Finance Committee on Sept. 26th, 2006

[Richard C. Gauthier]

Thank you for your question, Mr. St-Cyr.

When the GST was first brought in around 1990-1991, the government acknowledged the anomaly I referred to. It was then that the government introduced the national input tax credit. From then on, when a car dealer purchased a used car, the dealership could claim a credit, which on paper reduced the total cost of the vehicle. This practice aimed to balance out the market value of the car when resold, and the sales made by individuals, who at the time were not obliged to charge GST on the sale of a car. By having the possibility of claiming input tax credits, dealers were able to balance out, to a certain degree but not completely, the market value of the vehicle, which allowed them to compete with private sellers.

When GST regulations were revised a few years later, the input tax credit was completely eliminated, which gave rise to the situation we now find ourselves in today. You are referring to the unfortunate situation in which people are taking advantage of businesses by claiming to be licensed dealers, when an actual fact, the sales are between individuals, and are private, GST exempt transactions. As such, they are able to benefit from a 6% advantage, as compared to legitimate car dealerships that charge the GST.

As I said earlier to Mr. DelMastro, we are talking about bootleggers. These are people who operate from street corners or basements. The consumer is not protected, because he or she may be purchasing a car that is in poor condition, that has not been inspected, etc.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

You have put forward three mutually exclusive proposals: to eliminate the GST on all transactions, charge the GST on all transactions, or re-establish the input tax credit system you spoke about.

Are those proposals in order of preference or would you believe that these three measures are of equal importance in resolving this problem?

[Richard C. Gauthier]

That is a good question, Mr. St-Cyr. No, I would not say that all of the recommendations we have made are equivalent. If I were to make one single recommendation today, it would be to charge the GST on all sales, wether it be a sale by a dealer or an individual.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I see. As regards your first recommendation, which is to eliminate the GST, do you know what the ensuring shortfall would be for the government?

[Richard C. Gauthier]

Yes. We have the figures, Mr. St-Cyr. Unfortunately, I do not have them here with me today, and I do not wish to make a statement on that.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Surely...

[The Chair, Conservative, Brian Pallister]

I am sorry, sir, your time is up.

The next questioner will be Madam Ablonczy for five minutes.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chairman. I would like to thank all of the presenters for excellent background information.

I want to start with Ducks Unlimited. I have two questions and I'll give them both. You have quite a complete brief with a number of recommendations. What I'd like to know are the top two concrete measures--and some of them are perhaps a bit conceptual--that the government could take, in your view, to assist in reaching your objectives.

Secondly, and this sounds like a mischievous question but it really isn't, how can the work you do and support for the work you do contribute to Canada's global competitiveness? I know that Canada's natural assets really are a factor in global competitiveness, and I think it would be helpful if you just elaborated on why that would be so.

[Cynthia Edwards]

Thank you for your question.

As I mentioned earlier, I think the top two concrete things are the financial disincentives that discourage the destruction of any further loss of our natural capital and the mitigation...if I had an option for a third, it would be to enhance some of the work that's already under way within the agricultural policy framework and incentive programs, such as Greencover Canada, and the beneficial management practices, which recognize some of the positive contributions land managers play in environmental issues. Those can be enhanced.

As mentioned in the brief, with respect to global competitiveness, Canada is the steward of about 25% of the world's remaining wetlands. That's an asset we enjoy that many other countries don't have the opportunity to enjoy. As we move into richer nations and more tourism opportunities, as water becomes an issue, we need to be good stewards of those assets to maintain some of that competitiveness. Especially on the water issue, where we get into agricultural issues or industries that require a large amount of water, we have those resources and we need to look after them.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Okay. Thank you for that.

With respect to the Association of Labour Sponsored Investment Funds, a lot of people will be wondering about your reference to ticket size for investments. Can you explain a little bit more about how that works, and why government measures to support that regime would benefit Canada's competitiveness on the commercialization side?

[Les Lyall]

Sure, and thank you for the question.

How will increasing the ticket size stabilize venture capital in Canada generally and in Ontario specifically? First, it will make the product more appealing to mid- and high-income investors. Right now, 50% of our shareholders have incomes of less than $60,000 a year. People with more money to invest simply aren't interested in a $5,000 investment. For them it's so-called “small potatoes”.

Second, more financial advisers and brokers will be interested in selling the product because their commission will increase, along with the ticket size. Right now, they can't be bothered to become licensed to sell the product because the small commission is not worthwhile. What we have witnessed over the last dozen years or so, since the inception of the program, is that commission structures have moved away from selling small-ticket items. In most cases, the investment advisers receive very little, if any, commission when selling those products. So we've lost their interest, and it greatly inhibits our ability to sell the product to the retail public.

Third, being able to move to a larger ticket size, we can attract larger investors, who have a larger appetite for high-risk investments such as these, and be able to find a place in their portfolio. When it's a $5,000 item, it's just not a large enough item to consider for their personal investment portfolio.

[The Chair, Conservative, Brian Pallister]

Would you like to make a concluding comment? You have about 15 seconds.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

A concluding comment?

That does help regular people to understand, which is good, because, as you pointed out, those are the kinds of people who make the investment you're talking about. So we appreciate that. Thank you.

[The Chair, Conservative, Brian Pallister]

Regular people like you and me, Ms. Ablonczy.

Over here now to Mr. McKay for five minutes.

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

The quintessential regular MP.

[The Chair, Conservative, Brian Pallister]

As opposed to the other.

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

As opposed to the others, yes.

To the Canadian Association of Mutual Insurance Companies, as I understand mutual funds, the company is owned by its policyholders, and one of the ways in which it becomes a very attractive product is that there are sometimes profit distributions to the policyholders on a certain profit level. So I'm a little puzzled by your argument with the banks, who (a) want into retail insurance distribution and (b) are complaining that they have to set up offshore vehicles.

In your case, you don't have to set up an offshore vehicle for “tax purposes” because you're making your distribution directly to your policyholders. If you will, it's akin to an income trust. The revenues, the profits, are distributed directly to the policyholders; in income trust it's directly to the unitholders. So doesn't that give you, effectively, an enormous competitive advantage over other entities trying to sell insurance, whether it's demutualized insurance companies or banks?

[Normand Lafrenière]

Demutualized insurance companies are stock companies now, so the comparison between the stock companies and the mutuals is that at the end of the day these mutual insurance companies do not wish to make a profit over the long term. Over the short term, sure enough, we want that business to remain, and they pay taxes on the profits they make.

As to whether or not they would set up offshore companies in order to avoid paying taxes, they just don't do so. Other companies that we believe are doing it--and this is not only insurance companies but also the banks and other financial institutions--find an advantage in setting up offshore companies. Indeed, the study out of Statistics Canada came to the conclusion that there was an increase in those offshore companies and that the financial services sector was one of the prime areas responsible for that increase.

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

Why would a mutual insurance company set up an offshore vehicle if it can control its revenues by either distributing to the policyholders on the back end or reducing premiums on the front end, because there is no real need that a mutual insurance company make money?

[Normand Lafrenière]

There's no real need. There is a need over the short term because we want those organizations to be continuous organizations over the long term, so we want to be there for the bad days. In order to do so we have to maintain reserves and we have to maintain surpluses within those companies in all of that. The surpluses of the companies have to be maintained on a tax-free basis, so there would be an advantage to setting up offshore companies, but we just don't resort to that avenue.

[The Chair, Conservative, Brian Pallister]

Perhaps I could intervene, John. This won't count toward your time, of course.

Is this your point, then? The demutualized insurance companies and the other financial institutions that are able to set up offshore companies are getting some kind of competitive advantage versus the mutual companies that you represent. Is that the case?

[Normand Lafrenière]

That's right, but this is not to say that we're not able to set them up. We are able to set them up. We just don't resort to that.

What we're saying is that having offshore companies gives an advantage, obviously. It seems to be giving an advantage, and what we want you to do is take a look at that and see why there is an increase in those offshore companies and how we can avoid that in the future.

We suggest that one of the ways to do so is to have within Canada, just like they have in Europe and in Japan, a tax-free catastrophe reserve that would be there for both man-made and natural catastrophes.

[The Chair, Conservative, Brian Pallister]

It's back to you, Mr. McKay.

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

The issue isn't that you can't do it; it's that you don't do it. That is the issue.

My second point is for the car dealers. My recollection is that you're the first industry group that has said you were getting too audited by CRA. Your comments are fairly harsh toward the CRA, to say the least. As I recollect, you were the only industry group that has been quite so explicit.

I take it that you get not only CRA audits, but you also get PST audits. You get GST audits and the list goes on and on. There's no harmonization among the audits.

Would it be the view of your industry to support harmonization of sales tax then, if for no other reason than to reduce audits?

[Richard C. Gauthier]

Thank you, Mr. McKay, for bringing forward that point.

Yes, actually, we would support that. We have harmonization in the Atlantic provinces and something akin to that in the province of Quebec.