FINA Committee Meeting

37th PARLIAMENT, 3rd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, May 5, 2004

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1535

The Chair (Mr. Roy Cullen (Etobicoke North, Lib.))

Mrs. Carmen Rivet (Vice-President, Canadian Jewellers Association)

Mr. Satya Poddar (Past President, Canadian Jewellers Association)

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1540

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1545

Mrs. Carmen Rivet

Mr. Steve Parker (Past President, Canadian Jewellers Association)

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1550

Mr. Mo Charania (Vice-President, Canadian Jewellers Association)

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1555

Mr. Neil Foster (Vice-President, Canadian Jewellers Association)

Mrs. Carmen Rivet

The Chair

Mr. Werner Schmidt (Kelowna, CPC)

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1600

Mr. Mo Charania

Mr. Werner Schmidt

Mr. Mo Charania

Mr. Werner Schmidt

Mr. Satya Poddar

Mr. Werner Schmidt

Mr. Satya Poddar

Mr. Werner Schmidt

Mrs. Carmen Rivet

Mr. Werner Schmidt

Mr. Steve Parker

Mr. Werner Schmidt

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1605

Mr. Steve Parker

Mr. Werner Schmidt

Mr. Steve Parker

Mr. Werner Schmidt

Mr. Steve Parker

Mr. Werner Schmidt

Mr. Steve Parker

Mr. Werner Schmidt

Mr. Steve Parker

The Chair

Mr. Werner Schmidt

The Chair

Mr. Pierre Paquette (Joliette, BQ)

Mrs. Carmen Rivet

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1610

Mr. Pierre Paquette

Mrs. Carmen Rivet

Mr. Pierre Paquette

Mrs. Carmen Rivet

Mr. Pierre Paquette

Mr. Satya Poddar

Mr. Pierre Paquette

Mrs. Carmen Rivet

Mr. Mo Charania

Mr. Steve Parker

Mr. Mo Charania

Mrs. Carmen Rivet

The Chair

Mr. Alex Shepherd (Durham, Lib.)

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1615

Mr. Mo Charania

Mr. Alex Shepherd

Mr. Werner Schmidt

Mr. Alex Shepherd

Mr. Steve Parker

Mr. Alex Shepherd

Mr. Mo Charania

Mr. Alex Shepherd

Mr. Mo Charania

Mr. Alex Shepherd

Mr. Steve Parker

Mr. Alex Shepherd

Mr. Steve Parker

Mr. Alex Shepherd

Mr. Steve Parker

Mr. Alex Shepherd

Mr. Steve Parker

Mr. Mo Charania

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1620

Mr. Alex Shepherd

The Chair

Mr. Mo Charania

The Chair

Mr. Mo Charania

Mr. Satya Poddar

The Chair

Mr. Satya Poddar

The Chair

Mr. Satya Poddar

The Chair

Mr. Mo Charania

Mr. Steve Parker

The Chair

Mr. Steve Parker

Mr. Mo Charania

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1625

The Chair

Mr. Mo Charania

The Chair

Hon. John McKay (Scarborough East, Lib.)

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

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1630

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Mo Charania

Hon. John McKay

Mr. Neil Foster

Hon. John McKay

The Chair

Mr. Satya Poddar

Hon. John McKay

Mr. Satya Poddar

The Chair

Mr. Werner Schmidt

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1635

Mrs. Carmen Rivet

Mr. Werner Schmidt

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 020

l

3rd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, May 5, 2004

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Roy Cullen (Etobicoke North, Lib.)): Perhaps we could get the meeting started, please. I call the meeting to order.

    Today we're here in response to a reference from the Minister of Finance on a number of small business initiatives, initiatives that seem to have merit but need a little more work, in the minister's view. He asked our committee to look at this particular issue, the excise tax on jewellery, and a few others. We're going to do that and then report back to the minister.

    I welcome you all here today from the Canadian Jewellers Association. Your issue is not a new one for us, but we welcome you back. We have with us today Carmen Rivet, vice-president; Mo Charania, vice-president; Neil Foster, vice-president; Steve Parker, past president; Catherine Sproule, executive director; Raj Rasalingam—oh, he's not at the table, okay—and Satya Poddar.

    With that I'll ask you, Mrs. Rivet, to start the process and take us through your presentation in eight or nine minutes or thereabouts. And then we'll have a round of questions and answers.

    Mrs. Carmen Rivet (Vice-President, Canadian Jewellers Association): We'll try to make it short.

    Mr. Chairman, members of the committee, good day. My name is Carmen Rivet and I am the incoming president of the Canadian Jewellers Association. The CJA is the national trade association for the jewellery industry. I would like to thank the committee for your invitation to follow up on our November presentation to the Standing Committee on Finance and for the much appreciated additional opportunity to express our views on the repeal of the jewellery excise tax.

    Before I introduce my colleagues today, I would like to state that this issue continues to enjoy all-party support. Joining me here today are members of the Canadian Jewellers Association executive committee: Steve Parker, our past president, representing British Columbia, is a Vancouver-based manufacturer; Neil Foster, an independent retailer from Lethbridge, representing the prairie provinces; Mo Charania, representing Ontario, is an independent small-chain retailer in Ottawa; and Satya Poddar, tax partner at Ernst & Young.

    The jewellery industry in Canada comprises approximately 5,000 companies. The vast majority are small family-operated businesses. As an example, Mr. Foster is the son of a jeweller and works alongside his own two sons. These 5,000 companies are involved in all aspects of the jewellery industry, from manufacturing to retailing, appraising, and designing, providing full-time employment to over 40,000 Canadians.

    Monsieur Satya Poddar has a professional perspective on the structure of the tax and its impact on jobs and the economy. In fact, for a while, he was the man we all loved to hate, one of the individuals responsible for the existence of this tax. In his previous role with the tax policy branch at the federal Department of Finance, he made all our lives miserable. We have tried very hard to turn him around. I introduce Satya Poddar.

    Mr. Satya Poddar (Past President, Canadian Jewellers Association): Thank you, Mr. Chair, for this opportunity to be here with you.

    The last time we appeared and talked to you it was on the capital tax issues, and we are very thankful to you that you saw the light and implemented abolition of the capital tax. I hope this tax receives the same treatment.

    In a nutshell, the jewellery excise tax is a tax that violates every possible canon of a good tax. It is bad tax policy, bad economics, bad politics, if I could say so, and it is a lot of pain for so little revenue gained. Overall, it is a bad tax because it is inefficient, unfair, and complex to administer and comply with. The revenue cost of abolishing the tax would be more than offset by the economic benefits of a more efficient economy and growth and employment in the small business sector.

    To summarize, in 1987 the federal Department of Finance published this book identifying all the bad features of the federal sales tax. For this jewellery excise tax, you could write the same book today, because it is really a little bit of a leftover of the federal sales tax. It operates in exactly the same manner as the federal sales tax did and it has all the same problems that were prevalent with the federal sales tax, which led to the government replacing it with the GST.

    Let me just elaborate briefly why the tax is so bad.

    Number one, the tax violates the principle of neutrality. Neutrality is also a different word for economic efficiency. The tax applies to jewellery, but not to substitute consumer goods, which are exempt, whether luxury or non-luxury. Jewellery is the only item of this nature that is still subjected to this tax. There is no social or economic policy reason for singling out jewellery for this punitive tax.

    The burden of tax is highly variable across products within the jewellery industry, depending upon the trade or distribution channels. The tax distorts competition because of its uneven impact. Most importantly, the tax favours imports, as my colleagues will show later on. The difference in the tax on imported jewellery and domestic jewellery is staggering.

    It is an unfair tax. Most people think jewellery tax is paid by the rich people who can afford to pay, that it's a progressive luxury tax. But in reality the large portion of the taxes collected falls on the profits of small businesses because of competition from imports and because of the underground economy. When customers walk into your door, they say, I don't want to pay the taxes. Businesses still have to comply with the tax laws, so they end up paying the tax from their profits. So the tax is a hit on small business profits, not on the high-income consumers.

    It is a complex tax. As I mentioned before, the tax is subject to all the complexities that basically plagued the federal sales tax that was abolished in 1991. Typically, to design a tax you have to ask three questions: What is taxable? Who is taxable? How is the tax applied? You'd need a PhD thesis to answer all these three questions for this excise tax on jewellery.

    What is taxable? Jewellery is taxable. What type of jewellery is taxable is a very complex issue.

    Who is taxable? The people who are taxable are the manufacturers, but the definition of a manufacturer is very bizarre. Typically, tax legislation is 90% dictionary, and this dictionary has its own meaning as to who is a manufacturer. Other members of the Jewellers Association will give you examples of the problems they run into in defining who is a manufacturer.

    How is the tax applied? Tax is meant to apply to the selling price. What is the selling price? At the manufacturing level you can have all kinds of different selling prices. At the retail level the price is fairly well defined—it's whatever the consumer pays. At the manufacturing level you may have one price for the wholesaler, one for the retailer, one for the consumer. On what price you pay the tax is a very complex situation. Accounting and compliance requirements are very onerous for this tax.

    Because the tax is punitive and very high, and because you're dealing with high-value items, the tax burden can be quite significant per item. Obviously it's subject to a lot of evasion and avoidance. Honest business people who don't want to indulge in evasion and avoidance get stuck with the tax from their profits.

    This tax is also bad economics. Simply, it's bad economics because it distorts competition and favours imports. For this reason it is a killer of jobs. Lots of factories in Canada are closing down and shifting their operations abroad. Part of the reason for shifting abroad is the tax advantage of doing so. The businesses cannot recover the tax from the consumer and they have to absorb it in their profits. Their profit margins get thin. They have less money to invest in jobs and employment in the country.

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    Now, bad politics. Why is it bad politics? It's far from me to say so. That's your game. But I can just make the comment that any tax that is structurally flawed, discriminatory, unfair, complex to administer and comply with, and bad for the economy could be considered bad politics.

    Last, the revenue consequences. As I understand, this tax is yielding roughly $78 million gross. That's the revenue that is reported in the government's books. But if you take into account the money that is being lost through evasion, and when there's evasion you lose PST, GST, and income taxes at the same time, the net revenue cost is not huge. It is for these reasons that no industrialized country in the world has a tax of this type. Canada is very unique. Canada also should have abolished this tax at the time the GST was introduced, if not sooner.

    Thank you.

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    Mrs. Carmen Rivet: Mr. Chair, let me just trace some of the issues that Satya Poddar has identified in his presentation.

    You have here a display of items that, under the tax interpretation, qualify as luxury goods. All these jewels are subject to the excise tax because the items cost more than $3.

    Mr. Chair, the price threshold for defining “taxable jewellery” is a mere $3. It was a threshold that was set decades ago. The whole tax is as archaic as this price threshold.

    My 10-year-old daughter bought one of these popular best-friend chains for $15.99 to attend a kid's birthday party. She paid a luxury tax on it. On every jewellery imitation, fake, and cheap custom jewellery sold at Wal-Mart or Zellers, the tax applies.

    On the other hand, you would think that this $500 gold ring, gold wedding band, could carry an excise tax. Mr. Chair, I have a surprise for you. My brother bought this wedding band while on his honeymoon in Florida. Upon returning to Canada, his band was free of all taxes under the $750 tax exemption for returning residents. And my brother did not break any rules of Canada. It was all legal. Had this same ring been bought in Canada, he would have paid $100 in taxes. No wonder the couple in the poster are still smiling. They must have done the same as my brother.

    Finally, so what's in a name? No luxury tax, for sure, for this well-known brand label handbag that sells for well over $1,000.

    On that note, I would like to ask Steve to bring in the manufacturer's point of view, and also Neil and Mo to add their perspective, as retailers.

    Mr. Steve Parker (Past President, Canadian Jewellers Association): Mr. Chairman, my name is Steve Parker and I'm a small jewellery manufacturer based in Vancouver. My business is family owned and operated and I'm a third-generation jeweller. Our company employs 20 full-time people and manufactures a wide range of jewellery products, including wedding rings, family rings, earrings, and necklaces. We also make rings set with Canadian diamonds.

    The excise tax is a bad tax because it results in a loss of jobs—jobs for all Canadians, newly arrived and long-established. Under the old federal sales tax system, or FST, it was found that jewellery made in Canada paid 75% more tax than imported jewellery. The FST was abolished in January 1991 because it was found to be a killer of Canadian jobs. The excise tax is applied in the very same manner as the old FST.

    In my business, I can manage and control my own cost structures, but I can do nothing about the tax disadvantage I'm at when my products are compared to imported products. Let me describe to you why.

    I pay 10% excise tax on the full selling price of the jewellery that I make. That includes marketing costs, distribution costs, of course production costs, and ultimately my profit. If I made the decision to shift my business outside of Canada, and if all my other costs stayed the same, my jewellery would sell at a much lower price. Why? Because according to the tax laws of Canada I would pay the tax based on my landed costs. For example, on this ring here that I make in Vancouver, we pay $50 excise tax. If I manufactured this same ring outside of Canada's borders, I would pay less than $30 tax on that.

    In my small company, the excise tax has limited the number of people we can employ. In addition, I'm told that two of Canada's largest jewellery manufacturers have recently relocated out of the country, resulting in the permanent loss of Canadian jobs. I want to continue to employ Canadians to manufacture my jewellery free of the pressures and barriers of the excise tax.

    Mr. Chair, before I conclude my comments, let me bring to your attention a press release that was released today by the mining industry regarding the national diamond strategy. The release says, and I quote:

In less than a decade, Canada has emerged as a diamond powerhouse. ... We are already producing 15 percent of the world's supply of rough diamonds by value, with the potential to produce even more in the years to come. By providing the right mix of fiscal and regulatory policies, governments have the opportunity to maximize the contribution of Canada's diamond industry to the benefit of all Canadians.

    One of the key recommendations from this press release is, and I quote, “Eliminating the federal excise tax on jewellery”. The growth potential of this industry, with appropriate fiscal measures, is large.

    So, Mr. Chair, the revenue costs associated with removing the excise tax pales in comparison to these economic benefits of diamond mining in Canada.

    Thank you.

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    Mr. Mo Charania (Vice-President, Canadian Jewellers Association): Mr. Chairman and committee members, my name is Mo Charania. I'm a third-generation jeweller in Ottawa. I have four retail stores and employ over 50 people. I'm here to share my experience and to show how difficult and complex this tax is to understand and administer.

    As a traditional jeweller, we offer for sale jewellery, watches, and giftware, and we also offer repair services.

    My story starts with an excise audit that we faced in 1999 covering the previous three-year period. Although we are a traditional retail jeweller by all industry definitions and consumer perceptions, we were deemed to be a manufacturer for excise purposes. Needless to say, when the auditor informed us of that, we were shocked.

    According to the auditor, we were deemed a manufacturer because we repaired or restored client jewellery, restrung their pearls, replaced missing stones, and replaced clasps on their necklaces. Having five stores at the time, we had crossed the $50,000 annual threshold per company for the manufacturing allowed to a retailer.

    Secondly, if we sold diamonds and rings together, with both having their excise taxes paid, we were deemed a manufacturer and were asked to pay the tax on the selling price, and not on the cost price, as was paid already. If the articles were sold separately and not combined by us—just a $2 value added—we would be a retailer. How is that fair or just?

    We were initially assessed over $800,000 in excise tax. I handed my store keys to the auditor; I would have been out of business.

    Through our accountants, lawyers, and in talking to other retailers, we were able to find discrepancies and different ways to interpret the tax, which resulted in a reduction of tax payable to $340,000. We would have had to sell two of our stores to be able to pay for that.

    I was very persistent and could not believe how other firms could do the same thing we did and not be assessed. What I found out by further investigation was something referred to as “established and determined values”, an administrative policy—not legislation—that the people at Finance and the CCRA created to deal with such problems. In effect, it allows the excise tax to be paid at a discounted value for multiple items of the same article produced for retail sale. Since we are a multi-store operation, our purchases qualified us for this status.

    When we applied the formula, a refund was due to me, instead of my owing the $340,000. However, since this was an administrative policy, I was unable to get a refund for the overpayment.

    I see the following problems. What if I were a small retailer who couldn't afford to buy multiple items? Where would I be?

    Furthermore, there are many different opinions by different auditors and people at CCRA. None of them could come up with the same definition all of the time.

    All of the officials at the CCRA who interpreted and understood the policies and unwritten exemptions of the excise tax are long retired. Who truly understands this antiquated tax?

    Thank you.

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    Mr. Neil Foster (Vice-President, Canadian Jewellers Association): Mr. Chair, my name is Neil Foster. I'm a third-generation retail jeweller based in Lethbridge.

    I would like to describe to you some key aspects of the excise tax and how it impacts independent retailers—jewellers like me.

    With the pace at which businesses are changing, we have been forced to accept situations like Internet shopping. Customers are hungry for information and will surf the net to compare qualities, prices, and sources that have no international boundaries. In turn, they will come to my store armed with this information and will ask what I can show them with the same specifications.

    From that point forward, I can no longer be competitive. If the customer makes his purchase over the Internet, he now has a price that excludes all taxes and will receive his ring by overnight courier—ignoring all duties and taxes that legally should be paid. As an aside, many of my fellow retailers will tell you that Internet sales have turned courier companies into inadvertent smugglers of jewellery into Canada.

    In the good old days, customers did not have adequate information about pricing, and taxes could be buried in the price. Now, even a hidden tax like the excise on jewellery has become highly visible and is a serious impediment to Canadian jewellers making sales in Canada.

    The only way I can make sales to such informed customers is to absorb the tax into my profits. Then the tax is not on the consumer but on my profits. This was never intended by Parliament when it enacted the tax in 1918.

    The second issue is the confusion as to how I can sell jewellery. For example, if I buy a diamond with the excise tax already paid and buy a mounting, also with all tax paid, and I set the diamond in my store, ladies and gentlemen, according to the excise tax interpretation, I'm now not a retailer but have turned myself into a manufacturer.

    I'm a well-known car buff, so permit me this analogy. If GM makes a car and I install the hub caps, I would be deemed to be the manufacturer.

    To further emphasis this point, when we repair items we are deemed to be the manufacturer, and by law we must remit excise tax on the value of the repair. This is ludicrous to think that I'm a manufacturer. Things get damaged and must be repaired. Once I am deemed to be a manufacturer, then I have to split my manufacturing inventory from pure retailing inventory.

    Mr. Chair, for an illiterate retailer like me, that's quite a challenge.

    I am in the midst of succession planning, and there are many jewellers like me out there who are passing on their business to the next generation. I would like to offer my sons a successful and viable future, free of non-competitive tax regimes and restrictions.

    Thank you.

[Translation]

    Mrs. Carmen Rivet: I also own a small business on the south shore of Montreal, which employs five people including myself. My shop is less than 30 minutes from Lacolle, at the border. I would like to tell you a story.

    A client came to my jewellery shop recently to buy a ring setting. She had just bought a Canadian diamond on the Internet. The U.S. company that sold the diamond knew full well how all our taxes are applied. This U.S. company informed the customer about how it would send her the diamond so that she would not have to pay tax. The diamond was prepaid by credit card and delivered by mail or by courier in an envelope labelled documents. The bill and the certificates were sent in a separate envelope.

    Why can our Canadian consumers buy a Canadian diamond at a lower price in the U.S.? More than 70% of our clients ask how much our merchandise would cost if they paid in cash. Far too often, to please the client, the retailer reduces his profit margin to absorb the tax. I am sure you all understand why this excise tax must be removed from all jewellery items.

    We would be pleased to answer any questions.

[English]

    On behalf of the Canadian Jewellers Association, I once again thank you for the opportunity to present our cause to your committee.

    The Chair: Thank you very much, Ms. Rivet, and all of the presenters.

    We'll go now to a round of questions of seven minutes each.

    Mr. Schmidt.

    Mr. Werner Schmidt (Kelowna, CPC): Thank you very much, Mr. Chairman.

    Thank you very much for coming. That was a very impressive presentation you made. I liked the variety of presenters and the very different experiences you've had.

    There are a couple of things that I'd like to clarify to make sure I was right. These have to do with Mr. Charania.

    Is it true that the first audit suggested you owed $800,000, and that after examination it came to $340,000, and then that it got to a negative position, where you actually were to get a refund? Is that what happened?

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    Mr. Mo Charania: That's correct.

    Mr. Werner Schmidt: And that's because of the interpretation of the tax on the same case?

    Mr. Mo Charania: Many different interpretations by different auditors and different appeals people and different policy guides at CCRA....

    Mr. Werner Schmidt: I see. Okay, I just want to make sure I have those numbers right, because I find that rather striking.

    The other question I have gets into the broader area of the economics. How much, really, does this excise tax generate?

    Mr. Satya Poddar: I don't have the exact numbers right now. I did place a few calls before I came here. I haven't been able to get the exact numbers.

    My impression is that gross revenue yield is about $70 million to $80 million per annum.

    Mr. Werner Schmidt: Okay. Now, then, the next question. I'm sure you can predict what I'm going to ask.

    What will the economic benefit be of removing this tax? If it generates $70 million, how much benefit would be created by eliminating this tax, employing more people, so that they would be generating income into the economy? What would be the next impact, in a positive way?

    Mr. Satya Poddar: There are two comments I can make at this stage.

    One is that the $70 million to $80 million is the gross revenue yield of the tax. If you take into account the revenue that is being lost because of the underground economy, and if the underground economy goes down because of the abolition of the tax, you'll begin to collect GST, income taxes, and provincial sales taxes, so the net revenue loss will not be the full $70 million to $80 million. There'll be an immediate pick-up in revenues from the underground economy going down.

    So say the net revenue loss could be $40 million or $50 million. It's guesswork as to how much it could be. There'll be some revenue costs, but not the full $70 million to $80 million. At that point in time you'll bring in the economic benefits.

    Now, economic benefits are changing very dramatically from day to day. As Neil Foster mentioned, in today's economy consumers have become very aware of the hidden taxes, excise taxes, and they do a lot of information gathering before they come to the shop, so the extent of trade diversion is very significant. So it'll be guesswork, but my own feeling is that you'll be down to nickels and dimes for the size of the economy--$50 million in net revenue costs before economic benefits, and if you take into account economic benefits, you are basically around zero.

    Mr. Werner Schmidt: That's very interesting, because I think I heard a number of your contemporary presenters here suggest that you would employ more people.

    Now, how many more people, then, would you employ if this excise tax were not in force?

[Translation]

    Mrs. Carmen Rivet: We did look into this. For our presentation in November, we calculated the number of jobs that could be added if this excise tax were removed. I suggest that you refer to our November presentation. I do not have the exact figures. There would certainly be at least 5,000 more jobs, but I think we estimated there would be 20,000 more people at all levels.

[English]

    Mr. Werner Schmidt: Okay, that's one dimension. You would probably also be looking at expansion of businesses or establishing other kinds of dimensions to your enterprises.

    Have you done any research to figure out what that benefit would be or what that economic participation would be in that particular sector?

    Mr. Steve Parker: I can't give you specifics, but I can give you some examples of how it could improve the jewellery business.

    First of all, from a retailer's point of view, jewellery in a showcase now currently sits with the excise taxes already paid. This severely limits the amount of product that a retailer can afford to put on display, and therefore it limits his sales. The more you have to show, the more you can sell. That's one example.

    Mr. Werner Schmidt: Well, could I stop you right there? This is information that I didn't have, Mr. Chairman. It is very interesting.

    Your inventory has the excise tax paid. It's not collected at the point of sale.

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    Mr. Steve Parker: That's correct. This tax is levied in the same manner as under the old FST system. One of the problems with that old tax was that it was levied at the manufacturer's level and goods sat with taxes already paid before they were sold.

    Mr. Werner Schmidt: And you're in the same position?

    Mr. Steve Parker: Yes, we are.

    Mr. Werner Schmidt: Carry on with your second point.

    Mr. Steve Parker: We've already lost two of our largest jewellery manufacturers to overseas production. One of the contributing factors was the excise tax. Those jobs are permanently gone.

    Mr. Werner Schmidt: How many would that be?

    Mr. Steve Parker: That would be in the hundreds. We don't want to see a further erosion of jobs. We are fairly confident that with the emerging diamond industry in Canada, a lot more jobs will be created in our industry. With the excise tax gone, it would encourage secondary manufacturing and the retail area to grow significantly over the next few years. It's estimated that by the year 2009, Canada will be the number one producer of diamonds by value in the world.

    Mr. Werner Schmidt: You don't have to answer my next question, but I would like you to. Other than all these economic benefits, what would your particular business generate in terms of profit to your operation if the excise tax was not there?

    Mr. Steve Parker: We're a small manufacturer. Our growth is hindered because we have difficulty automating our systems. For example, the excise tax is not based on law but on interpretation, and we cannot buy a computer system with those interpretations built in. Each auditor has a different interpretation. So we are hindered. We can't put into effect the technology that our competitors across the border can. That's an efficiency we've lost.

    The Chair: Thank you, Mr. Schmidt. We can come back to you on another round, if you'd like.

    Mr. Werner Schmidt: Thank you.

    The Chair: Mr. Paquette.

[Translation]

    Mr. Pierre Paquette (Joliette, BQ): Thank you for your presentation. Again, we support your request. However, I would have liked you to have explained a few things. I think one of the main problems for the Minister of Finance—the current one as well as his predecessors—is that, when it comes to jewellery, people have the impression we are talking about luxury items that are meant for a minority. Politically speaking, it is a hard sell, and I imagine this would allow certain demagogues—unfortunately there are some in the press—to say that the federal government removed the excise tax on jewellery.

    What really struck me is that the tax applies on any item priced above $3. We are talking about imitation jewellery. I heard—perhaps you can confirm this—that China exports imitation jewellery under the designation “toys”. Obviously, in that context, the items are exempt from the excise tax because they were not made here. I would like you to confirm whether this is true or not.

    I talked with Mrs. Rivet about this earlier. If excise tax is imposed on jewellery affordable to the middle class, to people with a lower income, then, in other words, consumers are being made to pay tax on items that are not so luxurious. Would it be possible to impose a tax on jewellery above a certain price, much like the tax that used to be imposed on clothing? Competition being what it is, would this not resolve the industry's problem? I would like you to elaborate on this so that we can understand the impact of this tax and its elimination.

    Mrs. Carmen Rivet: China is a big country that manufactures huge quantities of so-called jewellery that is included in the luxuries category here. Of course, China also understands our tax system. Often the items are shipped and billed at $1, $2, $3 or $2.95, but separate bills are sent for research and development, making moulds and so forth, to avoid the excise tax.

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    Mr. Pierre Paquette: [Editor's note: inaudible]

    Mrs. Carmen Rivet: A Canadian manufacturer billing for this type of product cannot do that: it cannot send bills separately. In the Ottawa area, we had a colleague who made badges, company items, tie and lapel pins and so forth. Of the companies that were part of the competition 20 years ago, more than 10 have disappeared.

    Mr. Pierre Paquette: What do you think about having a tax that would apply above a certain price?

    Mrs. Carmen Rivet: We know that Wal-Mart sells the most jewellery in the world. A study shows that, on average, Canadian households spend $130 a year on jewellery. Is this really a luxury item, or is it not, often, merchandise like any other? A person might want to buy a wedding ring or children's jewellery for a first communion or another occasion. The $130 average per household is not very high. Obviously, if the $3 amount were increased to $1,000, then we could say the tax applies to a luxury item.

    Mr. Pierre Paquette: I have not really understood your answer to Mr. Schmidt about how much this tax brings in. You were also talking about net tax. Since this tax seems quite difficult to collect, how much net tax would it bring in for the government? Do you have an estimate? I did not understand the answer you gave earlier.

[English]

    Mr. Satya Poddar: The revenues that are reported in the financial statements of the government are in the range of $70 million to $80 million, but that ignores revenue the federal government has lost in income tax and GST and the provincial governments have lost in PST because of the underground economy.

    The net revenue government is collecting today is less than $70 million. That does not take into account the loss; the loss will show up as reduced income tax revenues and reduced GST revenues. That's why the net revenue could be in the range of $40 million or $50 million before economic benefits.

[Translation]

    Mr. Pierre Paquette: If our witnesses would please excuse me; I had informed the Chair that I would have to leave around 4:15 p.m.

    Thank you.

    Mrs. Carmen Rivet: Mo would like to elaborate on the cost of administering this tax.

[English]

    Mr. Mo Charania: We have been told repeatedly that the cost of administering the tax runs anywhere from $7 million to $14 million in the cost of audits, administration of the tax, etc. We're not privy to this information, but this is what we gather talking to various people. I don't know if this is factored into the equation; I doubt it.

    Mr. Steve Parker: May I address the concept of a luxury tax? I believe that in Canada today the concept of a luxury tax is extinct. There are no other goods taxed as a luxury; we are the last leftover that hasn't been cleaned up. For example, look at this little purse that cost $750. It's absurd that this is not considered a luxury when children's jewellery is; it's absurd.

    Mr. Mo Charania: I'll answer your question regarding raising the price threshold. We have countries right now that are reducing their rates. Australia and Russia have over the last couple of years eliminated their excise tax on jewellery. They've seen a net benefit in their jewellery sector through improved profitability, more businesses formed, more exports, and more manufacturing; it's been a boom for them. They are diamond-producing countries, and it's sad to see that countries like Russia are more forward-thinking than Canada.

[Translation]

    Mrs. Carmen Rivet: As I explained earlier, if you plan to spend $750,000 on a piece of jewellery, then it may be worth buying it abroad where jewellery is tax exempt.

[English]

    The Chair: Thank you. Merci beaucoup, monsieur Paquette.

    Now I'll go to Mr. Shepherd.

    Mr. Alex Shepherd (Durham, Lib.): I have a little conflict of interest. My wife just told me the diamond fell out of her wedding ring, so I get to go through this process.

    I guess the first question is this. I've heard of this tax; it's been around for ages. It's more properly a question for the Finance people, but what is the history? How long has this been on the books?

º  (1615)  

    Mr. Mo Charania: This tax came on board in 1918, after the First World War, along with a lot of other articles. We're talking about a tax that was imposed on snuff boxes, lighters, china--

    Mr. Alex Shepherd: The concept at that time was that jewellery was a luxury, but I hear what you're saying. We have televisions in our houses, we have Cadillacs driving around the street, and we have fur coats in the closet. It doesn't seem to make a lot of sense to me. I think the argument is that we don't want to lose $70 million.

    An hon. member: Do you have a Cadillac, Alex?

    Mr. Werner Schmidt: Alex has a Cadillac.

    Some hon. members: Oh, oh!

    Mr. Alex Shepherd: But there are a couple of little idiosyncrasies in there. Presumably the imports do attract some form of excise tax as they cross the border, though you're saying inequitably so. Presumably, by abolishing the excise tax we'd also abolish that tax on imports, and I don't know what impact that would have on you. I know those imported goods in Canada would be cheaper as well, just like your own manufactured goods.

    Mr. Steve Parker: It wouldn't abolish the duties that are also levied on imported jewellery. However, we're quite prepared to compete on a level playing field like that. It's just that as domestic producers, by the government's own figures, we pay 75% more in tax than an importer does.

    Mr. Alex Shepherd: We mentioned the cost and we talked about the $70 million that's showing up on our financial statements. You looked at the possibility that there was another $7 million or $14 million in collections, and presumably you mean that from an administrative point...on our side of the books. But presumably on the private sector side there's another similar add-on to that figure because they have to keep all the books and records and nonsense for all of this. I don't know if there's any kind of projected cost related to that.

    Mr. Mo Charania: There are costs associated with that, of course. We figure that in my business it costs me an extra 2% to administer some of these things. I'm also looking at loss of capital. I have a lot of capital tied up in the excise tax. I pay insurance on that. I can't hire people.

    If I were to take that 10% I have tied up in excise tax, train some staff, look at some manufacturing type of thing.... I'm a retailer but perhaps I could manufacture something. I could start diamond cutting to attract people and create a unique venue. I can't do any of those things because then I'd be deemed a real manufacturer, and although I'm primarily a retailer, they would exercise the manufacturing rules on me. It makes it very difficult.

    Mr. Alex Shepherd: The ultimate question is, if they take this tax off, are you going to transfer this on to the consumer or is it going to end up in your pocket?

    Mr. Mo Charania: Right now retailers have to absorb a lot of this. My profitability over the last three to four years has been horrible. I'm not talking about loss of revenue, just profitability.

    As Internet sales pick up, people start learning about pricing on these things. It's a global economy; we really need to compete on a global basis. We used to compete first regionally, then across the country, and now we have to compete globally. It's very easy to get on the Internet and find the price of a diamond, and it's shameful that we have Canadian diamonds that cost more in Canada than anywhere else in the world.

    Mr. Alex Shepherd: That being said, if the excise tax comes off, will that encourage you to export? You talk about the global economy, but primarily, most of our discussion is about sharing the domestic market. Is it going to give an incentive for manufacturers in Canada to export?

    Mr. Steve Parker: As manufacturers become stronger with the domestic market, we'll be better able to compete on a global basis.

    Mr. Alex Shepherd: It's not something we do very much. Is that a fair statement?

    Mr. Steve Parker: Well, first I think we have to get strong within our own country and become healthier manufacturers. At that point we can attack the world market.

    Mr. Alex Shepherd: But are your manufacturing costs higher, forgetting about the excise tax? Your manufacturing costs are going to be higher than those of other countries as well.

    Mr. Steve Parker: They are, but the types of goods we produce here in Canada are perhaps different from what may be produced in other countries; we take that into account.

    Mr. Alex Shepherd: It's a niche market kind of thing.

    Mr. Steve Parker: Yes, we build to our strengths.

    Mr. Mo Charania: Let's look at the diamond-cutting industry. We have a facility in Vancouver that is perhaps the most automated, most advanced diamond-cutting facility in the world. Look at technology. We need the funding for it. We could finance ourselves if we didn't have the excise tax hanging on our back. This cutting facility in Vancouver is able to cut in Canada more efficiently than they are able to cut in China. It's robotics: 24 hours a day, seven days a week, no breaks, no CPP, no UI, nothing. It makes a difference.

º  (1620)  

    Mr. Alex Shepherd: Well, I'm a supporter of revocation of tax hikes.

    Some hon. members: Oh, oh!

    The Chair: Thank you.

    I have a question just to make sure I totally understand. I hear your arguments about the underground economy, smuggling, and fictitious or phony invoices and that, but let's say you had a shipment of jewellery from abroad that came into a port in Canada at a fully disclosed price, a fair price. There are probably different types of jewellery, but what would the range of duties be? Are you saying that if it was coming in on that basis, there'd be no excise tax?

    Mr. Mo Charania: Typically, jewellery imported from certain countries has an 8% duty, and on watches you have a 5% duty. That's for things that don't qualify under NAFTA; anything that qualifies under NAFTA--the North American Free Trade Agreement--essentially comes in duty-free and we pay the excise tax on it. The excise tax is different from the duties paid on any particular article. We have a feeling that removing the excise tax gives us a level playing field so we're able to manufacture in Canada.

    Steve Parker has given you the example of added cost of manufacturing in Canada. If I could, I'll just elaborate a little bit on that. If we--

    The Chair: Sorry, I just want to make sure I'm totally clear. A watch comes in from Taiwan or somewhere, it doesn't matter. What kind of duty would that attract, what type of excise tax?

    Mr. Mo Charania: I think Taiwan might be exempt from duty; some countries are, as third world nations. But let's take Switzerland, for example. You pay something over 5% duty on that product, and then you'd add the 10% excise tax on top of that.

    Mr. Satya Poddar: Even though the excise tax rate is 10%, the value on which the excise tax applies is much lower on imported goods than on comparable goods sold domestically and manufactured domestically. The manufacturers in the domestic market will pay tax on the selling price. In the case of imported goods the tax applies on duty-paid value. The duty-paid value in relation to the selling price of domestically manufactured goods is only about half, or in that range, 60% maybe. That's where the differential comes in. The rate is the same, but that rate applies to different values.

    The Chair: I was having trouble understanding why, if we're charging an excise tax on domestically manufactured products, we wouldn't have an excise tax on imports. But you're saying it's the value it's based on or attracted to.

    Mr. Satya Poddar: As an example, in this 1987 report produced by the Department of Finance, the federal sales tax on imported jewellery was 9%, but it amounted to 2.6% for the imports and 4.7% for domestic goods, and that is all because of differences in value, not the rate.

    The Chair: Presumably, the GST would apply as well.

    Mr. Satya Poddar: But the GST goes to the retail level, so it doesn't make any difference.

    The Chair: Mr. Charania, do you want to finish off, and then Mr. Parker?

    Mr. Mo Charania: I'll let Steve finish. I think we have the same thought here.

    Mr. Steve Parker: I am a manufacturer in Vancouver, but we also do some importing of Italian-made jewellery. The amount of tax I pay on the imported product is so small compared to what I pay on my domestically produced merchandise. For example, when I make the product here in Canada, I pay excise tax on my salesmen's commission. I pay excise tax on all my costs in Canada, on payroll costs, on my profit. I can import that product and pay the tax at the border, and my profit then doesn't attract excise tax, nor do my commissions. It's a significant difference.

    The Chair: How much jewellery would you estimate is coming into Canada illegally to avoid this type of exposure to tax? Do you have an estimate?

    Mr. Steve Parker: I have no estimate. I can tell you anecdotally that with the Internet, it is expanding every day.

    Mr. Mo Charania: Internet business last year was $6 billion on the jewellery side, and it's growing rapidly, 50% to 60% a year. These goods could come in in a courier envelope very easily. Millions and millions of packages come across the border. If they're going to a business, chances are they're going to be stopped; if they're going to an individual, I doubt whether customs has the time or the ability to stop and check these parcels.

º  (1625)  

    The Chair: Do you think that type of operation would be designed simply to evade the excise tax, or is it for a whole bunch of other reasons as well?

    Mr. Mo Charania: It's a major contributing factor. As a retailer, I see this day in and day out. We have a proportionally higher use of the Internet in Ottawa than other places in Canada. I get clients all the time who bring in a diamond and ask me to set it. So here I am just setting it in a ring, making my profit just on that ring, when I could have made a profit on the diamond. They don't mind paying the GST and PST. They don't understand why there's even more of a difference in price, and when you try to explain it to them, some of them just look at you and say, you're lying, you're just trying to get extra profit.

    If I wasn't handicapped, I'd be able to compete more favourably. Perhaps I could sacrifice a little bit on margin and still make the sale, perhaps the consumer would say no, I don't want to be a smuggler bringing in these goods, I'm not going to take the risk, but a saving of 25% is a lot, and some people might think that risk is worthwhile.

    The Chair: Thank you.

    Mr. McKay.

    Hon. John McKay (Scarborough East, Lib.): I think it's the position of the association that there's really no fix for this particular excise tax, that there's nothing you can do about it. It's bad conceptually and bad in its administration. You can't even play with thresholds.

    Has your association looked at the net benefit to the government? The figure $80 million has been thrown around here in terms of gross revenue. There's usually an administrative cost. You mentioned $10 million or $12 million. I take it that the $10 million or $12 million is what you consider to be your cost for lawyers and accountants to administer this tax. Is that correct?

    Mr. Mo Charania: It's a figure that came up in meetings with Finance. We asked what the administrative costs are, but we never got a straight answer. I've heard that it's as low as $7 million. CCRA's estimate is $14 million.

    Hon. John McKay: That's the government's cost.

    Mr. Mo Charania: Yes.

    Hon. John McKay: So it's somewhere in the order of $60 million to $65 million net to the government. That's what it boils down to.

    Have you done any costing with regard to the number of sales you actually lose by virtue of this particular tax?

    Mr. Mo Charania: I can speak for myself as a retailer. I feel that I'm losing about 20% of my annual volume by dollars, not by the number of pieces but by volume. A tax is avoided on the higher price point articles. Nobody is going to smuggle in a $30 article. But to come in with a $1,000 article or a $10,000 article, it's tempting.

    Hon. John McKay: So it's 10% to 20% of your gross sales across the board. Is that the case for the industry?

    Mr. Mo Charania: I would think so. In talking to most retailers, we hear the same number. Some of them think it's even higher, particularly the ones who live in border towns.

    Hon. John McKay: What's the gross revenue of the industry?

    Mr. Mo Charania: About two years ago it was $1.2 billion.

    Hon. John McKay: So in rough figures, you could anticipate an increase in your sales of $120 million, which is 10% of $1.2 billion.

    Mr. Mo Charania: That seems to make sense.

    In addition, we're looking at the other benefits in terms of job spinoffs, investment, and further growth in this industry. We would like nothing more than to see growth in this industry. The diamond mines are emerging up north. It's a golden opportunity for us to move forward and expand the secondary manufacturing instead of just the mining sector. I think we'd see the benefits all across Canada.

    Hon. John McKay: That's an entrepreneurial statement. But assuming the industry remains in stasis and none of that actually happens, you would anticipate that your gross sales would increase by $120 million.

º  (1630)  

    Mr. Mo Charania: We should see about a 10% increase in gross sales. I also think that we will see an increase in profitability and investment within our business. But remember that sometimes we have to absorb that, which leads to less profit, less corporate tax, etc.

    Hon. John McKay: On the face of it, there would be $120 million in extra sales. There's the GST, which would be somewhere in the order of $9.6 million. So some of the revenue would be made up there. That brings the government's loss down to somewhere in the order of $50 million.

    Mr. Mo Charania: That's correct. I still think there would be a lot of other contributing factors that may bring that down.

    Hon. John McKay: Your corporate profits presumably are up, so your taxation is presumably up, that sort of thing.

    Mr. Mo Charania: It's a virtual guarantee that we'd have to employ more people. Right now we're running very lean.

    Hon. John McKay: I'm in the realm of the highly speculative here, I appreciate that. Has a reliable study been done that focuses on that point?

    Mr. Neil Foster: No.

    Being from Alberta, I have the 7% advantage. Quite often my sales are made legally outside of my provincial boundaries, and they're made because of the 7% saving on PST. If people are going to take the time to look at the small jeweller in the small market for savings, it tells you that they're not fools. They know how to save money, and they know how to make money. I suggest that if you take a look at the Alberta market versus similar-sized populations in other provinces, you'll see that Alberta moves a lot more jewellery than other provinces.

    There isn't any study, but there is a test.

    Hon. John McKay: Anecdotally, you're probably correct, but the finance department largely tries to deal with pros and cons, gains and losses here. They know what their loss might be.

    If one buys your argument entirely, that it's a poorly applied tax, that it's a poor tax conceptually, then the question is, okay, it's removed, but what is the replacement? How do you replace the revenue, and how do you replace the revenue within the industry?

    You make your point anecdotally. I agree with you, but anecdotes don't pay bills.

    The Chair: Mr. Poddar, did you want to add something?

    Mr. Satya Poddar: Ernst & Young has done two studies on the jewellery industry. One was commissioned by the Department of Finance, in fact, to estimate the extent of the underground economy. The other one was to estimate the loss of jobs and benefits because of the tax.

    Hon. John McKay: On your industry?

    Mr. Satya Poddar: On the jewellery industry.

    I don't have the exact information right now, but the underground economy by definition is very difficult to measure, because if you could measure it, you would see it and it wouldn't be underground anymore. But overall, the impression was that one-third of the sales are lost or are in the underground economy. How much of those will become above ground when the tax is abolished? That's where guesswork comes in, because those that were underground may want to remain underground. Some will come above ground. Some judgment is involvement, but I think your estimate of $100 million is not far off.

    The second question is about jobs and employment. Generally, that's again for a small industry, even though it's a very significant employer. For the size of the economy, $1.2 billion of sales is still a small fraction of the Canadian economy as a whole, and to get exact numbers, given the uncertainty about how the tax applies, is a bit of a challenge.

    But the other point to note is that in terms of continuing this tax, when the federal sales tax was around, Canada or the CCRA had the ability to understand how the tax applies. They could devote resources to interpretations, adjustments, rulings, and all those things. Today you can't even get a ruling from CCRA. You write for that, and they'll take three to six months because there's nobody left to answer that question.

    This is today, about 15 years after the FST. In another two or three years, there will be nothing left. Then you're at the mercy of the vacuum; where do you go for an answer?

    The Chair: Okay, thank you.

    Mr. Schmidt, did you have another question? We'll do a short second round.

    Mr. Werner Schmidt: Yes, I have a very, very short question.

    The question I have is really, what has been the attitude or the experience you've had with this committee before? I think you've made presentations before, but what's your history there?

º  (1635)  

[Translation]

    Mrs. Carmen Rivet: I met an MP who has been sitting on this committee for many years; I think this is our fifth time here. I believe the committee recommended at least three times that the excise tax be removed. I know for sure it was twice, but it may have been three times.

[English]

    Mr. Werner Schmidt: Okay, so it has been supported before.

    My other questions have been asked by other members, so I'm fine. Thanks.

    The Chair: Okay.

    Thank you very much to the Canadian Jewellers Association for an excellent presentation. We had a good discussion. Thank you very much for coming.

    We're going to adjourn now and go in camera briefly to talk about the process from here on in. So I would ask that the room be vacated in an orderly way, and we'll get on with that.

    Again, thank you very much for coming.

    [Proceedings continue in camera]