Finance Committee on May 28th, 2008

[The Chair, Conservative, Rob Merrifield]

Seeing as we have enough members and witnesses, we'll call the meeting to order.

Sorry about being late. I had to table a minor report in the House. We got that looked after, thanks to the good work of the committee.

We'll now move on. Today we have witnesses here from the Department of Finance who want to deal with a motion that we had with regard to estimates. I would imagine we have a presentation by the witnesses. We will entertain that at this time and then proceed to questioning.

The floor is yours.

[Brian Ernewein, General Director, Senior Assistant Deputy Minister's Office, Tax Policy Branch, Department of Finance]

Thank you, Chair.

My name is Brian Ernewein, and I'm the general director of the tax policy branch at the Department of Finance.

As we understand it, we were asked to attend today to speak about the two panels that were set up and for which provision was made in the supplementary budget estimates. I would like to offer a few moments of explanation on the advisory panel for international taxation.

We're also available to answer questions you may have regarding the budget relating to the panel and its supporting secretariat.

To start off, Canada's system of international tax is one of the most complex areas of our tax system, yet these rules are of crucial importance in attracting foreign investment into Canada and supporting Canadian corporations that do business abroad.

Significant changes to our system of international tax were unveiled as part of Budget 2007 and the anti-tax-haven initiative. I had the pleasure of being here before the committee following the announcement in 2007 and the May 14 changes to the anti-tax-haven initiative.

Those changes included, among other things, the non-deductability of interest expenses incurred as part of so-called double-dip financing structures, the elimination of withholding tax on all arm's-length interest payments to non-residents, the progressive elimination of withholding tax on interest payments to non-arm's-length U.S. lenders, and the extension of the existing exemption for certain dividends received from foreign affiliates, the so-called exempt surplus system, to dividends received from foreign affiliates located in countries with which Canada has signed an agreement concerning the exchange of tax information.

Also announced as part of Budget 2007 was the government's intention to create an advisory panel to review our current system and identify ways to improve its competitiveness, efficiency, and fairness.

The advisory panel was formally established on November 30, 2007 by the Minister of Finance. I believe we provided to the clerk yesterday the copies of the press release announcing this. The panel is chaired by Mr. Peter Godsoe, former chief executive officer and chairman of the Bank of Nova Scotia, and Mr. Kevin Dancey, now president and CEO of the Canadian Institute of Chartered Accountants, who acts as its vice-chair. Other members of the panel are Mr. James Love, Mr. Guy Saint-Pierre, Mr. Nick Pantaleo, Mr. Finn Poschmann, and Ms. Cathy Williams.

The panel's mandate, which was released with the announcement, is to review and assess the existing system of international taxation, to identify issues that arise under the system, to identify and assess possible options to address these issues, and to present detailed and specific recommendations for consideration by the government. The panel is to present its analysis and recommendations in a report to be submitted to the Minister of Finance by December 1 of this year.

As shown in the supplementary estimates, the funding allocated for 2008-09 for the panel's work is $3.76 million. This figure covers a number of activities. An important aspect, obviously, of the panel's mandate is to consult with stakeholders to obtain their input as to how the current system can be enhanced.

On April 25 of this year, the panel released a consultation paper identifying a series of questions about Canada's system of international taxation. It set out some of the panel's initial views and invited public comments on how to improve the competitiveness, efficiency, and fairness of the existing system.

The panel, as we understand it, will be receiving written submissions from interested parties until July 15, 2008, and many meetings between the panel and important groups of stakeholders are also being planned for the same period.

Research and analysis are two other important components of the panel's work. About a dozen research projects will be commissioned by the panel to study specific issues and aspects of Canada's system of international taxation. The panel and its work are supported by a secretariat headed by an executive director who reports to both the chair of the panel and the senior assistant deputy minister of tax policy at the Department of Finance.

Although formally a part of Finance, the secretariat is housed at a separate location and works at arm's length from the department so as to preserve the independence of the panel from the government. Nonetheless, all government rules and guidelines, notably those applicable to contracting, continue to apply to the panel and its secretariat. The Department of Finance retains signing authority for expenses relating to the work of the panel and its secretariat, including for contracts.

Finally, members of the panel have agreed to serve on the panel on a pro bono basis. They are reimbursed only for travel and accommodation expenses relating to their work in accordance with Treasury Board approved procedures. The Department of Finance has the responsibility to ensure that reimbursements are consistent with these procedures.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now open it up to questions.

Oh, we have two more presentations, fair enough.

[Serge Dupont, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance]

If you wish, we could put the panels together.

[The Chair, Conservative, Rob Merrifield]

We will go with both first, and then we'll go to questions and answers.

[Serge Dupont]

Thank you, Mr. Chair.

My name is Serge Dupont. I am assistant deputy minister in the financial sector policy branch. I would just like to speak to you about the Expert Panel on Securities, the other group mentioned in the supplementary estimates.

In Budget 2007, the government laid out its long-term plan for improving Canada's capital markets, with a document, that I think you have received, entitled "Creating a Canadian Advantage in Global Capital Markets". A cornerstone of this plan involves establishing a common securities regulator and advancing an approach to regulation that is more principles-based, with strong enforcement.

The government has made it clear that it favours a common securities regulator, not a federal one, and that it intends to be respectful of the jurisdiction of the provinces and territories. Indeed, the government has stated that it intends to build on provincial efforts to harmonize and simplify the regulatory regime.

As promoted in the 2007 Capital Markets Plan, a common securities regulator would encompass a governance structure that is representative and responsive to regional perspectives, strengths and needs. It would have one set of principles, supplemented by one set of rules and it would levy one set of fees. Its benefits would include clearer accountability and more responsive decision-making in a rapidly evolving capital market, strengthened capacity for enforcement, and a stronger voice internationally.

Ultimately, the government's objectives are to give enterprises of all sizes better access to capital at more competitive costs, to provide investors with increased investment choices and better protections, and to create more jobs.

In pursuit of this effort, in June 2007 the Minister of Finance convened a meeting with his provincial and territorial counterparts responsible for securities regulation. Following the meeting the minister committed to form a third-party expert panel to advise ministers on the best way forward.

The government appointed the panel of experts in February of this year. It is chaired by the Honourable Tom Hockin, a former Minister of State for Finance and a former president of the Investment Funds Institute of Canada. Other panel members are Ian Bruce, CEO of Peters and Company in Alberta; Denis Desautels, the former Auditor General; Hal Kvisle, president and CEO of TransCanada Corporation; Dawn Russell, associate professor and former dean of law at Dalhousie University, also a member of the Crawford Panel; Terry Salman, who is chairman, president, and CEO of Salman Partners in B.C.; and Heather Zordel, a partner at Cassels Brock and Blackwell.

The secretariat for this panel is staffed and paid by the Department of Finance. Many of the comments that Mr. Ernewein mentioned with regard to administrative arrangements hold for this panel as well. Panel members, for example, are committing their time and expertise on a pro bono basis. The department reimburses their travel and accommodation expenses.

The panel is examining in practical ways how to enhance the effectiveness, the content, and the structure of capital markets regulation. It is building on the work accomplished by prior private sector groups, notably the Crawford Panel. It will provide a concrete proposal, a transition path, and a common model act based on advice from recognized experts. It will report to the Minister of Finance and to provincial and territorial ministers responsible for securities regulation by the end of the year.

The panel recently issued a consultation paper for comment and began a consultation process seeking views from experts across the country. In parallel, the minister is pursuing his own discussions with capital market participants and with his counterparts on an ongoing basis.

I look forward to your questions. Merci.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to questions and answers.

We'll start with Mr. McKay, for seven minutes.

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

Thank you, Mr. Chair. Thank you, witnesses. It's nice to see so many former friends.

With respect to the common securities regulator, as you know, the Liberal Party certainly supports this initiative. I read in the newspapers that you have engaged counsel to draft a bill. I wonder whether you could comment on that. That would be number one.

Second, with respect to the legislative initiative, is the federal government prepared to go it alone if necessary, based upon their own legal analysis of their constitutional authorities?

Third, what does $2.8 million get you?

[Serge Dupont]

On your first question, the panel is assisted in its work by the firm of Stikeman Elliott. Along with the panel, they are holding the pen in drafting the model of common law.

Other resources that have been assigned to the panel include the Capital Markets Institute, which is leading the research program, and Sir Howard Davies, who was the first chairman of the Financial Services Authority in the United Kingdom. This was an interesting experiment because it brought together various regulatory agencies under one roof.

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

How far along are you in the drafting?

[Serge Dupont]

In respect of the drafting of the bill, you'd have to ask the panel itself. It is residing with the panel and its advisors. My understanding is that the work is proceeding, but there are also consultations taking place.

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

Do you have a timeline?

[Serge Dupont]

The report on the common law is to be presented to ministers by the end of the year.

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

So that would be when Parliament could expect to see a draft bill presented.

[Serge Dupont]

I imagine it will be shared quite widely, because it will be shared with your provincial counterparts.

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

The other question is with respect to Mr. Ernewein's presentation, on the issue of non-deductibility of interest expense. There's a big to-do over the original presentation. I think one very respected tax lawyer said it was the dumbest thing he'd heard out of Ottawa in 30 years. Then there was some climb-down on the part of the government. And now you appear to have created this panel, which is certainly a capable group of people.

Can you tell me whether one of the operating principles of this panel will be that no Canadian company will be put at a competitive disadvantage by virtue of these provisions?

[Brian Ernewein]

Part of the stated mandate of the panel is to build on the proposals put forward in last year's budget and to recommend other measures to improve the competitiveness and fairness of Canada's tax system. So the competitiveness as well as fairness will be considerations that the panel would be expected to take into account in recommending any changes.

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

So we have moved away from this vague idea of fairness and actually put into the mandate of the committee some notion that you have to be competitive in the international sphere?

[Brian Ernewein]

I have to challenge the premise of the question, which is that Canada's tax system, including the 2007 measures, didn't take competitiveness into account. I believe that last year's measures in extending the scope of our exemption system, not just to treaty countries but also to countries with which we sign information exchange agreements, will help to bolster competitiveness.

At the same time, the budget included proposals to constrain the expenses associated with this exempt income. It showed elements of both competitiveness and fairness in its terms.

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

Your position seems to be—how shall we say it?—somewhat lonely once you go outside the Department of Finance.

The final question has to do with P3 fund investments. The money has been set aside. I take it nothing has been spent. You're proposing to put $1.2 billion into PPP Canada Inc. as a crown corporation.

Would it be an operating principle of P3 that every funding initiative, joint or otherwise, taken by the Government of Canada or with funding partners like other provinces or territories must be overlaid with a P3 analysis?

[Serge Dupont]

Mr. Chairman, we had understood that the P3 would not be addressed at this meeting, because we're not in a position to answer that question with authority.

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

Oh, I'm sorry.

[The Chair, Conservative, Rob Merrifield]

That's fine. He can ask the question. If you don't have the information, that's fine.

[Serge Dupont]

I wouldn't be able to comment.

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

Okay.

You have $2.8 million. You figure you'll get a draft bill by the end of the year. What do you see as the constitutional framework for the unilateral imposition of a common securities regulator in Canada?