Finance Committee on Oct. 27th, 2014

[Gareth Kirkby]

I found that three major sectors are being audited: environmental organizations that work on energy issues, particularly around the oil sands and pipelines, and exports off the coast; secondly, international development and human rights organizations; and the third were charities that had significant labour union funding. I think it's fair to say that all three of those categories probably, with this current government, tend to have higher political activity levels than some others. In participating in public conversations, they may be more critical of the current government. They often have a different approach from what the government is taking on the issues.

[Arnold Chan, Liberal, Scarborough—Agincourt, ON]

Thank you, Mr. Kirkby.

I want to turn my questions to Mr. Campbell, and indirectly to Mr. Parker. In both of your organizations, your members voluntarily contribute to the Ombudsman for Banking Services and Investments. Of course, it's a voluntary participation under OBSI that provides a service that essentially seeks to resolve disputes between your member organizations and the broader public. It follows, really, from your comments with respect to financial literacy.

To Mr. Campbell, given that a number of your members, at least two of the chartered banks, have withdrawn their financial support to OBSI, do you think it might now be high time that they be subject to mandatory oversight by the Ministry of Finance?

[Terry Campbell]

Let me actually set the record straight just a little bit. We are members of the ombudsman system. Actually, in fact, the banking industry created the ombudsman system. All Canadian banking customers have access to consumer redress through the ombudsman system. Some go through OBSI. Some go through ADR Chambers.

The federal government has actually put a requirement in the Bank Act that says all banks must be members of an approved ombudsman agency. The approval process again runs through the federal government's Financial Consumer Agency of Canada. Applications have to be made to the FCAC demonstrating their processes, their strengths, their capabilities in terms of running an ombudsman system. Then the agency, I guess through the advice of the government or the minister, will recommend and approve those bodies that meet government standards.

It is in fact a requirement. There's a process under way right now that the two existing bodies out there and potentially others—I'm not privy to that—have put in their applications and they're being considered now. This is subject to government standards. All financial institutions, all my members, will have to be members of an accredited registered ombudsman through the government's regulatory requirements.

[Arnold Chan, Liberal, Scarborough—Agincourt, ON]

As a quick follow-up question, where there isn't ultimate financial support for OBSI, doesn't it ultimately undermine the financial capacity to have an effective ombudsman that they're not properly financially resourced?

[Terry Campbell]

I think if you look at OBSI's track record, particularly over the last few years, you will have seen a significant strengthening and improvement in terms of their responsiveness, their timeliness, the quality of their responses, their turnaround time, all of that sort of stuff. They have a very strong chair, a very strong board, and I think you will find that over the last few years there has been an elevation of how they're performing.

As I say, this will all be done under government standards and approved. I think we can all take comfort with that.

[Arnold Chan, Liberal, Scarborough—Agincourt, ON]

Turning now to Mr. Dancey, in the 2012 federal budget the SR and ED program of $1.3 billion was subject to cuts. The general rate was reduced from 20% to 15%. It excluded capital expenses from the program and also reduced the eligibility of contract payments from 100% to 80%.

What are your thoughts on these particular cuts, and what impact do you think this will ultimately have on Canadian competitiveness?

[The Chair, Conservative, James Rajotte]

There is about one minute remaining.

[Kevin Dancey]

There are several points. One, we're not sure all those cutbacks should be made—for example, particularly the exclusion of capital expenditures. Albert may have some comments on that as well.

I'd also like to come back to the patent box concept, because the SR and ED program, the way it is now, incents the carrying on of scientific research. That is a very important thing to do, but I think what we also have to do in Canada is incent the commercialization of that research in Canada and the retention of those patents in Canada. That's what the program does not do right now, and that's what a patent box would do.

I think the program has to deal with both aspects, incenting not only scientific research, basic foundational research, but also the commercialization of that research.

[Arnold Chan, Liberal, Scarborough—Agincourt, ON]

I have a very quick follow-up point. Would you favour the use of tax policy over grants? It's interesting, because supposedly the point of this particular reduction was to redirect funds toward the granting program.

[Kevin Dancey]

I'm not sure the institute has a view, but my own personal view is that I have always favoured tax policy to incent those things. The marketplace will do it as opposed to government trying to pick winners versus losers.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Chan.

We'll go to Mr. Allen, please.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Chair.

Thank you to our witnesses for being here.

I'll focus my questions toward Mr. Dancey and Mr. Baker. To start, I'll pick up on the patent box. Then I want to talk a little bit about tax simplification and about some of the red tape reduction.

With regard to the patent box, I get the idea on what you're trying to do there and the importance of the innovation, the R and D, and those types of things. Can you talk a little bit about how successful that has been in other countries, specifically with respect to what it has contributed to GDP? Do we have any numbers on that? Do you have any numbers on the increase in patents or companies staying within the country, for example, under a patent box theory?

[Kevin Dancey]

I will start, and maybe Albert can follow.

I don't have particular statistics at my fingertips on either of those things. What I think I could say, though, is that the first patent box I believe was in Ireland, probably about 20 or 30 years ago. It has been replicated in a number of European countries since that time. The latest I'm aware of is the U.K. just in the last year or two.

Sometimes imitation is the best form of flattery you can get. It's good evidence that it must be working. Otherwise, why would a whole bunch of other countries be doing it? I think that's a very key fact.

[Albert Baker]

I agree with that, Kevin.

In terms of the evidence, there aren't a lot of academic studies out there. A number of these regimes are relatively new, but as Kevin says, they're out there. They're certainly providing competition for Canada.

Anecdotally, there's evidence out there that's supportive of it. There are particular companies that have come out and given evidence; they've made statements around the fact that they've either stayed in that particular country or moved and carried out more operations in a particular country that had a patent box. I would say the academic evidence isn't there yet in terms of the resulting benefits to the GDP, but anecdotally there is evidence that these are working in other jurisdictions.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

It strikes me, using the patent box theory, what types of companies are asking for this, and are they? Maybe it would favour larger companies as opposed to smaller. If a smaller company is making a product and they're doing something in their business, let's say they're going to patent their process that helps them make a whole bunch of products, how do you attribute that to a specific thing?

I can understand if you have a new product that you're selling, it makes sense, and you could put that in a box, but if you're talking about someone who is doing something, a patent on a process that improves all their products, how do you do that?

[Albert Baker]

The regimes are all different, so I wouldn't be able to say exactly how that works in each regime, but in principle, in terms of large versus small, I would see it the other way. In terms of having the patent box, some of the regimes...we talk about the BEPS project, and some of these structures are being looked at, but larger multinationals around the world often have other alternatives available to them through international structuring, being able to enjoy lower tax rates on certain types of income around commercialization, which smaller companies don't have access to.

One of the ideas behind the patent box is that it's simpler and less expensive to implement than having those types of regimes in place. While those international structures tend to be more for the larger companies, a patent box, I think in principle, could be designed such that it would have applications both large and small.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

[Kevin Dancey]

Just a follow-up on that is that it's pretty clear, certainly given my history in tax over 30 years, that countries around the world use corporate tax policy as a competition vehicle. They use it to attract investment; that's just the reality of the world. Why shouldn't Canada want to attract that type of investment and have that retention and the commercialization of that intellectual property here? That would be good for this country to do.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

You led me right into the next question.

One of the things I did not see in your submission, which we've heard a lot from companies and in some of the briefs we're hearing today, is a long-term commitment to the accelerated capital cost allowance, which again is a measure that we say we are not competitive against the U.S., for example. Some have suggested a rate of 45% is the reason that has not been in your submissions.

[Kevin Dancey]

I didn't talk about it in our comments today, but the whole issue of making sure that our capital cost allowance system reflects the economic life of the assets and is competitive is one of the aspects in our written submission. To meet the five-minute time limit I had to cut certain things.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

I know how that happens.

[Albert Baker]

It's not one that we focused on in particular.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

I wanted to ask a question about tax simplification.

I asked Mr. Cockfield who was here last week at committee if there is an example of a country that has been able to take significant steps to tax simplification and if there is a process to get there. While some countries have done things—the U.K. has taken some measures, and we've done a few things—do you know of any countries that have made great strides in a process for tax simplification and could you see them getting to a simplified tax code from where we are today?

[Kevin Dancey]

Do you want to take that first, as the global head of the link?

[Albert Baker]

I wouldn't be able to identify any particular success stories offhand. Certainly it is an initiative, it's a goal. Given the complexity of carrying on business today, there are two issues: one is getting the tax policy right and the other is tax administration. Sometimes, unfortunately, getting the policy right does require introducing some complexity. Tax simplification is good overall, but if it's a choice between getting the policy right and getting simplification, I'll vote for the policy.