Finance Committee on April 9th, 2020

[Peter Fragiskatos, Liberal, London North Centre, ON]

Mr. Chair, since I don't have much time left, Ms. Durdin, perhaps you can offer an opinion on this question, but it is for Mr. Parmenter as well.

Recently in Australia, there's been a change in terms of banks. We've heard throughout about the importance of rent and how it is a key concern right now for businesses. Under this recent change, introduced just a few days ago, commercial landlords can defer mortgage payments for up to six months on the condition that they do not terminate leases for tenants who have been directly impacted by COVID-19.

I think there are some jurisdictional issues and complexities when it comes to how something like that could potentially be introduced in Canada, but what do you think about it? Do you have any view on this?

[Neil Parmenter]

As I mentioned earlier, I think banks are looking at a whole host of flexible and creative options for their clients across a broad range of industries, including commercial real estate. As I said, I think they're not only thinking of new ideas but also looking at their jurisdictions and borrowing where appropriate, but beyond that, it's difficult for me to offer a more informed view.

[Martha Durdin]

In terms of real estate, I think there needs to be some thought around how to manage the flow of landlords not paying rent to smaller companies and smaller companies not being able to pay larger ones.

At this point, it's being applied very inconsistently by individual large commercial landlords. I know this is true from the experience of our own organization. We are the landlord in a couple of places, and each company from which we rent, both of which are large, is dealing with it quite differently. The relief that individual companies are offering is being inconsistently applied.

I think there is a role for some kind of point of view on how it's managed across Canada.

[The Chair, Liberal, Wayne Easter]

Okay. With that we will have to end this session. We have another one-hour panel after this with two more witnesses.

On behalf of the committee, I want to thank the Canadian Bankers Association and the Canadian Credit Union Association for appearing before us. There's no question that these are extraordinary times that require extraordinary decisions to be made across the board by all levels of government, businesses, communities and individuals.

Again, thank you for appearing, for your remarks and for answering our questions.

[Neil Parmenter]

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you, Neil, and thank you, Martha.

We will have about an hour here. We will start with Canoe Financial.

For questions, we will start with Mr. Cumming and then go to Mr. Fragiskatos.

Okay. The floor is yours, Brett Wilson, with Canoe Financial.

I ask everyone who is not on the line to mute their phones so that the line will be as clear as possible.

Go ahead, Brett.

[W. Brett Wilson, Chairman, Canoe Financial]

Thank you first of all for the opportunity, and second, I was given a five-minute window. I love the fact that it might be an hour, but I have a four-minute presentation with basically one minute of introduction, one minute of context and two minutes to discuss an opportunity. I'm speaking a little bit about finance. I'm speaking a little bit about small and medium-sized enterprises in Canada, and I'm certainly speaking about energy in Canada.

I am Brett Wilson, the chairman of Canoe Financial. We run about $6 billion of assets, almost all of it invested by Canadians. I am a prairie boy. I am an engineer by training and early career. As an investment banker, I was a co-founder of one of Canada's most successful investment banks, FirstEnergy Capital, which of course happened to focus on energy. Ten years ago I evolved into the world of merchant banking with a wide diversity of investments in Alberta, Saskatchewan and British Columbia. I am active in the oil and gas industry. I'm active in hydro and wind power. I'm an investor in Canada's largest solar energy projects. I'm currently building a gas-fired electricity plant, and I'm active in almost all subsectors of the Canadian energy industry. I am committed to Canada, and I'm committed to its many energy industries.

Just for some context, the World Bank says Canada is number 23 as a place to invest in the world, and unfortunately it's dropping. In the past we've been recognized as a global leader in resource extraction. That recognition is also dropping. Over the last decade many global energy companies have exited Canada for compelling returns elsewhere in the world. The Canadian energy industry has juggled and struggled for the last five years, driving down operating costs, while seeing capital efficiency.

Issues still abound over responsible access to world markets for our hydrocarbons, all of which is exacerbated by foreign-funded and often misguided attacks on Canada's energy industry. The U.S. oil industry by contrast has more than doubled its production during the time that we have struggled and slipped.

Of note as well, the energy sector is Canada's largest employer of our indigenous peoples.

With regard to the opportunity I'd like to speak to, as of the end of 2018, small and medium-sized enterprises in energy in Canada had invested more than $80 billion in excess of their taxable income, resulting in $80 billion in tax pools between NOLs—net operating losses—and capital cost allowance pools and other pools that are directly attributable to energy, such as the Canadian oil and gas property expense, Canadian development expense and Canadian exploration expense. In sum, there is $80 billion in pools.

The opportunity that is circulating in Calgary, and what I'm proposing now, is to monetize some or all of that $80 billion in tax pools. Those are tax pools that are currently assets of the companies that spent the money, and they are liabilities to the Government of Canada as they offset income over time. As used, that $80 billion of tax pools would cost the government about $20 billion, 25¢ on the dollar.

My suggestion is that there is an opportunity for the two levels of government to offer two choices to energy companies: the direct repurchase of this tax pool asset from companies for, say, 50¢ on the dollar, and/or alternatively the issue of flow-through shares into the capital markets allowing renunciation of existing pools, rather than creating new pools for renunciation.

Thus, this opportunity is for both a $10-billion injection into Canada's world-class energy sector and at the same time a reduction of $10 billion to the CRA's expected cost of the ongoing utilization of the tax pools as claimed. The opportunity is a classic win-win for Canada. It is capital our energy industry would reinvest to the benefit of Canada in so many ways.

Ladies and gentlemen, thank you for the opportunity to pitch. I'm happy to take questions for most of the next hour. I understand that's not the case.

[The Chair, Liberal, Wayne Easter]

Thank you.

Well, there will be about 50 minutes of questions, Mr. Wilson, following Mr. Macdonald with the Canadian Centre for Policy Alternatives.

You're on, David.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

Thanks so much, Mr. Chair. Thanks to the finance committee for your invitation to speak today in these troubling times.

I'd like to thank members of the committee and all MPs for their rapid action taken to combat the economic impact of COVID-19 and their willingness to rapidly iterate program designs to better help struggling Canadian workers and businesses impacted by this public health emergency.

I'd like to restrict my comments today to the Canadian emergency response benefit as well as the Canadian emergency wage subsidy. Generally, I think these are good programs. Considering the time frame in which they were developed, they are nearly miraculous ones. However, as they are rolled out, it is important to continue to improve them as gaps are exposed. In no small part, those gaps are due to the speed with which they were rolled out.

To start, let me speak to the Canada emergency response benefit. Hats off to the MPs and the public service workers who managed to replace the employment insurance system in a week and a half. The emergency benefit is a much more modern program than EI ever was. It's faster to apply to. It's faster to get support. It's far less Byzantine, essentially throwing the antiquated EI system in the bin where it belongs. The emergency benefit covers many more unemployed workers than EI ever would have. It includes self-employed and gig workers, as well as insecurely employed workers, and for most workers it will provide more than EI would have on a weekly basis. With essentially five million Canadians now having applied for the emergency benefit, either through EI or through CRA, there are now one in five working-age Canadians who will be receiving this benefit. In terms of how quickly they were signed up, it's likely the most rapidly deployed income support program in our country's history.

However, there are still unemployed workers who won't receive any income support, either through the old EI system or through the new emergency benefit. There are over 600,000 unemployed workers who lost their jobs prior to March 15 who couldn't access EI due to its previous restrictions. Because they were unemployed prior to March 15, they can't get the emergency benefit because you have to have been unemployed after March 15 to get the emergency benefit. They didn't get EI because they didn't have enough hours in their city, they were self-employed or they were just coming back to work from parental leave. As a result, they will receive nothing from either employment insurance or the emergency benefit.

A further 309,000 workers unemployed prior to March 15 are receiving EI but are receiving less than $500 a week, which is the floor that the emergency benefit has created. There are an additional 175,000 unemployed Canadians who lost work after March 15 but who won't be able to access the emergency benefit because of the $5,000 in earnings in the previous year, in 2019, that is required. That $5,000 may seem like a small amount, but considering that the non-essential industries that have been closed—retail, food, hospitality, art, culture, sport—are all very seasonal or part-time industries, to the workers in those industries, that $5,000 threshold would be a very large impediment.

All told, there are almost 900,000 unemployed Canadians at present who will receive neither EI nor the emergency benefit. This does not include the 2.1 million Canadians who we learned about today who have seen the majority of their wages cut but who are not officially unemployed if their income has not completely dropped to zero, one of the other requirements for the emergency benefit, although there is some discussion about changing that detail.

In terms of the Canada emergency wage subsidy, the 75% subsidy for businesses with revenues that have fallen by 15% to 20% due to COVID-19, I believe this is a strong foundation to support the private sector. I know the program is still under development. It's being rapidly modified in an attempt to meet the possible needs of businesses and workers, although I would like to suggest several changes to ensure better work protection, as well as transparency to the program. This will be, by a long shot, the most expensive program rolled out of these emergency measures.

I am concerned that if workers are still fully working and not furloughed, there's no guarantee that they won't see their pay or benefits cut by 25% if their employer is not required to make up the additional 25% of their pay. If a worker is indeed entirely furloughed, the decrease in pay to 75%, I think, is reasonable. However, if workers are fully working, I don't think they should be the ones seeing a cut in their pay despite the fact the federal government is covering 75% of the payroll. The Irish version of the wage subsidy requires employers to show that cash reserves are quite low before allowing them not to top up the other 25% of employee wages. A similar requirement could be put in place in Canada so that workers won't bear substantial wage cuts as a result of the emergency wage subsidy.

Now, this is a program to keep workers and businesses afloat; it's not a program to enrich shareholders and executives. I encourage members to consider a cap on executives' pay for companies that are receiving the wage subsidy such that executives don't receive payments over the period of receipt of the emergency wage subsidy.

I'd also encourage members to consider forcing companies to stop paying out dividends or conducting share buybacks to enrich shareholders while they're receiving 75% of their payroll from the federal government.

Providing supports for big companies was a last-minute change to this legislation, as I know, and it will likely substantially increased the cost, although I think it's an important change, given the role that big enterprise plays in terms of employing Canadians.

I think there should be transparency, when this is said and done, as to who has received support. I would encourage the government to disclose in the fall, after the crisis has passed, companies over a particular size that have received the wage subsidy, such that we will have a full accounting of where this money has gone.

Thank you very much for your time, and I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, David.

We'll go to five-minute rounds, and if we can hold the questions and answers to five minutes, we can get eight people on for questions.

We'll start with Mr. Cooper, Mr. Fragiskatos, Mr. Ste-Marie and Mr. Julian.

Go ahead, Mr. Cooper.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you very much. I will direct my question to Mr. Wilson. I'm certainly interested in your recommendation to monetize about $80 billion of tax pools. I'd certainly give you a little more time to elaborate on the merits of that recommendation if you wish.

Before I do that, I know that Premier Kenney stated on Tuesday that there's a very real possibility of negative prices for Alberta's energy products. Would you agree with that, and could you speak to the serious economic implications of that very real possibility?

[W. Brett Wilson]

Certainly.

As differentials expand, we're trapped in terms of the oil we have in Canada, with the differential between what would be received on a world market and what's available in Canada. Last year, probably around this time, that led to the involuntary curtailment that was enforced by the government to ensure that there was not overproduction. It's the same concept that you would apply right now in the milk industry in terms of supply management.

Of course, oil can last in a barrel a lot longer than a gallon of milk can, but the real point is that we need supply management. That's what has triggered this explosion in the differential.

Do I think that there will be a sustainable negative? Well, people will simply stop producing. There's an implicit element of curtailment that will occur when prices plummet, and it's already happening. You're seeing the Russians and Saudis talking about curtailment, and across the Canadian oil and gas industry, voluntary curtailment is certainly occurring left, right and centre. The single benefit of this low oil price is of course for the refiners, who are able, when they choose to, pass on the benefit of a lower supply cost to the consumer buying gasoline at the pump.

Is it going to be a long-term issue? I don't believe so. We've already seen some recovery in the world price of oil. As we participate as best we can—and I congratulate the efforts of all levels of government in terms of moving forward on both Keystone XL and Trans Mountain—having access to world markets for Canadian energy is an integral part of being able to participate in a thoughtful industry on a global basis.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you.

It was all the way back on March 25 that Bill Morneau promised there would be help for Canada's oil and gas sector in hours or possibly days, as he said. It's now 15 days later, so clearly it hasn't been hours and it hasn't been days. It has now been weeks.

We have seen energy companies trim $8.5 billion in planned spending in Canada since March 7. Active drilling rigs are down to 42 from the 260 there were in February.

Can you speak to the urgency of relief for Canada's oil and gas sector? Also, in that regard, what would you say to those who say that programs such as CEBA and the wage subsidy are already being provided by the federal government? What would you say in response to those who say that the oil and gas sector will already benefit from those programs? Further, could you elaborate perhaps on some measures you'd like to see in a federal package?

[W. Brett Wilson]

Understood.

Those programs that you just spoke of, which have been implemented, have been invaluable to many industries. I'm very active in the hospitality industry. I own hotels, restaurants and gymnasiums for training and exercise. In businesses like that, these supplemental programs have been and are looked at very favourably, and so I have to express my appreciation, but they become irrelevant to industries that rely on major capital reinvestment, and that's really the essence of the Canadian oil and gas industry.

For the last 20 years, on average, the junior, mid-cap and small-cap public oil and gas companies have reinvested more than 100% of their cash flow. The distribution of cash flow by way of dividends we sometimes jokingly describe as simply giving shareholders a choice of where they might like to invest, but the oil and gas industry has historically required the opportunity to grow, and sometimes the opportunity simply to maintain its production has required significant reinvestment. Programs that subsidize wages for employees don't have an impact in any way, shape or form on the material issue, which is capital reinvestment, and capital reinvestment is where jobs are created. Distributing cash flow is not a job-creating business. A couple of payroll clerks would be required to write dividend cheques. That's not what we're about here. This is about the need to reinvest capital, partly to grow our production and partly to stabilize the production we have, and of course in all of this to participate in the growing global economy.

Leaving aside COVID and the collapse created by the Russians and the Saudis, in the last 15 years we saw world production grow from around 95 to close to 110 million barrels a day, so those who object to the growth of the hydrocarbon industry in Canada do so without knowledge of what's happening on a global basis.

To participate in that global economy simply makes sense on two levels. One is crude oil, and then there's liquefied natural gas. To the extent we participate in crude oil, we're bringing oil to a global market that is, first of all, responsible in terms of environmental compliance; responsible in terms of indigenous relationships; and responsible in terms of paying municipal, provincial, federal, property, operating and income taxes, and withholding taxes. All of that in Canada is organized in a thoughtful, responsible way.

With regard to respect for the dignity of women and children, something Canada exhibits, I wouldn't say that of the seven of the other top 10 countries in the world that have large reserves. We are third in the world in terms of our reserve base, so participating on a global basis for crude oil makes the world a better place.

In terms of participating with LNG, we've struggled in Canada to get LNG projects off the ground—

[The Chair, Liberal, Wayne Easter]

Sorry to cut you off, but we'll have to wrap it up there and turn to Mr. Fragiskatos. Sorry about that.

Go ahead, Mr. Fragiskatos.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much, Mr. Chair, and thank you, witnesses.

Mr. Macdonald, I have just one question. I think you quite appropriately hit the nail on the head when you said the response of the Canadian government was “nearly miraculous”, particularly when it comes to the CERB. We'll see where the numbers are today, but just yesterday at this time, nearly two million Canadians had been able to apply and be approved for the CERB. That's 1,000 applications per minute that are being put through, and credit goes to our outstanding public servants who are doing this work in the greatest moment of need that we as a country have felt since the Second World War. I saw that you caught yourself when you said “nearly” miraculous, because it's Holy Week, so I see that you're emphasizing “nearly”, but I think it's an appropriate way to describe the situation.

Here is my question. We've heard throughout these hearings about the issue of rent being a prime concern. For business owners and tenants, it's a major issue right now, and it promises to be a major issue in the weeks and months ahead. I put this question in the earlier panel to the banks, to both Mr. Parmenter and Ms. Durdin, and it seems they didn't want to answer, unfortunately. We didn't have much time, but I also noticed that perhaps they were being a bit evasive in part. That's fair, since it's a question that asks them to speculate on a policy response, but I still think it's in line with what we need to be focused on right now, which is a way forward, and that's why I want to talk about Australia.

Very recently, you may have seen, Mr. Macdonald, that Australia has introduced a change. Going forward, commercial landlords who can demonstrate a consistent record of payment can defer mortgage payments for up to six months on the condition that they not terminate leases or evict tenants who have been directly impacted by COVID-19. Do you think this is something that ought to be looked at in the Canadian context?

[David Macdonald]

I certainly think that rent, in both the commercial and the private sectors, is going to become an increasingly big issue if the public health necessity of the lockdown continues.

Certainly there is the question of deferral of residential mortgages, deferral of rent payments and protection against evictions if rent is not made for individuals in several provinces at this point. The question of whether businesses, particularly in certain retail settings, can defer rent could be an important one. I suspect that as this drags on, what will become clearer is that it will become a question of not just whether interest rates are appropriate or whether deferrals are appropriate. It's not as if individuals or small businesses are storing up three or six months' worth of rent in a bank account and in September they'll be able to open up that bank account and pay off what they owe; rather, it's that people will get behind in their rent, whether it's personal, corporate or retail, and they won't be able to make that money back. We won't be able to restart the economy just by pushing a button and getting everyone back to work on a certain date, June 1 or July 1.

I think there's going to be a much longer tail on this situation. Particularly for individuals with mortgages, individuals with rent, and small businesses that have their own rents as well as debt that they pay in terms of holding inventory or lost inventory, we will likely see a large uptick in bankruptcies and the need to rapidly renegotiate debt, as opposed to simply deferring it.

At this point, we're at the deferral stage. I think a month or two from now we'll be further along, and we'll be at the renegotiation and bankruptcy stage. My fear is that the current bankruptcy process, whether for personal or corporate bankruptcies, particularly in the current setting, may not have the capacity to deal with what we are likely to see in private small businesses.

[The Chair, Liberal, Wayne Easter]

We will have to end that round there, Peter. Sorry.

We'll give you the exact number on the CERB applications at 4:00 p.m. this afternoon, Ottawa time.

It was 459,970, so yes, they're rolling in.

[Peter Fragiskatos, Liberal, London North Centre, ON]

That's great to hear. Thanks, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you. We will now go to Mr. Ste-Marie and then Mr. Julian.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

I want to thank all the witnesses for their presentations. My questions are for Mr. Macdonald from the Canadian Centre for Policy Alternatives.

Mr. Macdonald, I want your opinion on the measures that the banks have taken and on the measures that they could take. We've seen the central bank, the Bank of Canada, cut its policy interest rate.

Should the banks be doing more?

[David Macdonald]

It would appear that the position the banks appear to be taking at this point is the deferral one that we were discussing earlier, potentially the deferral of interest. It's not the deferral of payments for individual mortgages. There does also seem to be a push to lower interest rates on credit cards from the 18% range to maybe the 10% range.

I think those parts may help some people. I think most people won't be particularly helped by that, in large part because deferring a mortgage payment, if you can't make the payment as it is, doesn't help you. It puts off the problem. Even if the interest rates are lower or the interest being charged has been deferred, the underlying principal payments, in many cases, haven't been deferred, or even if they are deferred, you don't have six months' worth of those payments sitting in a bank account somewhere that you can take out and then pay in September.

My concern is that the banks hold a lot of this debt, and you can say that the banks should be forced to forgive a certain amount of mortgages or that people should get a pass to not pay back their capital on mortgage payments. However, this isn't purely about the banks. We can say renters shouldn't have to pay their landlords, but their landlords may well have mortgages. Then we can say that the landlords shouldn't have to pay the banks their mortgages, but the banks themselves have their own costs.

There is a process for dealing with this type of insolvency. It's called renegotiation of debt. That's not necessarily the bank's fault per se. I'm sure that down the line we'll see a large uptick in bankruptcies or forced renegotiation of debt, whether for mortgages, rent payments or small businesses that can't operate and are forced to close. At that point, it may be necessary to use the stick of the federal government against the banks. It's not clear to me, at this point, exactly what that stick would be in terms of renegotiation. It might be a fund that would help bankrupted businesses renegotiate, with the federal government taking on some risk in that process.

I really think we need to be looking further than just deferring several mortgage payments or deferring some interest. We need to be looking at the fact that folks won't be able to make these payments back, and they'll likely have to renegotiate that debt over a longer period of different payments, or something along those lines.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Macdonald.

I also want your opinion on the Canada Emergency Response Benefit. Many jobs are in seasonal industries, and these people would normally return to work. However, given the COVID-19 crisis, they can't do so. Yet they're excluded from the Canada Emergency Response Benefit because they haven't lost their jobs.

In your opinion, should workers in seasonal industries be eligible for the Canada Emergency Response Benefit?

[David Macdonald]

The emergency benefit, I think, is a great program. Its speed and the ease with which people can apply has been commented on, but there remain a number of odd constraints on accessing the program, like the one you just mentioned. Given the number of applications to date, I think the labour force survey number that came out today seriously underaccounts for what is actually happening in the labour force. Clearly this program is needed.

I've identified some areas. You've identified one where the emergency benefit could be expanded rapidly, given that the infrastructure of CRA is already in place to process a phenomenal number of payments in a very short period of time.

I think that at this point we should be providing supports for people without undue constraints. Frankly, there aren't a lot in the emergency benefit, but there are some, and those should be further relaxed such that the people who don't have employment or don't have full employment or are seeing big drops in their hours can gain access to it.

[The Chair, Liberal, Wayne Easter]

Okay, thank you. That ends the round, Gabriel.

We'll turn to Mr. Julian and then Mr. Cumming.