Finance Committee on Oct. 24th, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 82nd meeting of the Standing Committee on Finance.

I apologize to our guests. There was a delay in the House that meant we couldn't start the meeting exactly on time.

Pursuant to Standing Order 83.1, we are continuing our pre-budget consultations for 2012. We have with us in this panel five organizations: the Canadian Alliance of Student Associations; the Canadian Association of Oilwell Drilling Contractors; the Investment Industry Association of Canada; the Portfolio Management Association of Canada; and the Rideau Institute.

You each have five minutes for your opening statement. We will start with Mr. Dayler and we'll work our way down the row. Then we'll have questions from members.

[Zachary Dayler, National Director, Canadian Alliance of Student Associations]

Thank you, Mr. Chair.

On behalf of our 25 student associations across the country, representing over 300,000 students, I want to thank you all for the opportunity to appear before you today and to bring forward our recommendations.

Canada needs more educated people with less debt. Canada recently fell from 8th to 12th place in the rankings of the Global Innovation Index and from 19th to 25th place for investment in human capital and research. This shows that compared with other nations, Canada is not investing enough in higher education and research and development to keep pace. While our outputs are good, other countries are catching up.

CASA believes the government should invest in programs that are working and further invest in those that will complement future success.

By 2017, university and college education will be required for 75% of new jobs. The problem, however, is that the costs of attaining an education are increasing at a dizzying pace, a fact that I know everyone in this room is aware of. Since 1991, the costs of education have more than tripled. In the decade between 2000 and 2010, costs of education increased more than 211%.

Given the increased costs, more and more students are turning to loans, both public and private, to fund their education, ultimately driving up their debt loads upon graduation. In 2010, Statistics Canada reported we are graduating students 10 years financially behind. The government can help address this by increasing grant funding through the Canada student grants program.

Since 2010, the CSGP has reduced the average student loan by $461. For a reasonable investment, the government can do even more by increasing available funding by 25% per qualified student. Such an investment will reduce the overall debt for low- and middle-income students, helping some of those with the most need.

Canada's universities and colleges are also magnets for global talent, and as a country, we want to not only cultivate the best and the brightest, but we should also want to attract them. Last year it was announced that 1,000 doctoral students would be accepted for permanent residency under the federal skilled worker program. The value of attracting and retaining international students is found both within the classroom and their contributions to the overall economy. The government should consider extending a similar fast track to the permanent residency program for international master's, undergraduates, and college students in disciplines that would address Canada's labour shortages.

We also need to have a focus on creating opportunity for Canadians. Demographic projections illustrate that one of the most important investments the government can make is in the aboriginal population of Canada, which is forecast to grow to 1.4 million by 2017. However, the program currently structured to support first nations and Inuit students is under a 2% funding cap placed on Aboriginal Affairs and Northern Development Canada. The PSSSP is an example of a program that could ensure future success if better funded. Those who've received funding are accessing and completing their education, and this is a positive.

We're recommending the government remove the 2% funding cap on the post-secondary student support program, fund the backlog of students who've been denied funding, and ensure that the program is adequately funded into the future.

This week is also Open Access Week. Canada needs to ensure that tomorrow's labour force has every means at its disposal to create, manufacture, innovate, and discover. This cannot be ensured through training alone. At present, most of the new findings and information generated through this research are paid for through public dollars, but it is not publicly available. The government should motivate innovation and entrepreneurial spirit by enacting legislation requiring the three federal agencies, SSHRC, NSERC, and CIHR, to ensure that all findings produced with publicly funded research are made available in an open access format.

In closing, I'd like to draw your attention to the importance of creating incentives for youth employment. Finding a job is one of the greatest challenges facing youth and students today. Canada's economy has added jobs, but youth have been left behind. To cover the costs of living, tuition, and academic materials, many students supplement available financial assistance by working during their studies. It has been reported that during the last year of an undergraduate program, 62% of students work, on average, 18 hours per week. Our members were pleased to see the government take action on the income work assessment. Now we ask the committee to take the next step and remove this earnings penalty altogether. No Canadian should be punished for earning a living.

The budget is a reflection of priorities. CASA believes every investment in education is an investment in our future prosperity and is a symbol of what makes Canada great.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now hear from Mr. Scholz, please.

[Mark Scholz, President, Canadian Association of Oilwell Drilling Contractors]

Good afternoon. My name is Mark Scholz. I'm the president of the Canadian Association of Oilwell Drilling Contractors.

Joining me today in the gallery are Mr. Doug Strong, president of completion and production services at Precision Drilling Corp., and Mr. Kevin Krausert, business development manager at Beaver Drilling Ltd.

Precision Well Servicing is the largest publicly traded service rig contractor in Canada, while Beaver Drilling is one of the oldest private, family-owned drilling contractors. We represent both of those contractors.

On behalf of the entire membership, thank you for inviting me to speak and participate in these important discussions.

CAODC represents 45 drilling rig contractors and 76 service rig contractors. We represent 100% of the drilling rig fleet in Canada—that's approximately 820 rigs—and 98% of the service rigs fleet, or approximately 1,100 service rigs.

Our membership is committed to promoting a culture of safety excellence in the industry, acting in the best interests of our member companies, their employees, and the industry as a whole, and continuing a strong tradition of leadership and cooperation.

The Canadian drilling and service rig industry is a critical sector within Canada's upstream oil and gas community. We provide a necessary service for our clients—oil and gas producers—to develop Canada's petroleum resources.

The drilling and service rig industry is part of a larger petroleum services sector. It employs thousands of Canadians from coast to coast and significantly contributes to Canada's overall GDP. Moreover, the drilling and service rig community is recognized internationally for its innovation, technology, and training standards.

My presentation will address four major themes: the promotion of a competitive investment destination; labour challenges; market diversification; and the natural gas strategy.

The government needs to continue to promote a competitive regulatory and fiscal regime in order to attract oil and gas investment. Our business relies on oil and gas producers to invest capital into new projects—oil and gas wells—in order to be profitable.

The oil and gas industry is a competitive business. Consequently, the industry is competing globally for this capital. Investors have a range of opinions or options to consider. For Canada to take full advantage of these opportunities, it needs to provide a stable and competitive regulatory and fiscal regime.

When an investment is made to develop Canada's petroleum resources, it is the drilling and service rig industry—along with a multitude of other service providers—that directly benefits from this investment. The investment provides Canadians with well-paid jobs and the raw materials to heat their homes and power their cars. Every rig that is working generates 135 direct and indirect jobs.

On the labour supply, Canada needs to address the critical labour challenges. Canada's oil and gas industry is one of the most expensive jurisdictions in the world to do business in. Although geography is certainly a major contributor to these costs, the lack of labour is a growing concern. If the labour supply is not addressed, it could have significant cost implications through unsustainable wages and inflation.

The existing domestic labour force needs to be utilized effectively. There are regions in the country with an oversupply of jobs, while in other areas there has been an oversupply of people without work.

The government should incentivize Canadians to relocate to where some of these jobs are. This could be accomplished through programs such as employment insurance or other forms of government financial support. Another option would be to provide tax credits for businesses that provide assistance to relocate workers or for travel for seasonal work.

Canadian businesses are experiencing the challenges of a growing retirement population. This will have an impact on future economic growth, as experience and industry knowledge leave the workforce and the industry moves to transition that knowledge to new workers.

The government should consider incentivizing individuals to stay in the workforce longer. This could be done through existing government pension plans, whereby an individual continues to contribute past 65 and receives higher benefits at a later retirement date.

The government needs to address market access for our crude and natural gas products. In western Canada, petroleum products are sold at a discount to WTI and Brent. The result is a significant loss of revenue for the industry and the Canadian government.

The industry requires broader market access, particularly to the emerging Asian markets. Moreover, it requires expanded capacity to the United States and eastern Canadian markets. Canada is not taking full advantage of its resource economy because of the lack of market diversification.

Finally, on the natural gas strategy, over the next several decades, fossil fuels will still be the dominant player in our energy mix. Most major energy analysts are supportive of this fact.

[The Chair, Conservative, James Rajotte]

Okay, let's just wrap it up very quickly, please.

[Mark Scholz]

In conclusion, Canada is in an enviable economic position. Much of the developed world is in economic crisis. With strong leadership Canada can certainly position itself to prosper.

Thank you very much.

I appreciate the discussion and look forward to your questions, particularly on the natural gas strategy, which I was timed out on.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll hear from Ms. Amsden, please.

[Barbara Amsden, Director, Investment Industry Association of Canada]

I'm Barb Amsden, director of the Investment Industry Association of Canada, or the IIAC.

I am pleased to share with you some comments from our association, the IIAC.

Our 170 members, with 40,000 employees across the country, range from small regional institutional and retail boutiques to national full-service companies. The interests of our members and the country's economy are closely aligned, with our members raising nearly $130 billion in equity and debt to fund businesses, not-for-profits, and all levels of government last year.

We continue to face a sluggish domestic economy and global recovery, a high Canadian dollar, and turbulent capital markets. Investors are skittish about the markets, and corporations are holding cash in reserve, now 30% of GDP, three times the historical average. The effect is that capital spending on productive investment has declined. In Q3, there were only seven IPOs valued at $270 million, compared with $540 million in 20 IPOs last year. At the same time, household debt is increasing, with base demographic shifts that will demand new ways of thinking to provide for health care and support systems for an aging population.

To cope with these challenges, government must rely on revenue from sustained economic growth and continued efficient program spending. We commend the federal government's continued prudent financial management and recommend that this continue. We urge government to keep the current competitive corporate tax rate level. Lower rates have not led to a decline in corporate tax revenues; in fact, quite the contrary. On the household debt side, we support the government's tough love decision to tighten mortgage lending rules.

While good fiscal management, competitive taxes, and balanced borrowing are key parts in the investment cycle, we need increased individual and corporate investment. Just as a circulatory system is vital to the healthy functioning of every human being, the circulation of our savings is critical for our economic health.

At the top of a handout, you'll all have something with squiggles all over it, with a generally blue colour. You'll see a stylized view of the economic circulatory system showing money saved by millions of Canadians becoming productive investments, generating jobs, leading to taxes, and contributing to a better standard of living for Canadians who save and so on. That's the kind of round diagram you see before you.

The second diagram below it shows, within the investment capital formation part of the cycle, the role of seed money, angel investors, venture capitalists, and regulated investment dealers, who are our members. Our members channel savings of Canadians into private and public investment instruments, such as stocks and bonds. Blockages at any point in the system can have serious consequences, and we think there are some blockages at various stages. A number are due to our genetics, our economy's composition. Sixty per cent of the TSX index are energy and financial institutions. Some blocks are environmental, the uncertainty in the U.S. and the eurozone. Others have risen when prescriptions taken to address one problem have caused harm elsewhere.

Neither our large national nor our small regional members can do what they do best without a steady flow of smaller companies growing to the size when the services our members offer come into play, and our members can't do as well as they might at that stage due to increasing costs.

As with our personal health, we need preventive and restorative measures, and we propose antidotes that we think you can recommend, and also rely on your power to draw attention to ones you cannot. The symptom of our weak economy is not enough capital at key stages in the financing cycle, particularly capital-intensive—

[The Chair, Conservative, James Rajotte]

Sorry, Ms. Amsden, I'm being told the interpreters are finding you a little too fast. Can we just slow you down a touch, please.

[Barbara Amsden]

I will. Thank you.

The symptom of our weak economy is not enough capital at key stages in the financing cycle, particularly capital-intensive innovative businesses with large research or technology risks that venture capitals don't address, companies with traditional market and other risks that venture funds can financial successfully.

Our diagnosis? While some problems are outside our control, some arise from aspects of financing programs, or their lack, and others from imbalances in the regulatory and tax systems. People must have confidence in the markets and taxpayers must have confidence that taxes will be paid. Not surprisingly, governments have determined that for investors and taxpayers to feel protected, regulation is the answer, but sometimes it's been to the detriment of other parts of the markets. Canada's securities commissions protect investors, but they must also promote fair and efficient capital markets. We have examples where we think the balance isn't right. CRA has a duty to ensure that taxes are paid, but the combined rules and administration that are our tax system also affect the savings to investment processes.

Still too fast?

[The Chair, Conservative, James Rajotte]

You have one minute.

[Barbara Amsden]

Okay.

The remedies we prescribe are in the circle on the back part that I've shown you. First is building up angel networks, setting a net return to Canada requirement. Second is expanding the risk capital for growth businesses. There are a couple of things we can talk about there, but most important is the flow-through share concept, which has been used in the oil and gas industry. Third is fostering the move beyond the growth stage through public-private partnerships, educating owner-operators on financing options. Fourth, at the IPO stage, is the change in capital gains treatment, but only for the higher-risk investments. Fifth is ensuring a better regulatory cost efficiency, better balance of securities and tax rules, improved entrepreneurial financial literacy, and annual checkups.

I'd be pleased to answer your questions later.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Ms. Walmsley, please.

[Katie Walmsley, President, Portfolio Management Association of Canada]

Thank you, Mr. Chair.

We are pleased to have the opportunity to make a presentation to the committee today.

My name is Katie Walmsley and I am the president of the Portfolio Management Association of Canada, formerly known by the acronym ICAC. I am accompanied today by Scott Mahaffy, who is the vice-president (legal) of MFS McLean Budden and who serves as chair of our industry regulation and tax committee.

If you have any questions after the presentation, Scott or I will be happy to comment.

PMAC is composed of over 170 investment firms from across Canada that manage investment portfolios for pension plans, foundations, endowments, and individual Canadians who are saving for retirement. Our total assets under management are over $800 billion and close to $1 trillion, if including mutual fund assets.

Given that much of these assets are in the form of pension or retirement savings, our recommendations today will centre on measures to help Canadians protect, preserve, and grow their capital to ensure they have adequate savings for a comfortable retirement.

I'd like to start by applauding the government for two initiatives that, when implemented, will go a long way to help Canadians grow and protect their savings: first, the introduction of the pooled register pension plans; and second, the pursuit of one common securities regulator.

First, let's start with the common regulator. Why do Canadians need one? What's wrong with the current, fragmented, costly system? According to the recently released 2012 CSA Investor Index, 27% of Canadians believe they have been approached with a fraudulent investment opportunity at some point in their lives, yet among this number, only 29% have reported this to the authorities.

The establishment of one common securities regulator will help improve investor protection against fraud and will ultimately increase investor confidence in the capital markets. We believe the December 2011 Supreme Court ruling suggested that the next step forward is for the government to develop constitutionally sound legislation that supports streamlined securities legislation in Canada. We truly believe that a common securities regulator is in the best interests of Canadians. We therefore recommend that the federal government extend the budget of the Canadian Securities Transition Office for at least another fiscal year to allow them to continue their work, and to work with the provinces cooperatively to make this objective a reality.

Second, we applaud the government for the recent introduction of the pooled registered pension plans. This is a very positive step forward, filling a gap for many Canadians who do not have traditional pension plans. We encourage the government to continue to work with their provincial counterparts to expand the use of PRPPs across Canada. However, given the likelihood that many provinces will not make PRPPs mandatory, we recommend that the federal government introduce specific tax incentives for employers to set up PRPPs or other retirement savings vehicles. Details of these incentives are outlined in our formal submission, but we believe these incentives will help kickstart PRPPs and make them a success.

What other initiatives would help Canadians save for their retirement? For starters, let's look at the tax they're paying for the professional management of retirement savings. There's a value-added tax principle that tax should be paid at the time of consumption. It's very logical. What doesn't make sense to us is why individual Canadians and pension plans must pay GST and then harmonize provinces' HST for the professional management of their retirement savings. They are, in effect, paying tax twice. When HST came into effect in Ontario and Nova Scotia, as examples, the pension plans in those provinces had to pay an additional tax—8% in Ontario and 10% in Nova Scotia—on the management fees. As you are all well aware, pension plans are already struggling with unfunded liabilities. The government has struck a committee that is looking at the taxation of financial services, and in light of the issue and the priority that government has given to retirement savings, we urge them to look holistically at a solution that would simplify the tax for retirement savings and ease the burden for Canadians.

We have one final suggestion. Canadians are encouraged to take the opportunity to invest globally. The government is also making international trade a priority. Many of the emerging markets, however, are not open to ordinary Canadians. On the list of designated stock exchanges, 40% are within North America, 40% are in Europe, and only three are in emerging markets.

The current list does not provide adequate risk diversification and optimum asset allocation and is completely out of date. We urge the government to both update the list and to streamline the process of keeping the exchanges current.

Thank you. Merci.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Staples, please.

[Steven Staples, President, Rideau Institute]

Good afternoon, honourable members of the committee and guests. Thank you for inviting me back to present our pre-budget consultation recommendations. My name is Steve Staples. I am the president of the Rideau Institute.

The Rideau Institute is a non-profit, non-partisan research, advocacy, and consulting group founded in 2006 with an expertise in Canadian defence and foreign policy, and we do not receive funding from the government or from firms. We are funded from donations from individuals and from consulting services we provide to non-profits and trade unions. I, myself, have been working in the field of defence spending and disarmament for about 20 years.

Our pre-budget submission has three main points for the government: first, to further reduce defence expenditures with a goal of returning to pre-9/11/2001 levels over time; second, to improve parliamentary and therefore public oversight of the military procurement processes; and third, to invest in Canadian industry by providing targeted support to areas of the economy where Canada is a world leader.

Defence spending today in Canada, even with the modest reductions made recently, remains at historically high levels. The dramatic buildup of defence budgets in the last decade, sometimes exceeding 10% a year, has left defence spending roughly 40% higher than before the 9/11 terrorist attacks. I've provided a chart from 2011 that documents in adjusted dollars where the budget is in real spending. We are sixth highest in NATO right now. In adjusted dollars, our defence spending is higher than at any point since the Cold War with the Soviet Union. I've also included that chart in the packages. However, the security situation has changed. We have a budget deficit and economic challenges at home. Our Afghanistan combat mission is over, and Osama bin Laden is dead.

Despite this, the government continues to commit to expensive procurement programs such as the F-35 and the shipbuilding program. It's evident from the analysis provided by the Parliamentary Budget Officer and the Auditor General that the costs of these programs have not been properly assessed by the Department of National Defence, and are not likely affordable, even with the increased spending commitments within the Canada First defence strategy. The National Defence budget must be brought into line.

As well, improved parliamentary oversight over major crown projects would increase transparency in defence procurement and accountability of the government and military contractors. A dedicated parliamentary committee for major crown projects would provide Canadians with additional confidence that public dollars are being used wisely, fairly, and efficiently.

For instance, on the F-35 stealth fighters, the public has been greatly confused by statements made by the government on costs that are frankly unpredictable, contracts that don't exist, and job opportunities that are little more than a hope and a prayer.

Establishing a parliamentary committee or a subcommittee responsible for major crown projects would help avoid the mistakes and complications that have arisen in many of the department's projects and help cut through some of the spin from the defence contractors and ministers.

Finally, defence procurement strategies have not reflected the government's goal of economic recovery and growth in key areas of the economy. The lack of a competitive process in sole-sourcing contracts has not guaranteed the industrial regional benefits that are essential for Canadian employment in these projects. For instance, there are no requirements for investment and job creation in the F-35 program, and I ask, what about the equally large shipbuilding program now? Where are the guarantees for jobs and investment there? Investments should be made where they stand the greatest chance of long-term benefit.

Media reports have suggested that the government is interested in a defence industrial strategy. This just doesn't make sense. With defence budgets declining globally, respected financial analysts such as PwC point to the commercial market as the best bet. Canada's future is in Bombardier's passenger jets, not Lockheed Martin's fighter jets.

Thank you, and I look forward to any questions you may have.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll go to members' questions.

Let us start with Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

My first question is for Mr. Scholz and Ms. Amsden.

Thank you both for being here and for your presentations.

In those presentations, you made almost the same comment. It was about how to reduce debt to 28.5% in one case and 25% in another. Reducing debt is not in itself a bad thing. Mr. Scholz suggested reducing corporate tax in order to get business to a competitive level. But, since 2000, the tax on businesses in general has been reduced. The tax rate at that time was 28% or 29%. It has been reduced; it think it will be 15% soon. That meant quite a substantial decrease in revenue for the federal government, partially made up for by increases elsewhere.

Basically, it was a substantial drop. Some things have been mentioned. Some people have said that it resulted in idle money piling up. Others have said that investments were going to increase. The reality is that, if you compare the present situation with the situation in 2000, 2001 and 2002, real investment has been stagnant for a long time. The logic used by a lot of economists is to think that reducing taxes will increase investments and everything will be fine. In reality, we have not seen that direct correlation at all.

I would like your comments on that. You can start, Mr. Scholz. You can answer afterwards, Ms. Amsden.

[Mark Scholz]

Yes, sure, and thank you for the question.

I would like to maybe go back to the experience that we had in 2008, particularly in Alberta, where we had the provincial government make some changes in the royalty structures for oil and gas producers. This directly affected the amount of activity that we saw and were used to in previous years.

The message I'd like to give is that what investors are looking for...and we benefit from that investment. When investments are made, we go to work and we put people to work. What we have seen is that when the government can put in place a stable and predictable regulatory regime, on the taxation side as well as making sure that there's a clear process for regulatory review, it benefits our operations. We've seen that when governments make—

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I'd ask you to be short, because I don't have much time.

[Mark Scholz]

At the end of the day, we support stable and competitive taxation rates.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Do you consider the current rate to be competitive?

[Mark Scholz]

At the end of the day, we have to ensure that we are competitive vis-à-vis other jurisdictions.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

My question is, are we currently competitive?

[Mark Scholz]

I think we're moving in the right direction, which is making sure that we're competitive vis-à-vis other jurisdictions.