Evidence of meeting #89 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was changes.
A video is available from Parliament.
Special Counsel, Financial System, Bank of Canada
Well, systemic risk is the risk to the financial system that is caused by some kind of contagion passed among financial institutions.
November 6th, 2012 / 4:15 p.m.
Conservative
Mark Adler Conservative York Centre, ON
It starts with one institution, right? Then the contagion begins to spread and amplify itself.
Special Counsel, Financial System, Bank of Canada
That's correct. It can start with one institution and then spread throughout the financial system, such as was the case with Lehman Brothers and the major insolvencies of the U.S. investment banks.
It can also start in these major clearing systems. The clearing systems really act as funnels where unbelievable amounts of money are funneled and cleared through the system in money and assets every day. If those systems are not sufficiently protected from risk and they fail, that's another form of systemic risk that will cascade through the system.
Conservative
Mark Adler Conservative York Centre, ON
Would you say that the financial system is too pro-cyclical, in your estimation?
Special Counsel, Financial System, Bank of Canada
It's really not in the purview of these amendments, so I'm really not in a position to respond to that.
Conservative
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?
Special Counsel, Financial System, Bank of Canada
I'm not going to look at each particular amendment, but generally, what these amendments are designed to do is to close the gaps in the legal protections that clearing and settlement systems have, and specifically these newer types of clearing and settlement systems called derivative CCPs. They're to close the gaps in legal protections for those systems.
What we're talking about when we say “legal protections” is protections against the risk that if a major participant defaults in a system, the system operator—the clearing house, the CCP—could be unable to exercise its remedies under the rules of the system, because of stays or unwinding of payments that have already been settled in the system.
Conservative
Mark Adler Conservative York Centre, ON
Could you talk about what numerical indicators are used to determine whether there is an initial shock within the system and what the threshold is to determine whether it's going to lead to a contagion or not?
Special Counsel, Financial System, Bank of Canada
I can't. Again, I'm legal counsel at the bank. I'm not in a position to discuss that kind of analysis.
Conservative
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Thank you very much.
To follow up on Ms. Nash's questions, I will address Mr. Lavoie.
You mentioned in your analysis that, for businesses, the cost of the changes to scientific research and experimental development tax credit would be about $660 million. However, when department representatives appeared before us, I compared your figures with those they gave us. They said the cost would be about $500 million.
What is that $160-odd-million difference due to?
Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters
The difference comes from the fact that they calculate the impact of those measures on government revenue, while we calculate the impact on incentives for businesses. Since tax credit is non-refundable, large companies that are not profitable can record that in their account ledgers and request it a year, two years, five years or ten years later. I think they may even have up to 20 years. If that is how a business operates, there is no impact on government revenues that year. That's what those people calculated.
We think that, just because a company does not request the credit during the year when it spends money, it does not mean that the credit is not an incentive for R&D. In a way, it is about playing with methodology. They look at government revenue and we look at tax incentives.
So federal tax incentives will be reduced by $660 million. We should not forget that a number of provinces provide their own tax credits for R&D and that those credits are administered by the Canada Revenue Agency. Changes made to the federal system will probably be automatically reflected in the provincial system. So a $84-million reduction in tax incentives should be added for all Canadian provinces, for a total of $750 million.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
What will be the impact of that loss of incentives—which will affect your members and businesses—on Canada's position in terms of R&D?
Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters
I don't see how reducing tax incentives could resolve the original issue, where the R&D expenditure percentage of the GDP is lower for Canadian companies than it is for companies in other countries. That is kind of like saying that, since Canadians are not saving enough money for their retirement, we will eliminate all RRSP-related tax credits.
There aren't really any alternative solutions. What we have heard is that more direct support will be provided. In the case of a company set up in Connecticut or in Germany, for instance, it does not help much to go see the international CEO to ask what will happen to R&D over the next five years and tell him that there will probably be some money available, at some point, for direct support.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
I am asking the question because the department representatives told us, when they appeared before us, that this would not have a significant impact on incentives for businesses.
Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters
That is a bit strange, since those same representatives published a report in 2007 where the SR&ED program was assessed. They said in their report that each dollar spent under this program had an economic impact of 11¢ per dollar. Today, they are saying that the change will not have an impact on the incentives. Some people are even saying that the SR&ED program is not working. So the statements are contradictory. I am not the one saying this, the Department of Finance is. It's on page 8 of their report.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
I have one last question. Mr. Cudmore, if there is any time left, you could answer after Mr. Lavoie.
It is also being said that capital expenditures should no longer qualify for tax credit. What will be the impact of that measure?
Mr. Lavoie can start, and I would then like to hear from Mr. Cudmore.
Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters
As I said, capital expenditures are more vigorous in our sector than in other sectors. Capital expenditures in software development, for instance, are larger than those in labour force.
It is estimated that capital will account for about $123 million of the $750 million that will be eliminated in total. That is $95 million at the federal level and $28 million at the provincial level. The provinces will probably also eliminate capital from their tax credit.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Mr. Cudmore, would you like to add anything?
President, TSGI-Chartered Accountants
The analysis we've done on large non-CCPCs that form part of our knowledge base indicates it's between 5% and 8%. That industry is different from the manufacturing group though.
Dave Van Kesteren Chatham-Kent—Essex, CPC
Thank you, Chair.
Thank you, all, for coming here.
Mr. Lavoie, I just want to get a clarification, and I apologize. Did you say that the primary focus of your group is the SR and ED issue? Is that first and foremost?
Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters
Do you mean in the bill?
