Industry Committee on Feb. 7th, 2008

[The Chair, Conservative, James Rajotte]

Order, please.

There's always a transition between the 9-to-11 committee and our committee, and I understand there are three witnesses who are stuck at the airport, so we will hopefully have them as the committee progresses. But we are here and we have two sessions today. The first hour is continuing our study of Canada's service sector.

We have four organizations here. First of all, we have the Canadian Gaming Association. They will hopefully be here from the airport shortly. We have the Canadian Real Estate Association, represented by Mr. Pierre Beauchamp, the chief executive officer, as well as Mr. Gregory Klump, the chief economist. From the Certified General Accountants Association of Canada, we have Ms. Carole Presseault, the vice-president of government and regulatory affairs. From Genworth Financial Canada, we are expecting Mr. Winsor Macdonell, but right now we have Ms. Francesca Iacurto, and she'll be reading a statement. Hopefully, she'll be joined later by Mr. Macdonell.

I think we'll start with Mr. Beauchamp for an opening presentation and then we'll go to Ms. Presseault.

[Pierre Beauchamp, Chief Executive Officer, Canadian Real Estate Association]

Thank you very much, Mr. Chair.

We're clearly pleased to have the opportunity to participate in this study of the services sector.

I understand that you'd like to hear about our industry, about the role we play in the economy and its problems, and what we'd like the federal government to do in respect to some of our issues.

The Canadian Real Estate Association is one of Canada's largest single-industry trade associations, representing real estate brokers, agents, and salespeople working through more than 100 real estate boards and associations in ten provinces and two territories in Canada.

As the national association, CREA owns the MLS trademark as well as the REALTOR trademark. The REALTOR trademark is an assurance of integrity and can only be used in Canada by members of the Canadian Real Estate Association who accept and respect a strict code of professional conduct.

The code requires members to subscribe to free and open competition according to the principles embodied in the Competition Act of Canada. The real estate database systems, operated under the MLS trademark by our member boards and associations, provide an inventory of available properties and ensure maximum exposure on the Internet of properties listed for sale across Canada and throughout the world.

I can tell you that our system of cooperative selling, combined with our technology such as MLS.ca, are the envy of the real estate world. When other national real estate associations seek a model for the online advertisement of real estate listings, they look to Canada first.

As I'm sure you know, the real estate housing industry is an important driver of the economy. But what does that really mean? Here is some important information to consider.

In 2007, total MLS/SIA residential sales in major Canadian centres crossed the $100 billion threshold in Canada for the first time in our history. MLS/SIA sales totalled $118.3 billion, an increase of 19.6% over the previous record set in 2006.

While we expect residential sales to decline somewhat in 2008, the situation in Canada is nowhere near the high-risk loans crisis in the United States.

The housing crisis in the United States resulted from poor lending standards. Risky loans were made to homebuyers with poor credit, on the assumption that rising prices would make up for any lending mistakes. When buyers started defaulting on these loans and foreclosed houses began to flood the market, lenders ended up losing huge amounts of money. By contrast, this country's housing market is built on strong employment growth and consumer confidence, not easy access to cheap credit. In Canada, in fact, only 5% of all mortgages are classified as subprime, whereas that figure is approximately 20% in the United States.

How is the real estate sector contributing to the overall economic health of the Canadian economy? A study by Altus Clayton for the Canadian Real Estate Association showed that homebuyers are pouring over $17 billion a year into the economy through ancillary spending, or spinoffs. Home sales often pave the way for major spending on things like fees to professionals, taxes to government, renovations, and the purchase of new furniture and appliances. Altus Clayton estimated that spending by homebuyers led directly to the creation of 94,700 jobs each year from 2004 to 2006, and that these spinoffs were also indirectly responsible for creating a further 63,900 jobs per year. This total of almost 159,000 jobs per year represents a significant contribution to the economy. Job creation as a result of actual home sales touches all sectors of the economy. Of the estimated 159,000 jobs created due to home sale spinoffs, 45,530 were created in finance, insurance, and real estate; almost 28,000 were in professional services; 26,000 were in trade; 23,000 in construction; 11,000 in manufacturing; and 25,000 were in other sectors.

Mr. Chairman, while ownership housing activity has been strong, rental housing activity has been extremely weak. That's one of the reasons the Canadian Real Estate Association has proposed a further measure to help increase rental housing stock. We are asking the federal government to defer the capital gains tax and the recapture of the capital cost allowance when an investment property is sold and the proceeds of the sale are reinvested in another property within one year.

Doing that would reduce the cost of rental housing and make it more affordable, as well as increasing housing stock. For some years, tax policy has deterred the private sector from building and maintaining rental housing.

The amendment proposed would provide more economic benefits by using the under-used wealth in our economy, supporting labour mobility and addressing the problem of Canada's competitiveness on the international scene.

The proposal would also make the federal government an active participant in its regeneration and intensification of urban neighbourhoods.

The real estate industry is highly competitive. Our membership is at a record of 94,000 realtors in Canada. Consumers have more information, and demand more service and have more agents and business models to choose from, than ever before.

One area where federal legislation is impacting this competition negatively is the competitive disadvantage created for our members by the latest money laundering and tourist financing regulations included in Bill C-25. Realtors have been captured under the existing regulations since these were first implemented six years ago. Other competitors of organized real estate will not have to comply until 2009. We see this approach as prejudicial to realtors, who are the only real estate professionals to have taken action to promote compliance with these federal initiatives.

Mr. Chair, I would like to reiterate strongly our industry's support for the government's efforts to curb money laundering and terrorist financing in Canada. We are simply asking for fair and equal treatment.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Beauchamp.

We'll now go to Ms. Presseault, please.

[Carole Presseault, Vice-President, Government and Regulatory Affairs, Certified General Accountants Association of Canada]

Thank you, Mr. Chair, members of the committee. I would like to thank you for giving us this opportunity to meet with your committee today.

We believe that you can help to improve public understanding of the role of the service sector in the Canadian economy, and most importantly help to determine what options are available to policy makers to ensure the continued prosperity of that sector.

CGA-Canada is pleased to participate in your discussions. I would like to take the next few minutes to suggest some strategies that would make it possible for businesses and consumers in Canada to continue to enjoy the benefits of a dynamic, competitive market that will provide them with professional accounting services that meet the standards recognized at the international level.

We are aware of the limits on the time allowed for this discussion. My presentation will deal with three essential recommendations. First, we recommend that the government establish principles for internal trade and create an internal trade tribunal. Second, the government must recognize that each professional body has the right and the duty to establish its own standards. Third, it must incorporate consultation mechanisms and transparency provisions in international trade agreements.

And let me explain why. But first allow me to remind the committee that CGA continues to be the fastest-growing accounting designation in Canada.

We are proud of the fact that CGAs have been providing valuable services to the public since 1908. This year we celebrate our 100^th anniversary of the founding of the CGA designation.

Accounting, as you are acutely aware, is the backbone of the business/financial world. Accounting is the key to measuring the activity, growth, and success of businesses and the economy, and it gives us the financial snapshot needed to make sound decisions. Because of its central role, accounting is highly regulated. Professions, the committee has been told, account for one-fifth of Canada's service economy. Within that, there are almost 200,000 accountants in Canada working in every corner of the country, in the private and public sector, or as self-employed individuals.

The industry continues to grow at a brisk pace. From 2001 to 2006 the number of accountants increased by 14%. This strong growth can be partially attributed to changes in business regulatory requirements, which have led to increased demand for accounting services.

Let me turn to the issue of internal trade. In today's world, goods and services cross international borders and move with incredible ease and speed. Given this reality, it is difficult to comprehend why current economic activity in Canada is still seriously inhibited by interprovincial trade barriers. It is estimated that these barriers may cost anywhere from $3 billion to $14 billion each year.

Barriers to the free movement of trade and services have put a stranglehold on Canada's productivity and competitiveness. CGA Canada believes the time has come for the federal government to step up to the plate and exercise its power to regulate trade and commerce under the Constitution.

We have two proposals. One is that the federal government establish in legislation a set of open trade principles based on the premise of a free and open market. The second is that the federal government establish a standing internal trade tribunal.

That is our first recommendation.

Let me turn to competition and the accounting marketplace. We are proud of the fact that CGAs across Canada provide professional services: the same uniform high standard of education, ethics, and practice. This ensures the full mobility of our members. This also ensures, more importantly, the continuity of services across borders, contributing to reducing the cost of doing business. There might be different approaches to professional training and certification for accountants in Canada, but the competence and performance standards required and practised are common to all professional accountants.

Until recently our members were prevented from providing the full scope of public accounting to business and consumers in Ontario and Quebec. This prohibition was found to impair trade and cause injury by two successive panels convened under the Agreement on Internal Trade. Moreover, the Competition Bureau released a helpful report in December on the self-regulated professions in Canada. The bureau makes it crystal clear that laws and regulations have impeded access to certain professions and have unnecessarily stifled competition. This also must be recognized in federal legislation.

We urge the committee to ensure that federal legislation recognizes competition in the accounting marketplace and recognizes the rights and obligation of each professional body to set its standards of education, ethics, and practice.

Let me turn to the international dimension very briefly. Accounting services are well positioned. In fact, the services industry, as you well know, is well positioned to increase Canada's economic importance internationally. We are proud of our international presence, a presence that we intend to expand and that we've been extending very much over the last year or so. We are very interested in Canada's pursuit of trade agreements. However, we are concerned that these discussions sometimes don't take into account the multi-body nature of accounting in Canada. There are three professional accounting designations in Canada. In dealing with professional services, most trade agreements encourage professional organizations to enter into mutual recognition agreements. It has been our experience that foreign authorities or foreign professional bodies have little motivation to enter into mutual recognition agreements with another body in Canada once an agreement has been reached with another body.

I am sorry if it is confusing, and I welcome your questions.

We believe the federal government needs to take this into account when entering into trade discussions in order to provide more clarity and transparency through the conduct of negotiations, especially as we believe they might affect the rights and privileges of professionals.

We recommend that the federal government build into international trade agreements the requirement that professional bodies consult with those who might be affected by agreements before undertaking negotiations that could affect their rights. The purpose would be to investigate whether a third body wished to join the negotiation, or at least it could provide the opportunity for an early assessment of the impact of the proposed mutual recognition agreement on their professional rights.

Thank you, Mr. Chair.

We leave you with three recommendations. As I said, the federal government ought to, first, set internal trade principles and create an internal trade tribunal; second, recognize the rights and obligations of professional bodies to set their own standards in a heavily regulated industry such as accounting; and third, introduce consultation mechanisms and transparency provisions within international trade agreements.

We wish you well in your deliberations and welcome any questions you might have.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Presseault.

I'll now go to Ms. Iacurto, please.

[Francesca Iacurto, Vice-President, Government Relations, Genworth Financial Canada]

Thank you very much, Mr. Chair.

Good morning, everyone.

My name is Francesca Iacurto and I am Vice-President, Government Relations, with Genworth Financial Canada. My colleague Winsor Macdonell has been delayed, but he should be here any minute to answer your questions.

Genworth is Canada's home ownership company. We are the largest private sector provider of mortgage default insurance in Canada, and one of the largest in the world. We operate in 25 countries. Today Genworth Canada has about $4 billion in assets and 300 employees, and it operates in every province and territory.

More importantly, we have helped over 900,000 Canadians purchase and stay in their homes since 1995. We have also helped lower the cost of home ownership by reducing mortgage insurance premiums twice since 2003. In pure dollar terms, these industry price cuts have saved Canadian homebuyers $700 million.

Before I continue, I would like to give you some background on the mortgage insurance product and the industry. First, mortgage default insurance is the fastest and least expensive way to achieve home ownership. This is because it allows homebuyers to obtain mortgage financing with little or no down payment while borrowing at the lowest possible interest rates. Mortgage insurance works by covering the lender's loss if the homebuyer defaults on the mortgage loan for any reason other than death.

In terms of our industry, the mortgage insurance marketplace is changing rapidly and is very competitive. There are two established mortgage insurance providers in Canada: the Canada Mortgage and Housing Corporation, or CMHC, and Genworth. Four new private sector companies are now entering the market as a result of federal legislation passed in 2006.

In addition to helping Canadians get into homes, mortgage insurance provides many other benefits. First, mortgage insurance plays an important role in maintaining the safety and soundness of the Canadian financial system. To explain, mortgage default insurance is mandatory under federal legislation for down payments of less than 20%. As a result, about half of Canadian mortgages today are insured, which means that each mortgage application is reviewed both by a lender and by a mortgage insurer before being approved. This second set of eyes is a responsible lending practice that also encourages prudent product development in Canada.

Mortgage insurance also helps small lenders compete against bigger lenders. This competition is particularly important for Canada, where credit unions and regional lenders provide significant services to rural areas and are a major provider of financial services in some provinces.

Mortgage insurance doesn't only help people buy homes, it also helps people stay in their homes when temporary financial difficulties put their mortgages at risk. These difficulties may include job loss, marital separation, serious illness, or accident. Over the past two years, Genworth has helped 580 Canadian households across the country stay in their homes in the face of financial hardship, and it is committed to continue helping more homeowners in the future.

I could provide you with many other benefits of the Canadian mortgage insurance system, but given the limited time, I'll just focus on one more. Mortgage insurers do not exit markets during periods of economic stress. Rather, they help maintain the availability of mortgage loans at affordable interest rates to help smooth market corrections. This is an important point to keep in mind, because as our neighbours in the United States are learning, market conditions can change quickly, and if we do not change with them, we could suffer the consequences.

Let me conclude by saying that Canada has one of the most efficient, safe, and stable housing markets in the world. Our experience elsewhere in the world is that increased competition in mortgage insurance can be beneficial, but it can also be detrimental if it is not properly regulated. Given current economic conditions, it is more important than ever that the federal government ensure that we have a strong mortgage insurance market. To this end, I'll offer the following two recommendations.

First, the federal government's policies in this area should ensure that there are clear rules so that consumers--that is, homeowners who pay for the cost of mortgage insurance--are the true beneficiaries of increased competition in residential mortgage insurance. Consumers benefit from competition, particularly with respect to innovation, competitive pricing, and greater efficiencies, when the market structure has been clearly established.

Second, the federal government's policies should ensure that the rules governing residential mortgage insurance apply equally to all market participants, including the CMHC, so that no artificial advantages for competitors are created or maintained and so consumers are the ultimate beneficiaries of competition.

I thank you for your time. Merci beaucoup.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We are joined now by the Canadian Gaming Association. We are joined by the president and CEO, Mr. Bill Rutsey, and we are joined by member of the board and consultant, Mr. Robert Scarpelli.

Welcome, gentlemen. I understand that you were delayed at the airport.

Mr. Rutsey, could we have you begin your opening statement now?

[Bill Rutsey, President and Chief Executive Officer, Canadian Gaming Association]

Fine. Thank you very much.

Good morning, Mr. Chairman and honourable members. Thank you for inviting us to appear before your committee. I'm Bill Rutsey, the CEO of the Canadian Gaming Association.

Our association represents the major participants in Canadian gaming: facility operators, equipment manufacturers, and service providers. We sponsor research and speak out on important national and regional issues.

I'm here today to introduce you to the breadth and depth of the gaming industry in Canada, which includes casinos, horse racing, bingo, lotteries, and electronic gaming devices. This is the first time our association or our industry has appeared before a committee of the House of Commons. We feel that our debut is most appropriate as a part of the committee's review of Canada's service sector. I'm sure the gaming industry is not top of mind when one is thinking about the service sector, but as you'll hear, we're a significant part of it.

With me is Rob Scarpelli, managing director of HLT Advisory Inc., Canada's leading provider of specialized consulting and support services to the national and international hospitality, leisure, and tourism industries. HLT has just finished the first-ever national economic impact assessment on gaming in Canada, utilizing the Statistics Canada input-output model. Rob is here to present the highlights of the study and to assist in answering any questions you may have, especially as they relate to the technical aspects of the study.

Legal gaming is a relatively young industry. It has grown 127% since 1995 to become the largest sector of Canada's entertainment industry. At over $15 billion, it's about the same size as professional sports, movies, TV, and recorded music combined. Gaming takes place in every province and territory in the country. There are 65 casinos and similar gaming facilities, 38 racinos and racetracks, and over 250 bingo halls across the country. In fact, there is likely a gaming facility in or close to each of your communities.

The industry directly supports more than 135,000 jobs. This increases to over 267,000 jobs when you take into account indirect and induced jobs.

As you are probably aware, gaming is conducted pursuant to the Canadian Criminal Code, under which it must be conducted and managed by a provincial government or, in some select cases, a charitable organization. As a result, gaming generates $8.6 billion annually in non-tax revenues to fund government and community programs and services like health care and education.

I'd also like to shed some light on the facts and myths surrounding gaming. Canadian-born journalist Peter Jennings once said, “I've always shied away from conventional wisdom, though I know the power of it.” Let me tell you, it has been powerful indeed when it comes to the public perceptions and misperceptions of gaming in Canada.

First of all, why do people gamble? When people are asked why they gamble, they say it's for fun rather than money. In fact, the number one answer is that they do so for its entertainment value. Gambling, for most Canadians, is just one of an array of entertainment alternatives. Simply put, people like to play games and make financial or emotional wagers on the outcome of events, and they have been doing so since humans began to reason. Gambling is older than history. Archeological sites throughout the world have documented various forms in practically all civilizations and cultures.

Who gambles? According to the National Gaming Monitor, an annual cross-country survey of the opinion of 1,000 Canadians, most Canadians have gambled at some point in the past year, with lottery and casinos being the most popular choices. Just about all of us--more than 85% of the adult population in Canada--do in one form or another. Canadian rates of participation in gaming are neither new-found nor unique but are reflective of worldwide norms.

How many people are problem gamblers? Problem gambling propensity rates have been measured across Canada and around the world for more than 20 years. The overwhelming majority of Canadians who gamble do so without problem or risk. More than eight out of ten always or almost always go with a budget and stick to it. Problem gamblers, the equivalent of alcoholics, comprise between 0.5% and 1.5% of the population both here in Canada and worldwide. To put this into perspective, you are three to five times more likely to have a drinking problem. More than 98% of Canadians can gamble without issue, for fun and entertainment. You should also know the numbers do not move or change with either the existence or absence of gambling.

How do we help these people? While problem gamblers are statistically few in number, problem gambling is a very real and serious concern for the people, and their families, who are dealing with the issue. These people need support and treatment to tackle their individual problems head-on. As an industry, we continue to work with all of our stakeholders to provide them with the necessary resources. In this regard, we are world leaders here in Canada, allocating more than $90 million annually for research and treatment, more than anywhere else in the world.

There is no mystery about gaming. It's a significant business. In fact, it's Canada's biggest entertainment industry, growing, and committed to doing so in a responsible, beneficial way.

The Dalai Lama, who visited Canada with great fanfare just a few months ago, has said: “Those who are in business, they create jobs and make a life for people, and that is worthy. If the byproduct is wealth, that's okay.”

It's true, the gaming industry in Canada does generate wealth. Most importantly, that wealth is shared; it goes right back into the communities we all live and work in. In fact, in a study--

[The Chair, Conservative, James Rajotte]

Mr. Rutsey, can I get you to conclude? We do need to go to questions from members right away. Can I get you to wrap up in about 30 seconds?

[Bill Rutsey]

Okay.

Well, all I can say, then, is that gaming is Canada's biggest entertainment industry, with a $15 billion top line, $8.6 billion for government programs and services, 135,000 direct jobs, and 267,000 jobs across the country.

There you go.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll start with Mr. Eyking, please.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair.

I thank the guests for coming here. It's quite an array of industries that have a big impact on our economy.

I'm splitting my time with the member for Kings--Hants, so I have only three minutes. My questions are going to be to the Canadian Real Estate Association. I have two questions that are together.

The first question is on the regional disparity between different parts of our country. When you look at Vancouver and Calgary compared to maybe Corner Brook and Sydney, Nova Scotia, there is quite a difference. Do you see that change continuing, that disparity? That's my first question.

Second, what is the outlook this year in the real estate market, with the subprime mortgage situation in the States and the softening of the U.S. economy? Do you see our real estate market cooling off?

[Pierre Beauchamp]

I'll address the first part, and I will ask Gregory Klump, our chief economist, to deal with the second part.

What exists now in Vancouver, Calgary, Toronto, and Nova Scotia--or the Maritimes or Atlantic Canada, if you wish--is simply reflective of a supply and demand situation. If you look at Vancouver, they are expecting major events to take place there, as you well know, in 2010. Alberta has oil. All kinds of different conditions exist, and they obviously will not change overnight.

No, there will not be a major change in that particular part of it in the foreseeable future, because the forces of supply and demand are there, and I don't think you can control that particular part of it. The condo market in Toronto is hot and burning now, because people want to go back and live closer to the centre of where the action is in downtown Toronto; that phenomenon is happening now, and it will probably continue for some time to come.

Greg, do you have other comments on that one, and could you deal with the second one? Thanks.

[Gregory Klump, Chief Economist, Canadian Real Estate Association]

In terms of the cooling off of the Canadian real estate market, we do see sales retreating from the breakneck pace that we saw in 2007. That having been said, we're forecasting that they're going to have their second-best year on record, second only to last year's, so it will be a silver podium finish, if you will.

As for price increases, they are going to continue this year, but again not to the magnitude we saw last year. The disparity between the fast growth out west and growth elsewhere in Canada is going to shrink. That having been said, the price increases will still be strongest out west, and they'll exceed inflation in all provinces.

It will certainly be nothing like the experience in the States. It's even softer than a soft landing; it's more like a featherbed landing, and affordability should increase this year, owing to smaller price gains at a time when incomes continue to rise.

[The Chair, Conservative, James Rajotte]

Okay.

Go ahead, Mr. Brison.

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

I have a couple of questions. The first is on the real estate side.

In terms of the capital gains measures, the capacity to roll forward and avoid capital gains taxes could be accomplished by allowing one to invest their RRSP, or part of their RRSP, in commercial or multi-unit real estate. Is that one of the options you would consider?

[Pierre Beauchamp]

No. The proposal we made is for the deferral of capital gains.

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

But that is effectively what happens when one invests in an RRSP. You're deferring taxes. You're not subject to capital gains.

[Pierre Beauchamp]

What's happening now is that apartment owners who want to expand by selling existing buildings and buying larger property have to pay the tax on the capital gain, and that is what is slowing the economy at the moment.

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

I know that. I own some small apartment buildings and have sold them and have had to do that, but I'm saying if you could invest your RRSP in this you would avoid.... Have you considered that as a public policy option, the capacity for small investors to invest part of their RRSP in real estate and, as such, accomplish this? If you haven't considered it, just say no.

[Pierre Beauchamp]

We discovered from a recent report that 66% of those reporting property gains in the 2005 taxation year had net incomes of $55,000 or less. So those are individuals who made a choice to put their money into property and very possibly could not or did not in another market. So we have a concern in that particular context.

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

One thing, just for the future...and we'd appreciate your feedback if you can get back to us. We can talk afterwards. But on gambling, I think the provincial governments have an addiction to their gambling revenue as much as individuals have. I liked seeing the investments in companies like Techlink and others that are developing responsible gambling devices, but I'd like to further explore your numbers on problem gamblers, because it's more than anecdotal, and I question whether or not society or governments gain by effectively taxing many low-income Canadians to pay for common services that people like me use.

[The Chair, Conservative, James Rajotte]

Mr. Brison, you're well over your time.

Mr. Rutsey, do you have a brief response?

[Bill Rutsey]

I can certainly say that the profile of the average person who gambles is that of someone slightly older, wealthier, and better educated than the general population. So it's not a tax on the poor.

In terms of people with a problem, those aren't my numbers. Those numbers have been developed across the country by people who study those numbers, and the Canadian numbers don't differ from the numbers anywhere else in the world. Statistically within the general population, about 1% of people have a problem with their on/off switch with respect to gaming, just as statistically about 5% of the population are clinically classified as alcoholics. Whether you have the games or you don't have the games, the numbers don't change.

[The Chair, Conservative, James Rajotte]

You'll have another chance, Mr. Rutsey. We're well over time.

Madame Brunelle.