User manual | Second Session Deuxième session de la Forty-first Parliament, 2013-14

Second Session
Forty-first Parliament, 2013-14
Proceedings of the Standing
Senate Committee on
Banking,
Trade and
Commerce
Chair:
The Honourable IRVING GERSTEIN
Wednesday, May 28, 2014 (in camera)
Thursday, May 29, 2014
Fascicule no 12
Sixth (final) meeting on:
The subject-matter of those elements contained in
Parts 2, 3 and 4 and Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24
and 25 of Part 6 of Bill C-31, An Act to implement
certain provisions of the budget tabled in Parliament
on February 11, 2014 and other measures
First meeting on:
Bill S-202, An Act to amend
the Payment Card Networks Act
(credit card acceptance fees)
INCLUDING:
THE FOURTH REPORT OF THE COMMITTEE
(Subject-matter of Bill C-31)
WITNESSES:
(See back cover)
51455-51463
STANDING SENATE COMMITTEE ON
BANKING, TRADE AND COMMERCE
COMITÉ SÉNATORIAL PERMANENT DES
BANQUES ET DU COMMERCE
The Honourable Irving Gerstein, Chair
Président : L’honorable Irving Gerstein
The Honourable Céline Hervieux-Payette, P.C., Deputy Chair
and
et
The Honourable Senators:
Bellemare
Black
* Carignan, P.C.
(or Martin)
* Cowan
(or Fraser)
Greene
Maltais
Massicotte
Moore
Ngo
Ringuette
Tkachuk
Bellemare
Black
* Carignan, C.P.
(ou Martin)
* Cowan
(ou Fraser)
Greene
Maltais
Massicotte
Moore
Ngo
Ringuette
Tkachuk
* Ex officio members
(Quorum 4)
Change in membership of the committee:
Pursuant to rule 12-5, membership of the committee was
amended as follows:
The Honourable Senator Moore replaced the Honourable
Senator Campbell (May 26, 2014).
Published by the Senate of Canada
Available on the Internet: http://www.parl.gc.ca
29-5-2014
12:3
ORDRE DE RENVOI
ORDER OF REFERENCE
Extract from the Journals of the Senate Tuesday, March 25,
2014:
Resuming debate on the motion of the Honourable
Senator Ringuette, seconded by the Honourable Senator
Smith, P.C. (Cobourg), for the second reading of Bill S-202,
An Act to amend the Payment Card Networks Act
(credit card acceptance fees).
After debate,
The question being put on the motion, it was adopted.
The bill was then read the second time.
The Honourable Senator Fraser moved, seconded by the
Honourable Senator Tardif, that the bill be referred to the
Standing Senate Committee on Banking, Trade and
Commerce.
The question being put on the motion, it was adopted.
Le greffier du Sénat,
Gary W. O’Brien
Clerk of the Senate
12:4
Banking, Trade and Commerce
MINUTES OF PROCEEDINGS
PROCÈS-VERBAUX
OTTAWA, Wednesday, May 28, 2014
(28)
OTTAWA, le mercredi 28 mai 2014
(28)
[English]
29-5-2014
[Traduction]
The Standing Senate Committee on Banking, Trade and
Commerce met in camera this day at 4:15 p.m., in room 505,
Victoria Building, the chair, the Honourable Irving Gerstein,
presiding.
Members of the committee present: The Honourable Senators
Bellemare, Black, Gerstein, Greene, Hervieux-Payette, P.C.,
Maltais, Massicotte, Moore, Ngo, Ringuette and Tkachuk (11).
In attendance: Adriane Yong, Brett Stuckey and
June Dewetering, Analysts, Parliamentary Information and
Research Service, Library of Parliament.
Also present: The official reporters of the Senate.
Pursuant to the order of reference adopted by the Senate on
Wednesday, April 9, 2014, the committee continued its
examination of the subject-matter of those elements contained
in Parts 2, 3 and 4 and Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24
and 25 of Part 6 of Bill C-31, An Act to implement certain
provisions of the budget tabled in Parliament on February 11,
2014 and other measures. (For complete text of the order of
reference, see proceedings of the committee, Issue No. 9.)
Pursuant to rule 12-16(1)(d), the committee considered a
draft report.
It was agreed that senators’ staff be allowed to stay in the room
and that blackberries and cellular phones not be used.
It was agreed that the report as amended be adopted.
It was agreed that the chair be authorized to table the amended
report in the Senate, at the earliest opportunity.
At 5:20 p.m., the committee adjourned to the call of the chair.
ATTEST:
OTTAWA, Thursday, May 29, 2014
(29)
[English]
The Standing Senate Committee on Banking, Trade and
Commerce met this day at 10:30 a.m., in room 9, Victoria
Building, the chair, the Honourable Irving Gerstein, presiding.
Members of the committee present: The Honourable Senators
Bellemare, Black, Gerstein, Greene, Hervieux-Payette, P.C.,
Maltais, Massicotte, Ngo, Ringuette and Tkachuk (10).
29-5-2014
In attendance: Adriane Yong and Brett Stuckey, Analysts,
Parliamentary Information and Research Service, Library of
Parliament.
12:5
Also present: The official reporters of the Senate.
Pursuant to the order of reference adopted by the Senate on
Wednesday, April 9, 2014, the committee began its examination
of Bill S-202, An Act to amend the Payment Card Networks Act
(credit card acceptance fees).
WITNESSES:
TÉMOINS :
The Honourable Senator Pierrette Ringuette, sponsor of the
bill.
Department of Finance Canada:
David Murchison, Director, Financial Sector Division;
Erin O’Brien, Chief, Financial Sector Stability - International,
Financial Sector Division.
Financial Consumer Agency of Canada:
Kevin Thomas, Acting Director, Compliance and Enforcement
Branch.
Competition Bureau:
Richard Bilodeau, Assistant Deputy Commissioner, Civil
Matters Branch Division B;
Nadia Brault, Senior Officer, Civil Matters Branch Division B.
The chair made an opening statement.
The Honourable Senator Ringuette made a statement and
answered questions.
At 11:23 a.m., the committee suspended.
At. 11:26 a.m., the committee resumed.
Mr. Murchison made a statement and, together with
Ms. O’Brien, answered questions.
Mr. Thomas made a statement and answered questions.
At 12:03 p.m., the committee suspended.
At 12:05 p.m., the committee resumed.
Mr. Bilodeau made a statement and, together with Ms. Brault,
answered questions.
At 12:28 p.m., the committee adjourned to the call of the chair.
ATTEST:
ATTESTÉ :
La greffière du comité,
Barbara Reynolds
Clerk of the Committee
12:6
Banking, Trade and Commerce
29-5-2014
RAPPORT DU COMITÉ
REPORT OF THE COMMITTEE
Thursday, May 29, 2014
The Standing Senate Committee on Banking, Trade and
Commerce has the honour to table its
FOURTH REPORT
QUATRIÈME RAPPORT
Your committee, which was authorized to examine the subject
matter of those elements contained in Parts 2, 3 and 4 and
Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24 and 25 of Part 6; of
Bill C-31, An Act to implement certain provisions of the budget
tabled in Parliament on February 11, 2014, has, in obedience to
the order of reference of Wednesday, April 9, 2014, examined the
said subject matter and herewith tables its report.
Respectfully submitted,
29-5-2014
12:7
EVIDENCE
TÉMOIGNAGES
OTTAWA, Thursday, May 29, 2014
The Standing Senate Committee on Banking, Trade and
Commerce, to which was referred Bill S-202, An Act to amend
the Payment Card Networks Act (credit card acceptance fees),
met this day at 10:30 a.m. to give consideration to the bill.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning. I call this meeting of the Standing
Senate Committee on Banking, Trade and Commerce to order.
Today the committee is holding an introductory meeting on
Bill S-202, An Act to amend the Payment Card Networks Act
(credit card acceptance fees), introduced by our colleague Senator
Ringuette.
I must say, on a personal basis, it is a pleasure for me to
welcome you as a witness for the first time, Senator Ringuette. I
have not had the pleasure of seeing you from this afar. Usually
you’re just to my left. We’re delighted that you’re appearing
before us this morning.
This morning’s meeting is divided into three parts of 40
minutes each. During the first part, we will hear from the sponsor
of the bill,Senator Ringuette. In the second part, the committee
will hear from federal officials from the Department of Finance
Canada and from the Financial Consumer Agency of Canada.
The final set of witnesses this morning will be officials from the
Competition Bureau of Canada.
With that, Senator Ringuette, the floor is yours.
The Hon. Pierrette Ringuette, sponsor of the bill: Thank you
Mr. Chair. As you said earlier, usually I’m sitting on the other
side. I hope my colleagues will continue their very strong
questioning of our witnesses, even though I’m here today.
I have been working on the issue of credit card fees since 2008,
with an early study of the issue that brought forth the code of
conduct. Since then, I have put forth six times the same bill, which
is modelled after the Australian one that dates back now 11 years.
[Translation]
After 11 years and a number of studies, the Australian
government deemed it appropriate to introduce a bill to cap
credit card fees at 0.5 per cent for merchants, 0.3 per cent for
governments and 0.0 per cent for charities. The bill contained a
provision requiring the Australian reserve, the organization
responsible for administering the legislation, to review
acceptable rates every three years.
12:8
Banking, Trade and Commerce
29-5-2014
I have obviously kept abreast of the Australian situation, and
the review has been done every three years. Following the first
review, the country further reduced merchant fees. After the next
two reviews were done, the merchant rate was kept at
0.5 per cent, the government rate at 0.3 per cent and the charity
rate at 0.0 per cent.
Since then, numerous things have happened. As I said earlier,
the Minister of Finance introduced a code of conduct. Two major
events have marked the past year: first, Visa raised its already
excessive merchant fees by 30 per cent in April, and second,
MasterCard raised its merchant fees by 20 per cent in July. And
that month, following nearly 18 months of discussion, witness
testimony and analysis, a complaint was filed.
[English]
[Traduction]
The Competition Bureau heard a complaint in regard to the
contract between Visa, MasterCard and also Canadian
merchants. Their first conclusion was that although the
Competition Bureau had jurisdiction only over products that
were for resale — the credit card is not a product; it is a service —
and even though it was a service, they concluded that they would
further their study because it was a major issue in the Canadian
marketplace.
Their second conclusion was that the issue was so important to
the Canadian economy that it was needed to have federal
regulation on the issue. I understand witnesses will be coming
forth, and they will be able to discuss their findings and how that
went.
In regard to another fact that happened last July, after two
years of study, the European Commission introduced in the
European Parliament a bill to cap merchant fees, government
fees, any fees related to credit cards and debit cards. The debit
card was capped at 0.2 per cent, and the credit card for merchants
was capped at 0.3 per cent.
This is a new event because, if you recall in my few speeches in
the Senate, I had enumerated the different rates for different
European countries. The average was 0.9 per cent. So, after two
years of review, the European Commission fixed that rate at
0.3 per cent. Each of the 28 countries had 22 months to put forth
the legislation in their country, but the interstate rate of
0.3 per cent was applicable immediately.
[Translation]
In Canada, when I introduced the first bill in 2009, Visa and
MasterCard held 82 per cent of the Canadian credit card market,
and today they have 94 per cent. I consider the fees in Canada to
29-5-2014
12:9
be excessive. If we compare the 0.5 per cent I am proposing with
the current market rate, which exceeds 3 per cent, these excessive
rates make up an estimated $7 billion a year.
Canadians charge an estimated $500 billion a year on their
credit cards. It is important to understand that some industries
are more affected than others, like the tourism industry. Most
travellers buying plane tickets, booking hotel rooms and making
other such trip arrangements are subject to fees that are even
greater than 3 per cent, when you take into account the extra fees
charged for what credit card companies term ‘‘card not present’’
or ‘‘owner not present’’ purchases. That means that whenever
consumers make a purchase remotely and do not enter their PIN
in person, merchants have to pay extra fees. It is a fact that
Canadians are making more and more purchases online. So there
again, merchants are subject to additional fees, with credit card
companies reaping the profits they generate.
Another very important consideration is not reflected in Bill S202, as I pointed out earlier.
[English]
All the data from our use of these credit cards and the
merchant transactions, et cetera, all that information resides on
the Visa and MasterCard computers in the U.S. In the last year,
there was a major story with regard to the NSA that has been
snooping in the Visa databank in the U.S. So, if you consider that
all of the information with regard to Canadian transactions also
resides on that computer base, I think it should also be a reason
for alarm.
[Translation]
I am going to come back to the bill now. The fees are modelled
on those in the Australian system. But I must tell you that, with
the advent of the European Commission and its various studies, I
would be entirely open to amending the bill and lowering the rate
from 0.5 per cent to 0.3 per cent. That is especially important in
light of the fact that we have just signed a free-trade agreement
with the Europeans and a large number of corresponding systems
on both trading sides will need to be brought in line with one
another. As I see it, if Canadians are going to be exposed to
competition and opportunities from the European Union, they
should benefit from a similar situation as far as the costs
associated with their purchases are concerned, not to mention the
costs of goods and services. Under the bill, the Minister of
Finance would be required to review, on an as-needed basis, the
rates that would be acceptable in Canada, to set all the related
guidelines and to identify the responsibilities around applying
those interchange fees for merchants.
No doubt, you have questions, and I believe I am wellequipped to answer them.
12:10
Banking, Trade and Commerce
[English]
29-5-2014
[Traduction]
The Chair: Thank you very much for your presentation. We do
have a number of questions.
Senator Black: Senator, I want to say to you, before I start my
questions, thank you for your tenacity and for your commitment
to something you so clearly believe strongly in. I would say to you
that this is a model for senators’ behaviour. You have chosen an
area of interest, and you have doggedly gone at it. Regardless of
what the outcome is, your intentions are honourable, and I just
wanted you to know, right off the top, that I’m very impressed by
the level of commitment you have shown to this.
Senator Ringuette: Thank you.
[Translation]
Senator Ringuette: People always start with the good news first.
So I am waiting for the bad news, Senator Black.
[English]
Senator Black: No, not at all. So, senator, if your proposal was
accepted, there clearly will be a financial hit to the credit card
companies. Based on the research that you have done, would it be
your understanding that, in Europe or Australia or other places
you may have looked, those companies increase other fees to
consumers?
Senator Ringuette: The studies that I have — and I have
numerous ones — do not indicate that. There are two issues:
whether there is an increase in fees to the consumers from the
credit card companies or the credit card issuers, and whether the
reduced rates will benefit consumers at large. In all of the studies
that I have seen — whether the reviews from Australia or a major
study done by the world economic group — indicate the same
scenario. About 50 per cent of the gains from the merchants are
passed on to consumers. With regard to credit card fees, it doesn’t
show any increase. Actually, what the study shows is that, when
merchants face reduced fees in accepting credit cards, there will be
more merchants accepting the credit cards and, therefore, more
consumer ability to make purchases.
What is lost in revenue per transaction for the credit card
consortium is gained with regard to volume because of more
merchants providing payments with credit cards.
Senator Black: Thank you.
In preparing your proposal, senator, can you share with us
whether you have consulted, at any level, with Visa, MasterCard
or any other sources to help inform your conclusions?
29-5-2014
12:11
Senator Ringuette: I’ve certainly been watching closely what
has been happening in Australia, New Zealand and Europe.
There also has been, in the U.S, legislation to limit the fees with
regard to debit cards. You have to understand that, in the U.S. —
contrary to in Canada where our debit card issuer is Interac and
they are doing a fine job at extremely low costs for merchants and
consumers — you also have Visa and MasterCard issuing debit
cards with excessive fees. It was joint legislation in the U.S. The
Republicans and the Democrats have agreed to put a cap on debit
card fees in the U.S.
Senator Black, I have been doing my homework quite a lot.
This is also very important; 11 years ago, when Australia put the
same legislation in place, Visa and MasterCard did not leave the
market. They accepted the market and, every three years at the
review time, they go in front of the forum and provide, through
discretion, their business plan and so forth. For the last 10 years,
the same rates have been accepted.
Last year, when the European Union put their legislation forth,
there was also a declaration by both MasterCard and Visa that
they accepted that 0.3 per cent rate. If Visa and MasterCard can
accept a 0.3 per cent merchant fee rate in 28 countries in the EU,
why could they not accept that same rate in Canada? I have
received visits from both to my office. They give me their side of
the story, but the facts that I’m stating to you are valid.
Senator Black: Did you say 0.03 per cent in Europe, or 0.3?
Senator Ringuette: It’s 0.3 per cent.
Senator Tkachuk: It’s not 3 per cent; it’s one third of
1 per cent.
Senator Ringuette: Exactly.
The Chair: I’ll follow up on Senator Black’s question. I believe
he asked you if the reduction of acceptance fees was made up by
the increase in other fees by the banks, and you said your research
indicated no. Is there anything in your research to suggest that
with the reduction in acceptance fees, there was a reduction in
retail prices?
Senator Ringuette: Yes. All the research indicates that, with a
50 per cent reduction in merchant fees, retailers reduced their
prices to consumers by 50 per cent of their gain.
[Translation]
Senator Hervieux-Payette: We talked about Visa and
MasterCard, but we also have American Express in Canada.
Would your bill apply to all credit cards on the market?
12:12
Banking, Trade and Commerce
29-5-2014
Senator Ringuette: Right now, no, but I am not ruling it out.
Visa and MasterCard currently hold 94 per cent of the Canadian
market, and they both operate in the same way when it comes to
banks and technology suppliers.
American Express is unique because it does not need banks to
provide its services to customers. It has its own bank, so it
operates within a different context. I know the merchant and user
fees are high. American Express is not part of my initiative, nor is
it covered by the Australian experience or Europe’s new
legislation. The reason is that American Express provides a
completely different service from that offered by Visa and
MasterCard in Canada, and that is true of the rest of the world
too, for that matter.
Senator Hervieux-Payette: We should recognize that even
senators have an American Express card for Senate-related
expenses. I mention it because, for those with a Costco
membership, American Express is the only credit card Costco
accepts. So we are talking about a huge company in Canada. And
I would think that Costco had certainly negotiated a lower rate
than what American Express would charge a smaller business.
That is my hope. Generally speaking, what are the debit card fees,
both here and in Europe?
Senator Ringuette: In Canada, within the Interac payment
network, fees are charged per transaction and not on the amount
of the purchase. The fee is 3 cents per transaction. That is minimal
for merchants. My research as far as Canada’s debit card market
and Interac go has shown that the company offers excellent
service at a minimal cost. Seldom have merchants or consumers
complained about Interac fees. At least I have not heard of any
merchants or consumers complaining about Interac fees.
Senator Hervieux-Payette: One or the other, technology-wise, it
does not make much of a difference. If they can live with an
Interac charge of 3 cents per transaction, we could say the same,
but with credit cards, would your percentage be charged per
transaction or as a share of the purchase amount?
Senator Ringuette: When it comes to Visa and MasterCard
credit cards, all fees are based on a percentage of the purchase and
a percentage of the sales tax paid by the merchant and the
consumer. At the end of the day, consumers are the ones who are
on the hook for the charges; it is a tax on a tax.
Senator Hervieux-Payette: That means that it would not be a
flat rate for all transactions; it would still be a proportion of the
purchase cost.
Senator Ringuette: Yes.
[English]
Senator Hervieux-Payette: How many jobs were created by
Visa and MasterCard — how many employees and how many
offices — in Canada?
29-5-2014
12:13
Senator Ringuette: Senator, I will have to get back to you with
that information. The jobs created by Visa and MasterCard in
Canada in the last 10 years, I would have to look that up. Their
job creation is probably greater in the U.S. than it is in Canada.
The Chair: Would you be good enough to forward that to the
clerk, please?
Senator Ringuette: Yes.
Senator Greene: Thank you for doing this. I appreciate it very
much.
My question actually follows the questions asked by Senator
Hervieux-Payette. It strikes me that 0.5 per cent can be a lot of
money depending on the item. I wonder why you decided to go
for a percentage instead of a combination, perhaps, of a flat fee
and a percentage, perhaps at different levels.
Senator Ringuette: The 0.5 per cent of the purchase price
struck me as the right combination when it was done in Australia
and their follow-up study on it. It was reaffirmed also when the
EU last year put a limit of 0.3 per cent. In the U.S., for instance,
the Visa and MasterCard debit card systems are both exactly that.
There is a flat rate plus a percentage of the purchase. The U.S.
legislation has put a maximum on the percentage rate for debit
cards there.
Not only are Visa and MasterCard involved in this credit card
payment system, but also all financial institutions that issue credit
cards. We have to acknowledge that your limit, say $5,000, on
your credit card to make purchases is set by your financial
institution, not by Visa and MasterCard. It’s a non-guaranteed
line of credit, if you look at the product. There is a certain amount
of risk and credit involved in the system.
I honestly agree with the fact that a percentage base, when you
look at all the players involved in the scheme, is a better way to
approach the fee structure. There is also the service provider in
respect of the technology.
Senator Greene: On a large item, a percentage can be a lot of
money.
Senator Ringuette: Yes.
Senator Greene: It strikes me that in a sense it’s not fair because
the act of using the system is the same, really, no matter how
much the item is worth.
Senator Ringuette: Yes, but as I said, you also have to take into
consideration the line of credit that is supplied. There is a certain
risk there.
Senator Greene: There is a certain risk, yes.
12:14
Banking, Trade and Commerce
Senator Ringuette: Also, with regard to that, the studies that I
have read indicate that we were used to having, in Canada, credit
cards being used for exactly that, namely, larger purchases so that
people did not carry cash on them and so on. That trend is
changing. Five years ago, rarely would you see at the grocery
store people paying with their credit card, but Visa and
MasterCard, on average, put $1 billion in advertising to have
Canadians increase their usage.
[Translation]
29-5-2014
Senator Massicotte: Thank you, Senator Ringuette, for your
perseverance on this very noble issue, one that really matters to
consumers and Canadians.
Everyone agrees that a problem exists as far as competition is
concerned. The consumer system is structured in such a way that
the consumer benefits from a cost that is indirectly incurred by the
merchant. And the entire world is trying to fix the problem. As
evidenced in its 2012 or 2013 budget, this government has
adopted measures in an effort to rectify the situation. We will hear
about them later; the government is proposing other measures to
this end. The Competition Tribunal even acknowledged that there
was a competition problem. There is something wrong with the
system.
With your private bill, you are claiming that neither Liberal
nor Conservative governments have done enough, and that the
proposed measures, including the code of conduct, are
inadequate. Is that indeed your view?
Senator Ringuette: Yes, that is my view. The code of conduct
established some guidelines for the system, but the core problem
involves merchants, small and large. That includes major chains
such as Walmart and Costco, and even merchant associations.
They have absolutely no bargaining power when it comes to
pricing. That is the core problem, and it has to be fixed.
In 2010, then Minister of Finance, Mr. Flaherty, introduced a
code of conduct, and it represents a step in the right direction.
Just consider Canada’s position as far as credit card fees are
concerned, as compared with that of the European Union’s
28 countries and Australia. Right now, Australia’s government is
attempting to negotiate, through the trans-Pacific agreement,
which will include Australia and New Zealand. Canadians can do
something about these exorbitant costs, can they not? I am
tenacious, because I see these excessive fees as entirely unfair to
Canadian merchants and consumers.
Senator Massicotte: Why are marketplace rules not working?
Senator Ringuette: Because there are only two major providers.
Over the past ten years, whenever Visa raises its prices,
MasterCard follows suit because they dominate the market. The
29-5-2014
12:15
statistics show that 94 per cent of credit card transactions made in
Canada are through either Visa or MasterCard. They dominate
the market and they know it.
They also know that Canadians are using their credit cards
more, not less.
Senator Massicotte: Your bill refers to ‘‘commissions
interbancaires’’ in French. What are they exactly?
Senator Ringuette: Interchange fees.
Senator Massicotte: Eighty per cent of the fees paid by the
merchant do not go to either Visa or MasterCard. Nearly two
thirds of those fees go to the issuing bank, not to Visa or
MasterCard. Which fees does the bill seek to reign in? A single
transaction reflects three or four different types of fees.
Senator Ringuette: The fees we are trying to reign in are those
under the exclusive control of Visa and MasterCard.
Senator Massicotte: Are they the interchange fees or merchant
fees?
Senator Ringuette: Merchant fees. They are the ones known as
‘‘interchange fees.’’
Senator Massicotte: Or ‘‘interbank’’?
Senator Ringuette: No, interchange. Visa and MasterCard set
the interchange fees for merchants and negotiate with Canadian
banks the portion of the fee that they will collect. Visa and
MasterCard would have us believe they are not the ones who set
the prices, but we know full well it is them.
[English]
Senator Tkachuk: What are the fees charged now by Visa and
MasterCard to retailers?
Senator Ringuette: To retailers?
Senator Tkachuk: Yes.
Senator Ringuette: It differs depending on what type of card
you have and how you purchase. It differs if you have a high
premium card. There is a lower premium card, and there is a no
premium card. It also differs whether you are present when you
make the purchase or not.
Senator Tkachuk: Or you buy it off the computer or
something?
Senator Ringuette: Exactly, but the average is over 3 per cent.
Senator Tkachuk: The average is over 3 per cent, and that
would apply to both Visa and MasterCard?
Senator Ringuette: Yes. They have a slightly different fee
structure but, at the end of the day, they are pretty similar.
12:16
Banking, Trade and Commerce
29-5-2014
Senator Tkachuk: Could you tell me what the difference is
between the premium card and the no premium card? That is, the
best interest or the best fee versus the worst fee card?
Senator Ringuette: It depends if you are asking for the best fee
for the merchants. Are you asking with regard to merchants?
Senator Tkachuk: Yes.
Senator Ringuette: Okay. The lowest fee is the plain Visa or
MasterCard with no bells and whistles and so on.
Senator Tkachuk: How much is that?
Senator Ringuette: That would be about 1.8 or 1.9 per cent.
The highest premium, the credit card with all the bells and
whistles, is roughly 3.1 per cent. Then there is an additional fee if
you are not present when you buy, when you buy via the phone or
Internet and so on.
Senator Tkachuk: Are Petro-Canada gas prices cheaper than
other gas companies? Petro-Canada has their own credit card. Do
they pass on the savings of their own credit card to the consumer?
They have their own credit card, and I don’t know whether they
charge themselves a fee versus another company that would use a
Visa or a MasterCard. Is there any significant difference in prices?
Home Depot has their own credit card, too. Are their prices
cheaper than others, such as Home Hardware or others who use
Visa or MasterCard?
Senator Ringuette: These are in-house cards.
Senator Tkachuk: Yes.
Senator Ringuette: You will recall that, for a while, Canadian
Tire had their own card. That is completely in-house. If the credit
card unit of Petro-Canada decides that they will charge an
administration fee to the Petro-Canada concessionaires, that is
their in-house thing, but you have to realize also that it is limited.
You cannot use your Petro-Canada card to buy something at
your corner store or grocery store.
Senator Tkachuk: I understand, but part of your argument here
is that consumers will benefit. You mentioned Australia.
I have a study by Chang, Evans and Garcia-Swartz, The Effect
of Regulatory Intervention in Two-Sided Markets: An Assessment
of Interchange-Fee Capping in Australia. They said that another
predictable result is the absence of evidence that consumer prices
have fallen in Australia as a result of lower merchant discounts.
So, in Australia, consumers didn’t benefit from the
0.3 per cent. My assumption would be that, if there were no
lower prices, that businesses benefited maybe by passing that
same charge on to the consumer.
29-5-2014
12:17
Senator Ringuette: Senator Tkachuk, I think that is the study
that was done in Australia and was paid for by MasterCard.
Could you verify that, please, sir?
Senator Tkachuk: I don’t know. Would that make it a bad
study?
Senator Ringuette: It would be a little biased from my
perspective.
Senator Tkachuk: For the studies that you are quoting, I think
that we would appreciate —
The Chair: Senator —
Senator Tkachuk: Could I just ask a question?
The Chair: Wrap it up. We have two more.
Senator Tkachuk: For the studies that you were quoting, I
would like it if you could circulate those to members of the
committee with the names of the authors so that we could access
them as well.
The Chair: Thank you, Senator Tkachuk. Your statement has
been made. Senator Ringuette, forward that to the clerk.
Senator Ringuette: It would be a pleasure to circulate the
European Commission study.
[Translation]
Senator Bellemare: Congratulations, Senator Ringuette, for
being so tenacious and for raising these questions. I think a good
many consumers and businesses are asking the same questions. As
an economist, I have always been somewhat reluctant when it
comes to getting involved in pricing. Competition is supposed to
yield results. A great many interconnected pieces are also at play.
Businesses pass along the costs in other ways when they are
subject to taxes and regulation. I gather that the reason that Visa
and MasterCard will not take other action is the increase in
volume.
You also mentioned that other fees are usually not increased.
This means that credit card fees for consumers remain unchanged
when fees are reduced for merchants. My question has to do with
credit card interest rates. If there is no connection between the
other fees, can a parallel be established between a lower return on
Visa and MasterCard credit cards and the costs that affect
consumers who have credit, especially through interchange fees?
Is there not a risk of interest rates increasing?
Senator Ringuette: Senator Bellemare, thank you for your
question. Interest rates are set by financial institutions. They are
no longer determined by Visa or MasterCard. Interest rates are
usually set based on the clients’ credit history and the type of card
they take out. This is a strange coincidence, since that is an issue
12:18
Banking, Trade and Commerce
29-5-2014
of concern for me. I actually introduced another bill before the
Senate — Bill S-210 — which deals specifically with the current
interest rates of 60 per cent. However, there is no connection
between lowered merchant fees and interest rates on credit cards.
Those are two completely different elements.
Senator Bellemare: So there is a wall between them. There is no
opportunity to make gains?
Senator Ringuette: Exactly.
[English]
The Chair: Thank you. Our concluding question from Senator
Maltais, please.
[Translation]
Senator Maltais: Twenty five or thirty years ago, most
merchants accepted credit cards — be it The Bay, Sears, Holt
Renfrew, and so on. Studies even showed that the Sears credit
card made more money for the company than the sale of
household appliances and clothing. Those same merchants
decided to transfer that aspect to Visa or MasterCard. Why?
Because they wanted to send their bad credit files to the cardissuing bank. The merchant was no longer responsible for the
credit. We should definitely not forger that the merchants you are
defending today have been just as cruel as MasterCard and Visa
in the past. That said, how do you explain that, in a city like
Edmundston — a charming little city — the chamber of
commerce managed to make those large companies, including
Discover, an American credit card, make concessions? The work
done by those people is amazing. Do you believe MasterCard and
Visa would go as far as colluding in terms of interest rates?
Senator Ringuette: No, I said that their rates were fairly similar,
despite a few differences. In my beautiful little city, where I began
my political career, I was the director of the Edmundston
Chamber of Commerce. The chamber has always supported
merchants’ efforts. A few years ago, I introduced my bill at a
luncheon, and the Edmundston Chamber of Commerce
supported my initiative. We have to realize that credit card
issuing has changed. You probably remember the time when
merchants offered their clients to put the purchases on their
account. On the weekend, the client would go cash in their
paycheque at the store and would pay their bill then. The
transaction market has changed. The reason pan-Canadian
organizations — including the Federation of Independent
Business and the Conseil des commerçants — are addressing
excessive fees for their members, merchants and small Canadian
businesses is that they have no bargaining power with
multinationals such as Visa and MasterCard.
29-5-2014
Senator Maltais: I will stop you there, senator. I do not agree
with you in that regard. How many people live in Edmundston?
Fifty thousand?
Senator Ringuette: No.
12:19
Senator Maltais: Not even that many. If a city of less than
50,000 manages to make Discover pay, what good is the chamber
of commerce, the consumers council and other similar
organizations? What is their use if the chamber of commerce of
a city like Edmundston was able to make a multinational
American company give in, and none of the organizations that
defend consumers and businesses can negotiate with those credit
card companies? What is the point?
Senator Ringuette: Senator Maltais, if 28 European countries
concluded — following many studies on the phenomenon — that
merchants have no power against Visa and MasterCard, I am
wondering why the Canadian government cannot come to the
same conclusion.
[English]
The Chair: Senator Ringuette, on behalf of the Banking
Committee and your colleagues, we greatly appreciate the
presentation that you made today, and you can now resume
your usual seat.
Senator Ringuette: Thank you.
The Chair: We are now pleased to welcome — and he is
becoming a regular in front of us now — from the Department of
Finance Canada, David Murchison, Director, Financial Sector;
and Erin O’Brien, Chief, Financial Sector Stability International, Financial Sector Division. From the Financial
Consumer Agency of Canada we have Mr. Kevin Thomas Acting
Director, Compliance and Enforcement Branch.
I will turn the floor over to Mr. Murchison first, who will make
an opening statement, to be followed by Mr. Thomas.
David Murchison, Director, Financial Sector, Department of
Finance Canada: Thank you, Mr. Chair. It’s nice to be back
before the committee. I am here today with Erin on my left and
Kevin on my right. They’ve been introduced, of course.
We have provided you with a handout, a slide presentation
which provides general background on the issue that Senator
Ringuette spoke of earlier. In there, I think you’ll find some
answers to questions that some of you posed earlier. While I
won’t propose to go through that slide deck unless you ask me to,
I will reference it on a couple of occasions as I go through my
opening comments.
In Economic Action Plan 2014, the government announced
two initiatives related to credit cards: one dealing with the cost of
credit card acceptance for merchants and another dealing with
market conduct.
12:20
Banking, Trade and Commerce
29-5-2014
On the issue of costs, merchants pay fees each time they accept
credit card payments from consumers. As with any other input
cost, merchants pass some or all of those costs on to consumers in
the form of higher retail prices. Senator Tkachuk, I noticed you
asked a question about the Australian experience and how those
costs might be passed on.
In 2013, the Competition Tribunal found that certain of Visa’s
and MasterCard’s network rules have an adverse effect on
competition which results in higher costs to merchants. I note that
a colleague, Richard Bilodeau from the Competition Bureau, will
be speaking before you shortly.
In light of the finding of the Competition Tribunal, the
government announced in Economic Action Plan 2014 that it will
work with stakeholders to promote fair and transparent practices
and to help lower credit card acceptance costs for merchants.
[Translation]
The Department of Finance has been studying the issue of
credit card acceptance fees — especially interchange fees — and
has been working with stakeholders to deepen our understanding
and discuss options. Interchange fees are high in Canada, as
shown on slide number 6 of the handout. The dynamics of the
market are complicated. Interchange fees affect merchants,
consumers and financial institutions differently. In principle,
any action to address these fees must consider the impacts on
different participants in the marketplace.
[English]
For example, a reduction in interchange fees would benefit
merchants by lowering the costs of credit card acceptance, but
could have a perceived negative impact on cardholders who enjoy
using the rewards associated with many credit cards. Many of you
will be familiar with the points that you get when you make
purchases with credit cards. Slide 5 in the deck will show you a
pictorial essay of that transaction.
From the standpoint, on the other hand, of financial
institutions, interchange is an important source of revenue from
credit cards and partially covers the cost of credit card services,
such as rewards programs and other services to cardholders, as
well as the cost of fraud and credit losses. As you can expect,
given the diversity of interest among stakeholders, we have heard
a wide range of perspectives on what should be the best course of
action to lower credit card acceptance costs for merchants.
29-5-2014
12:21
Market conduct — or business conduct might be a better term
— is part of a second initiative which is to improve the conduct in
the marketplace. The Code of Conduct for the Credit and Debit
Card Industry is a voluntary code that was created in 2010 to
promote merchant choice, transparency and disclosure, and
fairness in the credit card market. We have close to 40 entities
that are signatories to the code of conduct, ranging from credit
card networks, acquirers, as well as a large group of financial
institutions that issue credit cards. The Financial Consumer
Agency of Canada is responsible to monitor compliance with the
code of conduct.
In Economic Action Plan 2014, the government announced
that it intends to strengthen this code of conduct, and over the last
few months we have received feedback from stakeholders in a
number of areas for potential improvements to the code. This
includes inclusion of a dispute resolution process for merchants;
enhanced disclosure for key contract terms and fees; rules
governing contract renewal; and requirements on the branding
of premium credit cards.
During our engagement with stakeholders, merchants and
merchant associations, they told us that the creation of code has
materially improved market conduct in the industry. We continue
our work with stakeholders to develop options for further
improvements.
This concludes my opening remarks. I would be happy to
discuss any questions you may have.
The Chair: Mr. Thomas is next on behalf the Financial
Consumer Agency of Canada.
[Translation]
Kevin Thomas, Acting Director, Compliance and Enforcement
Branch, Financial Consumer Agency of Canada: Good morning
and thank you for inviting the Financial Consumer Agency of
Canada to appear before the Standing Senate Committee on
Banking, Trade and Commerce.
[English]
My name is Kevin Thomas, and I am the Acting Director of
Compliance and Enforcement at the agency. It is my pleasure to
represent Commissioner Lucy Tedesco, who is unable to be here
and sends her regrets. The agency appreciates the opportunity to
speak in this forum.
The topic of payment card networks and how merchants
interact with them is of particular interest to us. Before I describe
our work in this area, I would like to give a brief overview of our
organization.
12:22
Banking, Trade and Commerce
The federal government created FCAC in 2001 to provide
financial information to consumers and to oversee the market
conduct of banks and other federal financial entities. Since then,
our mandate has been expanded to include responsibility for
helping Canadians to improve their financial literacy.
[Translation]
In other words, it is our job to help Canadians develop
knowledge, skills and confidence in their ability to make informed
financial decisions.
[English]
Another specific group we reach out to is merchants and the
associations that represent them. Over the years, we have
developed information, tools and webinars for merchants with
two aims in mind: first, to ensure they are treated fairly in their
dealings with the six payment card networks that operate in
Canada; and, second, to ensure they understand their rights and
responsibilities when dealing with these networks. Our website
includes a section devoted to merchants. This one-stop-shopping
approach makes it easier for merchants to find information and
tools they can use to make decisions about their dealings with
payment card networks.
[Translation]
Merchants can also use our website to access a copy of the
Code of Conduct for the Credit and Debit Card Industry in
Canada.
[English]
29-5-2014
The primary purpose of the Code of Conduct is to ensure that
payment card networks make proper disclosure to merchants of
the fees associated with accepting credit and debit card payments.
The code took effect in 2010 following consultations between the
Minister of Finance and representatives of payment cards, credit
card issuers and merchant associations. Today, our agency is
responsible for ensuring compliance with the code. Responsibility
for policy development rests with the Department of Finance. In
the event that we encounter issues during monitoring that arise
outside the code, we report them to the minister for consideration.
However, from time to time our commissioner issues guidance
to clarify the code’s provisions. For example, last winter the
commissioner published guidance to clarify references in the code
to increased disclosure in sales and business practices, and
cancellation of contracts without penalties.
29-5-2014
To close, let me emphasize that our agency supports merchants
both in becoming knowledgeable about rights and responsibility
in respect of payment card networks and in making informed
decisions when choosing and using them; and we will continue to
do so.
[Translation]
We will also continue to monitor the compliance of payment
card networks with the code of conduct. And our commissioner
will continue to issue guidance to clarify the code’s provisions as
required. Thank you for your attention, and I look forward to
answering any questions you may have.
[English]
12:23
The Chair: We will start with the Deputy Chair of the
Committee, Senator Hervieux-Payette.
Senator Hervieux-Payette: My first question is: How many
people are working and in what kind of economic activities?
These two companies are bringing to Canada employees on the
ground that have earnings and spend money here. This is
important because to permit this exaggerated cost, I would say,
only to send money abroad would be quite annoying.
What is the percentage of those who have cards with all the
bells and whistles? There can be all sorts of benefits if you use
certain kinds of cards, such as flights and so on? Do you have
statistics on the number of people who take the basic card, usually
with an interest rate of around 9 per cent, and the number who
take the card with bonuses at 21 per cent? Are you aware that if
you pay that bill at your bank on the last day you are still
considered late because the bank has to have at least five days to
deal with it? Of course, not many people know when it says
payment is due on the twenty-first, you have to pay on the
sixteenth? Could you explain this to us? In your model, you talk
about those who bring a lot of privileges. I want to know if it’s
20 per cent in that category, 10 per cent or 80 per cent.
Mr. Murchison: I want to make sure I understand the question.
I think there are two questions there. One is: Would we have
statistics that break down the kinds of credit cards in the
marketplace, ranging from premium cards to basic cards? Your
second question relates to the timeliness of payment and
recognition of that payment.
I’ll ask Ms. O’Brien to answer the first one.
12:24
Banking, Trade and Commerce
29-5-2014
Erin O’Brien, Chief, Financial Sector Stability - International,
Financial Sector Division, Department of Finance Canada: Our
figures show that approximately 10 per cent of cardholders have
premium cards. These are typically cards associated with rewards
programs, travel points, et cetera. Those cardholders represent
about 35 per cent of the spend in the Canadian marketplace.
Senator Hervieux-Payette: For me that is good news, for sure.
Don’t forget about the statistics on Visa and MasterCard
operations in Canada. I understand we can have the
information later, but it is important that we know. You are
dealing with these people on a regular basis, and you can obtain
that information more easily than I can.
Mr. Murchison: We’ll do our best to get that. I’ve emailed my
staff to see if I can get the answer for you. The information we
had a few minutes ago didn’t break out the Canadian operation;
but we’ll see if we can get that answer for you.
Senator Hervieux-Payette: The other question is about the card
payment date.
Mr. Murchison: I don’t have the specifics for that answer. They
relate to overnight settlement rules.
Ms. O’Brien: The timing of the payment is dictated by rules
governed by the Canadian Payments Association. To provide
some guidance to consumers, it should indicate clearly on the bill
when the payment is required in order for the bill to be considered
paid on time.
Senator Hervieux-Payette: Is Mr. Thomas agreeing with that?
Is it clearly indicated that the due date for payment is on the
twenty-first? Even if I show up on the date with cash at the bank
or use my Interac card to pay, I will be declared in default and I
would have to pay the 21 per cent interest rate on the amount of
money due?
Mr. Thomas: I would not speak to whether this is always the
case. We found that, if you pay on the last day and you tell your
bank this is due today and I’m paying it today, they will make
arrangements to ensure you are not penalized for any late
payments.
Senator Hervieux-Payette: Is it clearly indicated?
Mr. Thomas: On the credit card statements, I believe it is.
Senator Tkachuk: I have a number of questions on credit cards
and costs. Credit card companies are in business and, the last I
heard, they are not a utility. Within the percentage that a retailer
pays, they receive some benefits. I used to be in business. Right
now, when you get a Visa, you deposit it that night. It is cash;
right? That’s a big deal. In the old days, before credit cards, you
deposited cheques and you weren’t sure if it was cash. There is a
high cost to the retailer for NSF cheques, cheques that were not
29-5-2014
12:25
good or were a problem because a signature was wrong or a
wrong date was put on. Those were costs that the retailer had to
absorb at the time, which they no longer have to absorb.
The customer gets another benefit. I had bought a rental in
Florida and it turned out to be a dud. Visa gave me my money
back. That was a big deal. That was a very big deal. It was a
$2,000 deal. I couldn’t have done that without the credit card.
There is a cost to that. There is a cost to the points. That’s a
marketing cost. Surely the marketing costs drive business. For a
retailer, it stimulates sales. When they market, there is an
off-setting cost in the sense that I, as a retailer, received a
benefit of the marketing being done by Visa to drive their
business, right? There are all these costs. At 0.3 per cent, my
question would be how will all those benefits be affected?
Mr. Murchison: You’re asking if —
M. Murchison : Vos voulez savoir si...
Senator Tkachuk: Why are we regulating something that
provides such benefits to the consumer? I receive a heck of a lot of
benefits from that card that I don’t even pay for.
Mr. Murchison: Maybe I could make one clarifying point. The
government, in its budget action plan, has committed to only
working with stakeholders to promote fair and transparent
practices and help lower credit card acceptance. It has not said
anything about regulation. I appreciate that we are here to discuss
Senator Ringuette’s bill, but there is no mention in the budget
action plan about regulation.
Senator Tkachuk: If the government is concerned, there must
be a reason why they are concerned.
Mr. Murchison: Yes.
M. Murchison : Oui.
Senator Tkachuk: I’m not sure what it is. I’m not sure what the
concern is. Maybe you could explain that a little more clearly than
you did at the beginning, because I’m still not quite sure why this
is a big deal.
Mr. Murchison: There are several factors in the budget action
statement and the interest of doing what is been said. The first is
that merchants are complaining, notwithstanding all of the
benefits that you just mentioned, senator. Maybe that was then
and this is now. It’s a younger crowd of merchants than it was,
and they don’t remember. Nonetheless, we hear from individual
merchants, we hear from associations, and there is a high level of
noise about the level of credit card acceptance costs that they pay.
We also hear that it used to be better in olden days.
Senator Tkachuk: Yes, I’m sure.
Mr. Murchison: There was peace in our time, sometime before,
and there isn’t now. That’s one factor in this.
12:26
Banking, Trade and Commerce
29-5-2014
The other would be on chart 6, which I had pointed to before.
You’ll see that Canada and the United States would be outliers in
the global payment system as it relates to credit card acceptance.
Those would be two things I would point you to there.
Senator Massicotte: Thank you again for being with us. As you
know, time flies, but five, six, or seven years ago, this committee
studied the whole issue of credit cards and made a significant
report, which the government partly responded to by adopting the
code of ethics and so on. I must admit that, at that point in time,
I fought hard among my colleagues.
The issue for me is that I’m a big believer in the marketplace
and therefore I frown with great suspicion on any intervention or
impediment to the marketplace because there are always serious
consequences. The solution would recommend that we give
guidelines and force the openness of the contracts so merchants
can even charge extras and fees. You went partly there.
I must admit, to give credit to my colleague, if you look at the
world experience, given the way it works, the person getting the
benefit does not pay for the cost of those benefits, and the
merchant is squeezed there and has no say in the fees. Even
Walmart, the biggest merchant in the world, could not negotiate a
special deal. That’s how powerful the mis-arrangement or the
unhealthy relationship of all of this is.
I’m now a little bit pessimistic. You made some reference, not
as much as we would have liked in the original report, that we can
never get there. In fact, if you look at the world, in Australia the
central market made a study and said maybe no impact. They
don’t know if there is an impact on retail. It’s not conclusive.
Irrespectively, the rest of the world has responded to increases in
fees, so somebody is profiting. I’m a big believer in the
marketplace and, if the fees are less, eventually consumers will
benefit, but it’s a slow process.
I’m not so sure your approach will get there. It’s more
coaching. Walmart now is negotiating again to see whether they
can come to a deal. Even they can’t negotiate a reduction in fees.
The one thing that we have to be cautious about is that the most
significant part of the fees does not go to Visa or MasterCard; it
goes to the banks. In the Canadian system, it goes predominantly
to the banks, and there is an oligopoly there and that’s where he
problem lies.
Let me challenge you. Why do you think what you’re
proposing now, given our little progress, even with what the
tribunal said, will make a difference? Why don’t we resign
ourselves to what the world is doing and say there is a real
problem and we have to legislate the fees because we’re not going
to get there based on the market mechanism, which I strongly
favour?
29-5-2014
12:27
Mr. Murchison: I will repeat myself. I’m working with the
commitment made in the budget text, and that’s where we are
today. I can’t speak to a world that might be beyond that.
I would say, though, that we have not stopped at code
enhancements. There continue to be a number of improvements
that we see can be made in the marketplace. We continue to see
some market abuses on the acquiring side, and those need to be
cleaned up. We do think that further transparency among
consumers, so they are aware of what the costs are for the
credit cards, is helpful. That may all be short of the answer you
would like to hear, though, senator.
Senator Massicotte: I don’t wish you bad luck but, if I were a
betting man, which maybe I am, I would bet you won’t go far
enough and you won’t get the results.
Let me jump to the other issue. We made reference in earlier
testimony about the European Commission, the 0.3 per cent
issue. To clarify that issue, I thought the reason that 0.3 per cent
stuff in the European Commission arose is because credit cards
charge a 3-per-cent fee in Canada for most cards. If you use your
Visa or MasterCard and go to the U.S. or Europe, they will
charge you a currency switch and they will charge you another
3 per cent. The shoppers in Canada going for a weekend in the
United States have to add 4 or 5 per cent to the bill when they pay
by credit card. I think that’s what they were trying to address,
because the European Commission thought it was not fair to
charge foreign exchange fees when they are in one market. I think
that’s where the 0.3 per cent comes from and not the interchange
fee. Am I correct in saying that?
Mr. Murchison: Erin can perhaps speak more fully to this, but
the approach in the EU has been to try to provide to the merchant
an indifference test, so that the merchant, in accepting a payment
form, will be indifferent between taking cash, cheque or a credit
card. That’s been the thrust of the approach there.
Senator Massicotte: Is that honourable? Is that what we should
also be seeking?
Mr. Murchison: Again, I will go back to the record that I have
before me, so I’ll defer from answering that question.
[Translation]
Senator Bellemare: Like my colleagues, I would like to know
where the money will come from if merchant fees are reduced. I
talked earlier about the communicating vessels principle. What
would change if merchant fees were reduced?
In your slides, you say that interchange fees are an important
source of revenue. A portion of credit card revenue is used to pay
for rewards or other cardholder benefits. So my understanding is
that reduced merchant fees would have an impact on rewards and
benefits.
12:28
Banking, Trade and Commerce
29-5-2014
Slide 6 contains a comparative chart on an international scale.
At first glance, the Canada and U.S. interchange fees are among
the highest. However, in Canada and the U.S., the difference
between interchange fees on credit cards with benefits and those
without benefits is not as large compared with other countries
around the world. In other words, other countries have
interchange fees on credit cards with benefits that are much
higher than fees on cards without benefits.
Would you like to comment on that? Do non-premium credit
cards sort of finance the premiums? Why is the difference between
Canadian cards and cards issued in other countries not that
significant?
[English]
[Traduction]
Mr. Murchison: I think there are two questions there. You had
asked me, first, in the world, where costs to merchants were
reduced, how the distribution of that would be reflected to other
stakeholders. I don’t have the full answer to that question, but it
would impact consumers, who, currently, are getting a certain
level of benefits.
A consumer will get that benefit indirectly, if you like, through
the merchant, in the course of buying a good. The interchange fee
is part of that. The consumer also, however, for some cards, will
pay an annual fee. Then, in turn, there will be some consumers
who are paying fees associated with not paying their credit card
on time and are forced to pay a revolving credit line through that
process. So, consumers would be affected in some way there. How
big that would be, I’m not sure.
The issuer community would also be affected. They would now
be getting lower interchange fees, which, as you note, are part of
their income, so their income will be reflected. Whether they will
be able to make that income up will depend on the degree of that
reduction.
[Translation]
Senator Bellemare: What percentage of interchange fees is used
to fund premiums?
[English]
Mr. Murchison: It varies. Do we have a distribution range we
could give there?
Ms. O’Brien: No. I think interchange is an important source of
revenue. It is not the sole source of revenue in terms of credit
cards. Part of that is made up of annual fees or interest rate
charges, and so there isn’t a one-to-one proportion between the
rate of interchange that’s charged and the rewards, for instance,
that are associated with particular products.
The Chair: We will have to conclude and move to Senator
Ringuette, and the final question will come from Senator Maltais.
29-5-2014
12:29
Senator Ringuette: Thank you. I understand you don’t make
the policies; you just try to put them forth.
Mr. Murchison: We make policy, and then some of it’s
accepted and some of it’s not.
Senator Ringuette: I want to stress to my colleagues that the
table on page 6 dates from July 2013. Therefore, not all of the 28
countries in the European Union for which the rate will be
0.3 per cent, whether it’s a premium or a standard credit card, are
reflected in this table.
Mr. Murchison: The problem there, just to speak to that very
point, if I may, for a second, is that it’s an average rate that has
been agreed to in the EU, an average effective rate. These are not
reflecting the average. So we’re seeing all the categories here, but
the average is the average.
The Chair: Do you have a question for the panel?
Senator Ringuette: Yes. My first question is: What do you
think, for instance, about Senator Tkachuk’s example? When you
look at this issue, are you aware that, when a customer returns an
item purchased, the same merchant interchange fee applies when
they return? So they’re being charged twice for the same item with
regard to the customer.
Senator Tkachuk: That’s not the same. She made reference to
me. It’s not the same. What I was talking about was the question
of me getting my money back for a bad item. She’s talking about
the return of an item that I returned.
Mr. Murchison: You’re talk being about fraud, I think.
Senator Tkachuk: Exactly. It was fraud. There was no place.
Mr. Murchison: You didn’t get the product you paid for.
Senator Tkachuk: I didn’t get the product that I bought.
Senator Ringuette: But the merchant is being charged twice.
Mr. Murchison: We are aware of that.
Senator Ringuette: How much time have you spent with regard
to looking at the European Union legislation that will be in force
in just about 10 months? Have you looked at that? Your part of
the public service, Finance, is a major department when you look
at all the implications of the Canada-EU free trade agreement.
Have you looked at the impact that this will have on having an
equal playing field or a fair playing field for Canadian merchants
and Canadian consumers, in comparison to their new competition
in the EU?
Mr. Murchison: On the first question, we follow the global
developments — in the EU, Australia, New Zealand —
reasonably closely. We try to stay on top of those issues. I
think the EU experience is a response to an anti-trust case there,
so I don’t believe it’s legislative.
12:30
Banking, Trade and Commerce
Senator Ringuette: No, it’s legislation.
Ms. O’Brien: I understand that there currently is draft
legislation or a proposal that is being considered in the EU.
Senator Ringuette: I’m sorry?
Ms. O’Brien: There is a legislative proposal being considered in
the EU.
Senator Ringuette: It was tabled last July.
29-5-2014
Ms. O’Brien: Yes, and it is currently going through the
legislative process and has not yet been accepted.
Senator Ringuette: No, the 28 countries had 22 months to
enforce.
The Chair: Our final question of this session is from Senator
Maltais.
[Translation]
Senator Maltais: Mr. Murchison, you said something
interesting that struck me. We are talking about services. A
credit card is a service people can choose to buy or not. Your
document states that there are 90 million credit cards in Canada.
On average, that works out to three credit cards per Canadian,
including infants and elderly people who can no longer use them.
For the majority, the privilege of using credit cards costs $100,
$125 or $150 a year. Why would merchants not have a fixed cost
for the use of a credit card? Let us use the hypothetical example of
Mr. X who conducts $200,000 in business with MasterCard. The
card company tells him that it will cost him $2,500 a year to use its
banner. Would that be a possibility?
[English]
[Traduction]
Mr. Murchison: You would have to ask the networks that
question. I think it is possible, but whether they would choose to
do that for their business would be a question for them.
If we look at the evolution in this marketplace, we have gone
from networks that were basically utilities, if you like, to profitseeking enterprises when they went into IPOs, at which point
relatively simple structures went to quite complicated and deep.
You heard from Senator Ringuette that there are a whole variety
of sectors and different payment provisions, depending on who
you are, what you are buying, and so on.
[Translation]
Senator Maltais: MasterCard and Visa will certainly not lose
any money with the merchant. The merchant will increase the
prices of their products in order to avoid losing money.
Consumers ultimately pay the price. They are the ones we
should protect.
29-5-2014
[English]
Mr. Murchison: Yes.
12:31
[Traduction]
M. Murchison : Oui.
The Chair: On behalf of the members of the committee, thank
you for appearing before us. This concludes our second session.
In our final session today, the committee will hear from
representatives of the Competition Bureau of Canada. I am
pleased to welcome Mr. Richard Bilodeau, Assistant Deputy
Commissioner, Civil Matters Branch Division B, who is
accompanied by Ms. Nadia Brault, Senior Officer, Civil
Matters Branch Division B.
I turn the floor over to Mr. Bilodeau for his opening statement.
Richard Bilodeau, Assistant Deputy Commissioner, Civil
Matters Branch Division B, Competition Bureau: Good morning.
My name is Richard Bilodeau and I am an assistant deputy
commissioner in the Civil Matters Branch at the Competition
Bureau. I am accompanied today by Senior Competition Law
Officer Nadia Brault, also from the bureau’s Civil Matters
Branch.
Thank you for inviting us to appear today as you study
Bill S-202, An Act to amend the Payment Card Networks Act
(credit card acceptance fees). It is a pleasure to be back before this
committee.
While the bill does not directly relate to the scope and mandate
of the Competition Act, the bureau is closely following
developments in this area.
[Translation]
The Competition Bureau, as an independent law enforcement
agency, ensures that Canadian consumers and businesses prosper
in a competitive and innovative marketplace.
Headed by the Commissioner of Competition, the bureau is
responsible for the administration and enforcement of the
Competition Act and three labelling statutes.
The Competition Act provides the commissioner with the
authority to investigate anti-competitive behaviour. The act
contains both civil and criminal provisions, and covers conduct
such as bid-rigging, false or misleading representations, pricefixing or the abusing of a dominant market position, among other
things. The act also allows the commissioner to make
representations regarding competition before regulatory boards,
commissions or other tribunals. As an advocate for competition,
the commissioner may also perform market studies designed to
improve the understanding of the effects of competition on the
economy.
The Competition Act applies, with very limited exceptions, to
all sectors of the Canadian economy, including the financial
services sector.
12:32
Banking, Trade and Commerce
29-5-2014
The bureau has been active in the financial services sector over
the last few years. I would like to give a brief description of some
recent matters relating to both the debit and credit payment
markets. First, I would like to briefly touch on the debit card
market — specifically the Interac payment network.
In 2009, Interac requested that the Commissioner of
Competition agree to vary a 1996 consent order to allow
Interact to restructure from a not-for-profit association to a
for-profit model. Based on the information available at that time,
the bureau announced in February 2010 that it did not support
changing or removing the consent order safeguards that
effectively protected consumers from the potential anticompetitive activity subject to the consent order.
That said, in 2013, Interac requested that the 1996 consent
order be amended to allow it to restructure from an
unincorporated association to a corporation with an
independent board. Following a comprehensive analysis of the
rapidly evolving payments industry, the bureau consented to the
request. The restructuring would permit Interac to operate the
services currently offered by the association under a cost-recovery
model, enabling it to fund research and development in new and
innovative payment services. This structure would provide Interac
with greater flexibility to compete in the evolving marketplace,
while retaining appropriate safeguards against anti-competitive
activity.
[English]
[Traduction]
I would also like to speak about the bureau’s work in the area
of credit cards. As this committee knows, in December 2010 the
bureau filed an application with the Competition Tribunal to
strike down restrictive and anti-competitive rules that Visa and
MasterCard impose on merchants who accept their credit cards.
Credit card acceptance fees paid by Canadian merchants are
among the highest in the world, estimated at $5 billion per year.
To protect these hidden credit card fees paid by Canadian
merchants, Visa and MasterCard have imposed on merchants a
number of rules that harm competition.
The rules challenged by the bureau prohibit merchants from
encouraging consumers to consider lower cost payment options
such as cash or debit, and prohibit merchants from applying a
surcharge to a purchase on a high-cost credit card. Further, for a
merchant to accept any of Visa or MasterCard’s credit cards, that
merchant must also agree to accept all credit cards offered by
those companies, including the premium cards that impose
significant costs on merchants.
29-5-2014
12:33
These restraints on merchants result in higher prices for all
consumers because merchants pass along costs they take on as a
result of Visa and MasterCard’s anti-competitive rules. Although
the tribunal issued a decision in July 2013 that dismissed the
bureau’s application, it found that Visa and MasterCard’s
conduct did have an adverse effect on competition.
The Tribunal’s decision also recognized that the Commissioner
of Competition advanced a case that should have been brought
before the Tribunal. At the same time, the Tribunal felt that
regulation of the industry would provide a more appropriate
solution than any remedy it could issue under the Competition
Act.
Following a careful review of the Tribunal’s decision, the
bureau decided not to appeal but to focus its efforts on identifying
alternate means of addressing the competition issues in the supply
of credit card services in Canada.
The bureau maintains that without changes to Visa and
MasterCard rules, merchants will continue to pay excessively high
card acceptance fees. These fees will continue to be passed along
to consumers in the form of higher prices for goods and services.
As such, the bureau will work with the federal government and
relevant stakeholders to advocate for changes in the credit card
market and has been monitoring recent developments in this area.
For example, we note that the government cited the Tribunal’s
findings in the Visa and MasterCard case in the Economic Action
Plan 2014 and indicated that it would strengthen the Code of
Conduct for the credit and debit card industry in Canada to
further improve business practices. The bureau welcomes and
supports measures that increase transparency and flexibility for
Canadian merchants and consumers.
In conclusion, the bureau understands the importance of
competition in this very complex market to all Canadians,
including consumers and retailers. I would like to note that
while we recognize that high prices are an important concern for
Canadian consumers, the bureau does not have the authority
under the Competition Act to regulate the daily operations of
markets or the level of prices in any particular industry, including
the pricing of financial services in Canada.
However, the bureau does have the authority to act when we
believe anticompetitive conduct has harmed competition. That is
what we did when we filed an application against Visa and
MasterCard. Ultimately the Tribunal did not grant an order
eliminating Visa and MasterCard’s restrictive rules, but it did
recognize that those rules had an upward effect on pricing for
credit card transactions.
12:34
Banking, Trade and Commerce
29-5-2014
Thank you again for inviting us today. I would be happy to
answer your questions.
Senator Massicotte: Thank you for being here today. If I were
to summarize that in my words, the Competition Board did
conclude that the arrangement with the credit card companies is
anticompetitive and it caused a monopoly structure to impose
their fees. You concluded that. Is that an accurate statement?
Mr. Bilodeau: The Commissioner of Competition filed its case
before the Competition Tribunal; it is a quasi-judicial body.
Senator Massicotte: That was the bureau’s conclusion?
Mr. Bilodeau: Yes, that was the bureau’s conclusion.
M. Bilodeau : Oui, c’est bien cela.
Senator Massicotte: The Tribunal said, ‘‘We don’t disagree
with your conclusion, but this is more of a policy decision as
opposed to a regulation decision.’’ They said they would not
award you what you are seeking. They are basically throwing the
ball to the government and saying, ‘‘Government, this is more of a
macro issue; you should consider this, and this is more your
decision-making level.’’ Is that a good summary?
Mr. Bilodeau: Yes. I would add to that that at the outset the
Tribunal found that section 76, which is the section of the act that
we used to bring our application to the Competition Tribunal,
they found that in order for section 76 to apply, the resale of a
product had to be present. In this case, we had not shown that
Visa or MasterCard’s credit card network services were being
resold. For that reason, the Tribunal at the outset said that the
elements of section 76 are not met and the Commissioner does
not win its case.
Senator Massicotte: What do you mean, ‘‘resold’’?
Mr. Bilodeau: Section 76 is the price maintenance provision of
the act, and it deals with situations where a manufacturer says to
a distributor or a retailer that you cannot sell my product for less
than $10 to your customers. For section 76 of the act to apply,
there has to be the resale of a product. If I manufacture pens and I
am selling them to a retailer who will resell them to you, that is
being resold. They found in this case the network services were
not being resold; so it didn’t meet that legal test of the provision.
The Tribunal went further. They did complete their entire
analysis of section 76 and ultimately found, as you properly
described, that they had market power and that they had engaged
in practices that influenced upward prices and they have had
adverse effects. Ultimately, even if we had been entirely
successful, they still would not have, as you described, issued an
order because they felt that regulation was the more appropriate
one.
Senator Massicotte: Because of section 76? You must meet that
provision?
29-5-2014
Mr. Bilodeau: Yes.
12:35
M. Bilodeau : Oui.
Senator Massicotte: In our society, not frequently, but there are
many other relations whereby the party receiving the benefit is not
the party who pays directly for the services. There is not a direct
resale of the product. Where there’s a tri-party relationship, and
you have got that elsewhere.
Does that mean that the current legislation will not allow the
competition board to get involved in those issues also, because it
will not meet that specific test?
Mr. Bilodeau: There is a long history to the price maintenance
provision. I will not go back in time because we would be here a
long time, but it has traditionally been used in situations where
companies are indicating to one of its suppliers or customers how
much to resell the product for. That used to be a criminal statute;
now it is a civil statute that has what we refer to as a ‘‘competition
test.’’ That practice may happen, but, if it does not harm
competition, then we will not be concerned with it.
Senator Massicotte: Does the current legislation, relative to the
administration of the Competition Bureau, does it not provide to
do something where you can determine there is market power,
there is an effect on retail prices, and there’s lack of competition?
You don’t have the power to do something in that case, if you
don’t satisfy section 76?
Mr. Bilodeau: Section 76 is just one of the provisions available
to us in the Competition Act. In that situation, if we are
challenging conduct under section 76, then, yes, we have to show
there is a resale of a product. A lot of different practices can be
examined under other sections of the act.
Senator Massicotte: Why did you not do so in this case?
Mr. Bilodeau: When we look at the facts of this case, and we
look at the provisions that are available to us in the Competition
Act, we felt that this was the provision of our act that most
applied to the situation and was the most appropriate to use
before the Competition Tribunal.
Senator Massicotte: I guess you screwed up.
Mr. Bilodeau: I would disagree.
[Translation]
Senator Bellemare: Mr. Bilodeau, I would like you to expand
on the arguments you presented before the tribunal.
In your presentation, you said the following, and I quote:
The rules challenged by the Bureau prohibit merchants
from encouraging consumers to consider lower cost
payment options like cash or debit, and prohibit
merchants from applying a surcharge to a purchase on a
high cost card.
12:36
Banking, Trade and Commerce
What does that mean in plain language?
29-5-2014
Mr. Bilodeau: One of the rules Visa and MasterCard imposed
is that a merchant cannot apply a surcharge when a consumer
pays with their credit card.
If I want to use my credit card in a store to pay for my
purchases, the merchant cannot say that, since I am using a high
cost card, my purchase will cost me an additional 2 per cent or
3 per cent. The merchant cannot do that nowadays, since Visa
and MasterCard created rules that prevent such behaviour.
The argument we presented to the tribunal was that, if I went
to a store with my high cost credit card and was told that a
surcharge of 3 per cent would apply, I would obviously prefer not
to have to pay that extra 3 per cent. Depending on what I had in
my wallet, I could pay with cash — which probably costs the
merchant less — or with my debit card. As Senator Ringuette
mentioned, Interac fees are about 3 cents per transaction. The
merchant would appreciate that more. At that point, I would
decide what payment method to use.
I was being told that, if the merchant had the possibility, they
could steer consumers toward lower-cost payment options. That
is what we have seen in other jurisdictions. Australia has been
mentioned, and the tribunal refers to that jurisdiction in its
decision.
Senator Bellemare: In other words, allowing the merchant that
freedom would help implement somewhat sounder competition
rules. Since certain credit cards cost more and others less, such an
approach would be conducive to a more transparent competition
system.
In fact, those who use cash to pay are currently financing those
who use credit cards.
Mr. Bilodeau: That is a good point. This is indeed what is
happening. When we go to a store and pay with a credit card that
costs 2.65 per cent — which is one of the MasterCard rates — or
use our debit card, which may cost 3 cents, as consumers, we are
paying the same price, and the merchant makes more or less
money, depending on the card.
[English]
[Traduction]
Senator Ringuette: First, I have an observation. I followed very
closely the event and the case that you had in front of the
Tribunal. I was impressed. Since then, at our office, we are
looking at an item that perhaps might modernize section 76 with
regard to your authority over the price of services into the
marketplace.
All that being said, the Competition Bureau has acted
diligently, but at the end of the day, as you state here, the
Tribunal’s decision also recognizes that the Commissioner of
Competition advanced a case that should have been brought
29-5-2014
12:37
before the Tribunal. That is why, even though they have looked at
the importance of this issue in the Canadian marketplace and the
Canadian economy, the Tribunal still went ahead and studied the
issue, and it came up with the conclusion that this issue had to be
brought under regulation by the government. I think it was a big
victory for all the efforts and the energy that you put in to try to
have fairness in the marketplace.
I guess the next step is in front of us with my bill. Of course, as
with any witness, we would welcome any kind of recommendation
with regard to the bill. If there are some weaknesses in it, in order
to address this issue, I and, I am sure, all of my colleagues would
welcome your input, considering all of the experience that you
have with regard to this issue.
Mr. Bilodeau, how can we increase the effectiveness of
Bill S-202 with regard to all the experience that you have had
with this issue?
Mr. Bilodeau: As you may appreciate, we are not in a position
to provide comments on legislation. Our mandate at the
Competition Bureau is to enforce the Competition Act and the
provisions that are given to us by Parliament. We have done a lot
work in this area; you are correct. A lot of the work that we have
done is reflected in the Competition Tribunal’s decisions.
If you are interested in reading more material, the Competition
Tribunal’s website has available for access all of the public
versions of the testimony from experts and expert reports. There
is a lot of information there.
Senator Ringuette: Yes; I have all of it.
Mr. Bilodeau: A lot of the positions and the knowledge that we
have has been before the Tribunal and is publicly available. I
draw your attention to that.
Senator Tkachuk: Regarding the behaviour of Visa and
MasterCard as far as prevention, is there language in the
contract that we could have a copy of that they use to prevent
the retailer from advertising other methods of payment in their
own place? Do you have that? Could it be made available to us?
Mr. Bilodeau: Visa and MasterCard have very lengthy rules
that apply to their networks. I think they run in the thousands of
pages. Yes, the rules governing no-surcharging and honouring all
card rules are explicitly in those rules.
I am not sure if the bureau is able to provide you with a copy of
those rules, because a lot of the information that we have was
collected during an investigation and it is protected by
confidentiality provisions, but we can check to see if we have
those available. It might be better to ask that question of the
networks themselves.
12:38
Banking, Trade and Commerce
29-5-2014
Senator Tkachuk: Do they actually go to the retailer and say,
‘‘You can’t advertise another method of payment’’? In other
words, ‘‘I can’t give you a discount if you pay cash,’’ or ‘‘I can’t
give you a discount if you write a cheque,’’ or some other method
of payment?
Mr. Bilodeau: To be clear, what I am referring to is the nosurcharging provision specifically, which says you cannot add a
cost to accept a credit card. When it comes to discounting, the
code of conduct put in place by the Minister of Finance clearly
states that you are allowed to offer discounts for cash payments.
Senator Tkachuk: You are?
Mr. Bilodeau: You are allowed to offer discounts.
Senator Tkachuk: In other words, you can’t surcharge. You
cannot pass on the price, right?
Mr. Bilodeau: That is right.
Senator Tkachuk: The taxi that I take from the airport here
charges me $1.50 if I use my credit card. How do they do that?
Mr. Bilodeau: I was asked that by Senator Ringuette the last
time I was here. It is a bylaw from the City of Ottawa that allows
taxi companies to charge $1.50 when you use your credit card or
your debit card, and because it is a city bylaw, it is permissible.
Senator Tkachuk: Is that right? So any city can do it? Don’t tell
them. They will take all the money themselves.
The Chair: To our panel, thank you very much for appearing
before us. You have been very helpful.
To our sponsor, we again express our appreciation for bringing
this forward. We will be discussing it further.
(The committee adjourned.)
Report on the subject-matter of those elements contained
in Parts 2, 3 and 4 and Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24
and 25 of Part 6 of Bill C-31, An Act to implement certain
provisions of the budget tabled in Parliament
on February 11, 2014 and other measures
Standing Senate Committee on
Banking, Trade and Commerce
FOURTH REPORT
Chair
The Honourable Irving R. Gerstein, C.M., O. Ont
Deputy Chair
The Honourable Céline Hervieux-Payette, P.C.
********
Available on the Parliamentary Internet:
www.parl.gc.ca
41st Parliament – 2nd Session
ii
INTRODUCTION......................................................................................................................... 1
Part 2 – Amendments to the Excise Tax Act .............................................................................. 1
Part 3 – Amendments to the Excise Tax Act, the Excise Act, 2001 and the Air Travellers
Security Charge Act .................................................................................................................... 6
Part 4 – Amendments to the Customs Tariff ............................................................................ 10
Part 6, Division 2 – Amendments to the Bank of Canada Act and the Canada Deposit
Insurance Corporation Act........................................................................................................ 11
Part 6, Division 3: Amendments to the Hazardous Products Act............................................ 12
Part 6, Division 4 – Amendment to the Importation of Intoxicating Liquors Act ................... 13
Part 6, Division 8 – Amendments to the Customs Act ............................................................. 13
Part 6, Division 13 – Amendments to the Bank Act ................................................................ 14
Part 6, Division 14 – Amendments to the Insurance Companies Act ...................................... 15
Part 6, Division 19 – Amendments to the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act............................................................................................................. 18
Part 6, Division 22 – Amendments to the Softwood Lumber Products Export Charge Act,
2006 ........................................................................................................................................... 23
Part 6, Division 24 – Amendments to the Protection of Residential Mortgage or Hypothecary
Insurance Act and the National Housing Act ............................................................................ 23
Part 6, Division 25 – Amendments to the Trade-marks Act .................................................... 24
APPENDIX A: WITNESSES ..................................................................................................... 29
APPENDIX B: BRIEFS.............................................................................................................. 33
iii
INTRODUCTION
Your Committee, which was authorized to examine the subject matter of those elements
contained in Parts 2, 3 and 4 and Divisions 2, 3, 4, 8, 13, 14, 19, 22, 24 and 25 of Part 6 of Bill
C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11,
2014, has, in obedience to the order of reference of Wednesday, April 9, 2014, examined the said
subject matter and now reports as follows.
The Committee held five meetings, the first of which was with the Honourable Joe Oliver, P.C.,
M.P., Minister of Finance who was accompanied by officials from the Department of Finance,
Health Canada, the Canada Revenue Agency, the Canada Border Services Agency, the
Department of Foreign Affairs, Trade and Development, Industry Canada, the Bank of Canada,
Canada Deposit Insurance Corporation and the Financial Transactions and Reports Analysis
Centre of Canada. These officials provided briefings on the various elements of Bill C-31 that
had been assigned to the Committee.
The Committee devoted two of its five meetings to the study of Division 19 of Part 6, which
would amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and to the
study of Division 25 of Part 6, which would amend the Trade-marks Act. In the other two
meetings the Committee focused on Division 13 of Part 6, which would amend the Bank Act,
Division 14 of Part 6, which would amend the Insurance Companies Act, Part 4, which would
amend the Custom Tariff, and Part 3, which – among other provisions – would amend tobacco
taxation under the Excise Act, 2001. The Committee received testimony from 14 associations
and three specialists or individual companies impacted by the proposed measures.
A complete list of the witnesses is found in Appendix 1. Appendix 2 lists the submissions
received by the Committee.
Part 2 – Amendments to the Excise Tax Act
Part 2 would amend the Excise Tax Act to make changes in relation to the administration of the
Goods and Services Tax (GST), the application of the Goods and Services Tax/Harmonized
Sales Tax (GST/HST) and the sharing of certain information.
a. Exemption for the Service of Designing a Training Plan
Part 2 would amend the Excise Tax Act to exempt, from the application of the GST/HST, the
service of designing training plans to assist individuals in managing, alleviating or eliminating
the effects of their disorder or disability.
According to the Department of Finance, training that is specially designed to help individuals
cope with the effects of a disorder or a disability is currently exempt from the application of the
GST/HST; however, this exemption does not include the service of designing a training plan.
1
b. Exemption for Acupuncture and Naturopathic Services
Part 2 would amend the Excise Tax Act to add acupuncture and naturopathic services to the list
of health care services that are exempt from the application of the GST/HST.
The Department of Finance explained that certain criteria are used to determine whether a
professional service should be GST/HST-exempt, including whether the service is covered by
the health insurance plan(s) of one or more provinces and, in relation to acupuncturists and
naturopaths, whether the service is regulated as a profession in the field of health in at least five
provinces. The Department indicated that, once acupuncturists and naturopaths were found to
have met the requirement of regulation as a profession, it recommended – to the Minister of
National Revenue – that the services of these professions be added to the list of GST/HSTexempt health care services.
c. Zero-Rating for Electronic Eyewear
Part 2 would amend the Excise Tax Act to add eyewear specially designed to treat or correct a
defect of vision by electronic means to the list of zero-rated medical and assistive devices;
devices on this list have the GST/HST applied at a rate of 0%. In order for this eyewear to have
the GST/HST applied at this rate, it would have to be supplied on the written order of a person
who is entitled under the laws of a province to practise the profession of medicine or optometry.
While the number of Canadians who would benefit from the proposed change is not known, the
Department of Finance explained that electronic eyewear is a fairly novel and expensive
apparatus that could be used by people suffering from certain diseases, such as macular
degeneration, and that the eyewear assists these individuals in regaining some level of vision. It
noted that, as electronic eyewear is not considered to be eyeglasses or contact lenses, it is not
included in the current list of zero-rated medical and assistive devices.
d. Closely related persons and the Application of the Excise Tax Act
Part 2 would amend the Excise Tax Act to allow certain members of a qualifying group of
corporations and/or Canadian partnerships resident in Canada and engaged exclusively in
commercial activities to elect to treat certain transactions between them as having been made for
no consideration; consequently, the GST/HST would not be applied on those transactions.
According to the Department of Finance, the proposed change is a simplification measure that
would extend an existing exemption that allows members of a closely related group of
corporations engaged in commercial activities, such as a holding corporation with its
subsidiaries, to not have to account for the GST/HST on certain transactions between the
members. In its view, the proposed change would extend the exemption to newly created
members of the group, such as entities resulting from a merger or a demerger. The Department
also noted that the proposed change would impose joint and several liability with regard to any
2
tax that may be owing on members that elect to not pay the GST/HST on transactions taking
place between them. Finally, the Department stated that any election would be filed with the
Canada Revenue Agency.
e. The Authority of the Minister of National Revenue with Respect to Registration for
the Goods and Services Tax/Harmonized Sales Tax
Part 2 would amend the Excise Tax Act to allow the Minister of National Revenue to register a
person for purposes of the GST/HST if that person fails to apply for registration when required to
do so.
The Department of Finance explained that the proposed change would give the Minister of
National Revenue the discretionary authority to register a person for purposes of the GST/HST if
that person has failed to comply with the requirement that vendors making $30,000 in taxable
supplies annually be registered with the Canada Revenue Agency, and collect and remit tax.
Currently, the Canada Revenue Agency cannot compel a person to register for purposes of the
GST/HST.
Although unrelated to Bill C-31, the Department noted that the amount of $30,000 is not indexed
to inflation. According to it, while a decision about whether the amount should be changed or
linked to inflation is a political one, arguments exist for increasing the amount to account for
inflation and for decreasing the amount to combat the practice of some businesses to not declare
all of their sales in order to remain below the $30,000 threshold.
f. Canada Revenue Agency Feedback for the Financial Transactions and Reports
Analysis Centre of Canada
Part 2 would amend the Excise Tax Act to allow the Canada Revenue Agency to provide
confidential information to the Financial Transactions and Reports Analysis Centre of Canada.
According to the Department of Finance, the proposed change is consequential to income tax
measures contained in Part 1 of Bill C-31. The Department clarified that the proposed change
would allow the Canada Revenue Agency to share information with the Financial Transactions
and Reports Analysis Centre of Canada for the purposes of providing feedback to the Centre
regarding its disclosures to the Agency.
g. Exemption for Hospital Parking
Part 2 would amend the Excise Tax Act to exempt hospital parking provided by public-sector
bodies from the application of the GST/HST; the exemption would apply to parking lots and
spaces that are primarily for the use of patients and visitors to the hospital. As well, it would
clarify that the current GST/HST exemption for parking provided by a charity does not apply to
parking that is used by certain public-sector bodies.
3
The Department of Finance indicated that parking has always been subject to the GST/HST, with
an exemption provided to charities that operate a parking lot. It explained that the proposed
change would clarify that the current exemption for parking lots operated by a charity does not
apply to parking provided by a charity that is set up by certain public-sector bodies, such as
universities, to accommodate staff or students. Regarding the proposed exemption for hospital
parking provided by public-sector bodies, the Department indicated that, when a parking lot is
used by both employees and visitors, the parking lot would have to be used primarily by visitors
in order for the GST/HST to not apply.
h. International Electronic Funds Transfer Reports and the Goods and Services Tax
Part 2 would amend the Excise Tax Act to ensure that the information collected by the Minister
of National Revenue in an information return filed in relation to international electronic funds
transfers under Part XV.1 of the Income Tax Act could be used by him/her for the purposes of
administering the GST/HST.
The Department of Finance commented that this proposed change, which was introduced in the
2013 federal budget, is consequential to the reporting requirements in relation to international
electronic funds transfers contained in Part 1 of Bill C-31.
i. Offshore Tax Informant Program
Part 2 would amend the Excise Tax Act to give the Canada Revenue Agency the authority to
provide certain confidential information to a person who has entered into a contract with it to
provide information under the Offshore Tax Informant Program.
According to the Department of Finance, the proposed change was mentioned in the 2013 federal
budget and is consequential to amendments contained in Part 1 of Bill C-31. It noted that the
Offshore Tax Informant Program allows the Canada Revenue Agency to pay rewards to
individuals who provide information relating to non-compliance with tax statutes; the rewards
are given where that information leads to the collection of tax owing. As well, limited GST/HST
information could be shared by the Canada Revenue Agency with these individuals for the
purposes of administrating the GST and the reward.
j. Disclosure of Taxpayer Information to a Police Organization
Part 2 would amend the Excise Tax Act to permit the disclosure of taxpayer information by the
Canada Revenue Agency to an appropriate police organization when the Agency has reasonable
grounds to believe that the information could be evidence of a listed offence. Listed offences
would include: bribery and the corruption of government officials as described in the Corruption
of Foreign Public Officials Act and in the Criminal Code; and crimes mentioned in section 742.1
of the Criminal Code with conditional sentences that were amended by the Safe Streets and
Communities Act.
4
The Department of Finance indicated that this proposed change, which is consequential to
amendments contained in Part 1 of Bill C-31, would permit the disclosure of confidential
GST/HST information to a police organization if there are reasonable grounds to suspect that the
information would be relevant to the investigation of serious offences, including money
laundering, terrorist activities and organized crime. It noted that the information would likely be
discovered in the course of an audit by the Canada Revenue Agency, rather than found in a tax
return, and provided the example of an auditor discovering child pornography on a computer in
the course of auditing a business; under the current rules, the auditor is not allowed to contact a
police organization.
As well, the Department of Finance noted that any report to a police organization would likely be
preceded by several steps of review, given that Canada Revenue Agency officials can be
penalized for disclosing confidential information without proper authorization.
Lastly, the Department of Finance noted that this proposed change originated from a
commitment between Canada and the Organisation for Economic Co-operation and
Development that permits the Canada Revenue Agency to make a report to a police organization
about the bribery of foreign officials.
k. Recovery Respecting Input Tax Credits
Part 2 would amend the Excise Tax Act to provide that, if a non-resident person is not registered
for purposes of the GST/HST and that person delivers taxable goods to a person in Canada, no
portion of that tax would be rebated, refunded or remitted to the non-resident person. Part 2
would also clarify that a person or a charity would not be able to claim input tax credits for
certain amounts of GST/HST paid when: a credit note has been received; a debit note has been
issued; or an amount has been rebated, refunded, remitted or recovered.
According to the Department of Finance, the proposed change is intended to close a loophole. In
some cases, businesses have been claiming input tax credits in relation to the GST/HST after
having recovered the tax from their suppliers through credit notes.
5
Part 3 – Amendments to the Excise Tax Act, the Excise Act, 2001 and the Air
Travellers Security Charge Act
a. The Excise Act, 2001 and the Domestic Rate of Excise Duty on Tobacco Products
Part 3 would amend the Excise Act, 2001 in a variety of ways, including by: setting out the
manner in which the rates of duty on tobacco products would – in future – be adjusted according
to changes in the Consumer Price Index; imposing a tax on cigarette inventories; and eliminating
the preferential duty treatment of tobacco products available through duty-free stores.
According to the Department of Finance, the Canadian Cancer Society, and the Heart and Stroke
Foundation of Canada, although reducing tobacco consumption is an important public health
objective, the general domestic rate of excise duty on cigarettes remained stable for 12 years;
consequently, the inflation-adjusted rate of excise duty has been reduced by approximately
23.7% since 2002. The Department of Finance indicated that cigarettes are currently subject to
an excise duty of $17 per carton of 200 cigarettes, or approximately $2.30 per pack of 25
cigarettes. According to it, Part 3 would increase the duty by approximately $4 per carton or
$0.50 cents per pack, thereby accounting for the inflation that has occurred since 2002. It also
explained that Part 3 would increase the rate of excise duty on other tobacco products, such as
fine-cut tobacco for use in roll-your-own cigarettes.
Moreover, the Department of Finance observed that tobacco products delivered to duty-free
shops are subject to a federal excise duty that – at $15 per carton – is $2 per carton lower than
that applied on tobacco products not sold in duty-free shops. It explained that Part 3 would
eliminate this preferential excise duty treatment.
The Department of Finance also indicated that all excise duty rate adjustments would become
effective as of 12 February 2014, and that the adjustments would apply to the inventories of
tobacco manufacturers and distributors in cases where the inventory exceeds 150 cartons and has
been held since that date. It stated that the Canada Revenue Agency has monitoring mechanisms
in place that would permit an assessment of these inventories in terms of both quantity and how
long they have been held.
Furthermore, according to the Department of Finance, Part 3 would index the excise duty rates
mentioned above to changes in the Consumer Price Index, with an adjustment occurring once
every five years. The first adjustment would occur on 1 December 2019.
The Canadian Cancer Society, the Heart and Stroke Foundation of Canada, and the Canadian
Medical Association expressed support for the changes proposed in Part 3 in relation to tobacco.
The Canadian Cancer Society, as well as the Heart and Stroke Foundation of Canada, was also in
favour of the proposed changes that would allow charities to use computers in their lottery ticket
sales operations. The Canadian Cancer Society also stated its support for Bill C-10, An Act to
amend the Criminal Code (trafficking in contraband tobacco).
6
Moreover, the Canadian Cancer Society, as well as the Heart and Stroke Foundation of Canada,
indicated that higher tobacco taxes are an effective strategy to reduce smoking, especially among
youth. The Canadian Medical Association estimated that youth are up to three times more
sensitive to cigarette price increases than are adults. According to it, a 10% increase in the price
of cigarettes would reduce smoking among youth by 5% in the short term and by 8% in the long
term. According to the Heart and Stroke Foundation of Canada, youth should be a particular
focus of public policies relating to tobacco, as the average teenager who begins smoking will
continue to do so for at least 20 years; the result may be premature death caused by smokingrelated disease. It said that, by age group, the highest rate of smoking in Canada occurs among
22–24 year olds; the smoking rate for this age group is about 22%.
The Canadian Cancer Society commented that Aboriginal individuals have particularly high
rates of smoking; the rate exceeds 50% for on-reserve First Nations individuals. It clarified that,
although reserves are exempt from provincial tobacco taxes, federal taxes are applied; therefore,
enactment of the changes proposed in Part 3 could decrease the smoking rates on reserves.
The Canadian Medical Association noted that, in Canada, the costs associated with preventable
disease and death caused by tobacco are approximately $17 billion per year in terms of medical
treatment, social assistance, lost productivity and reduced quality of life.
Regarding the suggestion that higher excise duty rates would lead to an increase in contraband
cigarettes, the Department of Finance indicated that approximately $91 million has been
allocated to the Royal Canadian Mounted Police (RCMP) in order to combat contraband
tobacco; it does not anticipate a large increase in tobacco smuggling if Bill C-31 is enacted. The
Canadian Cancer Society proposed that: the RCMP block the supply of raw materials – such as
leaf tobacco, cigarette paper and cigarette filters – used by factories that produce illegal tobacco
products; the federal government replace its plan to move the Cornwall border crossing post to
Massena, New York with one that involves a two-part border post, with check points in both
locations; and the federal government persuade the U.S. government to shut down factories
producing illegal tobacco products in Akwesasne.
The Canadian Cancer Society provided statistics demonstrating both a decrease in contraband
tobacco products in recent years, and the lack of a relationship between contraband tobacco
products and higher excise duties. For example, it shared information from British American
Tobacco that suggested that contraband tobacco products in Canada decreased from 33% of the
total demand for tobacco in Canada in 2008 to 19% in 2010. It also provided information
suggesting that the percentage of tobacco products sold that is contraband is higher in Ontario
and in Quebec than it is in other provinces; net tobacco taxes in Ontario and Quebec are lower
than those in western provinces. The Heart and Stroke Foundation of Canada agreed that the
smuggling of contraband tobacco products does not result from higher tobacco taxes; instead, the
principal cause is criminality in a particular location and/or geographic hub.
7
The Canadian Medical Association suggested that, in order to reduce the amount of cross-border
smuggling of contraband tobacco products, the federal government should work with foreign
governments to ensure that tobacco prices are harmonized. It further proposed that all levels of
government implement the most stringent measures possible to control the sale and distribution
of contraband tobacco products, and that the estimated increase in federal tax revenues of $96
million in 2013–2014, $685 million in 2014–2015 and $660 million in 2015–2016 that would
result from the proposed increase in tobacco excise duties be allocated to strengthening Canada’s
tobacco control strategy.
With respect to e-cigarettes, the Canadian Cancer Society stated that e-cigarettes containing
nicotine are illegal in Canada, although they can be sold legally in the United States. However, it
observed that, as e-cigarettes are sold illegally in some parts of Canada, the federal government
should intervene and regulate: the sale of e-cigarettes – including those without nicotine – to
minors; the use of e-cigarettes in public places; the marketing of e-cigarettes; and the addition of
flavours to e-cigarettes. While the Heart and Stroke Foundation of Canada and the Canadian
Medical Association suggested that the federal government should regulate e-cigarettes, they
recognized the potential use of nicotine-based e-cigarettes in efforts to cease smoking.
A number of witnesses considered the possibility that tobacco products should be banned
entirely in Canada, with the Heart and Stroke Foundation of Canada stating that it would
consider making such a proposal if smoking rates in Canada were to fall from the current rate of
17% to around 5%; in its view, a rate of 5% would be feasible in terms of enforcement. The
Canadian Cancer Society indicated that, instead of banning all tobacco products, the
provincial/territorial governments that have not already done so should ban flavours in tobacco
products. The Canadian Cancer Society supported enhanced package warnings, a ban on all
flavoured tobacco products, well-funded Health Canada programming and the implementation of
plain packaging.
b. Administrative Monetary Penalty
Part 3 would amend the Excise Tax Act in two ways. Firstly, it would create an administrative
monetary penalty to be imposed on those who make false statements or omissions in an excise
tax return under the Excise Tax Act’s provisions that are unrelated to the Goods and Services
Tax/Harmonized Sales Tax (GST/HST). Secondly, it would add the offences found in the
GST/HST portion of the Excise Tax Act to the Excise Tax Act’s non-GST/HST portion.
The Department of Finance explained that the non-GST/HST portion of the Excise Tax Act
imposes excise taxes on motor fuels, such as gasoline and diesel, among other things. It also
stated that Part 3 would provide the Canada Revenue Agency with a new tool with which to
discourage taxpayers from reporting false information. According to it, the tool would allow a
wider range of sanctions and would simplify administration of the provisions that would be
amended by Part 3.
8
As well, the Department of Finance indicated that the proposed excise tax administrative
monetary penalty would be the greater of $250 or 25% of the tax avoided, and would be applied
by the Canada Revenue Agency.
c. Canada Revenue Agency Feedback
and Reports Analysis Centre of Canada
for
the
Financial
Part 3 would amend the Excise Act, 2001 to allow the Canada Revenue Agency to provide
certain information to the Financial Transactions and Reports Analysis Centre of Canada.
The Department of Finance said that the changes proposed in Part 3 would allow the Canada
Revenue Agency to provide taxpayer information to an official of the Financial Transactions and
Reports Analysis Centre of Canada in order to evaluate the usefulness of information provided to
the Agency.
d. Disclosure of Taxpayer Information to a Police Organization
Part 3 would amend the Excise Act, 2001 to permit the disclosure of taxpayer information by a
Canada Revenue Agency official to a law enforcement officer of an appropriate domestic or
foreign police organization.
In speaking about the proposed change, the Department of Finance provided the example of a
situation in which a Canada Revenue Agency official has reasonable grounds to believe that the
information is evidence that would lead to the conviction of a serious crime.
e. The Offshore Tax Informant Program and Confidential Information
Part 3 would amend the Excise Act, 2001 to allow the Canada Revenue Agency to provide
specified information to certain individuals.
According to the Department of Finance, the proposed changes would give the Canada Revenue
Agency the authority to provide certain confidential information to a person who has entered into
a contract with it to provide information under the Offshore Tax Informant Program.
f. International Electronic Funds Transfer Reports and the Excise Act, 2001,
the Excise Tax Act and the Air Travellers Security Charge Act
Part 3 would amend the Excise Act, 2001, the Excise Tax Act and the Air Travellers Security
Charge Act to ensure that the Minister of National Revenue may use certain information for the
purposes of those Acts.
The Department of Finance stated that the proposed changes would ensure that the information
collected by the Minister of National Revenue in an information return filed in relation to
international electronic funds transfers of $10,000 or more under Part XV.1 of the Income Tax
Act could be used by the Minister for the purposes of administering those Acts.
9
Part 4 – Amendments to the Customs Tariff
a. Certain Mobile Offshore Units
Part 4 would amend the List of Tariff Provisions set out in the schedule to the Customs Tariff to
reduce tariffs in relation to certain mobile offshore units.
The Department of Finance indicated that the most-favoured-nation tariff would be reduced from
20% to 0% on drilling platforms and drill-ships used in drilling activity for exploration,
delineation or development of offshore projects; these vessels are otherwise known as mobile
offshore drilling units. It stated that the proposed duty-free status of these units would lower
business costs, improve the global competitiveness of Canadian energy products and increase the
potential for resource discoveries in Canada's Atlantic and Arctic offshore areas; the previous
duty-free status expired on 4 May 2014.
The Canadian Association of Petroleum Producers supported the proposed change, explaining
that mobile offshore drilling units are not produced in Canada, and that – since 2004 – the tariff
has been under a temporary duty remission order that has been renewed every five years.
According to it, eliminating the tariff permanently would provide the energy sector with longterm certainty, reduce costs, and create a situation in Canada that is similar to other countries
with offshore petroleum development, such as Norway, the United Kingdom, the United States
and Australia, none of which has such a tariff. The Canadian Association of Petroleum Producers
argued that the temporary duty remission order, with its periodic renewal, has contributed to an
increase in offshore activity in Canada in recent years.
According to the Canadian Association of Petroleum Producers, there are fewer than 500 mobile
offshore drilling units commercially available worldwide, and fewer than 30 that would be
suitable for use in Canada's Atlantic and Arctic offshore areas due to the regions’ challenging
operating conditions; most of these latter units are manufactured in Asia.
With respect to other tariff reductions that would benefit Canadian offshore petroleum producers,
the Canadian Association of Petroleum Producers mentioned that producers would benefit from
an exemption for certain specialized vessels and some parts of facilities that are built as part of
offshore petroleum projects.
b. Goods Intended for the Use of the Governor General of Canada
Part 4 would amend the List of Tariff Provisions set out in the schedule to the Customs Tariff to
remove the tariff exemption applied on goods intended for the Governor General of Canada’s
use, and to apply the same tariff rules on the Governor General that are applied on other public
office holders.
The Department of Finance stated that, although the proposed changes would eliminate the
special tariff exemption for the Governor General, they would ensure that representational gifts
10
given to the Governor General would receive the same tariff treatment as other public office
holders, including members of Parliament, provincial premiers and municipal mayors.
c. Certain Imported Products that Include Cheese
Part 4 would amend the Customs Tariff to add a supplementary note to Chapter 16 of the
schedule to the statute to clarify the tariff classification of food preparations with components
that include cheese.
According to the Department of Finance, the proposed changes would address a gap in the
legislation. In particular, it noted that certain imported goods were being packaged in a manner
that was intended to circumvent Canada's tariff on supply-managed goods, which – at 245% – is
relatively high. The Department provided the example of pizza toppings, which are being
imported as a packaged item with both cheese and pepperoni in order to be classified as a “food
product,” rather than as “cheese” and “pepperoni”; when packaged together, the tariff rate is
lower.
Part 6, Division 2 – Amendments to the Bank of Canada Act and the Canada
Deposit Insurance Corporation Act
Division 2 would amend the Bank of Canada Act and the Canada Deposit Insurance
Corporation Act to authorize the Bank of Canada to provide banking and custodial services to
the Canada Deposit Insurance Corporation. At present, these services are provided by a privatesector financial institution.
According to the Department of Finance and the Canada Deposit Insurance Corporation, having
the Bank of Canada provide banking and custodial services for the Canada Deposit Insurance
Corporation’s fund that covers losses resulting from the financial insolvency of a member of the
Corporation would reduce the risk that financial market participants would learn of activity in
relation to the fund. Their concern was that information gained at a private-sector financial
institution about a particular action in relation to the fund may give rise to speculation about the
solvency of Corporation members, perhaps with negative consequences. As of 1 May 2014, the
day on which the Department appeared before the Committee, the fund was valued at
approximately $2.7 billion.
The Bank of Canada clarified that it would not provide investment advice with respect to the
assets in the fund, while the Canada Deposit Insurance Corporation commented that a group of
advisors within the Corporation has responsibility for investment decisions.
11
Part 6, Division 3 – Amendments to the Hazardous Products Act
Division 3 would amend the Hazardous Products Act and make consequential amendments to
the Canada Labour Code and the Hazardous Materials Information Review Act in order to
implement the Globally Harmonized System of Classification and Labelling of Chemicals
(GHS), and to harmonize Canada’s regulatory regime for workplace chemicals with the regimes
in other jurisdictions, such as the United States.
The Minister of Finance indicated that the proposed changes are intended to align Canadian
labelling requirements for hazardous chemicals with international standards; such an alignment
would facilitate the sale and importation of hazardous products used in the workplace. He
highlighted the importance of harmonization in relation to the United States, including with
respect to labelling, as different standards impose costs on manufacturers. The Minister noted,
however, that the federal government must also ensure that the standards adopted protect the
workplace appropriately.
Health Canada explained that the proposed changes would facilitate the adoption of the GHS in
relation to the product labels and safety data sheets provisions of the Workplace Hazardous
Materials Information System (WHMIS). It noted that WHMIS, which is a national system that
came into force in 1988, is based on a series of federal, provincial and territorial statutes, while
the GHS is a classification and labelling system developed under the auspices of the United
Nations; the GHS has been adopted by a number of jurisdictions, including the United States, the
European Union, China, South Korea and Australia.
Regarding the Hazardous Products Act, Health Canada stated that Division 3 proposes changes
that would: implement the GHS and change definitions, terminology, regulatory authorities, and
compliance and enforcement provisions; move eight sectors that are currently excluded from the
application of the Act into a schedule to the Act so that these sectors could potentially be brought
under the scope of the Act after a full regulatory process is conducted; and provide a transitional
period during which companies would switch to the GHS. It highlighted that having the GHS
adopted in Canada would provide benefits to Canadian businesses valued at more than $400
million and provide savings of $200 million over a 20-year period.
With regard to the potential inclusion of new sectors under the Hazardous Products Act, some
Committee members were concerned that the benefits for Canadian workers of this potential
inclusion were not evident. Moreover, in their view, further study may be required, and certain
sectors – particularly the food sector – could become over-regulated. In response, Health Canada
said that worker health and safety concerns were raised by the provinces and territories, as well
as by workers themselves, in relation to these eight sectors; as well, these sectors are regulated in
other jurisdictions – including the United States – under hazardous products legislation. Health
Canada also stated that moving the eight sectors to a schedule to the Act would allow full
consultation with businesses in order to determine whether a particular sector should be brought
12
under the Act. It also clarified that WHMIS requirements do not restrict products from entering
the marketplace; instead, they regulate the communication of safety information in relation to the
products. Lastly, Health Canada agreed to provide the Committee with a full cost-benefit
analysis of the GHS and detailed information about its overall benefit to businesses and
Canadian workers.
In its written submission, the Canadian Consumer Specialty Products Association expressed
support for harmonizing the systems for classifying and labelling hazardous products, arguing
that the proposed changes would facilitate trade and increase competitiveness, particularly within
North America. The Association recommended one change: amend section 14(b) of the
Hazardous Products Act to enable the development of a regulation that would exempt certain
imported products from labelling requirements. According to the Association, suppliers would
have to ensure – prior to importation – that product labels comply with the Act. In its view, this
requirement creates an unnecessary burden on suppliers.
Part 6, Division 4 – Amendment to the Importation of Intoxicating Liquors Act
Division 4 would amend the Importation of Intoxicating Liquors Act to exempt beer and spirits
from the general prohibition against importing intoxicating liquors into a province or territory in
circumstances where two requirements are met: the beer or spirits are for personal consumption;
and the beer or spirits are imported in quantities that are permitted by the laws of the province or
territory. In 2012, wine was exempted from the same general prohibition.
According to the Canada Revenue Agency, the Importation of Intoxicating Liquors Act was
passed in 1928, following the prohibition era, to establish the legal framework for the movement
of alcoholic beverages into Canada and between provinces. Moreover, it indicated that the
proposed change is analogous to that which removed the federal restrictions on the
interprovincial importation of wine in 2012. The Agency noted that the provinces and territories
would have to make changes to their legislation in order to permit the importation of alcoholic
beverages into their jurisdictions for personal consumption, and that Canadians could ask for
greater choice in the marketplace for alcoholic beverages and for changes to legislation through
their respective provincial or territorial government. Lastly, the Agency mentioned that – if Bill
C-31 is passed – the federal government would inform provincial and territorial authorities, as
well as liquor licence boards, about the removal of federal restrictions on the interprovincial
movement of alcohol.
Part 6, Division 8 – Amendments to the Customs Act
Division 8 would amend the Customs Act to make two changes to the provisions that pertain to
the appeal and correction process. First, it would extend – from 30 to 90 days – the deadline by
which the Minister of Public Safety and Emergency Preparedness or a designated officer may
13
take corrective measures following a seizure, penalty assessment or ascertained forfeiture.
Second, it would streamline the procedure for an appeal by allowing requests to be made directly
to the Minister rather than to either the officer who seized the goods or conveyance in question
or an officer at the customs office closest to the place where the seizure was executed. Requests
to the Minister could be made electronically, if desired. Similar amendments would be made in
the case of third-party claims.
The Canada Border Services Agency stated that the proposed change in the deadline would
increase efficiency by allowing individuals and businesses to avoid the appeal process in
situations where an error has occurred in relation to an enforcement action. The Agency also
explained that the proposed change in relation to requests to the Minister would allow it to
receive appeals electronically, thereby making appeals more accessible and timely.
Regarding third-party claims, the Canada Border Services Agency provided the example of a
rental car company whose vehicle may have been seized as part of an enforcement action against
the driver of the vehicle. In such a case, the rental car company would be the third party.
Part 6, Division 13 – Amendments to the Bank Act
Division 13 would amend the Bank Act to provide the Governor in Council with regulationmaking powers regarding a bank’s activities in relation to derivatives and benchmarks.
With regard to derivatives, the Department of Finance indicated that the proposed changes are
part of the federal government’s efforts to reform the over-the-counter derivatives market, with
banks being the largest participants in the Canadian market. It noted that, in 2012, the
government implemented the central clearing of derivatives and that the Bank of Canada
designated LCH.Clearnet Limited, a clearinghouse based in the United Kingdom, as systemically
important for derivative transactions. As well, the Department commented that the provinces
have introduced requirements to make the reporting of derivatives trades more transparent, and
that the Office of the Superintendent of Financial Institutions has guidelines for both banks’
derivatives activities and the clearing of derivatives transactions through central counterparties.
The Canadian Bankers Association expressed strong support for the proposed changes, arguing
that they would clarify the federal government’s authority to regulate derivatives, particularly
over-the-counter derivatives. In its view, the proposed definition for the term “derivative” is
broad enough to provide the government with the scope to regulate a bank’s current and future
derivatives activities. The Association noted that there is no retail market for over-the-counter
derivatives, and that Canada’s five largest banks are involved in more than 95% of the over-thecounter derivatives transactions that take place in Canada. As well, it highlighted that Canadian
banks participate in about 2% of the global derivatives market, which is valued at between $600
trillion and $700 trillion. With regard to the Office of the Superintendent of Financial
14
Institutions, the Association explained that the Office has always had responsibility for
supervising banks’ derivatives activities, as well as for overseeing Canadian banks and their
foreign subsidiaries; furthermore, it has the ability to access data in relation to banks’ derivatives
transactions, including those with foreign counterparties.
According to the Canadian Bankers Association, the proposed changes would be part of
Canada’s Group of Twenty commitment to implement a coordinated regulatory reform of the
over-the-counter derivatives market, and would indicate – to international regulatory authorities
– the framework that Canada intends to use in its regulation of derivatives. As well, it
emphasized that it did not believe that the proposed regulations are intended to be used to
intervene in the event of a financial crisis. The Association agreed to provide detailed statistics
about derivatives transactions in Canada.
Regarding the proposed changes in relation to benchmarks, the Department of Finance
mentioned that the allegations concerning the potential manipulation of the London Interbank
Offered Rate, known as the LIBOR, in the United Kingdom resulted in an endorsement – by
international regulators – of the need for strengthened oversight of financial benchmarks. It
indicated that the proposed changes would regulate the data that would be submitted by
Canadian banks and the manner in which data are submitted in the setting of financial
benchmarks.
According to the Canadian Bankers Association, although it did not request the proposed change
in relation to financial benchmarks, it does not have any concerns with it. In its view, the
proposed change would demonstrate, to international regulatory authorities, that Canada’s
federal government and the Office of the Superintendent of Financial Institutions would be
participating in establishing or enhancing any practices in relation to the setting of financial
benchmarks, particularly the Canadian Dealer Offered Rate.
Part 6, Division 14 – Amendments to the Insurance Companies Act
Division 14 would amend the Insurance Companies Act to give the Governor in Council the
authority to make regulations respecting:

the process for developing a proposal to convert a mutual insurance company into a company
with common shares;

the circumstances for court intervention in that development process;

the Superintendent of Financial Institution’s authorization of notices to be sent in the context
of that development process; and

additional limitations on ownership of the common shares of a converted mutual insurance
company.
15
The Minister of Finance indicated that the federal government is in the process of drafting a
framework for the demutualization of mutual property and casualty insurance companies, and
will be holding consultations with stakeholders.
The Department of Finance explained that the proposed regulations would set out the details of
the property and casualty demutualization framework. According to it, public consultations were
held in 2011 in relation to a proposed framework for demutualization of property and casualty
insurers, and future consultations on this proposed framework will be extensive and involve
discussions about the rights of policyholders who are not mutual policyholders, including
whether they would have the right to vote on a demutualization proposal. As well, the
Department indicated that the proposed regulations and framework would address certain unique
aspects of mutual property and casualty insurance companies, including the rights of non-mutual
policyholders and the potential use of the court to facilitate negotiations among the various types
of policyholders.
The Insurance Brokers of Canada noted that mutual insurance policies represent one of every
four policies sold in Canada. It expressed support for the proposed changes, arguing that they
would give the Governor in Council a clear mandate to establish a framework for
demutualization of property and casualty insurers. In its view, a mutual property and casualty
insurance company that is proposing demutualization should: provide a clear rationale for
wanting to become a publicly held corporation; demonstrate why amalgamations with other
mutual insurers, loans and other means of raising capital are not sufficient to meet its needs; and
indicate how the same level of quality, cost and continuity of services would be provided to the
same range of constituents.
Regarding the relationship between policyholders and the equity of a mutual property and
casualty insurer, the Insurance Brokers of Canada explained that there is no direct relationship
between the current policyholders and the equity of the company, as the equity consists of assets
and surplus that have been built up over generations of policyholders. It argued that all present
and past policyholders should be permitted to vote on demutualization, and that voting should
occur in accordance with a one policy-one vote model.
The Canadian Association of Mutual Insurance Companies highlighted that Canadian mutual
property and casualty insurance companies were formed primarily by farmers between 100 and
175 years ago, and that – as it is the result of accumulated profits over many generations – the
surplus of mutual insurance companies belongs to all past generations of policyholders and to the
community. As well, it expressed concern that some policyholders only want to pursue
demutualization in order to access a portion of the surplus.
According to the Canadian Association of Mutual Insurance Companies, the proposed changes
have some shortcomings, and Division 14 should either be amended to address them or removed
from Bill C-31 to enable consideration as a separate bill. In relation to the shortcomings, it
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believed that the proposed changes should: require all policyholders of a mutual property and
casualty insurer to have the right to vote on a demutualization proposal; ensure that any
demutualization proposal is subject to supermajority quorum and approval thresholds; recognize
that the surplus of a mutual property and casualty insurance company is a common good built up
over many generations, with current policyholders unable to receive any part of a surplus to
which they have not contributed; and ensure that any issues in relation to a demutualization
proposal are resolved by elected officials through legislation, rather than through the courts. It
noted that the proposed changes could apply to four federally regulated mutual property and
casualty insurance companies.
The Co-operators Group supported the views of the Canadian Association of Mutual Insurance
Companies in relation to the rights of all policyholders to vote, and to receive a portion of the
mutual property and casualty insurance company’s surplus. As well, it argued that no
policyholder’s portion of the surplus should exceed the value of his/her actuarially determined
contribution to the surplus; any surplus remaining after each policyholder has received his/her
share should be used to support the mutual insurance industry or mutualist goals. It also
emphasized that, while life insurance policies are for longer terms and may have savings options,
mutual property and casualty insurers’ policies are only for one year; consequently, on an
actuarial basis, these policies make an insignificant contribution to the equity of an insurer. It
was also concerned that, in the event that all property and casualty insurance companies were to
decide to demutualize and become corporations with shares, these profit-oriented insurers would
start to focus on urban centres in order to access capital and new policyholders, resulting in
fewer insurers and insurance products for rural communities.
According to the Co-operators Group, mutual property and casualty insurance companies that
wish to demutualize should be required to demonstrate that all reasonable alternatives to
demutualization have been considered, and that demutualization would serve the best interests of
all policyholders. It noted that third parties, such as law firms and other groups, may contact
policyholders and encourage them to support demutualization in order to have access to the
surplus. Lastly, it advocated legislation that would allow mutual and like-minded organizations,
such as cooperatives and fraternal benefit associations, to be organized in a manner that would
preserve the character of the existing mutual property and casualty insurance company and be an
alternative to demutualization.
Economical Insurance – which has 940 mutual policies, about 800,000 non-mutual policies and a
surplus of $1.6 billion, as of 14 May 2014 – stated that it began to pursue demutualization in
2010 due to difficulties in raising capital as a mutual property and casualty insurance company,
and in competing against large publicly owned Canadian insurance companies and multinational
insurers. It explained that an Ontario insurance law requirement, which was repealed in the early
2000s, attached a premium note to mutual policies and made it difficult to sell these types of
policies; this premium note allowed the insurer to ask the policyholder to provide additional
capital, as required.
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Economical Insurance argued that demutualization would allow it to: improve its financial
stability and flexibility in raising capital; make improvements to its technological systems; and
position the company for consolidation with other insurers. In its view, the interests of the
mutual property and casualty insurance industry would be best served by regulations that permit
demutualization to be executed effectively and without delay, cost or undue risk of litigation. It
also noted that, in its consultation with the Department of Finance, the Department provided a
strong indication that the proposed regulations would provide for broad sharing of the surplus
and would be in the interest of all policyholders, not just the mutual policyholders.
Part 6, Division 19 – Amendments to the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act
Division 19 would amend the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act (the Act) in various ways.
The Department of Finance stated that, in proposing the changes in Division 19, it was guided by
a number of principles: Canada's anti-money laundering and anti-terrorist financing regime (the
Regime) should be at the forefront of the global fight against money laundering and terrorist
financing; the integrity of Canada's financial system should be safeguarded; and the balance
between the need to deter and detect money laundering and terrorist financing on one hand, and
the need to protect the privacy and Charter rights of Canadians on the other hand, should be
maintained. According to the Department, most of the amendments proposed in Division 19 are
related to five themes, which are identified below; other amendments, which were considered to
be technical in nature, were not addressed specifically by the Committee’s witnesses.
As well, the Department of Finance noted that, in the coming months, it will be developing
regulations to support the 40 legislative amendments proposed in Division 19; consultations
about these regulations will be held.
Theme 1 - Closing the Gaps in Canada’s Anti-Money Laundering and Anti-Terrorist
Financing Regime
The first theme identified by the Department of Finance was closing the gaps in Canada’s
Regime, in respect of which it explained that the proposed changes would ensure that entities
considered to be at risk of money laundering activities are covered by the Act. These entities
would include businesses dealing in virtual currencies, online casinos, and foreign money
services businesses that specifically target the Canadian market for online financial services.
The Canadian Life and Health Insurance Association supported the proposed changes in relation
to foreign money services businesses. According to it, an obligation that such businesses adopt
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requirements “similar to” those in Canada would avoid potential conflicts resulting from
legislative differences among jurisdictions.
The Department of Finance commented on the benefits, for businesses dealing in virtual
currencies, of being covered by the Act. It stated that including such businesses in the
“regulatory framework” would improve the likelihood that domestic financial institutions would
accept them as clients, given that some currently face challenges in accessing financial services
due to their “unregulated” status. The Department clarified that these businesses would be treated
as money services businesses for purposes of the Act and, as such, would be required to report to
and register with the Financial Transactions and Reports Analysis Centre of Canada (the Centre).
It also indicated that the forthcoming regulations will specify that the changes proposed in
Division 19 would apply to businesses that deal in virtual currencies, such as virtual currency
exchanges, and not to retail businesses that accept virtual currencies as a method of payment.
Theme 2 - Strengthening Customer Identification and Due Diligence
The second theme mentioned by the Department of Finance was strengthening customer
identification and due diligence. It noted that Division 19 would require reporting entities to
identify politically exposed domestic persons on a national and sub-national basis, and to take
certain measures when such persons are deemed to be “high risk” with respect to money
laundering.
Regarding Canada’s global responsibilities to help combat money laundering and terrorist
financing, the Department of Finance noted that – in 2015 – Canada’s Regime will be the subject
of a mutual evaluation conducted by the Financial Action Task Force, and that it is working
towards addressing any potential deficiencies to ensure that Canada is meeting its international
obligations. The Department also explained that the proposed changes relating to politically
exposed domestic persons reflect Financial Action Task Force recommendations.
The Canadian Life and Health Insurance Association stated that politically exposed domestic
persons should not automatically be considered “high risk,” and proposed that the list of
domestic persons considered to be politically exposed be narrowed. For example, in its view, the
list could be narrowed by applying a requirement that the reporting entity identify close
associates of a person only after it has identified that person as “high risk.”
The Chartered Professional Accountants of Canada cautioned that the amendments proposed in
Division 19 would not completely align the Act with the Financial Action Task Force’s
recommendation 22, which deals with customer due diligence by designated non-financial
businesses and professions. In particular, it noted that recommendation 22 states that accountants
should be required to submit a report when they carry out the following two activities:
organizing funds for the creation, operation or management of companies; and/or the creation,
operation or management of legal persons or arrangements. The Chartered Professional
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Accountants of Canada proposed that changes be made to the Act in order that accountants in
Canada would be required to report to the Centre when performing such activities.
Theme 3 - Improving Compliance, Monitoring and Enforcement
The proposed measures in relation to the third theme discussed by the Department of Finance –
improving compliance, monitoring and enforcement – would include the Centre’s ability to
receive information provided voluntarily by certain persons or entities with respect to a reporting
entity’s compliance with Parts 1 and 1.1 of the Act. According to the Department, Division 19
would also include an amendment to the appeal process for cross-border currency reporting
programs.
The Chartered Professional Accountants of Canada expressed concern that the proposed change
that would enable the Centre to file suspicious transaction reports with the court could
discourage reporting entities from filing such reports. It suggested that the name and identifying
details of the reporting entity should be redacted or sealed when such reports are filed with the
court.
Theme 4 - Strengthening Information Sharing within Canada’s Anti-Money Laundering
and Anti-Terrorist Financing Regime
The fourth theme identified by the Department of Finance was strengthening information sharing
among the Regime’s partners. According to the Department, the proposed changes would allow
the Centre to disclose information regarding threats to the security of Canada to Canadian law
enforcement agencies and the Canada Border Services Agency; at present, the information can
be disclosed only to the Canadian Security Intelligence Service. The Department of Finance
indicated that the proposed changes are part of the federal government’s response to the Air
India Inquiry.
The Chartered Professional Accountants of Canada supported the proposed change that would
allow the Centre to disclose publicly its involvement in a case that was successfully prosecuted,
and advocated additional amendments that would also allow the Centre to make public the
details of the suspicious transactions reports relating to that case.
Theme 5 - Bringing Part 1.1 of the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act into Force
The fifth and final theme mentioned by the Department of Finance was bringing Part 1.1 of the
Act into force; Part 1.1 was introduced by the Jobs and Economic Growth Act in 2010. The
Department noted that Part 1.1 would allow the federal government to take countermeasures
against foreign states and foreign entities that are considered to be “high risk” with respect to
money laundering or terrorist financing.
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The Chartered Professional Accountants of Canada requested that regulations in relation to Part
1.1 provide sufficient time to enable compliance.
The Costs and Benefits of Division 19 for Reporting Entities
In speaking about the costs and benefits of the changes proposed in Division 19, the Department
of Finance argued that the incremental cost of adding the concept of politically exposed domestic
persons to the Act would be small, as most federally regulated financial institutions already have
client identification procedures in place through their regular risk assessment processes; these
procedures would enable them to identify politically exposed domestic persons.
The Department of Finance also discussed the one-for-one rule, whereby an additional
compliance burden for reporting entities would be offset by removing a different burden.
The Financial Transactions and Reports Analysis Centre of Canada identified two fraud cases in
which it had made contributions that led to convictions. In one case, the fraud exceeded $200
million, while in the other case it exceeded $400 million.
Additional Changes Proposed by Witnesses
In addition to their comments in relation to specific provisions in Division 19, witnesses
proposed additional changes to the Regime. For example, in speaking about the links between
insurance fraud and organized crime, the Insurance Bureau of Canada requested that the federal
government establish protocols that would enable improved communication between public and
private organizations.
The Department of Finance stated that, while certain parts of the Act apply to life and health
insurance companies, the Act does not apply to property and casualty insurance companies. The
Insurance Brokers Association of Canada supported the continued exclusion of these companies
from the scope of the Act.
The Canadian Life and Health Insurance Association indicated that, in a risk-based approach for
the Regime, reporting entities would be required to take enhanced customer identification and
due diligence measures in situations where there are higher risks of money laundering or terrorist
financing, with simplified measures employed in situations of lower risk. It argued that, although
some of the changes proposed in Division 19 are risk-based, such an approach should be more
central to Canada’s Regime.
The Chartered Professional Accountants of Canada stated that most reporting entities are
frustrated with the burdensome nature of the Act’s identification standards, particularly in nonface-to-face situations; Canada’s identification standards are higher than those in other countries.
According to it, this frustration is not addressed through the proposed changes in Division 19.
The Department of Finance indicated that, with a view to minimizing the burden for reporting
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entities, it is considering regulatory measures that would address non-face-to-face identification
requirements.
Some witnesses suggested that the list of reporting entities under the Act should be expanded.
For example, the Chartered Professional Accountants of Canada proposed that all individuals
and firms that perform accounting functions in Canada be reporting entities for purposes of the
Act. In particular, it suggested that individuals performing the roles of trustee in bankruptcy,
receiver, receiver-manager, interim receiver and monitor should be reporting entities. Appearing
as an individual, Matthew McGuire proposed that leasing and finance companies also be
reporting entities.
Mr. McGuire further suggested that money services businesses should have prudential
regulation, and that the civil forfeiture regime should be used more often to prosecute money
laundering and terrorist financing crimes.
Division 19 and the Committee’s March 2013 Recommendations
A number of witnesses discussed the recommendations made by the Committee in its
March 2013 report on Canada’s Regime and their link to some of the changes proposed in
Division 19.
According to the Department of Finance, the provisions in Division 19 relating to information
sharing and enhanced accountability are partly due to some of the Committee’s
recommendations. It stated that other recommendations made by the Committee will be
addressed through the forthcoming regulations and the departmental performance review, the
latter of which provides statistics and performance measurements.
With respect to the Committee’s recommendation regarding “real time” reporting, the
Department of Finance indicated that such a requirement would create a substantial burden for
reporting entities, particularly those that are small. The Financial Transactions and Reports
Analysis Centre of Canada observed that the Regime partners do not complain about delays in
receiving case disclosures when the prescribed timelines are observed. Mr. McGuire asserted that
receiving electronic funds transactions reports in “real time” could enable authorities to stop a
transaction or impede the flow of further transactions, and that most large reporting entities
would be able to report in “real time” quite easily. He indicated that it would be more difficult,
and perhaps unwise, to require the submission of suspicious transactions reports in real time; as
filing such a report has consequences, reporting entities should give adequate thought before
doing so. He suggested that, if a financial institution has filed a suspicious transaction report in
relation to a client, it may be less likely to lend to that client in the future.
Regarding the Committee’s recommendations with respect to improved cooperation among the
various Regime partners, the Department of Finance said that it is developing a risk assessment
framework involving all Regime partners; according to it, the framework will improve
collaboration among them. The Canadian Life and Health Insurance Association urged the
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Department of Finance, the Centre and the Office of the Superintendent of Financial Institutions
to continue to work together to provide a clear, consistent and workable framework for the
Regime.
Some Committee members were frustrated with the changes proposed in Division 19, feeling
that they did not go far enough in addressing the Committee’s recommendations in its March
2013 report.
Part 6, Division 22 – Amendments to the Softwood Lumber Products Export
Charge Act, 2006
Division 22 would amend the Softwood Lumber Products Export Charge Act, 2006 to clarify
how payments to the provinces are to be determined. Under the Act, an export charge is levied
on certain softwood lumber products shipped to the United States; some of the revenue is
distributed among the provinces from which the softwood lumber products originate.
The Department of Finance explained that the federal government collects export charges on the
shipment of softwood lumber to the United States; after retaining an amount to cover federal
administration and legal costs, it transfers the remaining amount to the provinces. According to
the Department, the proposed change would clarify the cost recovery structure with the provinces
under the Canada–U.S. Softwood Lumber Agreement by: allowing federal costs to be carried
forward and recovered in future periods; allowing costs to be recovered pursuant to section 40.1
of the Federal–Provincial Fiscal Arrangements Act or through voluntary payments to a
province; and not requiring the Minister of National Revenue to transfer revenue to a province if
that province has an accrued balance with the federal government.
Part 6, Division 24 – Amendments to the Protection of Residential Mortgage or
Hypothecary Insurance Act and the National Housing Act
Division 24 would amend the Protection of Residential Mortgage or Hypothecary Insurance Act
and the National Housing Act. With the proposed changes, the regulatory criteria relating to a
guarantee of payment under the National Housing Act could apply to an existing insured
mortgage or hypothecary loan that has not yet been securitized. The proposed changes would
allow regulations to be made that would prohibit the use of government-insured mortgages as
collateral in securitization vehicles that are not sponsored by the Canada Mortgage and Housing
Corporation, regardless of when the loan was insured.
The Department of Finance explained that the proposed changes would broaden the federal
government’s ability to create regulations under the Protection of Residential Mortgage or
Hypothecary Insurance Act and the National Housing Act, in part by allowing the creation of
regulations that apply to mortgage or hypothecary loans that have already been insured.
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According to it, the proposed regulation-making authority would allow the government to
introduce regulations that would reduce the extent to which taxpayer funds would be used to
cover potential Canada Mortgage and Housing Corporation losses.
Part 6, Division 25 – Amendments to the Trade-marks Act
Division 25 would amend the Trade-marks Act to add several provisions relating to
three international treaties that the federal government seeks to ratify: the Madrid Protocol; the
Singapore Treaty; and the Nice Agreement.
The Minister of Finance stated that the proposed changes would reduce red tape for Canadian
businesses and simplify Canada’s trade-mark registration system.
According to Industry Canada, the changes proposed in Division 25 would implement the
Madrid Protocol, which provides a single trade-mark application for many jurisdictions, the
Singapore Treaty, which harmonizes trade-marks registration processes across jurisdictions, and
the Nice Agreement, which introduces a standardized trade-marks classification system. It
indicated that implementation of these treaties would reduce costs and the administrative burden
on Canadian businesses, facilitate the expansion of such businesses in foreign markets and
encourage foreign investment in Canada. In its view, Division 25 would not change Canada’s
substantive requirements in relation to trade-marks; rather, administrative practices would be
changed.
Industry Canada noted that, in the past 10 years, three consultations have been held with
stakeholders in the “intellectual property community” regarding the Madrid Protocol and the
Singapore Treaty; however, views differed about how to implement the treaties. Regarding
Division 25’s proposed change that would eliminate the requirement for businesses to file a
paper form declaring how a trade-mark is used, it asserted that the objective is to reduce the
administrative burden on businesses. Industry Canada also stressed that, with the elimination of
the declaration-of-use requirement, domestic and foreign applicants would be subject to the same
registration requirements; under the current system, some foreign applicants are allowed to file
for registration without a declaration of use. As well, it emphasized that use of a trade-mark
would remain a fundamental principle of Canada’s trade-marks regime, in that an application to
register a trade-mark requires the applicant to use – or to have the intention to use – the trademark in Canada, and that a registered trade-mark can be challenged and cancelled through an
administrative process if it has not been used in the first three years following registration.
According to Industry Canada, the rate of opposition for trade-mark registration ranges from 2%
to 5% each year; it does not expect the rate to exceed 7% or 8% following implementation of the
treaties.
Industry Canada noted that “trade-mark trolls” are companies that register trade-marks in order
to obtain payment from businesses for the right to use the trade-mark. Regarding a possible
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increase in the number of “trolls” following the implementation of the treaties, Industry Canada
indicated that it does not expect an increase in the number of trolls in Canada. As well, it said
that there is a robust examination system in place to deal with those types of registrations.
Industry Canada also stated that implementing these three treaties was not a precondition for
concluding the negotiations for the comprehensive economic and trade agreement between
Canada and the European Union; that said, aligning Canada’s administrative practices with those
of Europe would reduce the time and costs for Canadian businesses that wish to enter the
European marketplace. Regarding the United States’ implementation of the three treaties,
Industry Canada explained that – for constitutional reasons – the United States had to create a
dual trade-mark registration system: domestic applicants are required to file forms indicating
how the trade-mark will be used, while foreign applicants are not required to do so. It suggested
that, when compared to foreign applicants, the implementation of a dual system in Canada would
impose a greater administrative burden and higher costs on Canadian businesses.
In addition to federal officials, the Committee heard from several witnesses, all of whom had
strong reservations with respect to the changes proposed in Division 25.
Canadian Manufacturers & Exporters were concerned that the proposed change to the
declaration-of-use requirement would allow applicants that have little or no legitimate interest in
a trade-mark to register a trade-mark, and that this registration would be at the detriment of a
business that has a genuine intention to use the same trade-mark for commercial purposes. In its
view, the proposed changes would shift responsibility for ensuring that trade-marks are used
from the Registrar of Trade-marks to trade-mark owners; this shift would increase the costs for
businesses, as they would have to augment their monitoring of the trademark registry, as well as
initiate opposition and cancellation proceedings.
Regarding the implementation of the three treaties, Canadian Manufacturers & Exporters noted
that large companies would most likely benefit from the Madrid Protocol, while smaller
companies would mostly likely register using less expensive alternatives. Moreover, while it
expressed support for the implementation of the Madrid Protocol, it noted that adoption of the
Nice Agreement’s classification scheme could increase filing fees, cause delays and lead to the
possible cancellation of a trade-mark due to trade-mark examiners and applicants not being
familiar with the classification scheme. It argued that Bill C-31 should be amended to include: a
grace period to give businesses and intellectual property professionals sufficient time to
familiarize themselves with the Nice Agreement’s classification system; and an appeal process
for disputes in relation to the classification of a trade-mark.
The Canadian Chamber of Commerce asserted that the proposed amendment to the declarationof-use requirement would radically change Canada’s trade-mark law, in that it would replace a
use-based system, which protects the goodwill that a trade-mark represents, with a registrationbased system. In its view, this proposed change is not required to implement the three treaties,
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and would result in: an increase in the number of trade-mark trolls; the trade-mark registry
becoming overcrowded with unused trade-marks; and a greater number of disputes between
unregistered users of a trade-mark and registered owners of the same trade-mark that do not use
it for commercial purposes.
As well, the Canadian Chamber of Commerce emphasized that, while removing the declarationof-use requirement would allow applications to be processed in a more timely manner, it would
put a greater burden on Canadian businesses at the opposition stage when challenging a trademark registration. Lastly, the Chamber noted that the Trade-marks Act is based on the federal
power over trade and commerce; however, without the declaration-of-use requirement for a
trade-mark, trade-mark registration would not be based on trade or commerce and, consequently,
there could be a risk of a constitutional challenge.
Bereskin & Parr, an intellectual property law firm, also argued that not having the declaration-ofuse requirement would make the trade-mark registry overcrowded with unused trade-marks and
cause the approval of trade-marks to be more expensive for Canadian businesses. In its view,
Canadian intellectual property lawyers oppose the proposed conversion from a use-based system
to a registration-based system, and feel that the proposed changes would result in added costs for
Canadian businesses that want to oppose a trade-mark registration, and therefore more work for
lawyers.
Regarding the United States’ implementation of the three treaties, Bereskin & Parr highlighted
that the implementation occurred without substantial changes to that country’s domestic law; as
well, the United States’ system ensures that there is bona fide intention to use the trade-mark in
the United States. It stated that, although the Madrid Protocol has been in effect in the United
States for 10 years, some businesses find it less expensive to register a trade-mark using
alternative methods. In its view, Canadian businesses can pursue registration options that are
relatively less expensive than that provided in the Madrid Protocol. It acknowledged that the
legal profession – in general – does not oppose the implementation of the Madrid Protocol;
however, it feels that the Trade-marks Act should not be substantially changed in order to
implement it. Lastly, it mentioned that improving the efficiency of the Trade-mark Office should
be a priority before implementing the Madrid Protocol, as the Protocol imposes strict timelines
for applications.
The International Federation of Intellectual Property Attorneys argued that certain changes
proposed in Division 25 would represent a foundational restructuring of Canada’s trade-mark
registration system, and that this restructuring would be detrimental to Canadian trade-mark
owners. According to the Federation, the proposed change to the declaration-of-use requirement
would lead to: increased costs for businesses due to a greater number of legal challenges with the
Trade-mark Office and at the Federal Court; crowding of the trade-marks registry with unused
foreign trade-marks; an indeterminate status for registered trade-marks’ rights due to the trademarks being associated with potentially an unlimited number of goods and services; and
26
constitutional doubt about the validity of the trade-marks regime if registration would be allowed
for trade-marks not used in trade or commerce. In its view, the changes proposed in relation to
declaration of use are not supported by trade-mark owners and other groups that work with trademarks; nor do they appear to provide any advantage for Canadian businesses.
Like Bereskin & Parr, the International Federation of Intellectual Property Attorneys noted that
the Madrid Protocol is a European tool, and argued that its requirements align more closely with
a civil law – rather than a common law – system. As well, in its view, using the Madrid Protocol
would only be cost-neutral for a Canadian business if it wished to file in the United States, the
European Union and five or six other jurisdictions. It considered the approach taken by the
United States regarding the implementation of the three treaties as relevant for Canada, in that
the adoption of the Madrid Protocol in the United States occurred with minimal alterations to
that country’s domestic trade-marks system. With regard to the United States’ dual system for
registration of trade-marks, the Federation stated that – despite the different registration
requirements – both domestic and foreign applicants have to prove bona fide use of the trademark by the fifth and sixth years after registration. Lastly, it noted that there are additional
enforceable rights in relation to trade-marks under Canada’s common law and the Civil Code of
Quebec, and argued that the proposed changes to the Trade-marks Act are not consistent with
those rights. The Federation suggested that the clauses that would amend sections 16, 30 and 40
of the Trade-marks Act should be removed from Bill C-31.
A group of more than 228 Canadian intellectual property professionals, in a written submission
to the Committee, expressed concern about the proposed change to the declaration-of-use
requirement. They indicated that, while they do not object to the implementation of the three
treaties, they believe that removal of declaration of use as a registration requirement is not
required for their implementation. They urged the federal government to hold consultations with
stakeholders on this proposed change. Like the International Federation of Intellectual Property
Attorneys, they suggested that the clauses that would amend sections 16, 30 and 40 of the Trademarks Act, and related transitional rules, should be removed from Bill C-31 pending further
study.
In its written submission to the Committee, the Canadian Bar Association was also concerned
about the proposed change to the declaration-of-use requirement, which it believes is not
required in order to implement the three treaties. It suggested that the proposed change could be
motivated by “internal efficiency” at the Trade-marks Office, rather than by the protection of
Canadian business interests. The Association acknowledged that the federal government has held
consultations regarding certain aspects of trade-mark law, but noted that consultations have not
occurred with respect to the proposed changes that would affect the declaration-of-use
requirement; these changes are in clauses 330, 339 and 345 of Bill C-31. It suggested that
Division 25 should be removed from Bill C-31 so that the proposed changes could be subject to
further consultations.
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The Intellectual Property Institute of Canada highlighted, in its written submission to the
Committee, that Division 25 proposes a number of positive changes to Canada’s trade-marks
system, including a proposed expansion in the definition of the term “trade-mark” and an
amendment that would permit the correction of errors in the trade-marks register. However, in
identifying concerns about the proposed elimination of the declaration-of-use requirement, it
proposed that this requirement be maintained in the Trade-marks Act or, in the alternative, that
further amendments be made that would ensure that an application is based on use or proposed
use in Canada; such amendments could include: providing a definition for “propose to use”;
requiring foreign applicants to include a declaration of a bona fide intention to use the trademark in Canada; and requiring a registrant to file evidence of actual use of the trade-mark after
registration or upon renewal. The Institute also identified more than a dozen instances of what it
characterized as technical errors and inconsistences in the English and French versions of
Division 25, and suggested ways in which they could be addressed.
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APPENDIX A: WITNESSES
Thursday, May 1, 2014
Department of Finance:
The Honourable Joe Oliver, P.C., M.P., Minister of Finance;
Brian Ernewein, General Director, Tax Policy Branch;
Toni Gravelle, General Director, Financial Sector Policy Branch;
Pierre Mercille, Senior Legislative Chief, GST Legislation;
Gervais Coulombe, Chief, Excise Policy, Sales Tax Division;
Dean Beyea, Director, International Trade Policy;
Patrick Halley, Chief, Trade and Tariff Policy;
Kevin Wright, Chief, Financial Markets Division;
David Smith, Senior Chief, Capital Markets Policy;
James Wu, Chief, Financial Institutions Analysis;
Michèle Legault, Senior Project Leader, Financial Institutions Division;
Michèle Govier, Chief, Trade Remedies and General Trade Relations.
Health Canada:
Suzy McDonald, Director General, Workplace Hazardous Materials Directorate;
Jason Wood, Director, Policy and Program Development, Workplace Hazardous Materials
Directorate;
John Morales, Legal Counsel, Legal Services Unit.
Canada Revenue Agency:
Brian McCauley, Assistant Commissioner, Legislative Policy and Regulatory Affairs Branch.
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Canada Border Services Agency:
Tammy Branch, General Director.
Foreign Affairs, Trade and Development Canada:
Colin Bird, Director, Softwood Lumber Division.
Bank of Canada:
Rob Turnbull, Special Counsel, Financial System.
Canada Deposit Insurance Corporation:
Mark Maltais, Director, Treasury and Investment Management.
Wednesday, May 7, 2014
Department of Finance:
David Murchison, Director, Financial Sector;
Rachel Grasham, Chief, Financial Sector Division.
Financial Transactions and Reports Analysis Centre of Canada:
Darlene Boileau, Deputy Director, Strategic Policy and Public Affairs.
Canada Border Services Agency:
Colette Cibula, Director, Recourse Program Management, Recourse Directorate.
Insurance Bureau of Canada:
Garry Robertson, CFE, National Director, Investigative Services.
Insurance Brokers Association of Canada:
Steve Masnyk, Manager, Public Affairs.
Chartered Professional Accountants of Canada:
Matthew McGuire, Chair, Anti-Money Laundering Committee.
30
Canadian Life and Health Insurance Association:
Frank Zinatelli, Vice President and General Counsel.
Thursday, May 8, 2014
Industry Canada:
Darlene Carreau, Chairperson, Trade-marks Opposition Board;
Anne-Marie Monteith, Director, Copyright and Trade-mark Policy Directorate;
Paul Halucha, Director General, Marketplace Framework Policy Branch.
Canadian Manufacturers & Exporters:
Philip Turi, General Counsel and Director, Global Business Services.
Canadian Chamber of Commerce:
Scott Smith, Director, Intellectual Property and Innovation Policy.
Bereskin & Parr, Intellectual Property Law:
Dan Bereskin, Partner.
International Federation of Intellectual Property Attorneys:
Coleen Morrison, Vice President;
Robert Storey, President, Membership Commission.
Wednesday, May 14, 2014
Canadian Bankers Association:
Marina Mandal, Senior Legal Counsel;
Kenneth Thorlakson, Vice-President and Associate General Counsel, Scotia Bank.
Insurance Brokers Association of Canada:
Steve Masnyk, Manager, Public Affairs.
31
Canadian Association of Mutual Insurance Companies:
Normand Lafrenière, President.
The Co-operators Group:
Frank Lowery, Senior Vice President, General Counsel and Secretary.
Economical Insurance:
Karen Gavan, President and CEO.
Thursday, May 15, 2014
Canadian Association of Petroleum Producers:
Bob Bleaney, Vice President, Ottawa and Eastern/Atlantic Canada;
Paul Barnes, Manager, Atlantic Canada and Arctic.
Canadian Cancer Society:
Rob Cunningham, Senior Policy Analyst.
Heart and Stroke Foundation of Canada:
Manuel Arango, Director, Health Policy.
Canadian Medical Association:
Dr. Chris Milburn, Member of the Committee on Health Care and Promotion;
Jill Skinner, Associate Director, Public Health.
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APPENDIX B: BRIEFS

The Canadian Bar Association

Canadian Consumer Specialty Products Association

Intellectual Property Institute of Canada

Intellectual Property Professionals in Firms and Businesses Across Canada
33
QUATRIÈME RAPPORT
Président
L’honorable Irving R. Gerstein, C.M., O. Ont
This document is available in English.
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17 20 22 27 31 32 33 34 35 ANNEXE B : MÉMOIRES
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36 WITNESSES
Thursday, May 29, 2014
The Honourable Senator Pierrette Ringuette, sponsor of the bill.
Department of Finance Canada:
David Murchison, Director, Financial Sector Division;
Erin O’Brien, Chief, Financial Sector Stability - International,
Financial Sector Division.
Financial Consumer Agency of Canada:
Kevin Thomas, Acting Director, Compliance and Enforcement
Branch.
Competition Bureau:
Richard Bilodeau, Assistant Deputy Commissioner, Civil Matters
Branch Division B;
Nadia Brault, Senior Officer, Civil Matters Branch Division B.
Available on the Internet: http://www.parl.gc.ca
Disponible sur internet: http://www.parl.gc.ca

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