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Budget 2005 - Budget Plan
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Chapter 4 - A Productive, Growing and Sustainable Economy
More Efficient and Effective Markets

Highlights

• Launch of 2006 financial institutions legislation review.

• Reduction of overlap and duplication between the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Deposit Insurance Corporation (CDIC).

• Increased deposit insurance coverage limit to $100,000.

• Initiative to agree with the provinces by the end of 2005 on an enhanced system of securities regulation in Canada.

• Elimination of the 30 per cent foreign property limit for tax-deferred retirement plans.

• The Government of Canada will continue to review its regulatory and legislative framework to ensure it contributes to a growing, competitive and productive economy.

Introduction

Businesses bear much of the responsibility for raising Canada’s productivity growth. The Government of Canada can also play a role by creating the right economic conditions to support private sector initiative and investment. In addition to making tax rates more competitive, the Government of Canada can help create a favourable business climate, characterized by factors such as more supportive and efficient regulation. Budget 2005 therefore announces regulatory reforms and related initiatives that will advance Canada’s record of strong economic growth.

Financial Markets: A Key Economic Enabler

The financial services sector is one of the key foundations of any modern industrial economy. Its significance to the Canadian economy goes far beyond its own direct contribution to real output. The financial services sector and capital markets more generally are important parts of Canada’s economic infrastructure and play an essential role in ensuring stability, safeguarding wealth and fuelling growth that is critical to the success of all Canadians.

A well-functioning and innovative financial services sector is essential for the Canadian economy to achieve its full potential. Healthy financial markets represent a critical element of a positive and competitive business environment and are fundamental in achieving key economic policy objectives. As such, it is the Government’s responsibility to maintain an efficient regulatory framework that:

• Ensures consumers have access to quality services and adequate protection for their money.

• Allows financial market participants to operate as effectively as possible.

• Allows capital markets to allocate financing effectively to support growth.

The consumer protection aspects of the regulatory framework are as important as those of efficiency. In this regard, the Canada Deposit Insurance Corporation (CDIC) protects the deposits of Canadians and the Financial Consumer Agency of Canada (FCAC) protects and educates consumers. At the same time, the Government’s anti-money laundering/countering the financing of terrorism regime helps to protect the country’s financial system from abuse.

Maintaining the balance between safety and soundness, efficiency, and, foremost, consumer protection provides the foundation for all initiatives aimed at enhancing financial markets in Canada. This is a focus of Budget 2005 and upcoming initiatives such as the 2006 Financial Institutions Legislation Review.

Launch of 2006 Financial Institutions Legislation Review

Canada is widely acknowledged as having one of the safest and soundest financial sectors anywhere in the world. In order to maintain this valuable advantage, financial sector legislation is renewed every five years to ensure that it is most effective in meeting the needs of Canadian consumers and businesses. The next review, including bringing into force the new legislation, must occur by October 2006. As a result, with Budget 2005, the Government of Canada is announcing the launch of a consultation process, seeking the views of stakeholders and Canadians to refine the current framework to increase legislative and regulatory efficiency, improve consumer protection and adapt it to new developments.

A consultation paper to stimulate debate is being released as part of Budget 2005 (see Annex 6). Views on the issues raised and any other relevant matters are to be sent to the Department of Finance by June 1, 2005. A white paper will be prepared for the fall of 2005, following which the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce will have the opportunity to review it and provide comments. Legislation will be introduced in Parliament in early 2006, with a view to having it come into force by October 2006.

Regulatory Efficiency

Further to the initiative in Budget 2004, the Government is moving ahead to modernize the regulatory system to improve the efficiency and effectiveness of federal financial services regulation. In order to give Canadians smart, efficient regulation, the Government will clarify the roles and responsibilities of CDIC and OSFI and eliminate unnecessary overlap and duplication between the two agencies.

The Government will maintain the key roles and responsibilities of CDIC, while streamlining several supervisory functions within OSFI. OSFI will be primarily responsible for interacting with federal financial institutions. It will assess institutions against OSFI guidelines, replacing the assessment of institutions against CDIC’s Standards of Sound Business and Financial Practices, which are being repealed. Further, OSFI will become the sole organization responsible for reviewing new entrants into the financial sector and developing prudential rules and guidelines.

As part of these reforms, CDIC and OSFI will work together to ensure streamlined administrative and corporate service functions. To this end, CDIC and OSFI will present a plan to the Minister of Finance for streamlining administrative functions by June 30, 2005.

The Government will be introducing amendments to the CDIC Act to reflect these changes and CDIC will amend its by-laws as required by the legislative changes and to further reduce the administrative burden on its member institutions. Going forward, the Government will continue to search for efficiencies and ways of streamlining supervisory functions.

Deposit Insurance Coverage Limit

In addition, to help ensure the continued relevance of the deposit insurance system for Canadians and as part of our commitment to consumer protection, the Government of Canada is increasing the deposit insurance coverage limit from $60,000 for insurable deposits to $100,000, effective immediately. The limit was last changed in 1983. This change will enhance protection for consumers, promote competition among deposit-taking institutions, and help Canadians save for retirement.

Securities Regulation

In December 2003, the Wise Persons’ Committee (WPC) recommended that the provinces/territories and the Government of Canada collaborate to establish a single securities regulator in Canada. In the March 2004 budget, the federal government agreed with the WPC’s conclusions and committed to working with the provinces towards that end.

The House of Commons Standing Committee on Finance recommended in its report on pre-budget consultations that the Government of Canada meet with provincial/territorial governments with a view to reaching agreement on a national securities regulator. The International Monetary Fund (IMF) in its most recent annual review of Canada echoed this position.

Over the past year, a number of important steps have been taken to improve the operation of the existing structure of regulation in Canada. While the Government of Canada is encouraged by the progress being made towards increased harmonization of securities rules, all parties involved must go further and move faster to attain the best possible securities regulatory system for Canada.

The consolidation of some or all of Canada’s existing securities regulators into a single regulator would provide significant benefits, including:

• Greater regulatory efficiency.
• More timely policy innovation and development.
• Improved investigation and enforcement.
• A stronger international voice for Canada.
• Better coordination with other Canadian financial sector regulation.

Existing processes and proposals must also be measured against these standards.

The Government of Canada is firmly committed to improving the efficiency and effectiveness of Canada’s capital markets. In this regard, a meeting among senior officials of the Government of Canada and interested provinces and territories to explore how to build on recent progress will take place in March. The Government’s objective will be to reach an agreement by the end of the year on a new, enhanced system of securities regulation.

Eliminating the Foreign Property Limit for Tax-Deferred Retirement Plans

The Foreign Property Rule (FPR) was introduced in 1971 to ensure that a substantial proportion of tax-deferred retirement savings flowed to Canadian companies and provided support for the development of Canada’s capital markets. As these markets have grown, matured, and become more integrated with global capital markets, access to capital for Canadian companies has improved substantially. At the same time, there has been marked improvement in Canada’s fiscal situation, external debt, and balance of payments position over the past decade.

Budget 2005 repeals the FPR, effective immediately. This proposal responds to the growing retirement income needs of Canada’s aging population and the requirements of pension funds, in particular large funds, by allowing broader international diversification opportunities for retirement investments. The measure will also improve the international competitive position and foreign investment capabilities of Canada’s pension funds and fund management companies.

Eliminating the FPR has the potential to also increase the supply of venture capital (VC) from pension funds to Canadian small businesses. Since the FPR defines most limited partnerships (through which VC investments are typically made) as foreign property, some pension funds claim it acts as an impediment to VC investing. This is despite the fact that "qualified limited partnerships," the rules for which have been developed and refined over time in consultation with the pension industry specifically to facilitate VC investing, are not classified as foreign property. This budget clearly ends any remaining ambiguity. The foreign property limit also restricts the ability of pension funds to create an internationally diversified portfolio of venture capital investments, which is the prudent approach to investing in this asset class.

Venture Capital Financing

Over the past two decades, the Government of Canada has played a key role in promoting a healthy domestic venture capital (VC) industry capable of providing financing to companies at early stages of development and in different industry sectors. Budget 2004 featured measures enhancing the availability of risk financing for innovative firms. For example, the budget set aside $250 million for the Business Development Bank of Canada (BDC), and asked it to develop an investment plan in support of early-stage, seed and pre-seed investments, as well as specialized funds in key enabling technologies. The Government has approved the BDC’s plan and provided funds for its implementation. Together with related private sector investments, it is expected that this investment will generate over $1 billion of new venture capital activity in Canada over the next five years. An additional $20 million was provided to Farm Credit Canada for its venture capital operations. Recent budgets have also introduced significant improvements in the tax system that should encourage more early-stage equity investment.

The proposed elimination of the Foreign Property Rule (FPR) in Budget 2005 has the potential to increase pension fund investment in VC. Going forward, the Government of Canada will continue to work with the investment, venture, and angel capital communities to ensure an efficient venture capital market for early-stage small businesses in Canada.

Corporate Governance

Promoting investor confidence in the integrity of Canada’s capital markets remains an important priority. Over the past few years, a number of significant steps have been taken both by industry and by federal and provincial regulators and governments. More specifically, enforcement has been strengthened and financial reporting and market disclosures have been enhanced. As well, to improve the quality of the audit process, the Canadian Public Accountability Board (CPAB) was established to provide independent public oversight of the profession. The CPAB issued its first public report on the results of its inspections in October 2004. The Government will continue to work to ensure that Canadian standards remain among the most rigorous in the world.

In addition, in 2001 the Government reformed and modernized the Canada Business Corporations Act, which governs most federally incorporated businesses. To equip financial institutions and their stakeholders with the same modern governance tools, the Government will introduce legislation in the spring to reform the governance framework of the federal financial institutions statutes.

Making Better Government Policy and Regulation

The Government of Canada is committed to a regulatory system and policies that instill and protect public trust and confidence, support innovation, and foster a favourable business environment. Canada is lauded for being a regulatory leader and innovator; however, the regulatory system is challenged by the demands of an increasingly complex global knowledge-based economy and the need to sustain regulatory efficiency.

Smart Regulation

Effective regulatory reform can spur economic growth, investment, innovation, and development in new areas of industry. Canada’s regulatory system needs to be harnessed to be a strategic asset and a competitive advantage. Budget 2005 provides $4.5 million in 2005–06 to build continuous improvement into the regulatory system, making it more transparent, accountable and adaptable to new technologies and changing public priorities. The External Advisory Committee on Smart Regulation (EACSR) recently released its final report, proposing a number of recommendations that will assist the Government in its work. The regulatory system will support businesses doing business in Canada, while maintaining high standards of safety and protection.

Telecommunications Policy

The Government recognizes the critical importance of the telecommunications sector to Canada’s future well-being and the need for a modern policy framework. To ensure the telecommunications industry continues to support Canada’s long-term competitiveness, the Government intends to appoint a panel of eminent Canadians to review Canada’s telecommunications policy and regulatory framework. Reporting to the Minister of Industry, the panel will be asked to make recommendations before the end of the year on how to move Canada to a modern telecommunications framework in a manner that benefits Canadian industry and consumers.

In the meantime, the Government will continue to pursue a number of improvements to Canada’s telecommunications regulatory framework. The Government will table amendments to the Telecommunications Act to provide the Canadian Radio-television and Telecommunications Commission (CRTC) with direct fining authority. This measure should provide the CRTC with the flexibility to regulate in a more strategic manner that focuses on results. The Government also intends to ask the CRTC to move expeditiously to implement wireless number portability. Finally, the Government is asking the Task Force on Spam to report quickly in order that Canada have in place measures to control the spread of spam and spyware to reduce their damage to the future of the Canadian economy.

Table 4.11
A Productive, Growing and Sustainable Economy

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