Thank you very much, Mr. Chair, and members of the committee.
First of all, I'd like to express my condolences at the loss of a colleague and friend of many of you, former Ottawa Centre MP Paul Dewar. Paul was the same age as me. He was a neighbour and a friend. He always built on the positive side of people and situations all through his life of public service. He was devoted to the less fortunate right through to his final days, and I hope he inspires many others to do the same.
This legislation, Bill , which would enable Canada and other countries to effectively implement wholesale changes to their numerous bilateral tax treaties is, in general, very much a positive step forward to reduce the hundreds of billions in revenues that are lost annually around the world from aggressive international tax avoidance, primarily by larger corporations. This represents approximately $1 billion in Canada, if you include everything.
This multilateral instrument is the culmination of five years work through the OECD's base erosion and profit shifting initiative. It's an efficient way of consistently adjusting the thousands of bilateral tax treaties that have been signed between nations in order to implement a number of action measures of the whole BEPS process. By having a generally consistent set of measures, it will limit but not entirely eliminate the practice of treaty shopping that many large corporations have engaged in to avoid taxes and drive a race to the bottom.
The introduction of these changes will be especially beneficial for lower-income countries by strengthening the rules for taxation based on the source of the economic activity and not the putative residence, often in the tax haven of the corporation. It will limit tax avoidance through hybrid mismatch arrangements that exploit differences in tax treatments, treaty abuse through double non-taxation, and the avoidance of permanent establishment. These are all positive measures.
At the same time, there are some concerns about the part IV provisions for mandatory binding arbitration, as these opaque and secret panels rarely favour source countries, and they should consider not opting into them.
Article 17 also has some problematic measures, and countries should consider making a reservation under this section.
While this bill and the 2015 BEPS initiative that it stems from are positive, they are limited. They are all about patching a system that has a lot of problems, and they are now about to be eclipsed by much more important and fundamental changes that need to be made to the international corporate tax system.
Two weeks ago, following meetings with almost 100 countries in Paris, the OECD issued a policy note entitled “Addressing the Tax Challenges of the Digital Economy”. In the words of Alex Cobham, chief executive of the Tax Justice Network, “The three pages of text in this...policy note may be more significant than the thousands that made up the BEPS project.”
The archaic arm's-length transfer pricing system that underlies our international corporate tax system, which this bill is trying to patch up in different ways, is so broken and ineffective for our new economy that major countries around the world, including the United States, the U.K., France, Germany and others are already leapfrogging it with a range of different measures to tax large digital corporations using different approaches based on their actual economic activity in their country.
National revenue authorities have found that the transfer pricing approach also enables traditional and resource sector corporations such as Cameco to easily avoid billions in tax. There has been a case of CRA taking Cameco to court, but the courts have sometimes sided with the companies over transfer pricing.
What we ultimately need to do is to move to a unitary international corporate tax system with an apportionment of corporate profits to different countries based on their share of sales, payroll and/or other factors, preferably with a minimum corporate tax rate. This is a very straightforward system, and it's exactly what we have in place in Canada to apportion corporate profits for tax purposes between provinces. It's also the system used by American states and other federal countries to apportion corporate profit. We have this in place within Canada and other countries. We need to move to this globally as well.
In addition to its simplicity, the beauty of this approach is that a global agreement isn't necessary to proceed. It's preferable that Canada could move forward in this way, just as the United States, the U.K. and other European countries are doing.
The other beauty of this approach is that it would increase tax revenues from multinational corporations by about 33% to 50% according to the IMF, and by significant amounts for lower-income countries, which are the ones most harmed by the existing system.
In conclusion, this bill is a positive step, but we can and must take much bigger steps forward to develop a more equitable and functional international corporate tax system, and it doesn't need to be that complicated. It's the smaller and medium-sized businesses that lose out, mostly from the international corporate tax system that we have right now. They often pay a higher rate of tax than do the large corporations that are able to exploit the system that exists right now.
Thank you very much.
Thank you for having me here today. I just want to start by saying that I, too, generally support Bill and the ratification of the MLI in Canada. However, I do have some important concerns that I want to mention to you with respect to the process and manner in which it's ratified and adopted in Canada. I'm going to break that down into four points. I'll touch on each of them in more detail.
The first is on the principal purpose test, which I think is one of the most significant aspects of the multilateral instrument. We're in dire need of more guidance on how that's going to apply in Canada. Because it's the result of an OECD project, where they strived to get consensus among a broad group of nations, the text is very broad and ambiguous, and the examples that the OECD has provided give very little practical guidance as to how it's going to work in practice.
In contrast, when Canada introduced the general anti-avoidance rule domestically, the CRA, at the same time, came out with a detailed information circular, going through different examples in how they would apply in Canada. I think more guidance is needed on the principal purpose test, particularly with respect to private equity and other collective investments, which is an area that the OECD has struggled with in terms of how that test should apply to collective investors. Really, there's a huge amount of capital that gets invested into Canada that way.
The second point is that I think Canada should be opting into article 7(4). We've currently reserved on that. I'll touch on why it's inappropriate to not have article 7(4) applying, and, really, the double tax or the unfairness that could result without that.
My third point is that Canada should continue to reserve on all of the changes to the permanent establishment threshold. I think that's consistent with the approach Canada has taken to date, and it's really for two reasons. One is that what we have now, in terms of when you have a permanent establishment, is effectively a bright-line test. It's easy to understand. It's well recognized. What the changes bring in the permanent establishment test is a lot of uncertainty, ambiguity, and, really, the ability for countries to argue that there's a permanent establishment when otherwise there might not have been. That, again, can lead to a potential explosion in tax disputes among countries, and could have negative implications for Canadian revenue.
The last point I was going to make is with respect to binding arbitration. I think we should continue to push for binding arbitration in as many treaties as we can. Our firm is perhaps the largest tax litigation disputes firm in the country. I can say, from working at Osler for the past 20 years, the amount of tax disputes in the country have really continued to expand year after year. Binding arbitration is really an effective process for resolving disputes among countries on allocating taxing rights and who should have the right to tax different countries.
To turn back to my first point on the need for more guidance on the principal purpose test, again, the test applies if one of the principal purposes of an investment is to avoid tax. It's often difficult to determine what is a purpose versus a principal purpose, let alone what all of the principal purposes are and whether tax avoidance was a principal purpose. Particularly, as I said, with private equity or other investments, I'll just give a quick example, obviously oversimplified, to illustrate that, together with, in my view, the need for article 7(4) to be applicable.
If you have two investors, one in the U.S. and one in India, each wanting to invest collectively into different countries, including Canada, what will generally happen in this example is the U.S. investor would not want to invest through an Indian company, the Indian investor would not want to invest through a U.S. company. What they would often do is form a holding company, in a third country, to invest collectively. That serves a number of business purposes, including raising larger pools of capital to make larger investments in, say, mines or other development projects.
In my example, if the U.S. and the Indian companies invest, say, in a Luxembourg holding company, the Luxembourg holding company, in turn, could invest in Canada or other jurisdictions around the world. In that simple example, under our current system, if Canada pays a dividend to the Luxembourg company, we would have a 5% withholding tax, which is the same withholding tax that would apply if the Canadian company paid directly to the U.S. company. However, it's different from what would apply if it paid a dividend directly to the Indian company, because we have a 15% withholding tax rate under the Canada-India treaty.
What happens under the MLI is that if the principal purpose test applies—if you determine, in my example, that tax avoidance was the purpose of using this Luxembourg company—then treaty benefits are denied. There's a 25% withholding rate applicable on dividends out of Canada, which is more than what would have applied if either the Indian or U.S. companies had invested directly. Article 7(4) turns off that tap, or allows Canada, in this example, to apply a 5% or 15% withholding tax rate rather than revert to a 25% rate, particularly if it was as a result of commercial reasons that the Indian and U.S. companies invested together.
Admittedly, that's an overly simplified example. What typically would happen is that you'd have a larger number of jurisdictions of investors. Obviously, the U.S. is a major capital-exporting country, so it's not uncommon for large pools of U.S. investments to come into Canada. It's often commingled with investors in Europe or Asia or other jurisdictions. Because we have 93 tax treaties, in most cases the ultimate investors are in one of those 93 countries. That's where the largest capital pools are.
I'll turn now to the “permanent establishment” changes. As I mentioned, if we opt in to that change, it would have a permanent effect, because the election is irreversible, and it would apply to a vast number of treaties. As I believe Stephanie and Trevor mentioned two days ago, Canada might win or lose on that. To give a quick example, in the resource sector right now, resource companies in Canada can sell their resources around the world and pay taxes in Canada based on not having permanent establishments in those other countries. If we were to opt in to that test, it would allow foreign countries in Asia or Europe or other jurisdictions to potentially tax some of Canada's resource profits by arguing that those resource companies have permanent establishments around the world in their jurisdictions based on facilitating contracts or facilitating access to the local markets. It creates significant uncertainty. The taxpayer will always lose, because they'd have to file returns in more jurisdictions, and potentially pay taxes in more jurisdictions, but Canada could lose because it could be ceding taxing rights to other jurisdictions.
As well, because it's such a fundamental change and is irreversible, in my view it should have parliamentary approval; an order in council and subsequent governments should not be allowed to make those changes. As we stand now, any significant changes to tax treaties go through Parliament. In my view, removing that reservation on the permanent establishment changes is of such significance that it should be something for Parliament to decide, and not be done by order in council.
—but it can apply across industries, just to be clear.
I'm going to simplify, as much as I can, international tax and try to translate from tax to English, but please excuse me if I don't get fully out of tax.
What tax treaties do is to really allocate taxing rights between a residence country and a source country. For a source country, generally, if you have a permanent establishment, then you're carrying on business in that country, and that country has a right to tax, really the primary right to tax. The residence country would then give a tax credit to avoid double taxation. That's the normal process.
So right now, if Canada is both a residence and a source country by virtue of Canadian resources being sold around the world, Canada is taxing 100% of the profits and the foreign countries where those resources might be consumed are not taxing the profits from that business. If in turn the Canadian company does have a permanent establishment in those foreign countries, then those foreign countries would have the primary right to tax those profits—any income attributable to that permanent establishment. Canada would then lose the tax revenues, because instead of taxing 100% of the profits, Canada would be giving a foreign tax credit and ceding some of that tax to the foreign country.
The articles you just referred to relate principally to what we call an “agency permanent establishment”. Under the current treaties, that occurs if contracts are concluded in a particular jurisdiction. In my resource example, if the contract to sell the resources is concluded out of Canada, then only Canada is taxing those profits. If the contracts are concluded in the foreign jurisdiction or if somebody in the foreign jurisdiction is concluding those contracts on behalf of the Canadian company, then the foreign country would have the ability to tax some of the profits.
These changes take away that bright-line test of whether that agent in the local country is concluding contracts, and it changes it to ask in general—there are a few options—whether the person in that foreign country is conducting activities that assist in or facilitate or generally result in the conclusion of contracts, and if so, that's enough to have a permanent establishment.
It's very ambiguous what level of activity is needed in that foreign jurisdiction in order to create a PE, so the concern again is that if you had somebody in a foreign jurisdiction helping to find a purchaser for your products, depending on their level of activity and their involvement and whether it leads to contracts, that could be enough for the foreign jurisdiction to say that that Canadian company has a permanent establishment in their country and so they're going to tax the profits. Then, if Canada also taxes the profits, we either have double taxation or we go potentially through binding arbitration or a mutual agreement process to determine how much profit should be allocated to the foreign country, and then those foreign taxes take away from the Canadian revenue because we provide a credit for those taxes.
I'm pleased to be back at the Standing Committee on Finance and to discuss my favourite topic.
So far, the interesting thing about the debate on Bill is that the government is confirming, and admitting, that tax treaties are useful to people who want to abuse the Canadian tax system. It said openly, on Tuesday, and this is also found in its documents, that tax treaties can be abused. This is indeed the case, and I have two quotes in English to prove it.
The first quote is from a lawyer with the Rogerson Law Group, located on Bay Street, in Toronto. The lawyer explained how to take advantage of the tax treaty with Barbados. His article is entitled
“Taking Advantage of The Double Tax Treaty with Barbados”.
At the end of the article, in describing how to take advantage of this, he says:
The net result of the above is as follows. A Canadian resident corporation establishes a foreign affiliate in Barbados in the form of an IBC. The IBC makes $100 profit. Barbadian tax on the profit is levied at 2.5% leaving $97.50 to be remitted by the Barbadian foreign affiliate to its parent company in Canada. The parent company receives the dividend completely free of Canadian taxation.
An IBC is an international business corporation.
It's clear. The fact is, it's so clear that you don't even have to read between the lines. It's legal to do that.
Another proof of this is from what's called “Barbados Offshore Advisor”. An adviser based in Barbados says:
The foreign office must have “mind and management” on the island to qualify for attractive tax incentives. By providing an out-of-the-box solution with a full team at your disposal, service providers eliminate the human resource hassles and expensive start-up costs involved when opening an overseas office. Our team is responsive to your company's needs, providing rapid turnaround and dedicated management.
At this time, the most well-known and abused treaty is the treaty with Barbados. Do the witnesses also believe that tax treaties, such as the treaty with Barbados that has been in effect since 1980, are being abused, and that, as a result, Canadian taxpayers have lost billions of dollars in tax revenue?
I'll give you an overly simplified example, so we'll take it with that caveat.
When you invest in an RRSP in Canada, you might ask what your purpose is of investing in an RRSP. Is it to save for your retirement, or is it to avoid tax by getting a deduction on your RRSP contribution?
If you ask 10 different individuals, they might give 10 different answers. Some might say they did it just for retirement. Some might say they did it because they wanted the deduction. Many would say they did it for both reasons.
What this principal purposes test would do, if it applied to an RRSP deduction, is allow the government to step in and determine whether it thought the tax savings was one of your principal purposes, and if it were, then it would deny that deduction.
But I just use that as an example where it's difficult to determine at what point a purpose becomes a principal purpose, and whether it's one of your principal purposes. Quite frankly, in making any investment in any country around the world, if you don't take into account the tax result, you're negligent. It's part of computing your after-tax returns.
Because tax is always considered, it's very difficult to determine at what point you just considered the tax results and at what point it became your principal purpose.
And finally, on my RRSP example, I would say that it shouldn't matter in that example whether one person's purpose was retirement savings and another person's purpose was to get the current deduction. We should treat them equally, regardless of what their purposes were.
That's my other concern with the test is that it doesn't necessarily treat equal taxpayers equally because it bases the result on what their purpose was, as opposed to what they objectively did.
I'd like to thank all members for seeking clarification and for their suggestions on how to improve this motion for the study.
There have been some changes to it, and I'll read it into the record:
That, the Standing Committee on Finance undertake a study on open banking and report back the House on: a) whether open banking could provide benefits to Canadians; b) how potential risks related to consumer protection, privacy, cyber security and financial stability could be managed; c) what steps, if any, the Government should take to implement an open banking system;
—and here are the new parts, Mr. Chair—
that the Committee dedicate up to four meetings to the hearing of witnesses in Ottawa; that the Committee examine opportunities to travel to jurisdictions that have implemented a framework for open banking, including the United Kingdom; and that the Committee report its findings to the House no later than Friday, June 7th, 2019.
Mr. Chair, one of the reasons.... As you know, open banking is a process that is currently under way, but the framework in which we should try to take a look at it, specifically on the questions of consumer protection, privacy, cybersecurity and the like, hasn't been fully developed.
We're sort of catching up, but it's important for us to have an opportunity for this committee, and hopefully for this Parliament, to set forth a proper framework to make sure that Canadians going forward, as this gains in currency, know that we've protected ourselves on this file very well and protected them very well by making sure that the system is sound.
To that end, not only should we take a look at what we're doing here within our own private financial sector, but we should also have the opportunity to take a look at what is going on in other jurisdictions that have had an opportunity to really set a better framework in place than what we currently have. We can learn from them and adapt that to our situation.
I'm hoping this motion will receive the approval of this committee. I think we can do some really good work, like we did on the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which, again, I think was a remarkable cross-party effort to really come to the aid of Canadians.
I lay this on the table, and I move it.
I appreciate the attempts here to add a little bit of substance and some kind of measure to make sure this leads somewhere. That's great.
I'll comment first on what in it concerns me, and then what's not in it. I have a greater concern about that part of it.
First, I'll just touch on the travel side of it. I think that's maybe unnecessary. Well, it's not maybe: It is unnecessary. I don't mean to say that we shouldn't look at the experience of other jurisdictions, but is there really a need to travel to do this? I don't believe there would be, Mr. Chair. I think it could certainly be done by video conference and teleconference, and through reports that have been put out that have looked at what's been done, without our having to travel. That seems to be a bit excessive. I would have a problem with that.
More important is what's not included. As I'm sure most members are aware, the Department of Finance currently has consultations under way on open banking. The advisory committee on open banking that was set up in September of last year has been tasked with consulting on this viewpoint. This isn't to say that the finance committee shouldn't look at it as well; that's not the point I'm making here.
Let me just read the mandate that committee was given to look at, including the following:
[whether ]open banking [would] provide meaningful benefits to and improve outcomes to Canadians...[and] in what ways....
in order for Canadians to feel confident in an open banking system, how should risks related to consumer protection, privacy, cyber security and financial stability be managed?
if you are of the view that Canada should move forward with implementing an open banking system, what role and steps are appropriate for the federal government to take in the implementation of open banking?
This is obviously something that at least the department and, one would think, the minister would have some thoughts on already. There's no indication in this as to what sort of direction, or whether there is a place, the government's looking to go to with this. It's fairly wide open, it seems. It's a consultation, but at least on the surface there doesn't appear to be any real direction, as there sometimes can be with these things, as to where the government is looking necessarily to go with it. My understanding from the people I've spoken to who have engaged with it is that it certainly seems as though that's the case. Those are the perceptions people have had of it as well.
I'm also of the understanding, from people whom I've spoken to, that there hasn't really been a lot occurring with this advisory committee. I don't know why that is or whether that means the government has no real intention of moving in that direction. If that's the case, is a study worth it? If it's not the case, then obviously this advisory committee on open banking—which, I will point out, is supposed to be wrapping up its consultations by February 11, which is just a few days away. What is supposed to occur after that is that—verbatim from the press release setting out the consultations—
the Committee will deliver a report assessing the merits of open banking for Canada, with a strong focus on protecting consumer privacy, ensuring the security of financial transactions and maintaining the stability of the financial sector. The Committee will consider implementation opportunities and challenges later in the year.
That does give us some sense of the direction this is looking to go. Obviously, given the fact that this work has been done and that there is some kind of a direction there, hearing from this advisory committee would be very important, I would think, in this regard. I think that should be a part of the motion. We're obviously dealing with this amendment, so we can deal with that, and I think maybe that's another amendment we could look at here. But I think it should be specifically outlined in here that we should hear from members of this advisory committee and get a sense as to what they've heard and what sort of direction things might be moving in here. That would only seem to make sense to me.
I would think it would also make sense, of course, that we would hear from the finance minister on this and get a sense as to what direction the government is looking at, and what it would see as useful for the committee to look at and study. There's no point in the committee doing something in isolation.
If there are other things at work and at play here, why would we not all try to coordinate those things and do the best job we can to make sure that we're learning from the experiences of the other committee, the minister, and so on, especially given that it says here that this committee “will consider implementation opportunities and challenges”, and it says also, “later in the year”? Obviously, this indicates that there is an intention to take what comes out of this and move reasonably quickly with something. Therefore, why would we not be doing what we can to try to make sure that this work is informing what we would do, and that what we would do would inform what they do, so maybe we can get some sense as to the timelines?
When it talks about “later this year”, in government terms at least, that's fairly quickly, right? That would be good. Certainly that would be where the finance minister would be very helpful for us, to get some sense as to when the government is looking to move on this, and things such as that.
For example, we have an indication here of the committee reporting its findings to the House no later than June 7. Well, maybe that's too late. Maybe the government intends to move something forward before that. Therefore, we should probably be trying to make sure we're on the timeline that would allow this to be properly considered in what's going to take place, if something is going to take place.
Not only that, but it doesn't give an indication in here about reporting. It says “its findings”. It isn't indicating anything about recommendations. I would think if you're going to do a report, you want to ensure that recommendations are part of that, certainly. What's the point otherwise, right?
Those are some of my thoughts on it. The attempt of the amendment here is something that I appreciate, but there are some things in there that are of concern. More importantly, there are some things that are lacking there, so we need to firm those up a bit better.
I'm just picking up from where Mr. Richards left off. I know we had a conversation before, and I like the fact that some of those ideas are now in here. There are a set number of meetings, up to four meetings—so thank you for that—to hear from witnesses in Ottawa.
I have the same concerns Mr. Richards does about international travel. Mr. Saini will be very familiar with my opposition to travel by the foreign affairs committee more generally. I have generally been unhappy about travel internationally due to the costs for the taxpayer.
I did mention, and I think it would be a good idea, to not just have a report of our findings, but to have a report with recommendations, specifically, a recommendation to the government on whether or not to proceed with open banking. I'm going to read a part from the budget where Minister Morneau laid out his thoughts on open banking, because I have some other concerns about duplication of work between what the Government of Canada is doing and what this standing committee of the House of Commons would be doing.
I also think that we should be using Standing Order 109 more often and requiring the government to table a comprehensive report answering our own recommendations within 120 days. It's done almost routinely by certain committees of the House—not all—and I think it's a lost opportunity because it's a public document. Associations and groups who are interested in open banking can see it, as can the chartered banks and people who have concerns about open banking and how the government would proceed with it. They could then take a look at it.
I just think it's good, transparent, open government to require the government to produce a report in answer to the committee's work. I would also like to see the advisory committee on open banking be a witness, and that that would be embedded in the motion, because these are the people who are delegated by the minister of Finance with the authority to go out and consult on this. As Mr. Richards points out, they're supposed to have completed online consultation in four days, by February 11. I think that's an important component in all of this, so I ask myself the question, why are we at this time engaging in something that seems to have already been undertaken by the Government of Canada?
The open banking provision in budget 2018, on page 355, after talking about open banking as an opportunity for Canadian consumers, says:
Recognizing these potential benefits, the Government proposes to undertake a review of the merits of open banking in order to assess whether open banking would deliver positive results for Canadians with the highest regard for consumer privacy, data security and financial stability.
Some of the language is very similar to the motion, but the committee would be undertaking something the government has already done. In fact, the minister has appointed several people to this advisory group. Now we would be duplicating its work. We'd be doing the same thing the government is doing.
I've a bit of a concern that their consultation would end on the 11th, and they would then produce an internal government report that I assume would be made public, but in reading the government website, it wasn't entirely clear to me whether that would be the case or whether it would be advice to the minister. If anybody has some clarity around that, I would appreciate hearing it.
We could potentially be duplicating the work of this advisory committee, which is why I think it would be important. Again, I'm fine with open banking as an idea to research and to look into. I just think that's a required component of this, and maybe a tighter timeline around exactly when we would report back with what I would to prefer be more than just findings, but recommendations, because right now it's Friday, June 7. That would probably be the time around we'd be considering the budget implementation act, part I. I don't want to stall on an open banking report. I'd like it to come back and have the time to do a good job on it with good recommendations that the government would then be able to reply to.
One thing I noticed when I was looking online for more information about open banking.... Among the members who are assigned to this, or at least the members I could find in the public sphere, are Colleen Johnston, who is TD channels head; fintech venture builder, François Lafortune; Kirsten Thompson from the law firm Dentons Canada; and—I'm not going to say this name correctly, so forgive me, Mr. Chair—
—Ilse Treurnicht, former chief executive, Toronto's MaRS innovation hub. Again, I think these would be interesting individuals to meet with. The Canadian Banking Association, I note, is not enthusiastic because it says there's a risk of contagion to reputation or other types of risks with broad-ranging consequences from consumer data being shared. I know that the privacy component is in here.
The Competition Bureau also put out a fintech report back in 2017, supporting open banking, or generally being in support of it. It was entitled “Technology-led innovation in the Canadian financial services sector”, if any member wishes to take a look at it.
I think we could strengthen the motion some more. I think we could offer, maybe even a friendly subamendment if Mr. Fergus is willing to entertain it, to adjust the wording of the motion to get at what we would like.
There are a lot of jurisdictions doing this. I know it mentions the U.K. specifically, but Japan has done this too. Singapore has done this. Many other countries in the European Union have done this. A lot of this is already being done, from what I could gather, and 90% of it is already being undertaken by the private sector within the confines of the law, the way it is structured and the directives being issued by regulators. I really think that the real advantage we have here over, say, a government advisory committee, is to offer specific legislative changes to the Bank Act and other acts that would facilitate open banking, if that is our recommendation from this. If it's not, then fine, I'd be totally fine with that.
It's why I think it's critical to have recommendations. They should be very specific legislative recommendations, dealing with the Income Tax Act, for example, section so-and-so, that these are the changes that should be made, or to the Bank Act., etc. If it got to down to the specifics, it would be a great advantage to the government. A lot of the government's findings...and the Bank of Canada does a financial systems survey as well, where it asks how many people are interested in open banking, whether they see it as an issue. It's at 13% now amongst banking executives and senior executives in the financial services sector, so I think it's worth it.
One other thing I do think we could add to the motion, because I don't think it's covered, after the words, “how potential risks related to consumer protection, privacy, cyber security and financial stability”, is “and the automation of trading”. I think that would be a good addition to make. With automation of trading, the automatic traders, every second a trade is done by AI software, by artificial intelligence. We've seen other committees take on this subject, on whether there are issues with how fast trades can be made, automated trading creates systemic risks in the financial system, whether there are additional risks when people surrender their active participation and they just allow software to decide for them what their trades will be during a day and how that information is shared, perhaps, with different banking institutions. I think automation of trading could be added on here.
One other thing I don't see here is the potential job losses from open banking, given the brick-and-mortar style of banking that we mostly have in Canada right now. I know all of us have apps on our phones. For the major banks, at least, we have these apps, but perhaps a review and a specific mention of the impact on jobs in Canada would be a good addition.
I want to draw the attention of the committee members—I don't know if you've seen this—to an article in the Financial Post, “'Resistance is futile' in slow march to open banking in Canada”. Part of the committee's work, I assume, would be to make the march not as slow and speed it up a little bit.
I want to quote Matt Flynn:
“Canada needs to speed things up, frankly,” Matt Flynn, a Toronto-based partner at Bennett Jones, a law firm, told me in an interview on Jan. 23, adding that “90 per cent” of the legal structure that would be needed to support open banking already exists. “It’s better to get ahead and export our prowess (in financial technology) to the rest of the world, rather than have others come, partner with our banks, and eat our lunch,” he said.
It has a header, “Some fintech companies think the legacy banks might be the problem”. I mentioned the Canadian Banking Association being unhappy about it. I'm just wondering whether automation of trading couldn't be added here. If there's a good reason for not putting it in, I'd love to hear from government caucus members on why. If there's an opportunity, perhaps, to amend the (b) section, just to include job losses.... That wasn't something I'd mentioned before. I think job losses in the banking sector would be of concern to people in the greater Toronto area, because there are a lot of financial institutions there.
I know for the credit unions back home, and for the Alberta Treasury Branches Financial, a quasi bank owned by the Alberta government, it would be of concern to them as well if we're moving away from bricks and mortar. It is also a concern how fast the shift will be, and how fast those jobs are substituted with more IT design, app design and API software companies. That might be fine, but perhaps we should do a deeper dive into that type of information, to specifically bind ourselves to looking at it. I think that would be a good signal to members of the public, organizations and companies that we are going to look at the job losses.
Often we look at innovation, and this is a lot about innovation and the changes to legislation and regulatory directives by our regulators. However, we don't often look at the impact on Canadian jobs and what could potentially happen. I don't mean outsourcing; I mean a move away from the jobs of old. I'm not one of those people, but perhaps you remember when milk used to be brought to the door. That's not the case anymore. We have to go to the grocery store. Those jobs don't exist anymore. I think this would be important to look at as well.
I will mention that there is a bank, a junior member of the big six, the National Bank of Canada, that is already participating in data sharing. It has started sharing its customers' data if asked to do so. Lionel Pimpin, senior vice-president of digital channels, made the point that open banking is a two-way street and that National Bank created a digital hub where its clients can display both in-house and external accounts, which they say is very convenient for its users. It's an opportunity for National Bank to take some business away from some competitors and people from downstream on the business side. We see a lot of consolidation going on in the United Kingdom as well, and it's driven by clients granting permission to view the data they have imported from rival institutions. They see this as a major opportunity, which is different from what their banking association is saying.
Pimpin said all of this in a January 28th interview.
That's going back to my point that 90% are already doing it, according to Flynn, and at least one of the major banks in Canada is already engaging in open banking.
Obviously, there is already a legal structure, a regulatory structure, that allows for it. That's why the motion should be further amended to provide for specific legislative amendments.
I'll take you back for a moment to the tax treaty witnesses we had today. This is going to be complex. I don't think it's just a policy discussion; I think it's a legal discussion around the rules and how comfortable the banks feel about sharing customer data, as well as what the customers have a right to and the legal protections they enjoy.
If there is more open banking, more data could be shared out there. How closely will customers in Canada look at the data they're sharing? How long do those permission sets last? When you give permission to a financial institution, is it permanent? Can you revoke it? What are the measures to revoke it? Those are legal questions. They're ethical and moral questions as well. I think those are also legal rules that we should be recommending to the government on what to do.
That's maybe the difference between we and the advisory committee can do. They will perhaps look at the broader policy environment that exists right now. That is why I think our motion should make recommendations on legal changes to those acts that Minister Morneau is responsible for.
Moody's Investors Service has done quite a bit of review of open banking, making suggestions on some areas. Some of them match closely with consumer protection and the privacy and financial stability components that are in the motion. However, as I mentioned, automation isn't included in the motion, and neither are jobs.
I want to quote this one section from the Moody's report on the government's initiative:
The government initiative is credit negative for the largest Canadian banks' retail operations because it has the potential to incrementally weaken the industry's favourable industry structure of a few concentrated players, and therefore the banks' retail franchise strength and associated high profitability....
I get a lot of complaints from Albertans in my riding about bank profits. That's perhaps a a generalized feeling among the populace in western Canada, which I understand. At the same time, we should be looking at the impact this will have on how they operate. With regard especially to the back office that a lot of these banks have, will those be broken down into smaller financial institutions? What are the risks involved in doing that? What are the legal requirements for these almost subcontractors who will be doing business, and how much of your personal information will be changed?
Those are some of the concerns that I have with the way this motion is structured.
I'm also concerned that we won't be able to take on any other study if we approve this motion. I know it says we should hold only up to four meetings, but we only have one week sitting in March, if I remember correctly, which means that in April we'll be back, but it will be for the budget or BIA. I assume that will take us until May.
There will be no opportunity to look at my favourite subject, which, as many members know, is the stress test. I would love to take a look at that. I would be willing to stop talking, if I get some type of indication from the other side that you would be willing to set aside one or two meetings to hear the concerns of witnesses and members of the public about the stress test. We just need to do a simple review, and not make any recommendations. I have a motion ready before the committee on the subject, but I will not read it because it's not entirely germane to the discussion. I want to stay on subject, Mr. Chair. I think that is a worthy one, so if I can get indication from the other side that you'd be willing to consider passing it—as in actually doing it—then we can structure it within the calendar in a timeline that makes sense for the government caucus side.
I'll remind you that last year, Governor Poloz mentioned that he would need a year's worth of data from the Bank of Canada before being able to report back on the impacts of the stress test. There have been plenty of articles written on the subject already. I think it would be good for us to schedule it, which is why I'm concerned that if we pass this motion, this will be the last subject that we cover before we move on to the BIA and the estimates.
I will also mention that RBC, BMO and the Canadian Homebuilders' Association have met with different members of the government. As well, the chief of staff to the finance minister met them on February 5. I assume those conversations are being held in private on the government side regarding the stress test, so to return to open banking here, I don't want this to be the last subject that we cover.