International Trade Committee on Oct. 31st, 2006

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

Pursuant to the order of reference of Wednesday, October 18, 2006, we're dealing with Bill C-24, An Act to impose a charge on the export of certain softwood lumber products to the United States and a charge on refunds of certain duty deposits paid to the United States, to authorize certain payments, to amend the Export and Import Permits Act and to amend other Acts as a consequence. I read that just to remind people that we're not here to debate the softwood lumber deal; that debate is over, or at least it's not before this committee. We're here to deal with Bill C-24, which is an implementation bill.

We have as a witness, from Baker and Hostetler, Elliot Feldman. Again, welcome.

And from Gottlieb & Pearson, international trade and customs lawyers, we have Darrel Pearson, senior partner; and at the table with him, Michael Woods.

So we will take the opening statements in the order that we have on the list here, starting with Mr. Feldman. Perhaps you could state who you're representing here at the committee today, as you appear, and then go ahead with your opening statements, and we'll get to the questioning.

[Dr. Elliot Feldman, Trade Lawyer, Baker Hostetler]

Thank you, Mr. Chairman.

I'm appearing on behalf of the Free Trade Lumber Council.

I'm pleased to appear before the committee as it deliberates over the implementation of the softwood lumber agreement. I want to express my personal gratitude for the scheduling adjustment that made it possible for me to appear. I know it took the cooperation and interest of all parties, and I'm participating today very much in that spirit.

I recognize that substantial exhaustion has taken over the softwood lumber file. There's a strong desire to believe the battle's over. Do be careful: it isn't over. Just last week the Coalition for Fair Lumber Imports told a U.S. court that it is certain there will be more litigation, and not necessarily in the distant future.

It's important that this legislation not only stabilizes but also strengthens the Canadian industry. I believe it can. Failure to strengthen the industry could haunt this Parliament beyond tonight's Hallowe'en.

The softwood lumber agreement--as initialled on July 1, signed on September 12, and even as amended on October 12--does not include a tax on refunds of cash deposits illegally collected on softwood lumber by the United States since May 2002. This money has earned interest, but while being held, not invested, importers of record could not choose to remove it from the United States. It has lost very considerable value because of an appreciating Canadian dollar.

The decision to settle the softwood lumber dispute with the United States, when it was taken and the manner it was pursued, was a government decision, not an industry decision. In light of the very significant financial losses suffered by the industry caused by the dispute, which the government broadly has acknowledged in its defence of the settlement, the government could have elected to waive all taxes of these refunds, including income taxes. After all, the settlement of the softwood lumber dispute was not supposed to be a revenue opportunity for the federal and provincial governments, and there's nothing in the agreement that requires any taxation of refunds.

The interest accumulated is much less than the loss in currency exchange, which was entirely beyond the control of the companies. The return of the principal is arguably not taxable income at all, merely the return of funds already belonging to the companies. Whatever tax treatment there is to be, Parliament should be conscious that there is nothing in the agreement about taxes on refunds. The decision to tax the refunds thus is independent of any legislative requirements to implement the softwood lumber agreement.

Bill C-24, in my view, contains at least one serious problem with reference to the tax on refunds--namely, accepting that the refunds apparently are to be garnished and taxed. The background to the tax is important for appreciating why I believe there's a problem.

The policy decision to impose a special charge appears to have been reached for two reasons: first, to assure that Canadian taxpayers, other than those in the softwood lumber business, would not have to fund any of the $1 billion guaranteed payment to the United States that is in the agreement; and second, to punish those companies that declined the government's offer of advance payment on refunds, preferring to wait for the United States to return cash deposits with interest.

According to the original plan in the agreement before it was amended, companies electing to participate in the EDC advance payment program would surrender to EDC approximately 20% of the funds due them. With participation of companies holding rights to 95% of the total returns due, the 20% premium to be paid would have funded in its entirety the $1 billion guaranteed payment.

Two problems arose. First, there was some grumbling about so-called free riders, those companies that would not receive advance payments but also would not contribute to the $1 billion payment. There was virtually no acknowledgment in these discussions that the EDC participants were striking a bargain, getting their money back more quickly in exchange for a fee. Instead, focus was on companies preferring to deal directly with the United States for their refunds.

It appears that some of the concern about fairness developed when it became apparent that EDC might not deliver funds much more quickly than the United States. But substantial EDC payments were made yesterday, comfortably ahead of schedule, which should dispose of that concern.

A further concern seemed to develop when it was understood that accrued interest on funds coming from EDC would stop on October 1 under the terms in the softwood lumber agreement, but that non-EDC participants would receive interest accrued up to the day their customs entries were liquidated. That concern also should be eliminated, for under U.S. law there can be a lag of no more than 30 days between the cessation of interest accrual and the payment of refunds. With the first EDC payment yesterday, 30 days after October 1, treatment would appear to be no more favourable on interest for the non-EDC participants.

Second, the government did not obtain participating pledges from holders of 95% of the refunds due. The October 12 amendments solved the problem of removing the related condition precedent, but not the problem of funding the $1 billion; hence, the special charge seems to have been conceived as a way to make the companies not participating in the EDC program nevertheless fund the $1 billion. Nothing, to my knowledge, was said about the reverse fairness that these companies electing to wait for refunds on a schedule determined by the United States without advances would be taxed anyway, thereby with no benefit.

The concept underlying the special charge, therefore, was to tax only the companies not participating in the EDC program, however fair or appropriate Parliament would think that might be, but that is not how Bill C-24 is drafted. The draft makes everyone pay the special charge. Moreover, the bill forbids refund of the tax to anyone, including EDC program participants.

The problem occurs because of drafting in two places, perhaps three.

Subclause 18(1) defines “specified person” to mean “a person that filed the documents and information required under the applicable United States law in respect of the importation of any softwood lumber product into the United States during the period beginning on May 22, 2002 and ending on September 30, 2006.” That definition effectively includes all importers of record of softwood lumber.

Subclause 18(3) imposes the special charge on all specified persons who receive a refund.

Subclause 18(4) then states: “The charge under subsection (3) is payable by the specified person even if the refund is issued to a designate of the specified person.” “Designate” is the term used for the escrow funds, so all importers of record, without exception--including, incidentally, non-Canadians not resident in Canada, whom importers from this legislation cannot lawfully reach--must pay the special charge. There are no exceptions. The EDC participants will have returned to them only about 82% of the refunds plus interest owed. On the money refunded to them, they will also pay the special charge, that is, they will pay the special charge in addition to the 18% they do not receive when they receive their payment from EDC.

The public promise from the government has been that these importers of record would receive refunds of the special charge, but clause 39 states: “Except as specifically provided under this Act or the Financial Administration Act, no person has a right to recover any money paid to Her Majesty in right of Canada as or on account of, or that has been taken into account by Her Majesty in right of Canada as, an amount payable under this Act.”

Nowhere in the act, and hence nowhere as “specifically provided under this act”, is there a provision for the refund of any funds collected under the special charge.

There's broad discretion in the Financial Administration Act, but it would take very creative and potentially controversial interpretation to construe any of it as “specifically providing for refunds of taxes” mandated in a law that postdates that act.

Paul Robertson testified before this committee last week that the solution to the problem is to be found in the Financial Administration Act, but he didn't say where or how. We might speculate, looking into the Financial Administration Act, at subsection 20(2), except that the language, “purpose that is not fulfilled”, might be hard to square with collecting enough money to fund the $1 billion; or perhaps in section 22, except that the discretion there would conflict with the “specially provided” language in Bill C-24.

Most likely the discretion is in subsection 23(2), which authorizes the Governor in Council to “remit any tax or penalty...where the Governor in Council considers that the collection of the tax...is unreasonable or unjust”.

Still, without an adjustment in the phrase “specifically provided” in Bill C-24, the mandate to “remit any tax or penalty” in the Financial Administration Act would not appear to reach a tax imposed later, for which there is no special provision, in fact, in the Financial Administration Act.

And there's a question of fairness—the very basis of the mandate in that act. EDC participants entered a bargain for early payment; others accepted potentially later payment and therefore declined the bargain. Rhetoric about free riders notwithstanding, it's not obvious that reliance on a clause about fairness would authorize remittance to one group and not the other. There is no other apparent rationale for these taxes, which cumulatively will exceed the $1 billion owed the United States.

In an effort to gain acceptance for the agreement, carrots and sticks were brandished like medieval weapons, but always with the common assumption that the refunds were to fund the $1 billion promised to the United States.

Buy why? When asked about loan guarantees, the government said the EDC could afford to advance all the money owed the industry, so presumably the government has other sources to fulfill its pledge.

Why not embrace the simplest and best solution to the writing of Bill C-24, to embrace the principle of no new taxes? Delete clause 18 in its entirety and use the Financial Administration Act not to create refunds on dubious authority but to waive the income taxes on the basis of authority indisputably there. The only tax this bill ought to require is the export tax required by the softwood lumber agreement.

I want to quickly address two other points. Mr. Robertson, when he appeared before this committee one week ago, acknowledged that individual companies have no recourse to the dispute settlement mechanism and that the mechanism was not designed to address any of their concerns.

Last spring, not long before the initialling of basic terms on April 27, the United States Department of Commerce illegally modified the scope of the products covered by the anti-dumping and countervailing duties to include end-matched lumber. The Department of Commerce rejected the request of private companies for a review of this illegal scope determination. Subsequently, this amended scope became part of the agreement and is now part of Bill C-24 in two different places, pertaining both to the special charge and to the export tax.

We consider the inclusion of this product an error, and I'm setting out here how to fix it. I'm also indicating why it's particularly important to do so. The two companies most affected requested NAFTA panel review. The two governments, Canada and the United States, have failed to fulfill their NAFTA obligations and have not named panellists. The NAFTA secretariat, failing to meet its obligation to name panellists from the rosters when the governments failed to name them, has neither acted nor responded to pleadings.

There is a cure available in Bill C-24 for this problem—

[The Chair, Conservative, Leon Benoit]

Mr. Feldman, how much longer will your presentation be?

[Dr. Elliot Feldman]

Three minutes, roughly.

[The Chair, Conservative, Leon Benoit]

Okay, go ahead.

[Dr. Elliot Feldman]

It contains provisions to ensure that illegal actions of the United States Department of Commerce are not expressly endorsed by the Government of Canada and this Parliament, and that private companies deprived of access to dispute resolution within the agreement are not abandoned with no recourse. Their case, Wynndel Box vs. Gorman Bros., is the last of the litigation involving private companies that indisputably has not been mooted by the softwood lumber agreement and cannot be resolved without government involvement. It's in everyone's interest not to leave their case festering as an embarrassment to both governments, apparently afraid to let the challenge be heard before a NAFTA panel.

Assuming our advice is not followed, and the relevant part of clause 18 is not deleted, as I've suggested this morning that it should be, then to subclause 18(1), in the definition of “United States duty order,” paragraphs (a) and (b), after the words “as amended”, the following words should be added: “but disregarding the final scope ruling made on March 3, 2006.” One of the amendments to which the language refers is the amendment that added “end-matched lumber illegally after five years” to the scope of the orders. The addition of those words would mean that refunds of duty deposits on end-matched lumber would not be subject to the special charge.

The minister then has discretion over the export control list. Pursuant to section 6 of the Export and Import Permits Act, at the direction of Parliament, he should exercise that discretion, consistent with clause 112 of Bill C-24, to strike end-matched lumber, because it never should have been included. Because of its inclusion in annex 1A, Parliament must direct the minister to fix the problem. These two steps would effectively extinguish the pending litigation, saving both countries from the embarrassing way in which they have been treating their obligations to name NAFTA panellists, remove the last issue affecting private companies, who have no rights in dispute resolution within the agreement, and deny the United States a final illegal act in defining the products covered by the agreement.

Finally, this agreement entered into force on October 12, not October 1. Throughout Bill C-24 there are references to October 1 as the effective date. All these references should be corrected so that the bill conforms with the facts. Regarding interest accrued to participants in the EDC program only until October 1, Parliament should consider requiring a correction. On the U.S. side of the border, interest in fact accrued until October 12, when the orders were revoked. Moreover, U.S. law requires interest accrual until the liquidation of entries. For purposes of the legislation going forward, clause 10 needs to be amended because it provides for calculation of surcharges based on an October 1 effective date. The easiest option would be to waive the surcharge for October. An alternative would be a pro-rated calculation of the surcharge for October. Either way, without an adjustment there is a risk of a retroactive surcharge based on a partial month of data, which would be contrary to the intentions of the bill.

Thank you for my extra time, Mr. Chair. I'd be happy to do the best I can to answer questions or discuss other parts of Bill C-24

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Feldman.

Mr. Feldman, do you have a list of the members of the Free Trade Lumber Council with you?

[Dr. Elliot Feldman]

No, I don't.

[The Chair, Conservative, Leon Benoit]

Could you get one for the committee, please?

[Dr. Elliot Feldman]

I could certainly arrange to do that.

[The Chair, Conservative, Leon Benoit]

How many members are there, roughly?

[Dr. Elliot Feldman]

I have no idea of that either. I'm sorry.

[The Chair, Conservative, Leon Benoit]

Okay.

Mr. Harris.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

I haven't received anything on Mr. Feldman's credentials. Is he an associate of...?

I see, so you're not an associate of the Free Trade Lumber Council.

[Dr. Elliot Feldman]

I'm their counsel.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

You're their counsel, right. So you're not in the business; you're their counsel. Thank you.

[The Chair, Conservative, Leon Benoit]

Mr. Pearson, go ahead with your presentation, please.

[Darrel Pearson, Senior Partner, Gottlieb & Pearson, International Trade & Customs Lawyers, As an Individual]

As to the reason for our participation and our role here today, in answer to your question, in general it can be said that Gottlieb & Pearson has been representing the Canadian importing and exporting communities in Canada since 1969, and of course, we're committed to that task. Today we serve the role more properly described as amicus curiae, so we have no client per se. These comments are the comments of myself and my firm.

I have a few introductory remarks and then I'm going to focus on three technical aspects of the legislation and seek to be of assistance to this committee.

As we review Bill C-24, the focus of our attention must shift to assisting Canada's softwood lumber industry by facilitating the softwood lumber export business to the United States, which is consistent with the 2006 treaty, the SLA, under a new legislative regime. Under the assumption that Bill C-24, as it will be amended, will pass into law, Parliament must create a law that is transparent, as user friendly as possible, and does not constitute a non-tariff barrier to trade.

In my view, the committee should focus on ensuring that the statute and regulations to be promulgated are as devoid of ambiguity as possible, do not cause undue, unnecessary financial and/or administrative hardship, and facilitate and do not obstruct trade. This calls for more precision than is evident from a reading of the bill. We should also be ensuring that the bureaucracies that will support the implementation of the treaty receive adequate resources to assist exporters and to enforce the law fairly and reasonably.

We understand this committee will consider suggestions intended to help ensure that technical aspects of the legislation are addressed. While comments are technical and while the industry has endured disruption and hardship in the past, the technical interpretation of the implementing legislation will have immediate as well as long-lasting effects on the industry's competitiveness and investment decisions.

So in that context, I wish to offer the following observations from our review of the bill, focusing on three elements: first, the industry; second, the charging section and related sections; and third, exporting from a region.

Starting with the industry, the draft bill, in our view, fails to adequately define the industry and softwood lumber in clauses 2 and 12 of the bill, and in what will be new section 8.4 of the Export and Import Permits Act. Clarity of definition of key terms and phrases is critical to the issue of both jurisdiction and the scope of taxation. For this reason, more precision is required.

Clause 2 simply defines the phrase “primary processing” as “the production of softwood lumber products from softwood sawlogs.” Softwood logs are not defined. Softwood lumber products are likewise not defined, but rather are to be merely named or listed in accordance with new section 8.4 of the Export and Import Permits Act.

In turn, the phrase “primary processing“ is not defined except that we may infer that it is a form of process that changes undefined softwood logs into undefined softwood lumber products. While these terms and phrases may be understood by some, if not many, in the industry in a general colloquial sense, clear definitions--that is, legal precision--is critical to permitting all the stakeholders to understand their application, and specifically to the implementation of the charging and related clauses, clauses 10 through 17 of the bill.

There is similarly a lack of definitional precision as to what constitutes the phrase “semi-finished” or “finished” softwood lumber products. The bill does state that “remanufactured” in clause 12 contemplates “changes in thickness, length, width, profile, texture, moisture or grading, has been joined together by finger jointing or has been turned.” Remanufacturing can ostensibly create semi-finished or finished softwood lumber products, and this does not address the possible distinction between the two. In other words, what degree of change by remanufacture creates a semi-finished versus a finished softwood lumber product?

Without a clear definition of softwood lumber products and the other phrases, the problem is compounded. Precision in definition is relevant to jurisdiction as well as to the calculation of the base of taxation, because the phrase “export price” is determined by reference to these key terms and phrases: “softwood lumber products”; “primary processing” and “last primary processing”, which I'll return to in a moment; and “remanufacturing”.

The meaning of “last primary processing ” in relation to softwood lumber products should be clarified, particularly as the phrase “primary processing” is defined to mean production of logs to softwood lumber products. That is a clear inconsistency that has to be addressed. The reference is paragraph 12(2)(a).

Those are comments about the industry and the key phrases that will help define processing, etc., as well as the products. I'd like to turn to the charging section now, clause 10.

One pays a charge if one exports a softwood lumber product, which is undefined except that it will be named on a list. The term “product” is simply too vague. It is not clear in the proposed legislation when, at what point in time, or at what time in processing one moves from a softwood log to a product. The list will not address this issue, and since primary processing is left without a specific definition, the degree of processing offers no help in establishing the meaning.

Second, the time of export is measured relative to loading, but the legislation fails to address what specifically constitutes the act of exporting or who is exporting. The reference is clause 5.

Third, clause 9 offers an exception to exports that pass in transit through the United States, and applies to goods that pass in transit through other countries en route to the United States, but there is no definition of “in transit”. For example, does this mean in customs control, or does it contemplate goods entered into a free trade zone or entered for consumption and re-exported without sale or modification in the extreme?

A great deal of the comments I'm offering you come from our experience in litigating and interpreting other forms of customs legislation. These are the very types of issues that have unfortunately had to be resolved by the courts unnecessarily.

Finally, the proposed legislation provides for region-based commitments and regional exceptions. Subclause 11(2) provides that a softwood lumber product is deemed to be exported from the region where the product underwent its “first primary processing”--there's a new phrase. This last phrase could be a corollary to the “last primary processing” phrase, but is no more precise than “last primary processing”. The legislation needs to address the meaning of “primary processing” of a lumber product, particularly as it specifically provides that the processing converts a log to a product. Again we have a contradiction in the usage of the terminology. This creates a potential problem in relation to counting volumes for quota purposes; the application or exemption from the charge; and the calculation of the charge amount due to the timing, the reference price, and volume quota factors. I'll elaborate very briefly.

Export prices are dependent on an FOB value where the last primary processing took place, and that could be different from where the product is exported. The bill contemplates that the region of export can be different from the physical location of export due to the deeming provision, or it could be the same in certain regions.

Export allocations are to be issued to benefit recipients with preferred rates of charge, but there is no reference to the mechanism of the allocations. We know there's going to be some form of quota regime, but we don't have any information concerning how that will work. There is no structure to that, except the delegation of that authority to the minister.

Proposed subsection 6.3(2) of the Export and Import Permits Act, provided for in clause 111 of the bill, requires more precision as to the entitlement for quota, under what conditions it is to be transferable—because there will be economic rents associated with the transfer of the quota, which we've seen in every other quota regime—and we also have to address whether or not there are any situations in which the transfer could be cross-regional.

Discrimination between independent and non-independent remanufacturers and the determination of export price are accomplished through the use of these phrases: “last primary processing”, “last processing”, and “remanufacturer”. If only primary processing is involved, the export price is the FOB value where that processing occurred; if remanufactured by an independent manufacturer, the export price is the FOB value where the last primary processing took place, possibly back one step; if the remanufacturer is not independent, the export price is the FOB value where the last processing occurred, but that begs the question as to whether the last processing is the same as remanufacture.

As to the concept of independence, the minister certifies independence under clause 25, but there is a void of factors or considerations and the bill contains no definition. There is a provision for related persons, but that, I believe, is not intended to be applicable.

If the considerations, as per the treaty, are exclusively tenure rights or relationships with those withholders of tenure rights and/or purchasers from the Crown, these should be spelled out in the definition in the statute. If there are broader considerations, these should be indicated generally so as to circumscribe the authority of the minister.

One last point: the export price in the absence of a determinable FOB value is, according to paragraph 12(2)(d), a market price determined in a sequential manner in arm's-length transactions. Unlike other customs and special import measures legislation that account for differences in quantities and trade levels through adjustments, this bill does not do so; nor does it provide for the means of selection where there's a choice within the price category. This will lead to uncertainties and disputes.

Thank you, Mr. Chairman.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Pearson.

Okay, we'll go to questioning now, and we'll start with Mr. Temelkovski, for seven minutes.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

Thank you very much, Mr. Chair.

Thank you to the presenters. They were great presentations.

Mr. Feldman, you mentioned right at the top that there are some differences between the currencies; you mentioned the currencies' exchange rates. There will be a loss in the money coming back due to the currency exchange. Can you comment a little bit more about that?

[Dr. Elliot Feldman]

Thank you for that question.

The deposits started being made in 2002. The Canadian dollar was not as valuable then as it is now, but the money was handed over to the U.S. Treasury then and held all that time. As it comes back, it comes back against the very highly appreciated Canadian dollar. The rough estimates are that there's a 38% loss over that period in the exchange rate. So the companies are getting back a lot less than they deposited, because the money was held while the Canadian dollar appreciated—and they're getting it back in U.S. dollars.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

Is it your understanding that other agreements would take into consideration exchange rates, or do they usually use a currency with some plus or minus factors to it?

[Dr. Elliot Feldman]

Apart from the settlement in Mexican cement, I'm not aware of any agreements like this one where money held in the U.S. Treasury as a cash deposit against projected customs duties was later returned at a much later date, subject to an agreement. That is, money does come back, but not in the context of an agreement; it comes back as a result of the judicial process, as might have been the case here, but isn't.

So as I understand your question on whether there are other agreements that take into account this difference in currency exchange, apart from the Mexican cement settlement, I don't know of any agreements like this one. The Mexican cement agreement involved $150 million left behind; the rest of the money came back. I don't believe there was a currency adjustment, but I have no idea how that money was treated by Mexican tax law, which is the question I'm putting before you—how that money is to be treated here under the tax provisions.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

I studied finance in the past, and I worked in the financial industry for 20 years.

The currency exchanges are fluctuating so much that one must take extraordinary precautions to make sure nobody is short-changed in the process, especially if they're working on a fair playing field. How could somebody draw up an agreement like that?

[Dr. Elliot Feldman]

As the chairman indicated, I'm not here to address the agreement per se.

If you invest and you get it wrong on a currency exchange, that's your own risk. I believe Canadian tax law recognizes that. But here, there was no investment made. You weren't at your own risk. The money was taken from you and held. You had no option to remove it or exchange it, or change the currency. Because of that limitation, this circumstance is peculiar. I think the tax treatment of the money coming back should therefore recognize that peculiarity.