Bill C-24 (Historical)

Softwood Lumber Products Export Charge Act, 2006

An Act to impose a charge on the export of certain softwood lumber products to the United States and a charge on refunds of certain duty deposits paid to the United States, to authorize certain payments, to amend the Export and Import Permits Act and to amend other Acts as a consequence

The purpose of this enactment is to implement some of Canada’s obligations under the Softwood Lumber Agreement between the Government of Canada and the Government of the United States, by imposing a charge on exports of certain softwood lumber products to the United States and on refunds of certain duty deposits paid to the United States and by amending certain Acts, including the Export and Import Permits Act. The charge on exports will take effect on October 12, 2006 and will be payable by exporters of softwood lumber products. The enactment also authorizes certain payments to be made.

[Russ Cameron, President, Independent Lumber Remanufacturers' Association]

It should be under ten. I'll just read this and then have the questions.

I thank you for inviting the Independent Lumber Remanufacturers' Association, which I will refer to as the ILRA, to appear before your committee. Our 120 member companies represent the majority of British Columbia's non-tenured forest products sector. Non-tenured means that we do not harvest public timber that has been administratively priced by provincial governments. We pay market price in competition with the Americans and the rest of the world for all of our input wood fibre. We are small, family-owned companies employing over 4,000 employees. Annually we do $2.5 billion in sales on four billion board feet. We sawmill; we remanufacture; and we wholesale. Our markets are all over the world, but our primary market is the United States.

The constitution of the ILRA directs our group to maximize the socio-economic benefit per cubic metre of Canadian timber harvested by promoting business conditions that result in the further processing of wood products in Canada. We are the only growth opportunity in the forest sector, as we are the companies that employ more Canadians to do more work to less wood fibre by adding value to it. We're a collection of Canadian entrepreneurs who are used to having hurdles placed in front of us. In one way or another we always seem to find our way around or over supply problems, currency fluctuations, market swings, foreign competition, and the like.

Today, my members want me to tell you about a new hurdle that we may not be able to get around. As you know, a group of our competitors in the United States, known as the Coalition for Fair Lumber Imports, has used the U.S. Department of Commerce to impose conditions upon us to make us less competitive in the U.S. market. We have jumped this hurdle before and we knew that we could do it again. The trick is to survive to see the victory. Most of us did survive, although just barely, and we ultimately won this fight on all fronts. Even the U.S. government attempts to circumvent the NAFTA and WTO victories were thwarted by the U.S. Court of International Trade, which recently ordered the withdrawal of the duties and the return of all the deposits. Not only that, we finally had the coalition on the ropes. They've lost half of their original membership, as measured by their ability to fund future cases. They even had to resort to recruiting small timber landowners and remanufacturers with the promise of money via the Byrd Amendment, but now they have lost even that tool.

With yet again no return on investment, the prospect of the coalition's being able to launch and fund a fifth softwood lumber case was looking very poor for them. Even if they could get a petition together and funded, it is doubtful if they could ever get another finding of injury and a punitive level of CVD or anti-dumping. They had just confirmed to NAFTA that the actual CVD rate should have been zero all along, and they can no longer use zeroing in their calculations of anti-dumping.

We also must remember that the U.S. government is seeking to be the big guy in this series of binational free trade agreements instead of being just another name plate and a chair at the WTO. As you know, they are in the midst of negotiating a bunch of these FTAs. The administration's appetite for another round of softwood lumber is waning, as they know that these other countries have been watching them try to skate around their NAFTA obligations while wondering what, if the U.S. disrespects their agreements with their friends, they will do to them.

This in itself begs the question of why anybody would make a deal with someone who does not freely abide by the one they already have. But Canada has done just that, and we now face a hurdle that we may not be able to pass. The Canadian government has joined forces with the coalition and the U.S. government in their fight against us. They seek to moot our legal victories. They are taking our money from us and using it to provide funding and a return on investment to our U.S. competitors. They are imposing commercially unworkable business conditions on us. They are taking over the role of the U.S. Department of Commerce, ensuring that our products will be uncompetitive in the United States.

The objective of the U.S. coalition in this agreement was to have our government impose taxes and quotas upon us, which would make us uncompetitive in the U.S. market. Getting their legal fees paid and a return on investment was just a bonus. With Canada's help they have succeeded. The vast majority of our U.S. competitors use U.S.-grown wood fibre to produce duty-, tax-, and quota-free, value-added products. We cannot compete with them if our federal government taxes the products that we make in Canada for export to our primary market.

It must also be remembered that we are not the only country producing value-added wood products for sale in the United States. We cannot compete in the U.S. market with countries such as China, when our government taxes our exports and their government does not tax theirs.

We had been suffering under a 10.5% duty that allowed us to ship as much as we wanted. Instead of negotiating a deal that led to free trade, or taking our legal victory--paying no duty and getting all our money back--the Government of Canada has apparently decided that our industry is better off being forced to pay 15% to 22% and to give away a billion of our dollars to our competitors. This is to ensure that they will be sufficiently rewarded this time, which will virtually guarantee a next time.

Even the Canadian Lumber Trade Alliance, which is the umbrella group for Canada's major forest companies, recognizes this. On Friday they filed a response to the U.S. Court of Appeals opposing the U.S. and Canadian governments' efforts to have the coalition's constitutional challenge of NAFTA chapter 19 vacated. In supporting the coalition, the Canadian Lumber Trade Alliance stated:

While we vehemently dispute Petitioner's baseless characterizations of the reasons for the softwood lumber dispute and the conduct of the Canadian parties, we do agree that there is almost certain to be future lumber litigation initiated by the Petitioner, and the parties inevitably will end up before NAFTA BNPs again in the future.

Given that this agreement makes another case almost certain, they're saying let's find out now if it is worth bothering with NAFTA, or maybe we should just go straight to the Court of International Trade.

The ability to even do business under this agreement is very questionable. Depending on a composite price, there are eight different possible tax percentages and three different values for calculating it.There is the possibility of actually turning the shipment around if one of three different shipment levels has been exceeded. And it could apply either regionally or individually. These tax rates or quotas will change every month. One of the taxes will even be retroactive.

Our members are extremely discouraged. Let me read a comment from one of them to illustrate. You need to know what a “surge mechanism” is first. The 10.5% duty is now a 15% tax. But if a region ships over its quota in a given month, the tax goes to 22.5%. That's called the “surge mechanism”.

So here is his comment. I've received many, but this one's very illustrative:

The new fundamentals are just starting to be realized by most people. I just had my first experience. My last cut made a very small profit if the tax is 15%. I lose if we surge. The interesting part about this is that it feels kind of like the lottery. I will find out next month if I won or lost. Further, I find that it leads to a very interesting business decision. Do I double down? Repeat the process and double my profits, or double my losses? I don't know if I am making money or losing money while trying to make this decision.

We can't do business like this. We buy wood fibre at arm's-length market prices, and we manufacture it to serve niche markets with custom products. It takes time. We cannot even quote our customers if we do not know at what level our government will tax our shipments when they're ready to ship or if they will retroactively want more tax at a later date.

The uncertainty and lack of stability inherent in this agreement is already resulting in questions from our increasingly nervous bankers. Our members believe their already stressed businesses will suffer further negative impacts if this agreement proceeds. They believe it will result in further decreases in Canadian value-added processing and that there will be further employment losses and business failures.

The Independent Lumber Remanufacturers Association urges you to recommend convening international trade committees again, so that the parties affected by Bill C-24 may appear as witnesses and express their views on this pending legislation.

We realize that sessions were held earlier in this process, as we appeared at them, but things have changed a great deal since that time. For example, we were originally assured that all our interest would be returned to us, but now Canada will take some of it too. We were originally told in writing that we would get all our money back if we elected not to sell to the EDC at a discount, but now Canada is imposing a special charge and will take that money from us too. We were originally told that 95% support was required, but when it was not there, Canada changed this requirement. We were originally told that all litigation must be dropped, but when it was not dropped, the Government of Canada changed that requirement too.

We have yet to even see the much-changed final agreement that the GOC plans to force upon us, and yet we are currently operating under it. We now have experience with this agreement and what it will do to our industry. We need the opportunity to relate this new knowledge to the trade committee.

At the July 31 trade committee's meeting, a motion by Mr. Julian was passed to take the committee to the affected parties and hold meetings in B.C., Quebec, and Ontario.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

First of all, I would like to thank the witnesses today for their legal opinions about Bill C-24. Every opinion is of benefit. The arguments will come from opinions.

Mr. Feldman, in respect of your opinion on Mr. Julian's suggestion about the double charge, a company like Canfor stands to get about $870 million back. If your opinion is correct, they could be facing an additional $156 million charge. If they had concerns about it, do you not think that as we speak they would be landing with a planeload of lawyers? Don't you think that if they had these concerns they would be doing due diligence the instant this bill was off the presses?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

We are speaking to Bill C-24, Mr. Cannan.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you very much, Mr. Chair.

To come back to your comments, Mr. Pearson, about the loose or vague language contained within the draft legislation, my question back to you is this: how probable would there be litigation arising from this to clarify the loose language, and how soon might this litigation arise?

In other words, if we don't do our due diligence on Bill C-24, when would litigation possibly arise, coming out of the loose or vague language?

[Guy André, Bloc, Berthier—Maskinongé, QC]

Good morning, Messrs. Feldman and Pearson. I will speak in French because I can express myself better in that language. Thank you for being here today and for giving us different points of view about this bill.

You are no doubt aware that the Conseil de l'industrie forestière du Québec and all Quebec industries supported the agreement: the figure generally given, Mr. Harris, is 92% of industries in support. Nevertheless, this support was unenthusiastic, as you know. The demands of the various parties for support to industry through loan guarantees and other means gradually created a form of pressure. We are now reaching the final stage. The agreement was signed on July 1, in Geneva, where I was as well. The companies were exhausted. In Quebec, they wanted to be reimbursed. They were experiencing major job losses, suffering from a lack of support and similar problems. Here we are now with Bill C-24. We in the Bloc Québécois will support it because we have been told to do so by Quebec industry and our party is responsive to its members.

According to what you said, this bill does not fully reflect the agreement. You spoke about tax treatments under the agreement that were not included in the bill. I undertand what you are saying, of course. My colleague Mr. Cardin, who is not here, told you that your testimony was interesting, but that we had reached a different stage. Criticism must be taken into account. We are trying to move forward, because the pressures are enormous. The companies, who have begun to receive reimbursement, first had to complete a form, which was anything but easy. We know that the process is lengthy and that there are issues involved in all of this.

The companies want to be reimbursed. No one wants to go back before the courts: that would be going round in circles, unless there is an election, as Mr. Cardin was saying. Even then, it would not deal with the company issue.

Are there any amendments you would like to make to this bill, without casting doubt on all of the contents and the fact that the companies want reimbursement?

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Mr. Chair, thank you very much.

I am delighted that you are here today, Mr. Feldman, Mr. Pearson, and Mr. Woods. It's very important. This committee has to do its due diligence on Bill C-24, and the concerns you're raising are very significant and are something the committee needs to take into consideration.

I'm very pleased to follow Mr. Harris, because Mr. Harris raised the issue that he thinks other people may say other things about Bill C-24.

Now, we know, Mr. Chair, that in the last few days a number of organizations, municipalities, and industry representatives have written to the clerk to indicate that they want to be heard on Bill C-24. So I will raise a notice of motion. We have three notices of motion we sent to the clerk this morning prior to this committee. But I'll read mine out so that it's on the record:

That the Standing Committee on International Trade hear testimony from those organizations, businesses and municipalities that have recently written to the Committee to request to testify on Bill C-24, and that they be heard either in person, or by video, or telephone conference before the beginning of clause by clause consideration of Bill C-24 by this Committee.

That's a notice of motion for the beginning of the meeting on Thursday, Mr. Chair, and it's a good segue from Mr. Harris's comments.

I'd like to come back now to a point you raised, Mr. Feldman. In this turn, I'm going to concentrate on you. Mr. Pearson, I'll come back to you for questions on my next tour.

Mr. Feldman, you raised the issue of the payments that have been made. Essentially, the taxpayers picked up $950 million yesterday in payments out to companies. I certainly applaud this, as you did, and that the government has finally acted. They should have acted nine months ago and done this. We've said all along that the government had the power to take taxpayers' money and apply it to help the industry, and indeed, yesterday they proved that they can and that we were right on that matter.

Since the industry is receiving those taxpayers' funds, the issue, of course, is due diligence on taxpayers' money. We had a judgment on October 13 that essentially awards all the money back to Canada, as a taxpayer. And given that the taxpayers are picking up the tab, I guess the question would be what would happen--you referenced the fact that this committee and Parliament have the right to turn Bill C-24 down--if we indeed did turn down Bill C-24. How would that judgment of the Court of International Trade apply, and when would the taxpayers essentially get the money back that has been forwarded or advanced through EDC?

[The Chair, Conservative, Leon Benoit]

Your time is up, Mr. Harris.

I would like to encourage everyone to focus on Bill C-24. Let's stick to the subject at hand. We have the gentlemen here for less than an hour, so let's get on with the questioning.

Mr. Julian, go ahead, please. You have seven minutes.

[The Chair, Conservative, Leon Benoit]

Mr. Harris, perhaps we could get back to Bill C-24 and the issues surrounding that.

[Dr. Elliot Feldman]

There may be two or three ways in which I'd like to approach your question.

First, the agreement does not dictate to Parliament what Parliament has to do. That is, Parliament has a choice over this legislation. If there were no Bill C-24, the agreement would fall apart. But it wouldn't be as if the two federal governments were able to come together and tell Parliament it must pass this bill. To the contrary, the architecture of the agreement is that this legislation was supposed to precede. And what preceded was the ways and means motion, which is a temporary act, not this definitive legislation.

So without advocating any position at all, I'm merely trying to clarify for you that when you say this is done and you're now compelled to adhere to the terms of the agreement through this legislation, I don't think that's exactly so.

You could elect not to pass this bill. If you did that, you would undo the agreement, because the bill is supposed to be about the export tax, and the export tax is absolutely a condition of the continuation of the agreement.

The main point I've raised this morning is that the other taxes--the surcharges, the income tax, and so on--were not part of the agreement, and there's no obligation to pass those in relation to the agreement.

But as to the export tax, if you elected not to pass that, which is your prerogative, you would undo the agreement. But it's not as if the two governments could dictate to Parliament that you have to pass this bill.

[Dr. Elliot Feldman]

I certainly don't want to be part of a revisionist history. The industry was not at the table, did not participate in the negotiations, and is not signatory to the agreement.

We were consulted fitfully. We received drafts on very short time horizons. We were not consulted about Bill C-24. We received no drafts of Bill C-24. We received no explanations of the intentions or ideas behind Bill C-24 at any time. So as to the bill, from me at least and I think also from Mr. Pearson, you're getting a fair reading from reviled lawyers--it's lawyers, after all, who are going to have to deal with the bill—and we're reading it back to you as best we can, interpreting what the draft says as best we can, but not having been consulted at all, at any stage, about this bill.

[The Chair, Conservative, Leon Benoit]

Monsieur Cardin, first of all, we're not going back into discussion of the agreement. Secondly, Mr. Feldman appeared before the committee a couple of times on the agreement, so he certainly was involved.

Go ahead, gentlemen, but please stick to the Bill C-24 questions.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Good morning gentlemen and thank you for being here today.

To begin with, I must admit to you that there has been a time lag. This is unfortunate, particularly as I share virtually all of the concerns about which you have informed us. The fact remains that we are now studying Bill C-24, which is based on a signed agreement that almost has force of law. We are dealing here with statutes that would apply in Canada.

We at the Bloc Québécois had discussed many subjects, including the exchange rate. We had also discussed the tax treatment that could be applied if new amounts were received. The tax status can vary almost dramatically from one company to another. Some may be penalized indirectly, depending on the tax treatment applied. What you have been informing us of today should have been negotiated under the agreement. As it happens, the bill under review today implements the agreement. The process is therefore already underway.

Would you say that there was genuine consultation on the part of the government with a view to preparing and formulating this agreement? Given that the agreement has been signed and that what is at issue now is passing Bill C-24, it could be said that it is the end of the process.

At the beginning, the government told us repeatedly that 90 per cent of companies were in favour of this agreement. Were specialists like you able to contribute to the drawing up of this agreement?

[Darrel Pearson, Senior Partner, Gottlieb & Pearson, International Trade & Customs Lawyers, As an Individual]

As to the reason for our participation and our role here today, in answer to your question, in general it can be said that Gottlieb & Pearson has been representing the Canadian importing and exporting communities in Canada since 1969, and of course, we're committed to that task. Today we serve the role more properly described as amicus curiae, so we have no client per se. These comments are the comments of myself and my firm.

I have a few introductory remarks and then I'm going to focus on three technical aspects of the legislation and seek to be of assistance to this committee.

As we review Bill C-24, the focus of our attention must shift to assisting Canada's softwood lumber industry by facilitating the softwood lumber export business to the United States, which is consistent with the 2006 treaty, the SLA, under a new legislative regime. Under the assumption that Bill C-24, as it will be amended, will pass into law, Parliament must create a law that is transparent, as user friendly as possible, and does not constitute a non-tariff barrier to trade.

In my view, the committee should focus on ensuring that the statute and regulations to be promulgated are as devoid of ambiguity as possible, do not cause undue, unnecessary financial and/or administrative hardship, and facilitate and do not obstruct trade. This calls for more precision than is evident from a reading of the bill. We should also be ensuring that the bureaucracies that will support the implementation of the treaty receive adequate resources to assist exporters and to enforce the law fairly and reasonably.

We understand this committee will consider suggestions intended to help ensure that technical aspects of the legislation are addressed. While comments are technical and while the industry has endured disruption and hardship in the past, the technical interpretation of the implementing legislation will have immediate as well as long-lasting effects on the industry's competitiveness and investment decisions.

So in that context, I wish to offer the following observations from our review of the bill, focusing on three elements: first, the industry; second, the charging section and related sections; and third, exporting from a region.

Starting with the industry, the draft bill, in our view, fails to adequately define the industry and softwood lumber in clauses 2 and 12 of the bill, and in what will be new section 8.4 of the Export and Import Permits Act. Clarity of definition of key terms and phrases is critical to the issue of both jurisdiction and the scope of taxation. For this reason, more precision is required.

Clause 2 simply defines the phrase “primary processing” as “the production of softwood lumber products from softwood sawlogs.” Softwood logs are not defined. Softwood lumber products are likewise not defined, but rather are to be merely named or listed in accordance with new section 8.4 of the Export and Import Permits Act.

In turn, the phrase “primary processing“ is not defined except that we may infer that it is a form of process that changes undefined softwood logs into undefined softwood lumber products. While these terms and phrases may be understood by some, if not many, in the industry in a general colloquial sense, clear definitions--that is, legal precision--is critical to permitting all the stakeholders to understand their application, and specifically to the implementation of the charging and related clauses, clauses 10 through 17 of the bill.

There is similarly a lack of definitional precision as to what constitutes the phrase “semi-finished” or “finished” softwood lumber products. The bill does state that “remanufactured” in clause 12 contemplates “changes in thickness, length, width, profile, texture, moisture or grading, has been joined together by finger jointing or has been turned.” Remanufacturing can ostensibly create semi-finished or finished softwood lumber products, and this does not address the possible distinction between the two. In other words, what degree of change by remanufacture creates a semi-finished versus a finished softwood lumber product?

Without a clear definition of softwood lumber products and the other phrases, the problem is compounded. Precision in definition is relevant to jurisdiction as well as to the calculation of the base of taxation, because the phrase “export price” is determined by reference to these key terms and phrases: “softwood lumber products”; “primary processing” and “last primary processing”, which I'll return to in a moment; and “remanufacturing”.

The meaning of “last primary processing ” in relation to softwood lumber products should be clarified, particularly as the phrase “primary processing” is defined to mean production of logs to softwood lumber products. That is a clear inconsistency that has to be addressed. The reference is paragraph 12(2)(a).

Those are comments about the industry and the key phrases that will help define processing, etc., as well as the products. I'd like to turn to the charging section now, clause 10.

One pays a charge if one exports a softwood lumber product, which is undefined except that it will be named on a list. The term “product” is simply too vague. It is not clear in the proposed legislation when, at what point in time, or at what time in processing one moves from a softwood log to a product. The list will not address this issue, and since primary processing is left without a specific definition, the degree of processing offers no help in establishing the meaning.

Second, the time of export is measured relative to loading, but the legislation fails to address what specifically constitutes the act of exporting or who is exporting. The reference is clause 5.

Third, clause 9 offers an exception to exports that pass in transit through the United States, and applies to goods that pass in transit through other countries en route to the United States, but there is no definition of “in transit”. For example, does this mean in customs control, or does it contemplate goods entered into a free trade zone or entered for consumption and re-exported without sale or modification in the extreme?

A great deal of the comments I'm offering you come from our experience in litigating and interpreting other forms of customs legislation. These are the very types of issues that have unfortunately had to be resolved by the courts unnecessarily.

Finally, the proposed legislation provides for region-based commitments and regional exceptions. Subclause 11(2) provides that a softwood lumber product is deemed to be exported from the region where the product underwent its “first primary processing”--there's a new phrase. This last phrase could be a corollary to the “last primary processing” phrase, but is no more precise than “last primary processing”. The legislation needs to address the meaning of “primary processing” of a lumber product, particularly as it specifically provides that the processing converts a log to a product. Again we have a contradiction in the usage of the terminology. This creates a potential problem in relation to counting volumes for quota purposes; the application or exemption from the charge; and the calculation of the charge amount due to the timing, the reference price, and volume quota factors. I'll elaborate very briefly.

Export prices are dependent on an FOB value where the last primary processing took place, and that could be different from where the product is exported. The bill contemplates that the region of export can be different from the physical location of export due to the deeming provision, or it could be the same in certain regions.

Export allocations are to be issued to benefit recipients with preferred rates of charge, but there is no reference to the mechanism of the allocations. We know there's going to be some form of quota regime, but we don't have any information concerning how that will work. There is no structure to that, except the delegation of that authority to the minister.

Proposed subsection 6.3(2) of the Export and Import Permits Act, provided for in clause 111 of the bill, requires more precision as to the entitlement for quota, under what conditions it is to be transferable—because there will be economic rents associated with the transfer of the quota, which we've seen in every other quota regime—and we also have to address whether or not there are any situations in which the transfer could be cross-regional.

Discrimination between independent and non-independent remanufacturers and the determination of export price are accomplished through the use of these phrases: “last primary processing”, “last processing”, and “remanufacturer”. If only primary processing is involved, the export price is the FOB value where that processing occurred; if remanufactured by an independent manufacturer, the export price is the FOB value where the last primary processing took place, possibly back one step; if the remanufacturer is not independent, the export price is the FOB value where the last processing occurred, but that begs the question as to whether the last processing is the same as remanufacture.

As to the concept of independence, the minister certifies independence under clause 25, but there is a void of factors or considerations and the bill contains no definition. There is a provision for related persons, but that, I believe, is not intended to be applicable.

If the considerations, as per the treaty, are exclusively tenure rights or relationships with those withholders of tenure rights and/or purchasers from the Crown, these should be spelled out in the definition in the statute. If there are broader considerations, these should be indicated generally so as to circumscribe the authority of the minister.

One last point: the export price in the absence of a determinable FOB value is, according to paragraph 12(2)(d), a market price determined in a sequential manner in arm's-length transactions. Unlike other customs and special import measures legislation that account for differences in quantities and trade levels through adjustments, this bill does not do so; nor does it provide for the means of selection where there's a choice within the price category. This will lead to uncertainties and disputes.

Thank you, Mr. Chairman.

[Dr. Elliot Feldman]

It contains provisions to ensure that illegal actions of the United States Department of Commerce are not expressly endorsed by the Government of Canada and this Parliament, and that private companies deprived of access to dispute resolution within the agreement are not abandoned with no recourse. Their case, Wynndel Box vs. Gorman Bros., is the last of the litigation involving private companies that indisputably has not been mooted by the softwood lumber agreement and cannot be resolved without government involvement. It's in everyone's interest not to leave their case festering as an embarrassment to both governments, apparently afraid to let the challenge be heard before a NAFTA panel.

Assuming our advice is not followed, and the relevant part of clause 18 is not deleted, as I've suggested this morning that it should be, then to subclause 18(1), in the definition of “United States duty order,” paragraphs (a) and (b), after the words “as amended”, the following words should be added: “but disregarding the final scope ruling made on March 3, 2006.” One of the amendments to which the language refers is the amendment that added “end-matched lumber illegally after five years” to the scope of the orders. The addition of those words would mean that refunds of duty deposits on end-matched lumber would not be subject to the special charge.

The minister then has discretion over the export control list. Pursuant to section 6 of the Export and Import Permits Act, at the direction of Parliament, he should exercise that discretion, consistent with clause 112 of Bill C-24, to strike end-matched lumber, because it never should have been included. Because of its inclusion in annex 1A, Parliament must direct the minister to fix the problem. These two steps would effectively extinguish the pending litigation, saving both countries from the embarrassing way in which they have been treating their obligations to name NAFTA panellists, remove the last issue affecting private companies, who have no rights in dispute resolution within the agreement, and deny the United States a final illegal act in defining the products covered by the agreement.

Finally, this agreement entered into force on October 12, not October 1. Throughout Bill C-24 there are references to October 1 as the effective date. All these references should be corrected so that the bill conforms with the facts. Regarding interest accrued to participants in the EDC program only until October 1, Parliament should consider requiring a correction. On the U.S. side of the border, interest in fact accrued until October 12, when the orders were revoked. Moreover, U.S. law requires interest accrual until the liquidation of entries. For purposes of the legislation going forward, clause 10 needs to be amended because it provides for calculation of surcharges based on an October 1 effective date. The easiest option would be to waive the surcharge for October. An alternative would be a pro-rated calculation of the surcharge for October. Either way, without an adjustment there is a risk of a retroactive surcharge based on a partial month of data, which would be contrary to the intentions of the bill.

Thank you for my extra time, Mr. Chair. I'd be happy to do the best I can to answer questions or discuss other parts of Bill C-24

[Dr. Elliot Feldman, Trade Lawyer, Baker Hostetler]

Thank you, Mr. Chairman.

I'm appearing on behalf of the Free Trade Lumber Council.

I'm pleased to appear before the committee as it deliberates over the implementation of the softwood lumber agreement. I want to express my personal gratitude for the scheduling adjustment that made it possible for me to appear. I know it took the cooperation and interest of all parties, and I'm participating today very much in that spirit.

I recognize that substantial exhaustion has taken over the softwood lumber file. There's a strong desire to believe the battle's over. Do be careful: it isn't over. Just last week the Coalition for Fair Lumber Imports told a U.S. court that it is certain there will be more litigation, and not necessarily in the distant future.

It's important that this legislation not only stabilizes but also strengthens the Canadian industry. I believe it can. Failure to strengthen the industry could haunt this Parliament beyond tonight's Hallowe'en.

The softwood lumber agreement--as initialled on July 1, signed on September 12, and even as amended on October 12--does not include a tax on refunds of cash deposits illegally collected on softwood lumber by the United States since May 2002. This money has earned interest, but while being held, not invested, importers of record could not choose to remove it from the United States. It has lost very considerable value because of an appreciating Canadian dollar.

The decision to settle the softwood lumber dispute with the United States, when it was taken and the manner it was pursued, was a government decision, not an industry decision. In light of the very significant financial losses suffered by the industry caused by the dispute, which the government broadly has acknowledged in its defence of the settlement, the government could have elected to waive all taxes of these refunds, including income taxes. After all, the settlement of the softwood lumber dispute was not supposed to be a revenue opportunity for the federal and provincial governments, and there's nothing in the agreement that requires any taxation of refunds.

The interest accumulated is much less than the loss in currency exchange, which was entirely beyond the control of the companies. The return of the principal is arguably not taxable income at all, merely the return of funds already belonging to the companies. Whatever tax treatment there is to be, Parliament should be conscious that there is nothing in the agreement about taxes on refunds. The decision to tax the refunds thus is independent of any legislative requirements to implement the softwood lumber agreement.

Bill C-24, in my view, contains at least one serious problem with reference to the tax on refunds--namely, accepting that the refunds apparently are to be garnished and taxed. The background to the tax is important for appreciating why I believe there's a problem.

The policy decision to impose a special charge appears to have been reached for two reasons: first, to assure that Canadian taxpayers, other than those in the softwood lumber business, would not have to fund any of the $1 billion guaranteed payment to the United States that is in the agreement; and second, to punish those companies that declined the government's offer of advance payment on refunds, preferring to wait for the United States to return cash deposits with interest.

According to the original plan in the agreement before it was amended, companies electing to participate in the EDC advance payment program would surrender to EDC approximately 20% of the funds due them. With participation of companies holding rights to 95% of the total returns due, the 20% premium to be paid would have funded in its entirety the $1 billion guaranteed payment.

Two problems arose. First, there was some grumbling about so-called free riders, those companies that would not receive advance payments but also would not contribute to the $1 billion payment. There was virtually no acknowledgment in these discussions that the EDC participants were striking a bargain, getting their money back more quickly in exchange for a fee. Instead, focus was on companies preferring to deal directly with the United States for their refunds.

It appears that some of the concern about fairness developed when it became apparent that EDC might not deliver funds much more quickly than the United States. But substantial EDC payments were made yesterday, comfortably ahead of schedule, which should dispose of that concern.

A further concern seemed to develop when it was understood that accrued interest on funds coming from EDC would stop on October 1 under the terms in the softwood lumber agreement, but that non-EDC participants would receive interest accrued up to the day their customs entries were liquidated. That concern also should be eliminated, for under U.S. law there can be a lag of no more than 30 days between the cessation of interest accrual and the payment of refunds. With the first EDC payment yesterday, 30 days after October 1, treatment would appear to be no more favourable on interest for the non-EDC participants.

Second, the government did not obtain participating pledges from holders of 95% of the refunds due. The October 12 amendments solved the problem of removing the related condition precedent, but not the problem of funding the $1 billion; hence, the special charge seems to have been conceived as a way to make the companies not participating in the EDC program nevertheless fund the $1 billion. Nothing, to my knowledge, was said about the reverse fairness that these companies electing to wait for refunds on a schedule determined by the United States without advances would be taxed anyway, thereby with no benefit.

The concept underlying the special charge, therefore, was to tax only the companies not participating in the EDC program, however fair or appropriate Parliament would think that might be, but that is not how Bill C-24 is drafted. The draft makes everyone pay the special charge. Moreover, the bill forbids refund of the tax to anyone, including EDC program participants.

The problem occurs because of drafting in two places, perhaps three.

Subclause 18(1) defines “specified person” to mean “a person that filed the documents and information required under the applicable United States law in respect of the importation of any softwood lumber product into the United States during the period beginning on May 22, 2002 and ending on September 30, 2006.” That definition effectively includes all importers of record of softwood lumber.

Subclause 18(3) imposes the special charge on all specified persons who receive a refund.

Subclause 18(4) then states: “The charge under subsection (3) is payable by the specified person even if the refund is issued to a designate of the specified person.” “Designate” is the term used for the escrow funds, so all importers of record, without exception--including, incidentally, non-Canadians not resident in Canada, whom importers from this legislation cannot lawfully reach--must pay the special charge. There are no exceptions. The EDC participants will have returned to them only about 82% of the refunds plus interest owed. On the money refunded to them, they will also pay the special charge, that is, they will pay the special charge in addition to the 18% they do not receive when they receive their payment from EDC.

The public promise from the government has been that these importers of record would receive refunds of the special charge, but clause 39 states: “Except as specifically provided under this Act or the Financial Administration Act, no person has a right to recover any money paid to Her Majesty in right of Canada as or on account of, or that has been taken into account by Her Majesty in right of Canada as, an amount payable under this Act.”

Nowhere in the act, and hence nowhere as “specifically provided under this act”, is there a provision for the refund of any funds collected under the special charge.

There's broad discretion in the Financial Administration Act, but it would take very creative and potentially controversial interpretation to construe any of it as “specifically providing for refunds of taxes” mandated in a law that postdates that act.

Paul Robertson testified before this committee last week that the solution to the problem is to be found in the Financial Administration Act, but he didn't say where or how. We might speculate, looking into the Financial Administration Act, at subsection 20(2), except that the language, “purpose that is not fulfilled”, might be hard to square with collecting enough money to fund the $1 billion; or perhaps in section 22, except that the discretion there would conflict with the “specially provided” language in Bill C-24.

Most likely the discretion is in subsection 23(2), which authorizes the Governor in Council to “remit any tax or penalty...where the Governor in Council considers that the collection of the tax...is unreasonable or unjust”.

Still, without an adjustment in the phrase “specifically provided” in Bill C-24, the mandate to “remit any tax or penalty” in the Financial Administration Act would not appear to reach a tax imposed later, for which there is no special provision, in fact, in the Financial Administration Act.

And there's a question of fairness—the very basis of the mandate in that act. EDC participants entered a bargain for early payment; others accepted potentially later payment and therefore declined the bargain. Rhetoric about free riders notwithstanding, it's not obvious that reliance on a clause about fairness would authorize remittance to one group and not the other. There is no other apparent rationale for these taxes, which cumulatively will exceed the $1 billion owed the United States.

In an effort to gain acceptance for the agreement, carrots and sticks were brandished like medieval weapons, but always with the common assumption that the refunds were to fund the $1 billion promised to the United States.

Buy why? When asked about loan guarantees, the government said the EDC could afford to advance all the money owed the industry, so presumably the government has other sources to fulfill its pledge.

Why not embrace the simplest and best solution to the writing of Bill C-24, to embrace the principle of no new taxes? Delete clause 18 in its entirety and use the Financial Administration Act not to create refunds on dubious authority but to waive the income taxes on the basis of authority indisputably there. The only tax this bill ought to require is the export tax required by the softwood lumber agreement.

I want to quickly address two other points. Mr. Robertson, when he appeared before this committee one week ago, acknowledged that individual companies have no recourse to the dispute settlement mechanism and that the mechanism was not designed to address any of their concerns.

Last spring, not long before the initialling of basic terms on April 27, the United States Department of Commerce illegally modified the scope of the products covered by the anti-dumping and countervailing duties to include end-matched lumber. The Department of Commerce rejected the request of private companies for a review of this illegal scope determination. Subsequently, this amended scope became part of the agreement and is now part of Bill C-24 in two different places, pertaining both to the special charge and to the export tax.

We consider the inclusion of this product an error, and I'm setting out here how to fix it. I'm also indicating why it's particularly important to do so. The two companies most affected requested NAFTA panel review. The two governments, Canada and the United States, have failed to fulfill their NAFTA obligations and have not named panellists. The NAFTA secretariat, failing to meet its obligation to name panellists from the rosters when the governments failed to name them, has neither acted nor responded to pleadings.

There is a cure available in Bill C-24 for this problem—