Finance Committee on May 1st, 2007

[Mike Wallace, Conservative, Burlington, ON]

That's it?

[The Chair, Conservative, Brian Pallister]

Back to this baby. This incredible desire not to throw the baby out with the bathwater is interesting to me.

The AG's reports, and there are Stats Canada data in the last one, right back to Denis Desautels, have talked about the use of offshore tax havens, and it's growing. In the last couple of reports it has been growing exponentially, and this is in part because there's a perceived advantage, obviously, of paying less tax offshore. Clearly that's the motivation, and that's okay.

What we're talking about, apparently, with this budget proposal is addressing the issue of interest deductibility to remove one incentive to move money offshore. Correct? Okay.

If the Barbados and the Bahamas and Cyprus were such wonderful places to develop businesses on their own, that would be one thing. But to talk about flowing billions of dollars out of Canada, investing it there, and then writing off your interest here obviously creates a smack of unfairness in the minds of people who are not able to do that, who are out working and paying their taxes. I think this is really at the heart of the motivation around dealing with this issue.

Rather than let the baby soak in the dirty bathwater, I think there's a need to try to determine how we can address this issue. You've spoken rather clearly and well about the difficulty in determining what is a legitimate offshore investment and what's simply an attempt to defray your own costs here in Canada. That, we understand, is challenging.

I understand we're talking about hundreds of thousands of these types of entities that have been established offshore that are now being used by Canadian companies, and that Canada is one of the fastest growing countries in terms of making use of these types of structures. Is that true?

Secondly, in terms of the repatriation of profits earned offshore--Mr. McCallum spoke about levelling the playing field--do other countries allow you to borrow money corporately or individually, say corporately in their own jurisdictions, write off the interest, take the money, put it offshore, pay little or no tax on it, and then repatriate it tax free?

Are we in a playing field with a bunch of countries around the world who do that, or are we one of the only jurisdictions that allows that particular tax incentive to exist?

[David Dodge]

I wish I could answer that question as of 2007. I worked on this back in 1996-97. All I can say is that at that time our problem was that other countries in fact allowed all of these games to be played. So our firms would have been at a serious disadvantage if we had closed the thing up tight.

The real issue here, and it's on the tax haven side of it, is that unless collectively the European Union, the U.K., the U.S., ourselves, Australia, and the Japanese really went at this full bore, it's very hard for any one individual entity to go at it because they then make it difficult for their folks.

I can't answer your specific questions because I am now ten years out of date in terms of what goes on. You really should ask the Finance officials on that.

[The Chair, Conservative, Brian Pallister]

Would it be--

[David Dodge]

It's a very difficult, highly annoying, highly frustrating issue, because the appearance here of all sorts of bad things and the actuality of some bad things going on bring the system as a whole into disrepute. That is the very important reason to try to deal with it. All I'll say is that in the two times I tried to go at it, it was extraordinarily difficult to actually find legislative means to accomplish the goal. That is now the task that the minister has given the department, and hopefully people have learned something in the last ten years and can do a lot better than I was able to do.

[The Chair, Conservative, Brian Pallister]

Thank you for those comments.

It would seem clear that our system is based on voluntary compliance and also on a presumption of fairness, and that anything that creates the impression of unfairness is something we should be addressing. So this argument that level playing fields have to be preserved smacks to me of the argument that the race to the bottom is the one we should be entering. Surely, if corporate entities are able to escape their obligation through illegal mechanisms condoned by the government, this shifts the obligation to provide the revenue that supports government programs onto individual people. Do you have any information vis-à-vis--

[David Dodge]

That's absolutely correct, and therein is the difficulty. This is just a very difficult area, and it's been difficult ever since I've been engaged in this. It was difficult when we rewrote the tax law in 1972. When we rewrote it in 1972, the act was about that thick; it's about that thick now, and a lot of it has been to try to deal with these very thorny issues. It's really important to deal with them.

[The Chair, Conservative, Brian Pallister]

Thank you. I think it's a very important issue for us to address in particular at a time when Canadians have just submitted their income tax returns, because I think Canadians want to feel that the tax system is one that is fair and that protects their best interests and not certainly just a special group on the side.

In any case, we'll continue with Madame Wasylycia-Leis now.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

I agree this is a very interesting and important topic, but I want to come back to the manufacturing crisis, since we are talking about a loss to our economy of somewhere in the neighbourhood of $2 billion to $3 billion, in terms of lost wages and spin-off effects.

I want to ask you, Mr. Dodge, if in fact you don't have a regret as you leave your position, in terms of giving this sense of Canada's economy operating at full capacity, thereby giving consecutive Liberal and Conservative governments some reason not to act and therefore causing a problem.

Related to that, I want to ask the question that was in the paper from St. John's, Newfoundland, from Lana Payne. Would you consider taking on the manufacturing crisis before you depart for greener pastures? That's one question.

The second has to do with your involvement in and your perspective on a number of public policy issues. I just have to quote from Andrew Jackson because I think he says it well:

...somewhat at odds with his otherwise impeccably neo liberal/macro orthodoxy credentials, Dodge had a lively interest in broader public policy as a force for social and economic improvement.

I know you've spoken out on child care, on housing, on retirement. I'm just wondering if you have any parting thoughts on any of those issues, particularly the absence of a national child care program.

My third question has to do with hedge funds. We haven't talked about that at all. It has been a topic of discussion at the G-7. I'm wondering--

[The Chair, Conservative, Brian Pallister]

Just a suggestion. If you want a response to the first couple, you may not want to pose the third. You're running out of time.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

I would like an answer on all three, including hedge funds. I'll leave it at that for now.

[David Dodge]

I'll try to go very fast. First of all, when I come back in October we can talk about the social program side.

On hedge funds, what I said earlier is absolutely true. These private pools of capital--whether they be hedge funds, whether they be pools of taking corporations private--and this tremendous, apparently inexhaustible supply of liquidity to fund these guys are the real issue, and I'd be really happy at some point in the future to come back and spend some time on that.

Hedge funds is a kind of catchword that catches this really large problem. It's a very real problem and potentially a real concern.

Let me come back to manufacturing. I have no apologies for the fact that in trying to keep the inflation level, at certain points of time this means there's a relative shift from manufacturing to other sectors, and at other points of time, such as in the nineties, it meant a relative shift from other sectors to manufacturing. That is going to take place. Indeed, were that not to take place, we just would not have the total resources to deal with increasing production in the service and primary sectors without having a lot of inflation.

As long as relative prices are going to move around a lot, we are going to have sectors that are declining for a period of time and others that are rising for a period of time. The real issue is whether we have the adjustment mechanisms in place to facilitate the smooth transfer, in particular of workers from lower productivity, lower value-added occupations to those of higher value added. That is the real question.

[The Chair, Conservative, Brian Pallister]

We have time for just two or three more questions if we go reasonably quickly.

Mr. McKay, we'll begin with you, then Mr. Dykstra, and we'll conclude with Mr. Thibault.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

I take the view that Canada can't dress itself up like a Boy Scout in short pants, and therefore we have to have a competitive tax regime.

I did want to ask a question with respect to the issue of the rise in the Canadian dollar. The Canadian dollar is hovering around 90¢ right now. In theory, that makes Canada's assets more expensive to outside purchasers, yet simultaneously we see a lot of Canadian industries being gobbled up by foreign interests. The steel sector is pretty well gone. The beer sectors are all gone. Income trusts are on their way. You have mining sectors, and there are a lot of articles in the business press about the “hollowing out” of corporate Canada, which will challenge our economic sovereignty.

In economic theory, this seems to be counter-intuitive.

[David Dodge]

I'm going to let Paul deal with that, but let me make two observations. One, corporate consolidation is going on worldwide. It's going on here. It's going on elsewhere. And there are some very real reasons for that.

Second, the flows actually do go in both directions. Paul is going to talk about that in a second.

Third, it comes back to the issue that was just addressed, and that is that we do seem to have an inexhaustible supply of debt finance to facilitate, whether it be hedge funds or other private pools of capital, taking companies out of the public domain. This is not just in Canada; this is a global phenomenon, and it is an issue that, as a central bank, we have to be concerned about.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But interestingly, while you were giving testimony, Murdoch just made a $5 billion offer for the Dow Jones. Your point exactly.

[Paul Jenkins]

Let me address this issue of hollowing out, because it is important to get the facts around this issue.

There have been a couple of quite good studies recently. One was by the Institute for Competitiveness and Prosperity--this is the Martin institute, out of the Schulich school--looking at this issue of hollowing out. In fact, what they find is just the opposite, that in terms of the number of what they would call global leaders in the Canadian economy, the number has increased quite dramatically. They're comparing basically 1995 to 2006. So you are seeing a growing presence of Canadian companies outside Canada operating on a global scale, as well as some movement in the opposite direction.

The other study that I would draw your attention to is one by Statistics Canada, which also looked at this issue from the point of view of job creation, again looking at the growth of head offices within the Canadian economy. The growth of jobs at head offices within the Canadian economy over the last 10 years or so has come from foreign companies that now operate with head offices here in Canada.

The globalization does have this movement in both directions, and the numbers are important to look at here.

[John McKay, Liberal, Scarborough—Guildwood, ON]

If you took the financial services industry out of those numbers, what would it look like?

[Paul Jenkins]

I don't have a breakdown by sector, but certainly the Martin study looked at it across various sectors. What you're getting is this globalization showing up in the high-tech sector, health care, health services biotech. You see those sectors that have grown in importance in the Canadian economy becoming more important and indeed becoming global players.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Canada seems to be getting bought at a quicker pace than either Australia or the United States, so I don't understand the study.

[Paul Jenkins]

The study, as I said, looks at the presence of Canadian companies globally today compared to 10 or 15 years ago, and what you're seeing is that the number of Canadian companies operating globally has increased across a broad sector of areas.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

Mr. Dykstra, for just three minutes, sir.

[Rick Dykstra, Conservative, St. Catharines, ON]

You are being tough, I tell you.

[The Chair, Conservative, Brian Pallister]

Two and a half.

[Rick Dykstra, Conservative, St. Catharines, ON]

I'm going to simply ask my questions first and let you respond, and roll out the clock, as they say.

One of the things that no one has asked about that I really want to know is, have you recovered the items that were stolen from the Bank of Canada?

Second, I didn't see a lot in here, but obviously the environmental measures we'll be taking over the next number of years are going to have an impact, as we've talked about, to try to balance the environment and the economy at the same time. I'd like to hear your comments on that.

Third, I come from a riding that is very close to the border. I noted in your report the expected increase in our dollar as compared to the U.S. We're actually above what you're predicting for the end of April, beginning of May. There is a big impact on the greenhouse industry, the wine industry, the automotive industry in Niagara, and obviously across the country.

Could you briefly touch base on all three?