Bill C-45 (Historical)

Jobs and Growth Act, 2012

A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures

Part 1 implements certain income tax measures and related measures proposed in the March 29, 2012 budget. Most notably, it
(a) amends the rules relating to Registered Disability Savings Plans (RDSPs) by
(i) replacing the 10-year repayment rule applying to withdrawals with a proportional repayment rule,
(ii) allowing investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free basis to the RESP beneficiary’s RDSP,
(iii) extending the period that RDSPs of beneficiaries who cease to qualify for the Disability Tax Credit may remain open in certain circumstances,
(iv) amending the rules relating to maximum and minimum withdrawals, and
(v) amending certain RDSP administrative rules;
(b) includes an employer’s contributions to a group sickness or accident insurance plan in an employee’s income in certain circumstances;
(c) amends the rules applicable to retirement compensation arrangements;
(d) amends the rules applicable to Employees Profit Sharing Plans;
(e) expands the eligibility for the accelerated capital cost allowance for clean energy generation equipment to include a broader range of bioenergy equipment;
(f) phases out the Corporate Mineral Exploration and Development Tax Credit;
(g) phases out the Atlantic Investment Tax Credit for activities related to the oil and gas and mining sectors;
(h) provides that qualified property for the purposes of the Atlantic Investment Tax Credit will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity;
(i) amends the Scientific Research and Experimental Development (SR&ED) investment tax credit by
(i) reducing the general SR&ED investment tax credit rate from 20% to 15%,
(ii) reducing the prescribed proxy amount, which taxpayers use to claim SR&ED overhead expenditures, from 65% to 55% of the salaries and wages of employees who are engaged in SR&ED activities,
(iii) removing the profit element from arm’s length third-party contracts for the purpose of the calculation of SR&ED tax credits, and
(iv) removing capital from the base of eligible expenditures for the purpose of the calculation of SR&ED tax incentives;
(j) introduces rules to prevent the avoidance of corporate income tax through the use of partnerships to convert income gains into capital gains;
(k) clarifies that transfer pricing secondary adjustments are treated as dividends for the purposes of withholding tax imposed under Part XIII of the Income Tax Act;
(l) amends the thin capitalization rules by
(i) reducing the debt-to-equity ratio from 2:1 to 1.5:1,
(ii) extending the scope of the thin capitalization rules to debts of partnerships of which a Canadian-resident corporation is a member,
(iii) treating disallowed interest expense under the thin capitalization rules as dividends for the purposes of withholding tax imposed under Part XIII of the Income Tax Act, and
(iv) preventing double taxation in certain circumstances when a Canadian resident corporation borrows money from its controlled foreign affiliate;
(m) imposes, in certain circumstances, withholding tax under Part XIII of the Income Tax Act when a foreign-based multinational corporation transfers a foreign affiliate to its Canadian subsidiary, while preserving the ability of the Canadian subsidiary to undertake expansion of its Canadian business; and
(n) phases out the Overseas Employment Tax Credit.
Part 1 also implements other selected income tax measures. Most notably, it introduces tax rules to accommodate Pooled Registered Pension Plans and provides that income received from a retirement compensation arrangement is eligible for pension income splitting in certain circumstances.
Part 2 amends the Excise Tax Act and the Jobs and Economic Growth Act to implement rules applicable to the financial services sector in respect of the goods and services tax and harmonized sales tax (GST/HST). They include rules that allow certain financial institutions to obtain pre-approval from the Minister of National Revenue of methods used to determine their liability in respect of the provincial component of the HST, that require certain financial institutions to have fiscal years that are calendar years, that require group registration of financial institutions in certain cases and that provide for changes to a rebate of the provincial component of the HST to certain financial institutions that render services to clients that are outside the HST provinces. This Part also confirms the authority under which certain GST/HST regulations relating to financial institutions are made.
Part 3 amends the Federal-Provincial Fiscal Arrangements Act to provide the legislative authority to share with provinces and territories taxes in respect of specified investment flow-through (SIFT) entities — trusts or partnerships — under section 122.1 and Part IX.1 of the Income Tax Act, consistent with the federal government’s proposal on the introduction of those taxes. It also provides the legislative authority to share with provinces and territories the tax on excess EPSP amounts imposed under Part XI.4 of the Income Tax Act, consistent with the measures proposed in the March 29, 2012 budget. It also allows the Minister of Finance to request from the Minister of National Revenue information that is necessary for the administration of the sharing of taxes with the provinces and territories.
Part 4 enacts and amends several Acts in order to implement various measures.
Division 1 of Part 4 amends the Trust and Loan Companies Act, the Bank Act, the Insurance Companies Act and the Jobs and Economic Growth Act as a result of amendments introduced in the Jobs, Growth and Long-term Prosperity Act to allow certain public sector investment pools to directly invest in a federally regulated financial institution.
Division 2 of Part 4 amends the Canada Shipping Act, 2001 to permit the incorporation by reference into regulations of all Canadian modifications to an international convention or industry standard that are also incorporated by reference into the regulations, by means of a mechanism similar to that used by many other maritime nations. It also provides for third parties acting on the Minister of Transport’s behalf to set fees for certain services that they provide in accordance with an agreement with that Minister.
Division 3 of Part 4 amends the Canada Deposit Insurance Corporation Act to, among other things, provide for a limited, automatic stay in respect of certain eligible financial contracts when a bridge institution is established. It also amends the Payment Clearing and Settlement Act to facilitate central clearing of standardized over-the-counter derivatives.
Division 4 of Part 4 amends the Fisheries Act to amend the prohibition against obstructing the passage of fish and to provide that certain amounts are to be paid into the Environmental Damages Fund. It also amends the Jobs, Growth and Long-term Prosperity Act to amend the definition of Aboriginal fishery and another prohibition relating to the passage of fish. Finally, it provides transitional provisions relating to authorizations issued under the Fisheries Act before certain amendments to that Act come into force.
Division 5 of Part 4 enacts the Bridge To Strengthen Trade Act, which excludes the application of certain Acts to the construction of a bridge that spans the Detroit River and other works and to their initial operator. That Act also establishes ancillary measures. It also amends the International Bridges and Tunnels Act.
Division 6 of Part 4 amends Schedule I to the Bretton Woods and Related Agreements Act to reflect changes made to the Articles of Agreement of the International Monetary Fund as a result of the 2010 Quota and Governance Reforms. The amendments pertain to the rules and regulations of the Fund’s Executive Board and complete the updating of that Act to reflect those reforms.
Division 7 of Part 4 amends the Canada Pension Plan to implement the results of the 2010-12 triennial review, most notably, to clarify that contributions for certain benefits must be made during the contributory period, to clarify how certain deductions are to be determined for the purpose of calculating average monthly pensionable earnings, to determine the minimum qualifying period for certain late applicants for a disability pension and to enhance the authority of the Review Tribunal and the Pension Appeals Board. It also amends the Department of Human Resources and Skills Development Act to enhance the authority of the Social Security Tribunal.
Division 8 of Part 4 amends the Indian Act to modify the voting and approval procedures in relation to proposed land designations.
Division 9 of Part 4 amends the Judges Act to implement the Government of Canada’s response to the report of the fourth Judicial Compensation and Benefits Commission regarding salary and benefits for federally appointed judges. It also amends that Act to shorten the period in which the Government of Canada must respond to a report of the Commission.
Division 10 of Part 4 amends the Canada Labour Code to
(a) simplify the calculation of holiday pay;
(b) set out the timelines for making certain complaints under Part III of that Act and the circumstances in which an inspector may suspend or reject such complaints;
(c) set limits on the period that may be covered by payment orders; and
(d) provide for a review mechanism for payment orders and notices of unfounded complaint.
Division 11 of Part 4 amends the Merchant Seamen Compensation Act to transfer the powers and duties of the Merchant Seamen Compensation Board to the Minister of Labour and to repeal provisions that are related to the Board. It also makes consequential amendments to other Acts.
Division 12 of Part 4 amends the Customs Act to strengthen and streamline procedures related to arrivals in Canada, to clarify the obligations of owners or operators of international transport installations to maintain port of entry facilities and to allow the Minister of Public Safety and Emergency Preparedness to require prescribed information about any person who is or is expected to be on board a conveyance.
Division 13 of Part 4 amends the Hazardous Materials Information Review Act to transfer the powers and functions of the Hazardous Materials Information Review Commission to the Minister of Health and to repeal provisions of that Act that are related to the Commission. It also makes consequential amendments to other Acts.
Division 14 of Part 4 amends the Agreement on Internal Trade Implementation Act to reflect changes made to Chapter 17 of the Agreement on Internal Trade. It provides primarily for the enforceability of orders to pay tariff costs and monetary penalties made under Chapter 17. It also repeals subsection 28(3) of the Crown Liability and Proceedings Act.
Division 15 of Part 4 amends the Employment Insurance Act to provide a temporary measure to refund a portion of employer premiums for small businesses. An employer whose premiums were $10,000 or less in 2011 will be refunded the increase in 2012 premiums over those paid in 2011, to a maximum of $1,000.
Division 16 of Part 4 amends the Immigration and Refugee Protection Act to provide for an electronic travel authorization and to provide that the User Fees Act does not apply to a fee for the provision of services in relation to an application for an electronic travel authorization.
Division 17 of Part 4 amends the Canada Mortgage and Housing Corporation Act to remove the age limit for persons from outside the federal public administration being appointed or continuing as President or as a director of the Corporation.
Division 18 of Part 4 amends the Navigable Waters Protection Act to limit that Act’s application to works in certain navigable waters that are set out in its schedule. It also amends that Act so that it can be deemed to apply to certain works in other navigable waters, with the approval of the Minister of Transport. In particular, it amends that Act to provide for an assessment process for certain works and to provide that works that are assessed as likely to substantially interfere with navigation require the Minister’s approval. It also amends that Act to provide for administrative monetary penalties and additional offences. Finally, it makes consequential and related amendments to other Acts.
Division 19 of Part 4 amends the Canada Grain Act to
(a) combine terminal elevators and transfer elevators into a single class of elevators called terminal elevators;
(b) replace the requirement that the operator of a licensed terminal elevator receiving grain cause that grain to be officially weighed and officially inspected by a requirement that the operator either weigh and inspect that grain or cause that grain to be weighed and inspected by a third party;
(c) provide for recourse if an operator does not weigh or inspect the grain, or cause it to be weighed or inspected;
(d) repeal the grain appeal tribunals;
(e) repeal the requirement for weigh-overs; and
(f) provide the Canadian Grain Commission with the power to make regulations or orders with respect to weighing and inspecting grain and the security that is to be obtained and maintained by licensees.
It also amends An Act to amend the Canada Grain Act and the Agriculture and Agri-Food Administrative Monetary Penalties Act and to Repeal the Grain Futures Act as well as other Acts, and includes transitional provisions.
Division 20 of Part 4 amends the International Interests in Mobile Equipment (aircraft equipment) Act and other Acts to modify the manner in which certain international obligations are implemented.
Division 21 of Part 4 makes technical amendments to the Canadian Environmental Assessment Act, 2012 and amends one of its transitional provisions to make that Act applicable to designated projects, as defined in that Act, for which an environmental assessment would have been required under the former Act.
Division 22 of Part 4 provides for the temporary suspension of the Canada Employment Insurance Financing Board Act and the dissolution of the Canada Employment Insurance Financing Board. Consequently, it enacts an interim Employment Insurance premium rate-setting regime under the Employment Insurance Act and makes amendments to the Canada Employment Insurance Financing Board Act, the Department of Human Resources and Skills Development Act, the Jobs, Growth and Long-term Prosperity Act and Schedule III to the Financial Administration Act.
Division 23 of Part 4 amends the Canadian Forces Superannuation Act, the Public Service Superannuation Act and the Royal Canadian Mounted Police Superannuation Act and makes consequential amendments to other Acts.
The Canadian Forces Superannuation Act is amended to change the limitations that apply in respect of the contribution rates at which contributors are required to pay as a result of amendments to the Public Service Superannuation Act.
The Public Service Superannuation Act is amended to provide that contributors pay no more than 50% of the current service cost of the pension plan. In addition, the pensionable age is raised from 60 to 65 in relation to persons who become contributors on or after January 1, 2013.
The Royal Canadian Mounted Police Superannuation Act is amended to change the limitations that apply in respect of the contribution rates at which contributors are required to pay as a result of amendments to the Public Service Superannuation Act.
Division 24 of Part 4 amends the Canada Revenue Agency Act to make section 112 of the Public Service Labour Relations Act applicable to the Canada Revenue Agency. That section makes entering into a collective agreement subject to the Governor in Council’s approval. The Division also amends the Canada Revenue Agency Act to require that the Agency have its negotiating mandate approved by the President of the Treasury Board and to require that it consult the President of the Treasury Board before determining certain other terms and conditions of employment for its employees.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order.

This is the 89th meeting of the Standing Committee on Finance. We are continuing our study of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.

For our second panel this afternoon, I would like to welcome four individuals.

First of all, representing the Canadian Federation of Independent Business, Ms. Corinne Pohlmann, welcome to the committee. We also have a second organization, the Canadian Labour Congress, with Ms. Angella MacEwen. Welcome to the committee. We have Mr. Gregory Thomas from the Canadian Taxpayers Federation. Welcome. We are expecting Mr. Albert De Luca, partner with Deloitte & Touche.

You each have five minutes for an opening statement, then we'll have questions at the end of the last statement.

We'll start with the CFIB.

[Shelly Glover, Conservative, Saint Boniface, MB]

Excellent.

I might do the same thing with Madame Presseault and Mr. Cudmore, the wonderful general accountant at the end of the table, from TSGI.

Do you think the RDSP, registered disability savings plan changes that are in Bill C-45 are good measures? Are they important to families? Will these help families?

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair, and welcome to the witnesses.

I'm going to start by asking about a few measures we haven't talked about that are in Bill C-45. I think it's important that we get your input on those as well.

I'll start with Mr. Lavoie. You and I have had an opportunity to talk about some of the things our government has done in the past, in the hopes of creating jobs and helping businesses. These are things like the decrease in the GST, the corporate tax decreases, limiting the EI premium to 5¢ instead of 15¢, not opting for doubling of CPP as proposed by the NDP, not going to a 45-day work year that would cost businesses. For the most part, I know that your organization was very supportive of those measures to help your businesses. I appreciate that. I see you nodding your head. Hopefully that means it is still the case.

In this bill, there are a couple of measures I haven't heard you speak to, so I would like to give you an opportunity. On the accelerated capital cost allowance for clean energy generation equipment, I'm wondering if you can tell us how that investment would help your businesses. Is it a good measure in Bill C-45?

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

In a less polite way, I think they weren't as greedy as some of their counterparts in the United States and didn't take the risk as a result.

The changes in Bill C-45, in this regard, are probably something worthwhile. It wasn't that we had such great protection before. It was that we were lucky in a lot of senses of the word. Now we do need the provisional changes that we see in there, from your perspective.

[James Infantino]

That's my understanding of the language in the legislation under this particular part of Bill C-45.

[Ken Cudmore]

When the budget speech came out, it seemed to indicate they were dealing only with cases where someone was using a third party contractor, they hired XYZ Engineering Company to do part of their SR and ED program.

Then when Bill C-45 came out, they used the wording to actually encapture other parts besides third party contractors, the normal contractors. The budget speech said it was there to get rid of a profit margin. We can all dispute whether or not even that was necessary, but why would they want to put universities in there? If there is any group that does not make a profit—we're all supporting universities in many different ways. I don't understand why that would have been included in Bill C-45.

[Martin Lavoie]

Again, that was in the context of Bill C-45 and I would be happy to circulate to the committee a compilation of testimonies from companies from across the country that gave me their comments about how SR and ED changes would impact R and D in their businesses. I'd be happy to circulate that to the committee members.

[Mark Adler, Conservative, York Centre, ON]

Okay.

These amendments, as you mentioned, came out of the Pittsburgh G-20 in 2009, but the bank has been working on these and researching this for about 10 years now. It has been at the forefront of the central banks in terms of examining systemic risk.

Could you tell us specifically how the amendments that we have before us in Bill C-45 will minimize or mitigate the opportunity for financial risk in the OTC?

[Ken Cudmore, President, TSGI-Chartered Accountants]

Good afternoon, Mr. Chairman and committee members.

By way of introduction I'd like to make a few comments about my background as it relates to SR and ED and R and D funding.

I have more than 30 years as a chartered accountant, with a computer science degree and an MBA. In the past I was a full-time faculty member at the University of Calgary and taught the most recent SR and ED courses for the Institute of Chartered Accountants of Alberta. For the past 10 years my practice has consisted of about 10 qualified scientists and CAs who focus solely on the SR and ED area, serving multinational corporations as well as small corporations, mostly in western Canada.

I believe I have a unique multidisciplinary outlook on SR and ED. I am from the trenches. I've also worked with the National Research Council's industrial research assistance program, IRAP, and our firm was the company that submitted the first successful shale gas technology claim in Canada. I've served as the inaugural chairman of the joint CRA and industry information technology oversight committee for the SR and ED prairie region. I am an active participant as an angel investor in western Canada, both through direct investments and also through membership in Venture Alberta, which is reputed to be one of the most active venture forums in Canada. This provides me with further insight into the technology start-up community.

To begin, I would like to summarize the overall impact that we anticipate the changes proposed in Bill C-45 will have on SR and ED performers at the ground level.

Our company has gone through a detailed modelling process to simulate the SR and ED impact of the 2012 budget on our clients, who should be considered to be a cross-section of western Canadian companies. We did this because the microeconomic nuances of how policy decisions affect individual organizations are not always visible from a macroeconomic viewpoint. Our conclusion is that Canadian-controlled private corporations, or CCPCs, are likely to experience a 5% to 10% reduction in investment tax credits, whereas non-CCPCs—those are the big ones—can expect more drastic reductions, on the order of 30% to 40%.

The industry consensus communicated to us both by our clients and by contacts is that the reductions in the SR and ED benefits will unquestionably reduce their overall ability and willingness to conduct research in Canada and will reduce jobs. This should be a concern for all Canadians.

I am also particularly concerned about the impact of the proposed changes on the energy industry, which will have effects nationwide. The implications can be extrapolated to numerous industrial sectors in Canada over the long term.

The primary story of oil and gas in Canada is no longer a story of wildcat wells and exploration uncertainties. It is primarily a technology story, that is, of using new technology to unlock unconventional resources that were previously inaccessible. This fundamental shift is highlighted by the fact that in 2010 oil sands production overtook conventional oil as the leading production method in Canada, with 51.9% of production. The technology needed to turn unconventional resources into producible reserves and a contribution to our GDP is extraordinarily sophisticated and extraordinarily expensive, with sourcing requirements that reach beyond Alberta's borders.

Every day we see Canadian energy companies taking enormous risks to develop new technology. The largest spenders in oil and gas research are most commonly in the non-CCPC category, and they will be the hardest hit by the reduction in investment tax credits. In particular, the reduction in the general ITC rate from 20% to 15% and the elimination of capital expenditure deductions will severely impact these organizations.

In our view, the impact these changes will have on the energy industry warrants re-evaluation of the proposed policy changes. We believe that public innovation policy is best delivered in an indirect form that organically results in leveraging industries in which Canada has a natural advantage in developing, commercializing, and exploiting technology.

There are few other industries in Canada that have advantages such as we have in the energy sector. We are world leaders now and we need to stay there to protect Canada's economic future. We need to enhance our competitiveness in this increasingly technological field to build world champions. Reductions to the SR and ED program will dramatically alter the positive path that we are currently on in the energy industry along with many sectors upon which the industry impacts.

Lastly, I would like to comment on the critical issue of how the proposed changes will affect jobs in Canada.

R and D performers in western Canada tell us that they will react to the concerns outlined above by reducing their research efforts in Canada. This has already started to happen. Research capital is highly liquid, and these companies are not afraid to redistribute their funds to other jurisdictions. They also recognize that we are locked in a global war for talented innovators and that they must either initially attract and then keep our innovators in Canada or go to where these individuals are.

We are deeply concerned that the net effect of the proposed SR and ED changes will be the loss of high-value innovation jobs. This will have significant and long-term negative effects upon our global competitiveness.

Thank you for this opportunity.

[Chris Aylward, National Executive Vice-President, Public Service Alliance of Canada]

Mr. Chair and committee members, thank you for allowing me the opportunity to present to you this afternoon.

My name is Chris Aylward. I am the national executive vice-president of the Public Service Alliance of Canada. We represent approximately 170,000 federal public sector workers.

The Public Service Alliance of Canada has major concerns with the latest budget implementation bill, Bill C-45. Many of these legislative changes will have a drastic impact on Canadians and should not be rushed through Parliament without time for careful consideration, scrutiny, and debate.

My first comments are on the proposed changes to the federal public sector pension plans. These unilateral changes include increasing the normal retirement age from 60 to 65 for new hires beginning in 2013. PSAC opposes Bill C-45 because it is an attack on younger generations who make up the majority of new hires in the federal public sector. The increase in the retirement age will generate a two-tier system, creating inequities between young and older workers in the public service, forcing younger workers to retire at an older age. The public service pension plan is sustainable, and there is no reason to penalize young workers. Members of this committee should also be aware that the Canada pension plan and Quebec pension plan payments are integrated with federal public service pensions, and that the average annual pension received by retired federal public sector workers in 2011 was $25,991. PSAC calls on the government to focus on strengthening pensions for all Canadians, instead of weakening pension plans and retirement security for those dedicated to public service.

I also want to touch on a change to the Canada Revenue Agency Act contained in Bill C-45. I speak from a very personal advantage on this. This change will put the agency back under the authority of Treasury Board to oversee CRA's negotiating mandate, as well as certain terms and conditions of employment. This is a serious step backwards. Not only does the change in authority contradict some of the very reasons for creating the agency in the first place, it undermines a decade of hard work by the PSAC and the agency that have been put in place to develop effective labour relations. In fact, during the last two rounds of negotiations, both parties put considerable effort into reaching a settlement with the agency before the current collective agreement had expired. This is a first in the federal public service.

The PSAC has other concerns about Bill C-45 that echo much of the criticism being expressed by environmental, scientific, and aboriginal groups, and individual Canadians. I will not address these other concerns due to time constraints today; however, I will be providing the clerk of the committee with a short summary of our additional concerns for your information.

We believe Canadians are not well served by omnibus bills. Bill C-45 should be broken down into individual pieces of legislation so that parliamentarians and all Canadians have ample opportunity to study and understand the consequences of the proposed changes.

Before I close, I will take a few moments to reiterate our concern about significant changes to programs and services that affect the livelihoods, environment, and safety of Canadians, changes that are being made without transparency, and without hearing from those who depend on the services. Search and rescue and coast guard stations are being shut down, despite the pleas to reconsider coming from coastal communities. Veterans Affairs district offices are being closed across the country, including the one and only office in Prince Edward Island, located in Charlottetown. Case loads are almost doubling, despite the desperate situation faced by our veterans. The Department of Fisheries and Oceans' budget and fisheries habitat staff are being cut, yet the recently issued report of the Cohen Commission of Inquiry into the Decline of Sockeye Salmon in the Fraser River reaffirmed the importance of restoring the Department of Fisheries and Oceans' mandate and resources to protect fish habitat.

We believe there is a need for more transparency about the scope and impact of all planned cuts to federal services and programs, and a need to listen to Canadians being affected.

Thank you very much. I look forward to your questions.

[Carole Presseault, Vice-President, Government and Regulatory Affairs, Certified General Accountants Association of Canada]

Mr. Chair, members of the committee, my name is Carole Presseault. I am the Vice-President of Government and Regulatory Affairs of the Certified General Accountants Association of Canada, an organization that represents over 75,000 CGAs across Canada. We are happy you invited us to participate in your study on Bill C-45.

This is a very large bill. Much of its content is of considerable interest to our members. However, my comments today will focus on two main aspects—the Agreement on Internal Trade, which is covered in division 14, and the tax system.

Our comments today will concern two specific measures related to the Agreement on Internal Trade contained in division 14 and measures regarding the tax system. The measures included in division 14 implement financial penalties and enforcement provisions to support the decisions of panels that are formed to adjudicate disputes between parties to the Agreement on Internal Trade.

I've skipped a page, I'm sorry. I'm going to come back.

These measures implement changes to the Agreement on Internal Trade, which were agreed to by federal, provincial and territorial governments over the past few years. Let me remind you that the purpose of the Agreement on Internal Trade is to reduce, and where possible, eliminate unnecessary barriers to interprovincial trade and labour mobility.

It's not a perfect agreement and the Committee on Internal Trade was formed to ensure the agreement continues to meet its objectives and to improve the agreement that was signed more than 12 years ago. Implementing the measures in division 14 is a demonstration of the federal government's commitment to comply with the obligation under the agreement.

The measures contained in the bill before us implement financial penalties and enforcement provisions to support decisions of panels that were formed to adjudicate disputes between parties. These measures address a serious flaw. Prior to this, there was little incentive for governments to comply with panel rulings, as we discovered through our own experiences.

By the way, it's also worth noting that until the measures in division 14 are enacted, the Canadian government has lost its right to access the AIT's dispute resolution provisions. We support the measures contained in the bill, but we know there's so much the Committee on Internal Trade can do to further improve the agreement, particularly to improve the efficiency and accessibility of the dispute resolution process.

The process is a long and costly one, and citizens cannot access the process independently of government. Also needed are improvements to the AIT governance that would enable more stakeholder engagement and improved transparency. However, we are encouraged that ministers have agreed to develop a chapter on technical barriers to trade. This is a problematic issue in the approach to trade both interprovincially and internationally, and success in this area would help advance two of the government's priority issues in increasing international trade and reducing red tape.

The timing couldn't be better to address these issues. In December, the federal government will become chair of the Committee on Internal Trade and will have the opportunity to drive the agenda. We encourage the government to seize this opportunity to make the agreement a truly effective tool for strengthening the economic union.

Committee members won't be surprised to hear us talking again about taxation. We note with interest that part 1 of Bill C-45 implements a number of income tax measures and related measures proposed in the March 2012 budget. Measures that we've had the opportunity to comment on in previous processes include the registered disability savings plan, and as my colleague Mr. Lavoie mentioned, the SR and ED tax credit, and of course, international taxation. Many of these measures stem from the work of advisory panels, for example, the Canadian System of International Taxation, and the SR and ED measures from the Jenkins panel.

This leads me to highlight once again the importance of expert advisory panels in advancing change to public policies. I'm confident that members would agree with us, given the recommendations in last year's pre-budget consultations.

I want to talk about a measure that we did not see in the 2012 budget which continues to be a priority for our members and for taxpayers everywhere. It is the issue of a sunset provision to ensure that tax changes are enacted within a reasonable period of time after being introduced in a budget.

Today, you focus your efforts on improving policy changes announced in budget plan 2012, but we need to remember there are still hundreds of tax measures from previous federal budgets that still have not been enacted. We would encourage the consideration of the application of a sunset clause to ensure the coming forward of these amendments in a reasonable period of time.

I'd like to remind you that the short title of the bill is the jobs and growth act, 2012. We submit that removing barriers to internal trade and mobility and taking steps to simplify Canada's tax system are critical to jobs and growth, and Canada's long-term prosperity.

Thank you. I would be happy to answer any questions.

[Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters]

Thank you very much, Mr. Chair, and members of the committee. Thank you for inviting us to appear today on Bill C-45.

CME represents about 10,000 manufacturers and exporters across the country who account for 80% of Canada's manufacturing production and over 90% of all exports of goods and services. Innovation and productivity are obviously two increasingly important drivers of manufacturing growth in industrialized countries, and Canada is not an exception.

In the last 10 years, Canadian manufacturers have had to cope with increased competition from developing markets combined with a very rapid appreciation of the Canadian dollar. The only sustainable strategy in the long term is a stronger focus on innovation and productivity. From that perspective, I'll focus my remarks today on the proposed changes to the scientific research and experimental development tax credit, the SR and ED, which is, for our members, the most important issue in this legislation.

The Canadian manufacturing sector, despite representing now about 14% of Canada's GDP, accounts for 55% of all business R and D expenditures in Canada. It is by far the most R and D intensive industry in the country. Roughly half of SR and ED users are actually manufacturers.

Last week, CME published a special report on the economic impact of the proposed changes to SR and ED on business innovation in Canada. The first conclusion is that proposed measures will result in a net diminishment of R and D performed in Canada. We estimate that all proposed measures by the government will reduce R and D tax incentives in Canada by $750 million a year starting in 2016-17. To give you an idea of the size this amount represents, it's 5% of all business R and D expenditures in Canada last year. In our sector, according to our latest management issue survey, 69% of manufacturers will reduce R and D spending while another 20% will start looking at other jurisdictions to conduct R and D activities as a result of these changes. We estimate that the full impact of these changes on actual business R and D expenditures in Canada will be approximately $1.5 billion every year.

Our report also compared the generosity of the R and D tax credits for large companies in different countries. The international competitiveness of our R and D tax credit will fall from number 13 to number 17 in the OECD as a result of the 5% proposed reduction in the tax credit.

The budget also proposes to completely eliminate capital expenditure from the tax base. Again, no other sectors of our economy will be impacted as much as the manufacturing sector, which tends to have more capital intensive R and D activities. While on average in the overall economy only about 5% of all R and D expenditures are related to capital, in our sector it is more than 30%.

Our report compared the fiscal treatment of capital expenditures related to R and D in other countries. The vast majority of countries studied provide either a tax credit or a rapid depreciation rate, such as the U.K., for example, for capital expenditures related to R and D. Again, our international attractiveness as a destination for R and D will decrease.

Another change in the budget was the reduction of the proxy used for claiming overhead costs under the SR and ED program. By proposing to reduce the proxy from 65% to 55%, the government estimates that the proxy is too generous, and that reducing it would best reflect the actual overhead costs of companies. We have not seen any evidence or analysis provided by the Department of Finance that suggests this is really the case. We rather believe that the use of the proxy has to do with the simplification of the claim process, as suggested by the Jenkins panel in their report. Therefore, the government should proceed with a full analysis before making a change that will make more companies turn to the traditional method of claiming overhead instead of using the proxy. We think this will increase compliance costs for companies, and it will also add a burden on CRA's auditors. That was also a key recommendation of the Jenkins report.

In conclusion, there are three ways of looking at the impact of these proposed changes on business R and D. In terms of actual dollars, as I said, changes would reduce business expenditures in R and D to an estimated $1.5 billion a year once all the measures are implemented. In terms of taxation of large companies, the negative impact of the 5% reduction in SR and ED exceeds by far all the benefits that resulted with the corporate income tax, CIT, cuts that have taken place at the federal level since 2008, if you look only at the large manufacturers.

In terms of international competitiveness and our capacity to attract foreign investment from large R and D performers, our ranking would decrease from number 13 to number 17. Even more importantly, all the major developing countries such as India, China, Turkey, and Brazil will now offer more advantageous R and D tax credits, according to our report.

We are making three main recommendations that will mitigate the negative impact of these proposed changes.

The first one is to provide more direct support to large companies by way of a partially refundable tax credit that would be targeted at projects related to enhance productivity. The second one is to allow companies to more rapidly depreciate the cost of machinery and equipment used for R and D purposes. The third one is to conduct a more detailed analysis of overhead costs and the use of the proxy before implementing the 10% reduction.

Thank you very much for your time. I'm available to respond to questions.

[Robert Turnbull, Special Counsel, Financial System, Bank of Canada]

I guess I'd better hurry. Thank you very much, Mr. Chairman, and honourable members of the committee. The Bank of Canada is very pleased to appear before the committee today. What we've been asked to talk about to assist the committee are the amendments in part 4, division 3 of Bill C-45. These are the amendments to a piece of legislation that I'm sure keeps you up late at night called the Payment Clearing and Settlement Act .

What I'd like to do is deliver a fairly brief opening statement. It is a fairly technical topic. I tried to be as clear as I could. Then I'd be pleased to try to answer your questions about these particular amendments.

I will begin in French.

At the 2009 G20 Summit in Pittsburgh, the leaders agreed that standardized over-the-counter derivatives contracts should be cleared through central counterparty clearing systems, by the end of 2012.

A central counterparty is a financial market infrastructure that stands between buyers and sellers in financial transactions, ensuring that obligations will be met on all contracts cleared through the CCP.

By managing and mitigating counterparty credit risk, central counterparties have the potential to reduce systemic risk, both globally and in Canada. They reduce the potential for financial shocks to be transmitted through the financial system and enable markets to remain continuously open, even in times of stress.

About a month ago, Canadian authorities reconfirmed their G20 commitment to central clearing and indicated that Canadian participants in the derivatives market can respect this commitment by clearing derivatives contracts through the global, cross-border clearing systems that are currently being developed in the United Kingdom and the United States.

Regardless of whether derivatives are cleared through a central counterparty in Canada or abroad, Canadian laws will be applied to determine the rights and obligations of Canadian participants and their customers. It is therefore important for financial stability in Canada that the transfers of assets among central counterparties, Canadian participants and their customers for the clearing and settlement of derivatives transactions be protected from possible legal challenges in the event that a Canadian participant were to become insolvent.

The main statute in Canada for protecting clearing and settlement systems from legal challenges in the event of the failure of a participant is the act that we're dealing with here, the Payment Clearing and Settlement Act, or as we call it, the PCSA. The PCSA gives the Bank of Canada responsibility for the regulatory oversight of clearing systems that could pose systemic risk. The PCSA also provides a number of important legal protections for these systems. In particular, it ensures that the rights of a clearing house to be paid, to settle transactions and to deal with collateral deposited by participants will not be stayed or unwound under the insolvency statutes if a participant defaults.

The purpose of these protections is to ensure that a clearing house will be able to exercise its legal rights to settle the system within a reasonable timeframe following a default and that it will have sufficient rights in the assets deposited by participants to ensure that the clearing house itself is not brought down by a failure of one or more participants, thereby propagating systemic risk.

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 89th meeting of the Standing Committee on Finance. Orders of the day are pursuant to the order of reference of Tuesday, October 30, 2012, continuing our study of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.

Colleagues, we have two panels with us this afternoon. In our first panel, the first organization we have is the Bank of Canada. The second organization is Canadian Manufacturers and Exporters. We have the Certified General Accountants Association of Canada, the Public Service Alliance of Canada, and we have TSGI-Chartered Accountants.

Welcome to all of you. Thank you for being with us this afternoon. You each have five minutes for your opening statement.

We'll start with Mr. Turnbull and we'll work our way down the row. Then we'll have questions from members after that.

[Jeff Watson, Conservative, Essex, ON]

That's correct.

On removing these process points for judicial review, while saving the compliance, you may have heard federal officials earlier who said that the only real challenge when Bill C-45 is passed is a constitutional challenge against Bill C-45 itself. They were satisfied that the challenge could not be mounted.

Are you sufficiently assured, being in a strongly impacted community with this project, that at least on the Canadian side with the passage of Bill C-45, we will be clear of lawsuits?