Finance Committee on Nov. 6th, 2012

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you. I have so many other questions, but I only have about a minute left.

Mr. Aylward, you talked about the changes to pensions. I'm interested in what this is going to mean for young people who are trying to get jobs in the federal public service. Will this mean a delayed entry into the workforce for them, because the people who are already there will be staying longer and not retiring?

Can you comment on that?

[Chris Aylward]

That's not so much our concern. Our concern really lies in the fact that what we're going to end up having is a two-tier system. I don't know how attractive the public service is going to be to younger workers, knowing that if they're coming in the door today they're going to be in a different pension stream from the person who is already sitting inside the building. Again—

[Peggy Nash, NDP, Parkdale—High Park, ON]

It's less affordable, and people feel they're not getting the same benefits. It's a lower two-tiered system.

[Chris Aylward]

Exactly.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

Ms. McLeod, go ahead, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I want to do a brief summary of the SR and ED, but then I have some specific questions for Ms. Presseault.

I was on the Red Tape Reduction Commission. To be quite frank, as we travelled across the country, I don't think there was one table where we sat that people didn’t complain about the complexity and onerous requirements of the SR and ED credit. It was a whole market industry in itself.

Certainly, the Jenkins report was a very important one. It was an expert panel. I understand they're going to be taking some of the money that was in this program that is complex and very difficult to weave one's way through. It's not being taken out of innovation and that area, it's just being redirected.

Ms. Presseault, in the past, did your members have any comments and concerns on the complexity of this particular program? It’s funny to hear now that it's such a great program when I heard everywhere that it was flawed and had many challenges.

[Carole Presseault]

You're absolutely correct.

We initially raised this in a pre-budget consultation back in 2004 the concerns of our members about the complexity of the SR and ED tax credit. When we look back, one of the key recommendations from the Jenkins panel was to reduce the complexity.

Hand in hand with this of course is the government's intent in reviewing the whole issue of fees and contingency fees. You have to look at the complexity of a system that needs to rely on professionals to be able to do that. That is something that needs to be addressed in the future. We haven't seen anything in this legislation that addresses the issue of complexity.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

To go to division 14, you said something about your own experience. Could you tell us about your own experience and how these changes might facilitate or make things better for you? It sounded as if you had an example that you didn't have time to articulate.

[Carole Presseault]

I could go on for many hours, not on SR and ED as much as on the internal trade agreement. We have a lot of experience. We've been directly involved with three challenges brought under the dispute resolution procedures of the Agreement on Internal Trade. Two were person-to-government challenges, and one was government-to-government, where the provinces of B.C., Alberta, Saskatchewan, and led by Manitoba, took a dispute on our behalf against measures in Ontario. To summarize quickly, it prevented our members from being mobile across provincial jurisdictions. In our experience, until these changes were proposed, there was no enforcement mechanism. There was no hammer. There was nothing to make the government that was found to be in contravention of their engagement to internal trade to be brought to account, and implement the panel findings.

Over the last several years, I mentioned that the committee on internal trade made a number of improvements. That was essentially around the issue of monetary penalties, which are on a sliding scale for smaller provinces like P.E.I., for example, with a $250,000 fine, to large provinces like Quebec, Ontario, and B.C., with fines in the $5-million range.

We think now we have a stick. There's another stick that is less mentioned because the focus is always on monetary things. It's one of loss of dispute resolution privileges if one fails to implement panel findings. We find that to be an equally important stick. In June, the committee brought those changes forward to the other aspect of person-to-government challenges. There are still a lot of issues around accessibility of the agreement for citizens, for parties, to be able to take disputes forward without government's approval.

Generally, this is a positive move. Enforcement was the key thing. We still have to resolve things around the issue of accessibility.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Mr. Turnbull, I have a quick question.

In 2008, during the worst of the financial crisis, would this measure being planned right now have helped in any way?

[Robert Turnbull]

Certainly, in regard to the measure that has been adopted by the G-20, going back to 2009, which obviously was part of redoing the whole regulatory structure to try to make sure that a financial crisis like that does not happen again. The commitment there was to try to contain the risk that's caused by these derivatives contracts, and the trading of derivatives contracts, by requiring that the trade take place and that, before the trade has settled, it be submitted to the essential counterparty so that the risk will be transferred from the original parties to the essential counterparty, which itself will be heavily risk-proofed.

The idea behind these amendments to the Payment Clearing and Settlement Act is really to support the idea of making sure that these central counterparties are protected from, in this case, legal risk, that they're protected from the—

[The Chair, Conservative, James Rajotte]

Okay, I'm sorry, Mr. Turnbull, but we're way over on Ms. McLeod's time.

Could I just remind members, if they do have a question, to allow enough time for the answer.

We'll try to come back to that later in the hearing. I'm terribly sorry about that.

Mr. Brison, it's your turn.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair.

I want to say, Ms. Presseault, that the intervention and need for tax reform is clear and should be something—you've intervened previously in our pre-budget consultations—that we take very seriously. Plus, the grey areas in our tax system that are created by this space in time between the introduction in a budget and the actual implementation through legislation I think are very important. This is something that we should consider as part of our pre-budget consultations.

Monsieur Lavoie and Mr. Cudmore, you've made compelling interventions today on the importance of SR and ED. We have with us today Ted Hsu, who is the member of Parliament for Kingston and the Islands and is also the Liberal critic for science and technology and an expert in all things SR and ED.

Mr. Hsu.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you.

I was interested, Mr. Cudmore, in your remark that you had done some simulations on the effect of the changes in SR and ED on your client base, and also in your statement that a lot of the view from the ground out west often isn't seen in Ottawa. It seems, if I have it right, that you're telling us that folks here in Ottawa are not seeing that jobs in oil and gas companies will be affected because the cuts in SR and ED will reduce the incentive to do research and development. Also, because that is a world-leading sector of Canada's economy, indirectly that will affect jobs in all of Canada.

I think I have it right, but I want to ask, are you sure? You have a limited client base; it's mostly companies in western Canada. Do you have any evidence, other than what you find from your client base, that would apply more generally?

[Ken Cudmore]

No, other than anecdotal information and talking with people who have practices in the major accounting firms spread across Canada. I'm not sure whether the data they were expressing was across Canada or simply the western numbers, but some of them were even higher than the numbers I gave you.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Based on what you do know for sure, which is your own client base, what do you see from your own client base in terms of the numbers of research and development dollars that might go outside Canada and be spent outside Canada, because of the reductions to SR and ED?

[Ken Cudmore]

All we have is anecdotal information. In other words, when we talk to tax managers and CEOs of companies, they tell us what's happening with respect to their budgets. The oil and gas industry is extremely fluid. They will turn on and turn off a billion-dollar project just like that. It all depends upon what is happening.

What we find with R and D is that the scientists within these companies have to fight for the opportunity to do this SR and ED work, and they have to fight against other projects. Shale gas would never have occurred; shale gas has been a game changer for all of Canada and North America. That probably wouldn't have happened if they hadn't been able to have some tipping point in the SR and ED program. It's quite often that tipping point that allows those engineers and scientists to go forward with some of these technologies that push the envelope beyond where we ever anticipated it could go.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

With regard to the complexity of SR and ED, could you address that in the context of the decrease of the proxy rate from 65% to 55% that is proposed in SR and ED?

[Ken Cudmore]

The proxy was put in place in 2002 to simplify things. As Canadian Manufacturers and Exporters has indicated, it's really to reduce audit angst. When Canada Revenue Agency gets a claim that uses traditional overhead, they have a real problem with it because it can be neither proven nor disproven. It causes a lot of angst for taxpayers. In an attempt to avoid that, the proxy method was brought in.

I heard the testimony on Thursday where it was indicated that too many people are using the proxy because it's too generous. That's not what we find at all. We actually have an internal policy that the traditional has to exceed the benefit from proxy by a very significant amount before we will even use traditional overhead because of the audit problems that occur.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Very quickly, is it fair to say that jobs in the oil and gas industry in Canada will be at risk because of cuts to SR and ED?

[Ken Cudmore]

Absolutely. I can tell you that for one of our major clients, the difference in the projected R and D in the next year is very, very significant. How much is it related to this? A lot, I think, but it's also affected by other world factors as well.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you to all for being here today.

Mr. Turnbull, I want to give you an opportunity to finish your thoughts on the question that Ms. McLeod had.

[Robert Turnbull]

I think I was almost finished the response to the last question.

These amendments are quite related to the efforts to make sure that a financial crisis like the one that occurred in 2008 does not happen again, or at least one that's propagated by the derivatives market.

[Mark Adler, Conservative, York Centre, ON]

Mr. Turnbull, I was very interested in your remarks. I followed them very closely. If there was one thing we learned out of the recent financial crisis, it was that we need to pay more attention to the stability of the financial system. You addressed that during the course of your remarks.

The systemic risk, of course, can manifest itself in many different ways. Could you discuss some of those ways?