Firstly, Mr. Chair, thank you for inviting me to appear before the committee today, to discuss the CRA's main estimates.
Before I begin with some brief introductory remarks, I would first like to introduce two of my colleagues who have accompanied me today. James Ralston, Chief Financial Officer and Assistant Commissioner of the CRA's Finance and Administration Branch, and Mary Jane Jackson, Deputy Assistant Commissioner of the Finance and Administration Branch.
The CRA's 2007-08 main estimates are seeking an increase of some $152 million to its authorities over the previous year. This represents an approximately 4.7% year-over-year increase on the mains.
This increase is related primarily to an adjustment of $99 million related to collective agreements. This is, of course, about two-thirds of the increase that's being sought.
There is a transfer of $49 million for the national collection services from Human Resources and Social Development Canada. This is in regard to the student loan program. This includes $21 million in payments to private collection agencies who are involved in that part of our business.
There is an increase of $48 million in re-spendable revenue, reflecting primarily an increased demand for information technology services by the Canada Border Services Agency.
Mr. Chair, if I may offer a note of explanation, in 2003 when the Canada Border Services Agency was spun off as a stand-alone agency in the public safety portfolio, it had until that time been part of the Canada Customs and Revenue Agency. We continue to provide IT support to the border agency because many of our systems and much of our infrastructure is integrated. So this is a reflection of their increased activity.
There is an increase of $19 million to address legislative policy and operational initiatives arising from past federal budgets, including the universal child care benefit and other minor adjustments, such as the new textbook tax credit, the tax credit for public transit passes, and the children's fitness tax credit.
You may recall that when we were last here, which was March 1, on supplementary estimates (B), there was a question about what you need. That was for the current fiscal year, 2006-07. This reflects the ongoing costs, and if you notice, it's lower than what we would have needed to get started up, which was the subject of a question that came from one of the members in early March.
There is also an increase of $18 million for the children's special allowance. This is a statutory payment for eligible children in the care of specialized institutions, reflecting an increase of $21 a month per child for the 65,000 children who receive this benefit.
If you did the math on that, that actually comes up to $233 million, but it's offset by a number of factors. There is a $69 million reduction related to the Canada Revenue Agency's contribution to government budget reduction exercises. There is also a recovery of $12 million from the Canada Pension Plan and EI account to cover the increased costs of administering the agency's CPP- and EI-related responsibilities, yielding a net yearly increase of $152 million over last year's mains.
Mr. Chair, that concludes my opening remarks. My colleagues and I would be pleased to answer any questions that committee members may have.
The quality was excellent.
I have been looking through these estimates, and I'm trying to figure out--but I can't tell from the numbers here, and perhaps you can help me--the amount in additional costs incurred as a consequence of small tax credits of various kinds, as opposed to simple taxes.
We have--and you know better than I do--a plethora of new targeted tax credits. Is there any way you could tell us--if these numbers are not here--or you could explain what that has done in terms of the costs of administration?
I have another question on a different subject. I remember that when I was Minister of Revenue, we had a number of advisory committees. There was one committee in particular advising on disabilities. I'd ask you to correct me if I'm wrong, but my understanding is that this advisory committee was simply terminated.
A member of the committee came to see me a few months ago, saying that its members were very upset to have been peremptorily disbanded, and that indeed the committee was continuing its work on its own, at its own expense. He had written a letter to the minister and had not, after several months, received any reply. I'm wondering if that's true.
More generally, is it true that many of these advisory committees have simply been disbanded, so that agencies are no longer hearing from stakeholders in the way that used to be the case?
Mr. Chair, it is true that the standing advisory committees—and they would have been in place during your time as minister, Mr. McCallum—were dissolved in their current form. As a result, this was one of the items in the expenditure reduction exercise that was announced last September. In lieu of those, we're looking at each individual sector and are working out the right way to obtain input from the particular interest group, whether it's small business or disabled.
If I might use an example just to illustrate, there was also a small business advisory committee. In lieu of having a standing committee, we've regrouped some representatives of small business to look specifically at issues as they affect small business. We started this process late last summer, and we call this an action task force, which has been mentioned a couple of times in the context of paper burden reduction. It looks at what can be done to simplify the lives of small business people.
Our view is that we are more effective working with particular groups if we can target our engagement with them on specific problems, with a view to identifying specific solutions. So we still engage with any interested group.
Thank you for your presentations.
In December, a few months ago, we noticed that there was a problem concerning the Attikamek community. It was noticed that the sampling was somewhat skewed because of the audit criteria used by the Canada Revenue Agency. What has happened since?
I know that people have received their cheques, that they have been reimbursed, but have you reviewed your sampling methods? Did you decide to conduct new audits with certain members of that community? What has happened exactly?
Thank you, Mr. Chairman.
Thank you for being here today.
I have a few questions. On managing the appeals side, it looks like we're having a bit of a bump in costs. I don't know what the actual volume is in terms of a percentage. Oh, there it is, 14%.
Can you explain whether we are seeing more appeals by taxpayers, or are they just taking longer? Why has that gone up 14%?
On a different topic--and maybe you cannot help me and you could steer me in the right direction--I had a gentleman come to see me with his tax form. I don't have it with me. At his count, it had 25 different percentages in it. Some of them were 15.5%; you multiply it by 15.5%. They weren't even round numbers, they were all decimal points.
He is a senior citizen. He was thinking that the form had become very complicated. He was not happy with the variety of percentages, that it's not even in round numbers and so on.
On reporting compliance, we're up a little, but not a lot. Are we having any difficulties in reporting compliance due to the difficulty of the form?
Mr. Chair, with permission, I'll answer your second question first; that's easier. We estimate that about 52% file electronically, and that would be from the home through NetFile or through a tax preparer, through electronic filing, and other filing options that have been around for awhile, including Telefile.
I can tell you, Mr. Chair and members of the committee, that we fully restored our operations since experiencing the difficulty we had about three weeks ago, and all manner of filing tax returns is back to normal, whether it's by paper, electronically, through tax preparers, or otherwise.
Cheques started going out last week for people who may have been impacted initially by the delay, either cheques in the mail or direct deposit. We're still doing minor amounts of catch-up, but for all intents and purposes, we're back to normal.
Thank you very much, Mr. Chair. Thank you all again, good to see you again, as good as it can be for you to see one of your critics.
I wanted to pick up on your last point, the e-filing. Since we've got this opportunity and it's timely, can you tell us quickly what happened and what the assurances are that it's not going to happen again? It really did cause...I don't need to tell you that people were not impressed, and certainly my office was going crazy.
So perhaps you could give us a quick “what happened”. What assurance do we have that private information was kept, that it won't happen again? What steps have you taken?
This was a serious matter, there's no doubt about it. It did inconvenience Canadians and it prevented us from providing the quality and timeliness of service we aspire to provide and we take the matter very seriously.
The problem started on a weekend, March 4, when we were undertaking a relatively routine procedure, which is putting what we call a patch on our software. We do hundreds of these throughout the year. With the complexity of databases and information, you've got to keep updating and maintaining the system.
This one particular software patch, which was provided by an external supplier, had some improper code built into it, and that problem effectively created a situation where the connections between the databases was not occurring as it should. It was installed on Sunday. We detected the problem on Monday and we immediately took measures to contain the situation, which was to essentially freeze our application, so we wouldn't make the matter any worse.
I can assure the chair and members that at no point was any of the data corrupted by a virus or a hacker, so integrity wasn't an issue. We did have to go back through our records, though, and recover some of the data that was affected by this.
The specific problem that caused this outage has been fixed. We are in the process now, Mr. Chair, of conducting a more thorough post-mortem to see if there's anything different we could do before or during to try to ensure continuity of service.
Having said that, at the end of the day I think the most important thing we can do when presented with a situation like that is not make matters worse. The integrity of our databases is paramount.
The tax system affects 25 million Canadians. That's the number of returns we receive, and as you know, that database is relied on for the issuance of benefit cheques, and so on. So keeping that healthy was the most important consideration.
Will it ever happen again? This particular problem I don't think will ever happen again. Will there be other situations that cause us to have to shut down for a period of time? It's very possible. We're going to do whatever we can to mitigate those situations.
I appreciate that. I appreciate that you understand how Canadians feel—how jarring it is, not just the inconvenience but also how worrisome it is that their information.... So thank you for answering that.
I want to go back to an issue we've talked about before. I know it's something the chair is apparently interested in, as I think he made comments on this the last time I raised it. I'm referring to the Auditor General's report of last month. What I'm looking for, or what my question will culminate in, is where in the estimates are the actions you've committed to take? The issue is international auditors' expertise in the Toronto offices, and I read from the Auditor General's report:
—so not in this audit, but five years ago—
||we expressed concern about the lack of adequately trained and experienced international auditors to undertake the complex audits of the international transactions of the largest corporations that involve transfer pricing and foreign affiliate issues. Our specific concern was that the audit approach and coverage across the country might be inconsistent, because of the relative inexperience of the international auditors in the four TSOs in the greater Toronto area (GTA). At that time, over one third of the international auditors in two of the GTA offices had less than one year of experience.
||In 2002, we also pointed out that 40 percent of the large corporations that file foreign information returns reside in the GTA. We believed this indicated that significant international tax risk existed in these TSOs....
This means the Auditor General is concerned that money that ought to be coming into Canada from these large foreign corporations is not going to find its way here. This is big money.
This concern came out in the 2002 audit; it came out in this audit too.
I've had assurances from you in previous questioning. I'd like you to show me in the estimates where is the commitment to do something about this.
Mr. Chair, there are a couple of elements in terms of response.
The budget that was just brought down on March 19 included, as I'm sure you're aware, some specific tax policy measures to address international taxation. They relate to the withholding of interest. There the whole issue of interest deductibility, which was an area where profits could be shifted offshore. As well, there were exchange of information agreements.
There was also in the budget—and perhaps not as prominent as other things—some additional money identified for the Canada Revenue Agency to increase its compliance activities, in particular in the area of international taxation. The total amount identified in the budget was $50 million, beginning in the next fiscal year, for 2008-09. A good portion of that will be put toward increasing our level of effort on international taxation, because it's a growth area, frankly. More and more businesses are engaging in international transactions, and we have to try to stay on top of these.
Back to the situation in Toronto, I have a point of clarification. The observation of the Auditor General that people working in international taxation in the Toronto area had less than two years' experience--I believe those were her words--was about people who had less than two years' experience in the international taxation area. These are very seasoned auditors. It's not uncommon not to have a lot of years of experience in international taxation, because you only get to do international tax audits after you're a fairly mature and seasoned expert auditor.
With the additional money, we'll be able to increase our level of effort. In light of the Auditor General's report, and as indicated in our response to the report, we're also looking at opportunities to beef up the training and development of our auditors to fill that gap.
As I said on March 1, Mr. Chair, and I'll say it again, it will always be a challenge for the CRA to attract and maintain auditors at that level in the Greater Toronto Area because of the economic demands and competition we get from the private sector.
Thank you, Mr. Chairman.
I have a quick question, Mr. Baker. I want to go back to the point my colleague raised regarding the computer glitches. You've done a great job from a public relations point of view in terms of recovering. We don't see it in the news anymore; we saw it for the 10 days while we had the trouble. But we're still in the middle of tax season, so we haven't seen anything.
Why were only certain aspects of the processing affected, such as e-filing or electronic filing—and I think there was another electronic aspect, Internet filing, or something like that—and not whole department that shut down? Why was it only the individuals and not the corporate section?
It's true, Mr. Chair, that it only affected tax processing of individuals, because the corporate tax systems and the GST systems are on separate systems or platforms. There's a limited amount of connectivity between the different systems, and those systems were not affected.
What became public was the difficulty people had in submitting electronically filed tax returns, but in fact, the problem affected our ability to process any kind of tax return, whether paper or electronic. So for that period of time, we were unable to do the normal keying in of paper returns, nor were our computers able to accept and process electronically filed returns.
Mr. Chair, it is true that as tax changes are made, we have to make sure we can adequately incorporate them into our processing systems.
This particular problem had nothing to do with any specific tax measure. If I may explain, Mr. Chair, what we do once a year is essentially shut down our IT systems to program any new budgetary measures and any new tax rules into the system. That was done, I believe, in late January.
This particular problem was very specific to the functioning of the databases themselves, regardless of the tax measures they were designed to implement. So in this particular case, there was no—
I don't know whether you have before you page 4.4 of the estimates, but there's an interesting table there.
When we ask in the main estimates process for authority to spend, the amount we are seeking authority for, which in total turns out to be $3.379 billion this year, does not in fact reflect all of the spending we will undertake. In addition to that amount, we will spend another estimated $163.9 million related to the CPP and EI functions we undertake.
The particular $11.6 million item you refer to is to reflect the fact that when, for example, we have another amount, which we indicated was $99 million that we were asking for in respect of collective agreements, and there was a certain amount reflected in respect of the administration of the student loans program.... Included in those other amounts was the $11.6 million, and we broke it out in order to avoid double counting.
These days, people are able to buy software that can produce and analyze income tax returns, and submit them electronically. To my knowledge, this cannot be done free of charge, however. If I am mistaken, please let met know. For those who fill out their tax return manually, as I continue to do, an electronic copy of the tax return cannot be found on the Internet, and therefore cannot be submitted electronically.
Is this correct? Is there a free service? If not, do you intend to provide free service? In my opinion, this would be a good idea. You would not be competing with private companies who process, analyze and manage data. People would then be able to file their returns electronically, free of charge. That would save you from—
For now, we have no intention of doing so. Software provided by the private sector costs between $6 or $7 to $40. However, pursuant to agreements we concluded with the private sector, approximately 60% of low-income earners have access to the software free of charge.
There are now 14 companies in Canada that provide electronic filing software. They've been in business since the 1980s. It's a vibrant business, and it's not our intention at this time to replace that, given they've agreed to ensure that lower-income Canadians, and in fact 60% of Canadians, have free access to this software.
I might add that any Canadian can also file using Telefile free of charge. We also provide a very robust community volunteer program for immigrants, senior citizens, and Canadians in need for whatever reason, which can help people file. They use electronic filing, and that's available free of charge.
I'm a little concerned about my good friend Mr. Pacetti, who seems to want to increase taxes on the folks who probably need money the most--those using transit. It's a big concern. It's probably something he regrets and wants to take back.
I want to ask a couple of questions to get a broader understanding of the appeals process and what exactly we fund under it. I notice it has jumped by about 14%. I know that Mr. Wallace asked about it, but I'd like an overall understanding of it.
Any taxpayer, whether it's an individual or a business, assessed by the Revenue Agency has the option to contest that assessment for whatever reason.
We've had the process for many years, and the first step is an internal process through the appeals branch. This is part of the Revenue Agency, but it has complete independence, which allows it to take an objective look at any decision the agency has taken and review the facts. That group resolves on average about 95% of all the disputes it receives. It's a well-functioning unit. It has been modelled across the world, and is provided at no cost to taxpayers, unless of course they choose to be represented by an accountant or a lawyer.
If they're not satisfied with the decision from the appeals branch--the administrative redress process--their option is to file an appeal with the Tax Court of Canada. That's a special court in Canada that exists just to deal with tax matters. It's very professional. You can appeal a Tax Court decision to the Federal Court of Appeal and ultimately seek leave from the Supreme Court. That is the mechanism we employ to deal with disputes.
Mr. Chair, I think the specific measure you're referring to is the decision to move from walk-in service to a by-appointment service only. This was done for three reasons.
First of all, the number of people wishing to walk into our offices for answers has declined over the years. More and more people are comfortable getting answers via the telephone or on the Internet, and that's just a modern way of doing business. We encourage it because it's actually more efficient, it provides a more precise answer, and it is cheaper to administer for taxpayers.
The other factor is that we've found that those issues that do require service at the counter are increasingly complicated, and the idea of having somebody walking in, speaking to one of our client service officers and getting all the answers at that point in time is increasingly unlikely. So we ask people now to call, let us know the nature of the issue that they wish to discuss, and we'll gladly arrange an appointment for that person to come in. We've also found generally that people are very satisfied with our telephone and online services, so we're confident.
It is an adjustment; I don't deny that. Any time the agency changes anything, because we affect so many people, it takes a bit of getting used to. But I believe this is a wise way forward for the evolution of the agency.
Mr. Baker, a friend of mine, a well-known lawyer--you'd probably recognize his name if I mentioned it--used to make something of a living going around the charitable circuit, primarily Christian charities, and he used to explain the new rules or try to explain the new rules for charitable compliance to a variety of groups, whether they were church groups or NGOs, or in some cases non-Christian charities, etc. He lobbied hard and long with the Department of Finance to try to get them changed so that there was some simplification so people wouldn't err inadvertently and fail to comply because they either didn't understand or misinterpreted the rules.
He was notable in his lack of success in terms of changing the rules, and so now I assume your agency is stiffed with trying to interpret these rules or at least force compliance by these charities, of which there are quite a number. There are literally thousands of charities that you have to deal with.
So I would like to know from you, from your perspective, the experience that you've had with these new rules and what measures, if any, are in place with respect to compliance errors that are largely innocent errors.
If I may, Mr. Chair, we have over 80,000 registered charities in Canada today--that is, they are registered as charities under the Income Tax Act. The approach we take with charities with respect to compliance with the rules, I think, recognizes the important role they play in Canadian society. Often, as well, charities are not being run by large boards of directors that have sophisticated knowledge and expertise.
We're doing a few things. First of all, if we determine that there's a compliance problem with a charity, we don't tell them in the first instance that they're offside and therefore no longer eligible to derive the benefits of being a charity. We would get in touch with the charity and let the charity know the issue we've identified and find a way that resolves it.
There was reference earlier, in fact--and I'll just highlight it in the main estimates--to charities regulatory reform, which was announced in budget 2004. As Mr. Ralston explained, this was also designed through outreach to provide more education and support to charities to help them comply with the requirements under the Income Tax Act as they affect charities.
Yes. Thank you, Mr. Chair and members of the committee. Good afternoon.
The Office of the Superintendent of Financial Institutions was created to contribute to public confidence in the Canadian financial system. Canada's robust regulatory regime has assisted in creating one of the strongest financial systems in the world. The strength of this system is critical for continued development and innovation in our economy and in protecting the savings of Canadians. Therefore, maintaining our status as a world-class prudential regulator is an OSFI priority.
OSFI is mandated to supervise institutions and pension plans to determine whether they are in sound financial condition, and are complying with their governing law and supervisory requirements. In the event we perceive any material deficiencies, we advise institutions and require them to take necessary corrective measures. OSFI also monitors system-wide or sectoral issues that may have a negative impact on institutions, and we advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk.
Canadian financial institutions are operating in an increasingly complex international environment. To meet its mandate, OSFI must monitor Canadian institutions' ability to manage the risks of operating in this environment. OSFI's priorities for the coming year and beyond build on our commitment to world class regulation.
OSFI's major priorities for the current planning cycle include Basel II implementation for banks, an assessment of Canada's financial system by the IMF and the World Bank, an assessment of Canada's anti-money laundering and anti-terrorist financing regime by the Financial Action Task Force, an in-depth review of life insurance capital rules, the adoption of international accounting rules in Canada, pensions, internal systems and processes, and readiness planning.
OSFI's costs of regulation and supervision are almost fully recovered from the industry. As well, CIDA currently funds approximately $1.3 million of our annual costs for the assistance that we provide to foreign supervisors through our international advisory group. The costs of the Office of the Chief Actuary are largely funded by the organizations for which it does actuarial work. An annual appropriation of approximately $780,000 covers the actuarial services the OCA provides to various public service pension plans.
OSFI's overall costs will rise by 6.5% between 2006-07 and 2007-08. The increases are due to normal inflationary and merit adjustments and continued technology investments related to the implementation of the Basel II Capital Accord, and to support our monitoring of private pension plans.
OSFI's accountability framework has a variety of elements. Our internal audit group conducts assurance audits based on a comprehensive five-year risk-based plan. Audit results are reviewed by OSFI's executive and the audit committee at regularly scheduled meetings.
OSFI strengthened its internal audit program considerably in 2006-07 in accordance with the new Treasury Board audit policy. Effective the first quarter of 2006, OSFI appointed four external members to its audit committee who serve with the superintendent. The independent members represent a majority of the committee.
Internationally, as mentioned previously, OSFI participates in reviews jointly held by the World Bank and IMF to determine whether we are meeting internationally established principles for prudential regulators. We also regularly conduct anonymous surveys of knowledgeable observers on our operations.
We consult extensively on our regulatory rules before they are finalized. We issue an annual report, and our financial statements and related control processes are audited annually by the Auditor General of Canada. We also discuss our budget with financial institutions and pension plans every spring.
OSFI's mandate, coupled with the powers provided to it by Parliament, has gone a long way in contributing to a safe and sound financial system in Canada. But we are always mindful of the fact that the financial services sector is dynamic and ever-changing. OSFI will continue to do its part to maintain and further develop a strong prudential regulatory regime that will have the confidence of all Canadians.
I would be pleased to answer any questions the committee might have.
On federally regulated pension plans, anecdotally and evidentially my recollection is that something in the order of at least 50% of them aren't meeting OSFI standards. Can you give us, in general terms, an analysis of the state of pension plans that are federally regulated?
Secondarily, part of the problem has to do with their reserves, what reserves they need to set aside in order to fund, and it's all based on ratios, which only actuaries and accountants actually understand. Is there any movement afoot to deal with those ratios and lessen that burden in order that more plans can be brought into compliance?
First of all, there might be some confusion about how many plans are in compliance versus how many plans have a deficit that they are paying off. Most of our plans are in compliance.
The issue is that last year we reported that three-quarters of the pension plans had a deficit, which means that they have to fund that deficit over a five-year period. That was a relatively new development. Prior to that, a few years ago, most plans were even or in surplus.
Currently, the health of the stock market last year has had quite a positive impact on pension plans. While I don't have the final results for the year 2006 yet—I will have those in a few weeks—early indications are that many of our plans are back into an even situation, meaning they would not have these deficits that they have to pay off over five years, and that is due to the strong stock market returns.
On your other question, about actuaries and accountants, accounting rules are the purview of the Accounting Standards Board, but they are announcing some changes that would have an impact. Those changes would suggest that if you're a corporation with a pension plan that has a deficit, the deficit should go on the balance sheet of the corporation, as opposed to being in the notes. That's one current development.
We continue to talk to the actuaries about their rules, because they made a major change a few years ago that has had an impact on how you calculate what pension plans owe. We continue to talk to the actuaries about that to see whether they might go in and look at revising that in the future.
I guess it depends. At the end of the day, corporations that are affected by this will have an opportunity to provide their views to the Accounting Standards Board.
Some people might say the information is in the notes to the financial statements, so if it goes onto the balance sheet, rating agencies that might be looking at the corporation read the notes, and if this change goes through, they'll also see it on the balance sheet of the corporation. There could be a difference in those two scenarios in terms of how the market looks at the corporation. That's beyond my expertise, but it is an important issue, and corporations that are affected should be talking to the Accounting Standards Board.
Under the pension rules, I don't think pension plans are allowed to invest heavily in their own shares. That is something we would keep a close eye on.
Thank you for your presentation. My first question is on the Basel II Capital Accord and the funds allocated to implement it. In general terms, can you remind us what the accord is about, and tell us how the office intends to assist banks in adhering to the accord. In your statement, you mentioned that the Office of the Superintendent of Financial Institutions will work closely with the banks in the coming year as implementation of the Basel II Accord moves forward. I would have liked to know, in concrete terms, how exactly the office will work alongside the banks. And please remind us, if you will, of what the Basel II Accord is about.
The Basel II accord is an international agreement among bank supervisors to change the way capital requirements are developed and calculated for banks. Up to this point in time, all banks had the same rules, called Basel I. They were not very risk-sensitive, so that if the bank was lending to a corporation that was rather weak or a corporation that was really strong, the capital charge was the same for both. Under Basel II, a lot of work has gone into developing more risk-sensitive requirements. A lot of mathematics goes into this.
In addition, there were a lot of requirements that banks have a lot more data to look at the types of risk they take, and there were more requirements for boards of directors and managers to have more information about how the bank is performing when it makes loans.
In terms of OSFI's role, we had to create a number of new systems so that we could receive a lot more data from the institutions, and we could slice and dice it to look at what was really happening and to come to some understanding with the banks as to what each bank's capital level ought to be. It's fairly important, because going forward under this new regime, some banks may have to increase their capital and some banks might see a decrease in their capital. That's a fairly important thing.
All of our work now is designed to ensure that we understand each bank's system, how they're coming up with their numbers, so that we can make a final determination as to whether their capital levels at the end of the day are acceptable.
I'm glad to hear that, and it's nice to see all women up front here on financial issues.
Since my colleague Mike Wallace has asked a lot of in-depth questions on estimates, I'm going to go to a couple of current issues for which I think OSFI has a role. The first has been in the news quite a bit lately and has to do with conversion fees.
Of course, you know that it used to be that if I had an RRSP and invested in U.S. bonds that matured and I wanted to reinvest that money, I'd have to pay to convert from U.S. to Canadian currency and then pay again to convert back into U.S. currency, but that was supposed to have changed on June 14, 2001. However, it's clear that some financial institutions are continuing to charge those fees without the consent of their clients. It's been very much in the news, as recently as March 24.
I'm wondering what you have done. What has OSFI done to investigate the situation, what have you found out, and what can you do about it?
We've been monitoring closely what is going on in the U.S. We don't see the same conditions here at all. The U.S. market is much more developed than the Canadian market. The Canadian market is growing rapidly, but has only started to grow over the last few years. Institutions and unregulated players in the U.S. have been doing this for quite some time. It's probably 2% of the Canadian mortgage market, and it's closer to 15% in the U.S. We don't see much activity in new originations. It may be 5% here; it's closer to 20% in the U.S.
A few institutions are very interested in this, small institutions, and some unregulated players in Canada are interested in this market. We would, as part of our job, be looking at what those institutions are doing. The U.S. market is giving us lots of examples of what to look at. We're not seeing the exotic mortgages; we're still seeing 25-year amortization with three- to five-year fixed terms. Also, in the U.S. the interest deductibility of interest payments when you have a mortgage is a big driver to borrow more than you would borrow here.
Mortgage insurance is playing a big role in Canada as well; all the high-ratio mortgages must be insured if they're offered by a bank. Predominantly the lenders are regulated institutions in Canada. There are new players—
Finally, from my standpoint for questions, in terms of the most recent budget, it makes reference to the--I hate to use the word--liberalization in terms of access to various investment vehicles in Canada, international vehicles that may be more available on a retail level. What impact do you see in changes in respect of investment options being expanded, perhaps greatly, for the Canadian consumer?
Also, more importantly, I suppose, for financial institutions, pension plans and the like, what impact do you see that having, if any, on your work and in terms of the oversight that you must offer to some of these institutions?
Thank you, Mr. Chair. I have a few questions. In fact, I have three, to be precise.
In the breakdown of the program by activities, under the heading “Regulation and supervision of federally regulated financial institutions”, there is a figure in the column entitled “Capital” that amounts to almost $7 million. For the following headings of “Regulation and supervision of federally regulated private pension plans”, “International assistance” and “Office of the Chief Actuary”, there are no capital expenditures.
What does this figure of $7 million refer to exactly, and why is it categorized under the heading of regulation and supervision of federally regulated financial institutions?
It's a matter of wages.
In closing, my last question deals with the requested appropriation of $780,000. Once again, it is quite striking to note that in your expenditure budget, there's a balance for all activities, that is to say that revenue balances out with expenditures, except in the case of the Office of the Chief Actuary, where only one part of the expenditures has been recovered.
What explains this difference? Why must money be allocated to the chief actuary's office, and not for other activities?
Thank you. I have other questions.
I want to go back to pensions. In your 2005-06 annual report you state that one of the priorities going forward is to “contribute to financially sound federal government public pension and other programs through the provision of expert actuarial valuation and advice”.
I'm asking you, given the fact that CPP contributors are not able to receive their benefits beyond 11 months, is there an actuarial reason that overrides this access to their rightful benefit?
You've said that OSFI needs to--and I am quoting from your last annual report--“promote institutional behaviours that support good risk management”. Given that, if you have a situation where banks are breaking the law or are appearing to break the law and they are embroiled in lawsuits, does it not make sense that this kind of behaviour affects the reputation of our banking institutions, that it could affect the whole issue of risk management, and therefore it requires some sort of oversight, investigation, and response on your part?
Thank you, Ms. Wasylycia-Leis.
Thank you very much, Ms. Dickson. And thank you to your friends for being here today. We appreciate that as well.
Quickly, committee members, remember that on Thursday, from 11 until 12:30, we'll be hearing from the Canadian International Trade Tribunal and representatives from FINTRAC. Be prepared for that discussion.
We are adjourned.