund the new spending programs that have been in their budget every year since 1993.

    I want to ask a question of Mr. Daniels. In your presentation you talk about something, the capital tax, that this committee for a number of years has concluded is a damaging tax. It impedes investment. I'm having a hard time understanding why the government hasn't got it after all these years. In addition, you talk about the LCT tax. Apart from the obvious, the tax revenue, and given all the evidence to support the reason these taxes should be reduced, phased out, or eliminated immediately, is there any plausible reason the government would want to hold on to this particular tax?

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    Mr. Mark Daniels: I think, sir, you've given your answer. It's a very nice revenue generator.

Á  +-(1150)  

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    Mr. Richard Harris: But if that tax were eliminated or reduced, the benefits from the investment of those funds would be revenue generated for the government as well.

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    Mr. Mark Daniels: Of course, and that's the argument on the other side. But the way you put the question, I think you answered it as you gave your initial statement. I don't know what else to say. I think Canadians pay a big price for that, but who's to measure the disincentive effect? You're hearing, and have heard many times, from some very senior practitioners, Mr. Currie among them. When you hear that kind of thing from people at that level in the major corporations in this country over time, you're getting the best counsel you could get from the business community.

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    The Chair: Mr. Shaughnessy, do you want to add a quick comment to that?

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    Mr. Kelly Shaughnessy: We've used the word “perverse”, and it is really a perverse tax, because, as we said earlier, it penalizes a company for investing in jobs in Canada, for investing in technology, for investing in productivity.

    We're preaching to the converted perhaps at this committee on capital taxes, but there's a second role this committee and the federal government can play, and that is with regard to capital taxation in the provinces. In our industry we paid a total of $703 million in capital taxes, the big six banks, in the last fiscal year. Only $150 million of that was paid to the federal government, the balance was paid to the provinces. So the former Minister of Finance a number of years ago undertook to work with the provinces towards the elimination of capital taxes, both federally and in the provinces. I really think this committee and this government have a leadership role to play in that.

    Companies in Canada today are not executing business strategies in isolation behind our borders. Companies in Canada today are operating, at a minimum, on a continental basis, and an awful lot of companies in Canada are operating on a global basis. They're making investment decisions based on a number of factors, and taxation is one of those factors. So if we want to be a force on a continental basis, if we want to be a force on a global basis, we have to make sure we're not penalizing companies for investing in this country.

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    Mr. Richard Harris: I can't leave the committee room without bringing up a question on the bank merger thing. I hope I'm not going to put anybody on the spot, but there seems to be a conflict between what the Prime Minister's authority is and what the finance minister's authority is, the finance minister having traditionally been in charge of how the financial services sector operates. If you could speculate as to who's in charge of whether there will be any merger proposals coming forward, as concerns a response from the government, do you think it rightly should be the finance minister, or should it be the PMO's office?

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    Mr. Peter Currie: I'll make a brief response on that.

    As an industry, we're actually very pleased with the clarification in Bill C-8 recently. We were also pleased with Minister Manley's position last week in his request for clarification of a public impact review process. My read of the Bank Act is that combinations of federally chartered financial institutions are within the domain of the Minister of Finance. I can only comment on what I've read in the newspapers relative to the reported combination of two of the schedule A banks over the past few weeks and the purported response from the Prime Minister's Office. I have not seen a quote from the Prime Minister on this topic, so I can't comment.

    We would be very anxious to see the process clarified. We think combinations are a viable strategy for building a business, but they're one of many strategies. We, as a company, RBC, have said for some time, should combinations occur in Canada, that's something we think is viable, we think it will help the country, we think it will ultimately help consumers, and we think it will help shareholders, which ultimately helps investors. But that's one of a series of elements we, as a company, are pursuing. I can only speculate that the other participants in industry are doing the same thing.

Á  +-(1155)  

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    The Chair: Thank you.

    I'll give Mr. Wilfert the same time, seven minutes.

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    Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chairman.

    First of all, I thank everyone for coming and for their briefs.

    The minister's fiscal update yesterday would indicate that we obviously do not have a lot of room to manoeuvre. We have no surplus, in my view, and I don't know why we always talk about a surplus when we have a $540 billion debt. That debt is extremely important, and the fact that we are saving about $3 billion a year in interest is I think important for Canadians, important for future generations. We need to be able to apply some of that money to some of the social issues we have.

    I was very struck by I think Mr. Currie's comment that corporate taxation is a mug's game. I would agree with you about the United States; we will never win that battle and we shouldn't try to win that battle. We can certainly improve, and we need to improve, given our position in the OECD with regard to personal income tax issues. But on the health care and quality of life issues, there are a lot of myths out there. If you look at the American health care system, over 44 million Americans have no form of health insurance.

    My major issue, which unfortunately isn't the issue that I'm going to be able to ask you too much about today, is the issue of concentration of foreign ownership in Canada. And I'm not talking about investment. We have not had a debate in this country, and we're going to have to have it soon, on the issue of so-called integration on a lot of issues.

    We are losing this country; we are losing this country very quickly. Part of it, I think, is that certain corporations and certain right-wing academics with right-wing agendas are out there, fostering the notion of common dollars and everything else.

    In my view, your point is extremely important. Yes, we are moving on the tax issue, certainly when it comes to personal income taxes, but if we're going to maintain a quality of life, then we are going to have to decide what our priorities are. You can't cut all the taxes in the world and then say, well, at the same time we have to address the environment, we have to address issues of education, etc.

    I'm a great believer that the CHST should be scrapped. I'd scrap it tomorrow. I wouldn't give the provinces a nickel until we had transparency and accountability: if a dollar is for health care, show it; if a dollar is for post-secondary education, show it.

    Mr. Nick Discepola: That's why you're not Prime Minister.

    Voices: Oh, oh!

    Mr. Bryon Wilfert: I'm not running for leader. I'm probably the only one who's not running at the moment.

    I think in a wider context, on the bank issue, I do believe with Bill C-8 we've clarified the rules, and on the issue of the public interest, I appreciate the minister asking this committee to go further on that with the clarification. You know, if you want the truth, don't read the papers. If you want the truth, don't believe the opposition. The view is somehow that there's an intervention. But it will go through a public litmus test. It will go through the Competition Bureau and all those other things it has to do.

    In the end, though, personally, I want our banks to be as competitive internationally as they can be, but I want them to be Canadian. I don't want them to be anything else other than strong Canadian banks in a strong Canadian financial system.

    But the real issue, for me, is that governing is about choices, and you're the first one I've heard come here and actually say that one of the things we have to look at, in maintaining that quality of life, is the fact that it can't all be just...because too many people are coming in and saying, “Cut, cut, cut”, without adding, “But what are the implications if we do that?”

    I think our country is vanishing. I think it's vanishing because we are no longer able to control the economic levers of power. That's my concern.

    I don't know if you want to respond to that, but--

    An hon. member: What's your question?

    Mr. Bryon Wilfert: My question is, are we going to have a... Well, I don't need to have a question.

    Voices: Oh, oh!

    An hon. member: You were given two questions.

    Mr. Bryon Wilfert: No, I wasn't. I let Mr. Harris take his two questions. The chair was kind enough to give me mine.

    At any rate, I think Mr. Shaughnessy wants to respond.

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    The Chair: Mr. Shaughnessy would like to comment.

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    Mr. Kelly Shaughnessy: I think it's very important to understand that in terms of budgetary matters--the elimination of capital taxes and all that--what we are proposing is to encourage investment in this country, to retain investment in this country. That way this country can afford precisely what you're wishing for in the way of the social fabric and the social programs we have.

    As I said earlier, we're operating, at a minimum, on a continental basis. A number of our industries are operating on a global basis, and we have to make sure that we get that fair share of investment. We have to make sure that we retain those jobs in this country and don't lose them to other jurisdictions. Tax policy is one of the elements that will permit us to do that.

  -(1200)  

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    Mr. Bryon Wilfert: I would agree with you, sir, that it is one of the elements. I want to attract good foreign investment. My concern is the ownership issue, R and D, and productivity. Those decisions may not be made by Canadians for Canadians. A shocking comment is that Canadian National Railway is 80% foreign owned. It's not even listed on the TSE as a Canadian company any more. That to me is a very sad commentary.

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    The Chair: Mr. Colby, you may make a brief comment.

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    Mr. Everett Colby: Mr. Wilfert, I'm a native American who moved to this country 10 years ago, and I would not move back, because I find the overall quality of life superior in this country, despite its apparent deteriorating state.

    This brings me to a point I didn't highlight in our opening remarks but that is in our brief, and that is that our entire tax system needs structural reform. There are many different issues. You can use the tax system to affect not just fiscal and economic policy but social policy. There needs to be public debate, which this committee can lead, on a lot of different areas, and we'd be happy to participate with you on whatever areas may be your particular concern and of concern to Canadians in general.

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    The Chair: Thank you very much.

    Just before we wrap up, Mr. Currie, you gave a dollar value of the capital tax borne by the banks. I was just wondering if you know the percentage of the capital tax collected in this country. Are you 50% of all capital tax collected or 30%? I know that a lot of SMEs are also involved.

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    Mr. James Witol (Vice-President, Taxation and Research, Canadian Life and Health Insurance Association Inc.): If I may answer, there was a study done by Ernst & Young recently that indicated that the financial industry, which constitutes 5.5% of GDP, paid 21.3% of the large corporations tax. Those are the only numbers I have. So there's a very significant burden on the financial sector.

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    The Chair: Thank you for that clarification. Sometimes when we get a dollar value, we don't get the context of what that means.

    Mr. Nick Discepola: That's corporate taxes.

    The Chair: That's corporate taxes. I was asking about capital taxes.

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    Mr. James Witol: That was the large corporations tax.

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    The Chair: That's not the tax I was referring to. Mr. Currie gave a dollar--

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    Mr. James Witol: No, but that is the--

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    The Chair: Oh, that is a capital tax.

    Mr. James Witol: Yes.

    The Chair: It's part of the capital tax. Fine.

    On behalf of all the members, thank you very much. I'm sorry we had that 15-minute interruption. You also added some laughter to our morning. Thank you very much for both your briefs and presentations and answering our questions.

    We are adjourned until 3:30 this afternoon.

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