Finance Committee on Sept. 21st, 2023

[Daniel Brosseau]

Just on this indexing, 3% is correct. That is what's being used by the international actuaries to say what a diversified global market is. The problem with this is that it means that if you're a small country, you shouldn't invest in yourself. If you're a big country, you should. If you're the U.S., oh, yes, you should put all your money there, and in fact all the world should be putting their money into the U.S.; nobody should be putting any money into Canada.

It's a logic that makes absolutely no sense.

[Joanne Thompson, Liberal, St. John's East, NL]

What kinds of policy changes can we make to try to shift this?

[Daniel Brosseau]

As I think we outlined here, it can be done through regulation. We can incentivize certain behaviours and disincentivize other behaviours by this reserve system. It's quite simple. It's quite analogous to what's being done in the banking industry and in the insurance industry. There are precedents for this.

[Joanne Thompson, Liberal, St. John's East, NL]

Is there a global trend away from pension plans in terms of generational shifts? Are we seeing less investment in pension plans? I'm looking at this in terms of stability going forward. We know that there are strong reserves in pension programs now, but is investment in pensions continuing in workplaces, or are there alternative investments that younger workers in particular are making?

[Daniel Brosseau]

There's been a really large shift in the coverage of people by pension plans in the private sector. In the public sector, there's definitely a big increase, but in the private sector, there's a big decrease. It has a lot to do with the way the regulations have changed to shorten the investment horizon of the valuation of these funds.

Shortening the investment horizon, as has been done through actuarial valuations and things like this, has synched it with the business cycle. When the business cycle turns down, what happens? Interest rates go down. The bank reduces them to get the economy going again. What happens then is that the liabilities go up because the interest rates are used to value the liabilities. On the other hand, there's economic difficulty, so the assets go down. All of a sudden, you go through a business cycle and you have an increase in your liabilities, a decrease in your assets and a lot of stress. That stress requires you to put money into your fund. At a time when your business is not doing so well, you'll say, “Well, why am I going to do that?” The consequence is that all the businesses will say that they don't want anything to do with this.

I made a reference to 40 years ago. It used to be that we'd be able to amortize the assets over 25 years. We used to be able to make up the difference over 25 years. It was all smoothed out, which is also what we have to go back to.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Thompson.

We will now move on to the third round.

We have MP Morantz for five minutes.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Professor Lee, there's one thing, or a number of things, actually, I want to ask you about. Speaking of 40 years ago, I remember the government program called MURB, the multi-unit residential buildings program. It allowed average investors who would take the risk of investing in the development of multi-unit residential buildings to take the depreciation of capital cost allowance and soft-cost expenses in the year of construction against their personal or professional income. My recollection is that the program was highly successful at getting hundreds of thousands of apartments built across the country.

Now, it was nice to see the Liberal government actually providing a tax concession to business people, finally. If we did that, they'd be accusing us of providing tax breaks to our wealthy business friends. I won't say that about them, but that's what they would say.

In any event, I'm curious to know what you think about an idea like that. What other types of measures or tools could be used within the Income Tax Act to incentivize the construction of residences?

[Dr. Ian Lee]

I do remember the MURBs, because I financed some way back when. This was in the late 1970s and early 1980s. I can't remember the details now at all, I assure you, but they were very popular and they were used widely. It shows that incentives work. When you provide incentives like that....

I think I agree with Ben. The fundamental problem we have—and others are saying it, including CMHC in their latest report—is that we need to build more homes, not only affordable housing in the subsidized market or whatever word you want to use, but also in the commercial market.

I want to follow up to make my response a little broader. If you look at the sheer magnitude and you accept CMHC's number for a shortfall of 3.5 million units by 2030, and I think most of us do, the idea that governments, plural, can handle the majority of that 3.5 million I just think is preposterous. There was an op-ed in the Globe just this week showing the sheer math involved. Just multiply.

What it means is that it is going to be fundamentally the private sector that's going to have to be involved, and I'm not talking about geared-to-income units. Subsidized housing, or whatever word we want to use, is the role of government. I'm sorry that I'm not using the proper terminology. However, the vast majority of housing that needs to be built is going to be done by the private sector, private banks and private capital, so we need to incentivize that. Whether they're high-rise condos or low-rise townhouses and garden homes, I'm not going to get into that. I'm just saying that the idea that governments—federal, provincial, municipal—are going to solve this and come up with 3 million or 3.5 million homes is mathematically and financially nonsensical—

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you very much, Professor Lee. I don't mean to cut you off, but I want to get Mr. Rabidoux to chime in on the same question while I have about a minute and a half left.

[Ben Rabidoux]

Thank you.

I think depreciated capital or accelerated depreciation in capital cost allowance is something that's certainly worth examining. The proof is in the pudding. It has worked in the past. There's no reason to think that it wouldn't work in the future. I'll refer the members to some of the work done by Mike Moffatt out of the University of Western Ontario, I believe, who has done some excellent work on this front.

Does that answer your question?

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Yes. We will have a look at Mr. Moffatt's work. Thank you for that suggestion.

Professor Lee, there's just one other thing. We've heard John Manley talk about this recently, and it's something that's been on my mind quite a bit. I'll try to encapsulate it.

If we have government engaging in excessive deficit financing at the same time as the Bank of Canada is engaging in quantitative easing and increasing interest rates to try to rein in inflation, do you see the fiscal policy of this government and the monetary policy of the Bank of Canada working at cross-purposes to each other at this point?

[Dr. Ian Lee]

Yes, I do, and so do many people. I mean, deficits are by definition stimulative, regardless of—again—the motive. It doesn't matter what you claim your motive is; deficits inject money into the economy.

There's a metaphor I like to use. I was a caregiver for my late remarkable mother, who lived on her own to 91. She drove until 88, when I took her car away because she used to drive down the side streets of Ottawa with—no exaggeration—one foot on the brake and one foot on the gas pedal. It used to confuse people behind her, believe me. They would see the car accelerating with the brake lights on.

[Voices]

Oh, oh!

[Dr. Ian Lee]

This is an excellent metaphor. Monetary and fiscal policy should be operating in concert.

When we go into a recession, if we stimulate through driving down interest rates and running up deficits, they're in concert, but right now we're trying to cool down the economy because the economy's too hot, as the governor has told us repeatedly in the monetary policy report.

What we're doing on the fiscal side is that we're counteracting, cancelling or partially cancelling or offsetting what the central bank is doing, so we should be sterilizing—that's the technical term—the deficit. It doesn't mean that we shouldn't be spending on pharmacare or whatever; it just means that any increases in our spending should be covered by an offsetting reduction somewhere else.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Lee, and thank you for that metaphor. The family stories are always welcome.

Thank you, MP Morantz.

We're moving to MP Weiler, please, for five minutes.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you, Mr. Chair.

It's a pleasure to be joining this committee for the first time. Like Ms. Thompson, I just joined the committee—I just found out yesterday—so I'm quickly getting up to speed on matters, and we're already having a very interesting discussion today.

I want to pick up on part of the testimony from Mr. Rabidoux.

You mentioned a few of the demand side measures that you recommended the government take, and one of them was a registry for beneficial ownership. Of course, earlier this year, we passed legislation to have a beneficial ownership registry for companies that are incorporated under the Canada Business Corporations Act. It was set up in a way so that it could work very closely with provincial corporate registries, but what we're talking about here is real property, and in the province that I live in, in British Columbia, we brought in a beneficial ownership registry for real property as well.

I was hoping you might be able to expand a bit on how the federal government might be able to work closely with such registries where such matters are under provincial jurisdiction. How might that be able have an impact on the demand side and housing affordability as well?

[Ben Rabidoux]

Certainly. Thank you for the question.

As it relates to British Columbia, I'm a little concerned about the user-friendliness of that database. It's not easy to search.

Ultimately, the disincentive of a beneficial ownership registry is.... I'll use a cliché. Let's say that you are an international money launderer. You do not want to be within the purview of your local government or any jurisdiction, so any country that allows you to obscure ownership and creates a registry that's easily searchable and user-friendly, naturally, is a jurisdiction that is not particularly welcoming for you. British Columbia has made a step in the right direction. It would be nice to see it open that up and make it a little more user-friendly and searchable.

I'm not sure that I have a detailed answer for your specific question. I don't claim to know the inner workings of those various systems. I would certainly expect this to be a matter of great interest, particularly in the more affordability-challenged provinces such as British Columbia and Ontario, so I don't know why you wouldn't get a buy-in from the provinces.

With regard to the specific intricacies, I'm probably not the person to answer directly.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you very much.

I'd also like to pick up on a bit of what Mr. Brosseau and Mr. Letko were talking about with respect to pension investment in Canada and, really, the lack thereof.

I'm wondering if you could point to other countries that have been able to address this problem and what we might be able to learn from those international comparatives.

[Daniel Brosseau]

Canada is very particular. Other countries have not had to address it to the extent that Canada has.

As I said earlier, domestic equity exposure as a percentage of overall equity exposure in Canada is the lowest compared to anywhere else in the world. Australia's is about 50% and the U.S. is at about 80%, so this is a Canadian problem. We're the first. We'd better be the first to solve it, too.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

That's great.

[Peter Letko]

I would add that there is an issue currently being discussed in the United Kingdom. Their level of pension fund investment has been low too, but I don't believe any of that discussion has concluded. That might be a good place to look to for some guidance.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

In the material that you submitted, one of the fixes you mentioned relates to increased transparency and standards. I was hoping you might be able to share with this committee the need for further transparency as it relates to disclosures and reporting of pension fund investments.

[Peter Letko]

One very strong trend in the investment of Canadian pension funds is the move toward more investment in private equity, real estate infrastructure and so on. It now accounts for about 43% of total pension fund assets. What's important here is that when determining solvency, you have to come up with a valuation for these assets, and this is highly dependent on appraisal.

I don't know if anyone among you has ever hired an appraiser, but if you have, you might remember that the first question an appraiser probably asked you was, “What is the purpose of this appraisal? What do you need it for?” That should make you a little suspicious.

The other observation is that if you're not happy with that appraisal, you probably won't be bringing that appraiser back next year, so there's a concern here that there may be some kind of bias that builds into this valuation of 43% of our assets.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Letko and MP Weiler.

We will now go to MP Ste-Marie for two and a half minutes.

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

Thank you, Mr. Chair.

Ms. Laflamme, you're calling for all the funds earmarked in the National Housing Strategy to be devoted to social housing, including comprehensive, long-term programs. To that end, you said that it was important in the short term to provide new funding for the Rapid Housing Initiative, as this would make it possible to supplement housing funding. Finally, you said that we should launch a program to acquire and renovate rental properties dedicated to social housing.

Could you elaborate on the importance of this request?

If you wish, you can also use the remaining few minutes to address other aspects.