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37th PARLIAMENT, 3rd SESSION

Standing Committee on Finance


EVIDENCE

CONTENTS

Thursday, April 29, 2004




À 1020
V         The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.))
V         Mr. Denis Richard (President, Coopérative fédérée de Québec)
V         Mr. Pierre Gauvreau (Chief Executive Officer, Coopérative fédérée de Québec)

À 1025
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Claude Lafleur (Secretary General, Coopérative fédérée de Québec)

À 1030
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Réjean Laflamme (Director of Development, Conseil canadien de la coopération)
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)

À 1035
V         Mr. Richard Harris (Prince George—Bulkley Valley, CPC)
V         Mr. Richard Harris
V         Mr. Pierre Gauvreau
V         Mr. Richard Harris
V         Mr. Pierre Gauvreau
V         Mr. Richard Harris
V         Mr. Pierre Gauvreau
V         Mr. Richard Harris
V         Mr. Pierre Gauvreau

À 1040
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Denis Richard
V         Mr. Paul Noiseux (Treasurer, Coopérative fédérée de Québec)

À 1045
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Werner Schmidt (Kelowna, CPC)
V         Mr. Pierre Gauvreau
V         Mr. Werner Schmidt
V         Mr. Pierre Gauvreau
V         Mr. Werner Schmidt
V         Mr. Pierre Gauvreau
V         Mr. Werner Schmidt
V         Mr. Pierre Gauvreau
V         Mr. Werner Schmidt
V         Mr. Pierre Gauvreau

À 1050
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Pierre Paquette (Joliette, BQ)
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Denis Richard

À 1055
V         Mr. Pierre Paquette
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Claude Lafleur
V         Mr. Pierre Paquette

Á 1100
V         Mr. Claude Lafleur
V         Mr. Pierre Paquette
V         Mr. Réjean Laflamme
V         Mr. Pierre Paquette
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Massimo Pacetti (Saint-Léonard—Saint-Michel, Lib.)
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Denis Richard

Á 1105
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Massimo Pacetti
V         Mr. Claude Lafleur
V         Mr. Denis Richard
V         Mr. Pierre Paquette
V         Mr. Massimo Pacetti
V         Mr. Denis Richard
V         Mr. Claude Lafleur
V         Mr. Massimo Pacetti
V         Mr. Pierre Gauvreau
V         Mr. Massimo Pacetti
V         Mr. Pierre Gauvreau
V         Mr. Massimo Pacetti
V         Mr. Pierre Gauvreau
V         Mr. Massimo Pacetti
V         Mr. Pierre Gauvreau
V         Mr. Massimo Pacetti
V         Mr. Réjean Laflamme
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Claude Duplain (Portneuf, Lib.)
V         Mr. Claude Lafleur

Á 1110
V         Mr. Claude Duplain
V         Mr. Denis Richard
V         Mr. Claude Duplain
V         Mr. Denis Richard
V         Mr. Claude Duplain
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Claude Duplain
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Rodger Cuzner (Bras d'Or—Cape Breton, Lib.)

Á 1115
V         Mr. Réjean Laflamme
V         Mr. Rodger Cuzner
V         Mr. Réjean Laflamme
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)
V         Mr. Denis Richard
V         The Vice-Chair (Mr. Nick Discepola)










CANADA

Standing Committee on Finance


NUMBER 018 
l
3rd SESSION 
l
37th PARLIAMENT 

EVIDENCE

Thursday, April 29, 2004

[Recorded by Electronic Apparatus]

À  +(1020)  

[Translation]

+

    The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Pursuant to Standing Order 108(2), we will now go to our study on small business tax measures. I would like to thank our witnesses for agreeing to appear before us on such short notice. Your testimony is important, and the committee very much wanted to hear from you.

    With us from the Coopérative fédérée de Québec are its President, Mr. Denis Richard; Secretary General, Mr. Claude Lafleur; the Chief Executive Officer, Mr. Pierre Gauvreau; and the Treasurer, Mr. Paul Noiseux. Also with us, from the Conseil Canadien de la Coopération, is Réjean Laflamme, who is the Director of Development.

    Thank you for coming and welcome to the committee.

    There may be a vote in the House. With the consent of the whips, I will try to keep three government members and three opposition members here. We will try to move quickly. We will give you the time you require and we would ask you to leave enough time for committee members to ask questions.

    Please proceed with your presentation.

+-

    Mr. Denis Richard (President, Coopérative fédérée de Québec): Thank you, Mr. Chairman. First, I would like to thank you for agreeing to hear from us so quickly, as you mentioned.

    I will take a few minutes to describe very quickly the Coopérative fédérée de Québec. We are an agricultural cooperative, with 100 member cooperatives. The total membership is 37,000 in Quebec, and a few outside the province, some in the French-speaking part of Ontario and the rest in the French-speaking region of New Brunswick.

    Our cooperative employs about 10,000 people. Our main activities are supplying farms and marketing farm products. Most of our jobs are in marketing farm products—and our main activities are poultry and hog slaughter. In these areas, the Coopérative fédérée de Québec operates under the commercial name of Olymel or Flamingo, which is better known throughout Canada.

    As you probably know, Canada is the largest pork exporter in the world. The Coopérative fédérée de Québec, through its branch Olymel, is the largest Canadian exporter.

    Since my time is limited, I will restrict my description of our business to these few remarks. We will move immediately to the requests we wish to submit to the Department of Finance.

    We've had two requests on the table for three years with the Department of Finance. The first has to do with carrying forward income tax for members who leave their capital in the co-op. The second is for a cooperative investment plan.

    I will now turn the floor over to my Chief Executive Officer, Mr. Gauvreau, who will provide more details about our two demands.

+-

    Mr. Pierre Gauvreau (Chief Executive Officer, Coopérative fédérée de Québec): Thank you, Mr. Chairman.

    Our first demand is for an income tax deferral for the payment of dividends as shares. The logic is very simple. When a cooperative makes a surplus, it gives its members a dividend. Often, in order to maintain capitalization for the cooperative, it gives part of the dividend in stock or shares, depending on the type of cooperative. The other part is given in cash. Generally cooperatives ensure there is a cash component to allow their members to pay the income tax on the entire dividend. This means that the member has only the shares, and no cash benefits from the dividend right away.

    This stock or these shares are kept in the cooperative for a period of 5, 10 or even 15 years in some cases. When members leave the cooperative, they apply some pressure to recover these shares. They are in fact income tax free, and this results in the decapitalization of the cooperative. This is similar to the problem faced by the people in the Saskatchewan Wheat Pool when they decided to look to the public market. They said they had a large future liability because of aging members who were close to retirement and wanted to withdraw the capital the co-op had kept in the form of dividends. That is when they did a public offering, and so on.

    This alerted us to the fact that this was a long-term difficulty for cooperatives with individual members. The members of the Coopérative fédérée de Québec are cooperatives—so this provides a type of immortality, so to speak—whereas in our member cooperatives, the members are individuals. Consequently, when it comes time for them to retire, they want to withdraw their capital for their retirement.

    In an effort to allow cooperatives to maintain the capital for as long as possible, we think it would be most appropriate to consider not taxing the part of the dividend paid in shares in the year in which the shares are distributed, but rather that the income tax be payable on these shares only when they are redeemed. So this is what is known as a tax deferral, not a tax gift. It is a deferral of income tax forward in time. It also enables some retired members, who do not necessarily need the money immediately, to spread this withdrawal out, and to orchestrate this with the next generation taking over the farm in a phase-in-phase-out, as it is often described. This provides some balance. There is no real tax cost involved, but rather just an impact on cash flow. That is the first measure.

    The second measure is to establish a program to promote the capitalization of cooperatives through a cooperative investment plan. Quebec has a program of this type at the moment. It was established in 1985 or 1986, close to 20 years ago now. Last year, in its first budget, the new Liberal government put a moratorium on the cooperative investment plan so as to review it. In the recent budget, after taking into account the merits of the program, the government has decided to re-establish it with some changes that are actually slightly more advantageous than the previous plan. The government has met some of our demands.

    As a result, we can say that in the last year we have been able to demonstrate the merits of such a program not only for capitalizing cooperatives, but for achieving other objectives of the government, particularly in regional and rural development, and also in encouraging people to assume responsibility for themselves. A cooperative investment plan is not a subsidy. It is a plan in which people invest in their cooperative and receive an income tax credit for this investment.

    Over time, this is a program that has proven its worth in dynamic cooperatives. We also determined, over a 10-year period when these measures were proposed, that we could justify and solidify some $1 billion in investment over 10 years in the agricultural cooperatives of Quebec.

À  +-(1025)  

    Some of our investments are simply for maintenance, upgrading and modernizing existing plants and facilities. We also use these funds to work on environmental problems and health and safety issues. As you know, we also invest significantly in food traceability and safety, particularly between the farm and the processing plant. This is becoming a very important component. In fact, it makes the headlines regularly.

    This measure is an additional tool to allow for and improve the promotion and development of the capital held by cooperatives. Since there are some restrictions that apply with respect to eligibility for the cooperative investment plan, these two measures together, allow us to achieve some balance in the case of a cooperative that may no longer have access to a cooperative investment plan, for example, because its capital base is considered high enough, which means that the cooperative would no longer be able to enjoy the tax benefits when shares are issued.

    Those are our two main proposals. We put them forward as a way of making cooperatives the partners of government in the implementation of regional and agricultural development measures.

+-

    The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Gauvreau.

    You have the floor, Mr. Lafleur.

+-

    Mr. Claude Lafleur (Secretary General, Coopérative fédérée de Québec): I would just like to take two minutes to talk about the political dimensions of these two measures.

    First of all, as you must know, for three years now, Coopérative fédérée de Québec and the Conseil canadien de la coopération have made many representations. We appeared before the Standing Committee on Finance, and we also appeared before the Speller Committee and the Mitchell Committee, without any lobbyists. We also have had ready access to the government and we have been able to set out our views. We have also done so before this committee.

    We answered the following three questions. First, why should you be adopting these measures? You should do this mainly because the co-ops located in the regions in Canada do not have the necessary capitalization to continue to meet the globalization challenge. That is the main economic argument.

    The second question is whether or not these measures are reasonable. The two measures we are calling on the government to adopt would cost about $15 million a year. You have two important studies in your kits, one done in the United States and the other in Europe. They use exactly the same arguments that we have been putting forth for three years.

    Europe is saying that the best solution to the current rural exodus problem lies in agricultural cooperatives. Agricultural cooperatives are the biggest job creators in the regions.

    The same goes for the United States. The Americans think that agricultural cooperatives have been neglected, that the capitalization base is not strong enough and that the government must intervene to “recapitalize” these cooperatives, which belong to people in the community.

    The third question is whether or not these measures are useful. That is the last question. The Quebec government, which has very tight budgets, as you know, has looked at this very closely for one year. Despite the fact that most exemptions for small businesses have been abolished, it has kept the measures for cooperatives, because the government thinks it is extremely efficient to encourage people to invest. This is not government money, it is money that comes from the members and employees who invest in specific projects in their communities. This is a regional development measure. In seven years, we have created 4,500 jobs, not just in Quebec, but also in Alberta, New Brunswick, Ontario and Manitoba.

    In closing, as I was saying, this is the most effective regional development measure, in terms of the cost-benefit ratio, that we know of at the moment. In fact, we have just discussed this with Mr. Goodale. I would remind you that we are talking about members' money invested in their communities, not to make a profit. In a cooperative, the money is dormant. There is no capital value, the money is dormant in the cooperative. The idea is not to make profits, but rather to provide services.

    The services offered in the regions of Canada depend to a great extent, and increasingly, on cooperatives. Private companies are leaving the regions at the moment. That is the main factor. This is to some extent an extension of the regional programs set up by the federal and provincial governments in the last 20 years, without much success. We think this is a very reasonable demand for an effective measure, and Canada is not alone. You will see in your kits that the American and European studies both reached the same conclusion.

À  +-(1030)  

+-

    Mr. Denis Richard: That completes our presentation. If you have any questions, we will try to answer them.

+-

    The Vice-Chair (Mr. Nick Discepola): We will move directly to the question period.

+-

    Mr. Réjean Laflamme (Director of Development, Conseil canadien de la coopération): I would like to add that the two demands put forward by the Coopérative fédérée de Québec are part of a study done by the Conseil canadien de la coopération and the Canadian Cooperative Association, thanks to funding from Agriculture Canada under the Canadian Adaptation and Rural Development Fund.

    These two proposals have been supported by the board of directors of the Conseil canadien de la coopération. We think that theses initiatives could play an important role throughout Canada in developing cooperatives in rural communities. We therefore hope that your committee will be able to help promote them.

    The Ernst & Young study emphasized clearly that our agricultural cooperatives need capitalization. That explains why some of them, those located in western Canada, have had some significant problems. In my opinion, the proposed measures would mean that these problems would not recur.

    We want to avoid having cooperatives become the property of American companies, as happened in the west, and we want to be able to keep our agricultural businesses in Canada. I think that both the francophone and anglophone components of the cooperative movement stand behind these proposals.

+-

    The Vice-Chair (Mr. Nick Discepola): Thank you very much. Would someone like to add something?

+-

    Mr. Denis Richard: We could add that we met with Mr. Goodale at 9 a.m. this morning. He urged us to make a presentation to you, so that you could make a recommendation to include these measures in the budget.

+-

    The Vice-Chair (Mr. Nick Discepola): I must tell you that this meeting was called at his request. So he's been informed of the various issues.

    For the time being, I am going to allow members to ask their questions. Later, we will try to draft a recommendation for Mr. Goodale.

[English]

    Mr. Harris, for 10 minutes.

À  +-(1035)  

+-

    Mr. Richard Harris (Prince George—Bulkley Valley, CPC): Thank you.

    Thank you, gentlemen. I sure like the look of your brochure. That's probably the nicest looking one I've seen on this committee in some years.

+-

    Mr. Richard Harris: I have some questions on your first point regarding the tax return on dividends. You're saying that the members are rewarded for their investment in shares and cash, depending on the performance of the co-op. The cash portion, of course, is to pay the taxes on the dividends on the shares as well as the cash they receive. Is that correct?

+-

    Mr. Pierre Gauvreau: It's not a reward on the investment. Rather, it's a patronage dividend that rewards the member for his purchases or the price paid for his supplies to the co-op. So really it's a return to the member--

+-

    Mr. Richard Harris: On their investment.

+-

    Mr. Pierre Gauvreau: The cooperative needs cash to develop. Therefore, instead of returning to the members the full amount—let's say $1,000 in cash—they say, you'll probably have to pay 35% or 40% income tax; we'll give you $400 to cover the tax part, and we'll give you the other $600 in shares. The shares are redeemed at the discretion of the board most of the time. Very rarely do they have a term attached to them.

+-

    Mr. Richard Harris: Say someone was a member of the cooperative for 35 years. They could build up a substantial fund based on the share value. Is that what you're saying?

+-

    Mr. Pierre Gauvreau: The shares maintain a nominal value. They do not appreciate. I don't think they would have accumulated for 35 years, because they regularly redeem those shares. So there is a return. The principle behind that is to make sure the current users are adequately financing their cooperative.

+-

    Mr. Richard Harris: I need you to explain this, then. You talked about the payment of the tax when someone withdraws from participation in the cooperative. As I understand it, rather than have the payment of the tax payable in the year they withdraw, you would like to have it spread over a longer term as a deferred tax. Is that it?

+-

    Mr. Pierre Gauvreau: It's not that.

    Let's say a member retires. As his business has grown, he has accumulated $50,000 worth of shares over the last five or ten years, depending on the redemption rate and that. He is then entitled to request his co-op to redeem those shares under various bylaws and plans. Therefore, it creates a burden on the cooperative to buy back the shares because those shares represent a patronage dividend on which he has already paid income tax. Therefore, it's tax-free money that's coming to him.

    What we're saying is, to enhance the capitalization of cooperatives, when a cooperative elects to pay a patronage dividend partly in shares, that this part not be taxed immediately but rather be taxed at the time they are redeemed by the member. So this is really a tax deferral, not a credit tax or an option. It's just to be efficient cash-wise.

    This exists in Quebec under the Quebec income tax act. It was created two years ago and it has enabled us, for instance, when we pay patronage dividends, to increase the amount of patronage dividends by about 10% or more in shares over what we could in the past. In the past we used to pay 40% in cash and 60% in shares. Now we are really paying 30% in cash and the rest, 70%, in shares, which allows us to increase the capitalization. This is why we say it's one of the tools--and a very useful one--that at minimal cost for taxation purposes can enhance the capitalization of the cooperative.

À  +-(1040)  

[Translation]

+-

    Mr. Denis Richard: I would just like to add one point. As a producer, the cooperative gives me a return on the use I make of the cooperative. So, if at the end of the year, there is $1,000 in dividends to report and the cooperative wants to keep them and reinvest them, I have to pay income tax on this $1,000, even if I did not get any cash from my cooperative. I have to pay the income tax now. It is therefore difficult for cooperatives to encourage members to leave the returns in the cooperative, because they have to pay the income tax on these amounts immediately.

    If I retire as a producer in 20 years, the income tax will have been paid for the previous 20 years. There's therefore no incentive for me to leave these dividends in the cooperative, as Pierre was saying, because all the income tax has been paid. There is no incentive for me. The year in which the dividends are reported at the annual meeting, producers ask for the money, because they have to pay income tax on it in any case to the federal and provincial governments.

    If this were deferred until the member retires, it would be easier for cooperatives to convince their members to leave their money in the cooperative to allow it to develop and take on the multinationals in the global economy.

+-

    The Vice-Chair (Mr. Nick Discepola): To give us some idea of the tax implications, could you tell us what the total amount would be for Quebec and Canada as a whole if there were such an income tax deferral?

+-

    Mr. Denis Richard: It's already been granted in Quebec. The Government of Quebec decided several years ago not to tax members of cooperatives when the patronage dividends are declared but rather when they are cashed in. So that exists in Quebec.

    With respect to the federal government, I think Ernst & Young did a study to see how much it would cost; it's not huge because it is a deferral. Taxes will be paid, only later.

    Paul, do you have the answer? Mr. Noiseux will answer.

[English]

+-

    Mr. Paul Noiseux (Treasurer, Coopérative fédérée de Québec): As mentioned, trying to estimate the numbers was the process; it was a recommendation from the Ernst & Young study, as mentioned. What they did was based on the Quebec experience, and I think the one major important point is that in Quebec this measure is for producer co-ops. It's not for all types of co-ops; it's for producer-worker co-ops. They tried to estimate that number based on that experience.

    What they are saying is, from the Canadian perspective, the first year deferred tax revenue will be around $30 million to $35 million, based on the Quebec experience in terms of the level of patronage given, so we give the same type. Now, if there is an increase in the patronage because the earnings are increasing or the shares they are giving in patronage are higher than what they gave in the past...considering that measure.

    They also tried to estimate what the impact could be. What they did was, on both sides, to say that if all co-ops issued 100% of the patronage in shares... They also did that type of estimate, which we don't believe will be the case because there are also partners, the bankers, the other side of our business, who will request that some part of the earnings belong to the co-ops and not only to the members, because that's a kind of weakness. As the finance guy of the co-op, someone working with bankers, I'm sure it would be impossible to say all the equity belongs to the members. To have a relationship between the equity belonging to the members through shares and the equity belonging to the co-ops...so there is something.

    What I'm saying is that it's about $33 million, and the cost of it is a deferral. What we don't get today will be paid in three, five, or seven years, depending on when the shares are redeemed. And the process goes through time, so there are things taking place. The cost will be zero-based because what you redeem is going to be closer to what you buy back.

    They estimate the cost over a three-year period will be the cost of the money. So the cost of interest for the government for not getting the money now... instead of getting their money sometime in the future, they estimate for a three-year period a cost of $4.1 million...Canadian base. And it will go to $7.5 million if all the co-ops issue 100% patronage in shares; that's for a three-year period.

À  +-(1045)  

+-

    The Vice-Chair (Mr. Nick Discepola): Thank you.

    Do you have any more questions?

    Mr. Schmidt.

+-

    Mr. Werner Schmidt (Kelowna, CPC): Thank you, Mr. Chairman, and thank you, gentlemen, for being here.

    I think it's a very interesting proposal you're making. I'd like to ask you, if the income tax was adjusted so the share dividend in effect were non-taxable or were a deferred tax, why would the co-op issue cash at all? Why wouldn't it give all the dividends in—

    A voice:— [Inaudible—Editor]—

    Mr. Werner Schmidt: No, that's the case now. Given your proposal, let's say that proposal was accepted, that the dividend portion that would be shared would be a deferred tax, why would the co-op not issue all dividends in the form of shares?

+-

    Mr. Pierre Gauvreau: We can all answer this. I'll give you just one practical example.

    You have, let's say, a hundred members in your co-op, and you come up at the annual general meeting and say, we're going to give everybody a patronage dividend all in shares. Mr. X is about to retire next year. He says, that's okay; I'll get it next year. Mr. Younger-one says, hey, I need money to invest in my farm; I don't need shares of the co-op to invest in my farm; I've increased my purchases and therefore I'm willing to leave some to support my part of the cost of doing business with the capitalization of the co-op, but I need money for my farm.

    That's where the trade-off would come in. To satisfy the members, people would have to consider the best balance for the group, because in a co-op it's done with a recommendation at the general meeting.

+-

    Mr. Werner Schmidt: I don't need to go any further. I can understand that. I know where you're coming from.

+-

    Mr. Pierre Gauvreau: The other point is that it depends on the philosophy of a given co-op. A given co-op may be very dynamic, aggressive, and wanting to do things. They are willing to do it 100%, but you must have a payback some time. Some others will say, notwithstanding.... Even in Quebec, with the law existing right now, nobody has gone from one extreme to the other. They continue their practice, except that they have a new tool to better manage, better plan what they can do.

+-

    Mr. Werner Schmidt: Given the current atmosphere, there's no doubt they would do that. I can understand that. I'm trying to project your proposal forward. The dividends, whether they're shares or whether they're cash, are all considered income as far as the income tax return is concerned, right?

+-

    Mr. Pierre Gauvreau: That's right.

+-

    Mr. Werner Schmidt: Okay. Now, your cash part is used in part to pay tax on that which you really don't have cash for; you have it in the form of shares. My question is this. If you defer this, that's all very well. Now this person retires, and the income at this time may be considerably less than it was during the time he had the dividend issued. At what rate would the deferral take place? Would it be at the rate In the year he got these shares or in the current year?

+-

    Mr. Pierre Gauvreau: There could be regulations to monitor that, as there are regulations in the RRSP.

+-

    Mr. Werner Schmidt: I know there are regulations. What's your proposal?

+-

    Mr. Pierre Gauvreau: What we propose is that the cooperative... On this tax deferment, we haven't put a limit, except that if a cooperative obtain a certain level... As we have done in the cooperative investment program, if you obtain a certain level, there's no need for capitalization; therefore, this might not apply, for instance, to a certain type. Or if a cooperative has issued shares outstanding for more than x number of years—let's say 10 years—it may become a deemed revenue for a member.

À  +-(1050)  

[Translation]

+-

    Mr. Denis Richard: In my opinion you have to look at it as a form of assistance for agricultural cooperatives. At first glance the idea of helping them with their tax deferral and their cooperative investment plan may seem unfair, but the fact is that several countries do it, and for good reason. These agricultural undertakings are in the regions. They promote regional development in the country.

    In Canada, all agricultural cooperatives are outside of large urban centres. What's unique about them is that they do regional development, but they don't have access to everyone's capital. They only have access to their members' capital. A private company which would want to develop in the regions would have access to public capital, something that cooperatives do not have. So their capacity, in capital terms, rests on their members.

    A few cooperatives have tried going public, and each time, it was a failure. It's as though they were altering their nature and, in so doing, members had less faith in them. The best example of that would be the Saskatchewan Wheat Pool, in my opinion. After it went public, its members abandoned it, because there was a conflict between the property of the producers and the priority given to stock market shares.

    We want to ensure that agricultural cooperatives continue to be capitalized by producers. We are therefore asking the government to offer an incentive, while bearing in mind the fact that these companies do regional development. Their long-term survival is much more significant than that of private companies.

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    The Vice-Chair (Mr. Nick Discepola): Thank you.

[English]

    Mr. Schmidt, our guests have to leave at 11:15, and I've been very generous; I've given you 16 minutes. I want to give the other people some time.

    Monsieur Paquette, s'il vous plaît.

[Translation]

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    Mr. Pierre Paquette (Joliette, BQ): Thank you very much, Mr. Chairman.

    Welcome. You've already given a good explanation of the situation, and I'd like to continue in that vein.

    From what I understand, cooperatives give their members patronage dividends based on purchases or the use of services. These paid dividends are currently taxable at a rate of 100%.

    Did the individual members or the boards decide how much is paid in cash and how much is issued in common shares?

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    Mr. Denis Richard: The members, during their annual general meeting, decide...

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    Mr. Pierre Paquette: Collectively.

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    Mr. Denis Richard: According to the Canadian Cooperatives Act, the members decide what they will do with the surplus during their annual general meeting, whether they will distribute it out as patronage dividends or whether they will reinvest it in the company. Sometimes they can decide to declare it but not take possession of it immediately. But they are taxed on it right away, as soon as it is declared.

À  +-(1055)  

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    Mr. Pierre Paquette: All right.

    From what I understand, it's good for the cooperative because it's an incentive to leave money in the cooperative in a way.

    With respect to common shares, if they cost $5 each, and that doesn't change, then it's not really like capital stock. But it's good for the members as well.

    If you're looking at planning for retirement, it seems to me that the idea of maintaining part of your capital... It's a bit like an RRSP. The only difference, is that the money stays there. So, the agricultural producer's taxes are deferred and once he retires, he can decide to withdraw part of his shares to avoid having to pay as much tax. That's what happens in the case of an RRSP. It's not very different.

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    Mr. Denis Richard: That's what they end up doing, because they have to pay taxes today...

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    Mr. Pierre Paquette: They withdraw everything at once.

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    Mr. Denis Richard: They say they would rather withdraw everything and invest in an RRSP. That doesn't increase their taxes.

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    Mr. Pierre Paquette: All right.

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    Mr. Denis Richard: The government doesn't receive more money, but the money doesn't go back into the co-op either. They ask for their money, because in any event, the money is subject to tax, then they turn around and buy an RRSP, which is invested who knows where, in Canada.

    This is why we're saying that if you would give them the same advantage as when they invest in an RRSP, producers will leave their money in the cooperative, which is in the region and promotes regional development.

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    Mr. Pierre Paquette: So essentially, seeing as we have to make a recommendation on that point, we could set the amount which has to stay in the co-op and have tax deferred up to a percentage of farmers' income.

    Let me explain. In the case of an RRSP, you can't invest 100% of your income in an RRSP, you can only invest a percentage of your income. So, for instance, we could set the level at 20% of the agricultural producer's income.

    I know that patronage dividends are not quite the same thing, but if we have a recommendation to make to the Minister of Finance with respect to the tax deferral limit, or the assets which could temporarily be tax exempt, could that be an interesting possibility?

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    Mr. Denis Richard: It could be, but I don't think that you're looking at an exorbitant cost for the government. In fact, those taxes will still have to be paid later on. It's similar to an RRSP.

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    Mr. Pierre Paquette: But for an RRSP there's a limit precisely because we don't pay taxes today. In the end, there's no guarantee that the level of taxes will be the same, because retirement income is generally less than work income.

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    Mr. Denis Richard: But if you consider the income of Canadian producers over the last two years, it's practically nil.

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    Mr. Pierre Paquette: I fully agree with you. I saw Mr. Pellerin two weeks ago and he did enlighten me on this issue.

    I have two other questions. How long have you been suggesting these two measures? They seem so interesting and obvious, and I am aware of the serious problem capitalization poses for cooperatives. How long have you been proposing this? And what arguments did the Department of Finance use to postpone decision-making? Let's hope that Mr. Goodale will be more open to this than previous Finance ministers.

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    Mr. Claude Lafleur: The Coopérative fédérée has travelled throughout Canada, and over the last three years, in cooperation with Canadian cooperatives associations, we've been asking the government to study this issue. We were involved with Mr. Speller and Mr. Mitchell in the working group, and in the committee which held hearings in Saint-Hyacinthe. In fact, each time we appeared before federal committees, we were well received.

    We were also given a favourable hearing by Mr. Vanclief. In fact, he's the one who funded the study which confirmed that our requests were appropriate. The department however hesitated for two or three reasons, the first being the cost of our initiatives. Given that they haven't done this type of work, their assessment of the cost was much higher than ours. However, Ernst & Young, the company that did the studies, estimated the costs using two measures, and the costs according to them would be $15 million.

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    Mr. Pierre Paquette: For Quebec?

Á  +-(1100)  

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    Mr. Claude Lafleur: For the whole of Canada. So, it's not very costly, and I would say we settled the issue this morning, with Mr. Goodale.

    The second question was whether it should apply only to agricultural cooperatives. The officials were concerned by fairness, in this case. Well, we were able to prove that since agricultural cooperatives are in the regions and require much more capital—compared to consumer cooperatives or funeral home cooperatives for instance—the members have to make a much more sustained effort than they would in other cooperatives. That opinion was shared by the Europeans and the Americans as well. Specific tax treatment is justified in the case of agricultural cooperatives.

    Third, they were concerned with knowing whether people were unanimous on this point throughout Canada. With respect to other cooperatives, I will ask my colleague from CCC to answer your question.

    The last issue had to do with fairness for other sectors of the economy. On that point, we reiterated our argument, which is recognized by all industrialized nations, to the effect that it is considered a very effective measure when it comes to regional development and job creation. Politically speaking, it's excellent for a nation.

    A nation's wealth is derived from two sources: its capital and its entrepreneurs. As far as we're concerned, we are entrepreneurs, and moreover, we have capital. We would like you to encourage these farmers who are entrepreneurs, who are having a hard time making ends meet, who don't have much money, to invest in their cooperatives, not only so that they can afford services, but also to offer some to the community.

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    Mr. Pierre Paquette: And with respect to people agreeing unanimously?

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    Mr. Réjean Laflamme: Some of our anglophone colleagues from the Federated Co-operatives Limited—its headquarters are in Saskatchewan, but it is the federation of consumer cooperatives in the four western provinces—had expressed some reservations. However, we continued our discussions with them as well as with our colleagues from the Canadian Co-operative Association. Subsequently, it became quite clear that the demands which had come out of the Ernst & Young study, which the Coopérative fédérée submitted to you this morning, had been misunderstood.

    Over the next few days, the Federated Co-operatives and the CCA will be meeting. I think the objective of these meetings is to explain to them what the initiatives are about. As we've already stated, these measures are targeted to agricultural cooperatives only, not consumer cooperatives. So people should not be concerned about the implementation of these measures.

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    Mr. Pierre Paquette: As far as I'm concerned, these measures should be recommended by the committee, all the more so since in the budget, there's an entire section on social economics. In it, the capitalization of social economy enterprises other than the agricultural cooperative movement and the Mouvement Desjardins is raised.

    So, the budget recognizes that there is a capitalization problem because of the specific nature of cooperatives. In my opinion, it would be normal for the finance minister to be open to this suggestion. For my part, I undertake to promote this within our committee.

    I thank you. I will now give the floor to our Liberal friends.

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    The Vice-Chair (Mr. Nick Discepola): Mr. Paquette and Mr. Duplain, if you wish, you can split your time. You have a maximum of 10 or 15 minutes.

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    Mr. Massimo Pacetti (Saint-Léonard—Saint-Michel, Lib.): I would like to add that we are here because of my colleague Claude Duplain. Usually I don't like to get into political observations, but I think that in Claude you have the best possible lobbyist you could ever have in the House of Commons. That's why we're here.

    This isn't the agriculture committee but rather the finance committee, and that's why I would like to talk figures. I would like to a make a request for a one-page summary which would explain how patronage dividends work, and whether they are dividends or returns. I would like it if on one page you could describe how the system works and on another page, you could say how, generally speaking, costs are calculated throughout Canada. The questions I have will be related to this.

    How are the cooperatives currently structured? Do the owners have stock?

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    Mr. Denis Richard: They are common shares; not stock. In a private company, when the company is doing well, the value of stock increases, whereas for cooperatives it's always based on face value. So if you have $100 invested in a cooperative, even if the cooperative brings in profits year after year, after 20 years, you'll still be withdrawing the nominal value of $100. The return is in use rather than in equity.

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    Mr. Massimo Pacetti: All right.

    So, are patronage dividends 100 per cent taxable for the individual, or do some companies get some?

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    Mr. Denis Richard: Yes, some companies get patronage dividends.

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    Mr. Massimo Pacetti: So someone could be taxed at a rate of 20 per cent or 50 per cent.

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    Mr. Denis Richard: Yes, depending on whether you are dealing with an individual or a company or corporation.

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    Mr. Massimo Pacetti: So, even if it's paid out in cash, it could be issued in dividends.

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    Mr. Denis Richard: It's not a dividend. Patronage dividends are different. They are based on use. Dividends are always calculated according to the amount invested in a company. Patronage dividends are calculated on the business you had with a given company. I could have invested $100,000 in a cooperative, and my neighbour $100. At year's end, if I've made no use of the co-op, if I didn't purchase anything from the co-op while he spent $100,000, he will have a return on his purchases, and not on the money invested in the co-op.

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    Mr. Massimo Pacetti: So someone who invests $100 does not have a return on...

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    Mr. Denis Richard: No, you have to make use of it.

Á  +-(1105)  

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    Mr. Massimo Pacetti: I see.

    So, in the end, when someone wants to withdraw from the cooperative, he or she cannot sell his or her shares to someone else. It has to be the co-op.

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    Mr. Denis Richard: Yes.

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    Mr. Massimo Pacetti: So, if I'm not mistaken—and correct me if I'm wrong—when someone retires, the government is going to foot the bill as they say.

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    Mr. Denis Richard: No, no. When people decide to retire, the cooperative will reimburse them. But today, everyone pays taxes when the amounts are declared, even if they're not withdrawing any money. So either way, when a person retires, taxes are paid. There's no point in leaving it in the company once a person quits farming.

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    Mr. Massimo Pacetti: The reason I ask you this is because when someone retires, someone has to take his place.

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    Mr. Claude Lafleur: That's the cooperative's problem.

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    Mr. Denis Richard: You have to find another member or more capital.

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    Mr. Pierre Paquette: He can retire, leave the money there, and withdraw it gradually.

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    Mr. Massimo Pacetti: No, I understand that, but even if there is a tax deferral, how can you get new people interested?

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    Mr. Denis Richard: This will help. It's up to us to devise a business proposal which is strong enough to sustain the interest of the next generation of producers.

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    Mr. Claude Lafleur: I find your question interesting. You know, in Quebec and in Canada, we lose eight agricultural producers per day. Out of the eight we lose, six of them are members of the co-op. When they retire, they obviously withdraw their money from the co-op. You have to replace them with bigger producers. But bigger producers have bigger farms and their capital is precious to them. They have the choice of investing it in a company that gives them no return, because this capital cannot be evaluated, or they can invest it in their own farm. We know that when it comes to regional development, co-ops, hardware stores, services—because we are the top oil distributors in the rural regions—processing, all of that is done by cooperatives. So, if there is no capital, when those people die they are not replaced by private companies, because they are not interested in the regions. Gas bars such as Sonic's are cooperatives. Esso Imperial Oil is not going to go there.

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    Mr. Massimo Pacetti: What is the percentage of co-ops in the rest of Canada? We have to sell this on a national scale. What is the percentage?

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    Mr. Pierre Gauvreau: According to one study there are 1,110 Canadian cooperatives which could be affected by these measures, representing about 14,400 members.

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    Mr. Massimo Pacetti: Most of them are in Quebec?

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    Mr. Pierre Gauvreau: No.

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    Mr. Massimo Pacetti: What percentage of them are in Quebec, versus the rest of Canada?

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    Mr. Pierre Gauvreau: Twenty-five per cent.

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    Mr. Massimo Pacetti: So, 25 per cent of the savings will be in Quebec out of the $15 million.

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    Mr. Pierre Gauvreau: It all depends on who's eligible. It could be anywhere from 25 to 40 per cent, when compared with the rest of Canada, because in certain sectors, there are more cooperatives in Quebec than—

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    Mr. Massimo Pacetti: I ask you this for the following reason. If the Minister of Finance introduces this measure, will other cooperatives be created overnight throughout Canada in order to take advantage of it? Everything is structured more or less the same way.

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    Mr. Réjean Laflamme: It will obviously be easier to create new ones. We're not saying there will be others overnight. But it will be easier to create others thanks to this instrument, obviously, because new producers who want to create a new cooperative will know that they can defer their taxes.

    There's also the issue of the cooperative investment plan. We're only looking at the issue of dividends. Take Quebec, for instance, which has had a cooperative investment plan for 10 or 15 years now. There have been many more cooperatives created in the agricultural sector and in other sectors than in the rest of Canada.

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    The Vice-Chair (Mr. Nick Discepola): I thank you for your cooperation.

    Mr. Duplain, you have seven minutes.

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    Mr. Claude Duplain (Portneuf, Lib.): Hello, gentlemen. Welcome. I would like to ask Mr. Lafleur a question.

    I have seen figures according to which cooperatives are much more prosperous than ordinary companies, even though they lack capital. Have you even seen these figures? I was told that there were fewer bankruptcies for cooperatives, because people work together and that when you create a cooperative, as opposed to a company—

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    Mr. Claude Lafleur: They are not necessarily more prosperous, but they're more resilient, as people say nowadays. Studies prove that... We have been in existence for 84 years. Cooperatives are celebrating their 60th anniversary. These companies last longer than private companies. They have more staying power. With respect to their prosperity, you'd have to look at the figures. These companies do not have an abundance of capital. They do, however, offer us many services.

Á  +-(1110)  

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    Mr. Claude Duplain: The Standing Committee on Finance and the Minister of Finance will surely ask how much this will cost. As far as I'm concerned, cost is important, but I'm very interested in returns as well. Could you explain the returns? Massimo was saying a little earlier on that if we pass this measure, there would be more cooperatives. So, this measure may cost more and more, but what will the return be? If it costs more, perhaps there's also a bigger return.

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    Mr. Denis Richard: I think there's a very good example of this. I was telling Mr. Goodale this morning that cooperatives are engines of growth in the regions. We gave the example of a cooperative in Île-aux-Grues. Perhaps you don't know Île-aux-Grues, it depends on the region you come from in Canada. It's a small island near Quebec City, in the St. Lawrence River. There are six agricultural producers, actually there were six, now there are only five. The cooperative investment plan allows other people to invest, not only producers. The staff of the cooperative can also take part in the cooperative investment plan.

    There was an investment project and everyone had to pitch in, from the staff to the producers. They reinvested in their cooperative, which produces cheese; it is a dairy cooperative. They improved their cheese manufacturing methods. They produced two new varieties of cheese and now five or six years after the investment, they can't even meet the demand. The president of Île-aux-Grues said to me a month ago that for the first time in his life—he's 60 years old—he saw a producer who is not from Île-aux-Grues buy a farm there.

    I don't know if you understand. We ensure that the money that is in the regions stays in the regions. As was stated earlier, in any case, people try to find ways to defer their taxes, but thanks to the cooperative investment plan we ensure that people in the regions invest in their region and that they take the success of the investment to heart. Whenever people invest their money, be they employees or producers, they do not want the company to fail. Cooperatives may go bankrupt, just as private companies do. If the cooperative fails, all of these people will lose their money. The money is on the line. It's a regional investment and there are a lot of people who are keeping an eye on it to make sure it works.

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    Mr. Claude Duplain: The member for Abitibi--Témiscamingue gave me an example at one point of an RRSP, where people invested in funds such as union funds or other funds—I don't know them all—and the money was supposed to stay in the region. Well, it would seem that out of $200 million invested, only $6 million were re-invested in that area.

    Can that happen to cooperatives?

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    Mr. Denis Richard: That would be impossible.

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    Mr. Claude Duplain: This is legislation which would ensure that the money invested in a cooperative remains in the region.

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    Mr. Denis Richard: That's impossible because the CIP is accountable to the co-op unless the co-op invests in other regions. But that would mean extraordinary development, which is a bit rare: there are other cooperatives elsewhere. So we ensure that in the case of cooperative investment, in the Quebec Cooperative Investment Plan, the money from the regions stays in the regions. The money is not exported from the region, it is used for development in the region.

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    The Vice-Chair (Mr. Nick Discepola): Do you want to leave the last question for Mr. Cuzner?

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    Mr. Claude Duplain: Yes.

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    The Vice-Chair (Mr. Nick Discepola): Thank you.

    Mr. Cuzner.

[English]

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    Mr. Rodger Cuzner (Bras d'Or—Cape Breton, Lib.): I'm asking for advice, I guess, and it will probably be directed to Monsieur Laflamme.

    I come from Cape Breton. I have a very active cooperative community in Cheticamp, probably about eight very active, viable, successful co-ops, whether you look at groceries, or insurance, or a major fishery there that's all cooperative and very successful. It's a community that really tries to address its own problems and concerns; they seek solutions within themselves, and they've been very successful at doing this.

    But there's a group of seniors who are trying to put together a fairly significant housing project. I guess the problem lies with CMHC not being willing to cover the insurance on the mortgage. If it were a private venture they would, but in light of the fact that it's a cooperative, they are not willing to really share in the risk. I guess the position is that they can't come back on any one individual—or the entity itself.

    I'm just wondering whether there is any advice I can pass on to this group, who seem to be spinning their wheels with this problem right now. It seems there's no way we can specifically assist this cooperative.

Á  -(1115)  

[Translation]

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    Mr. Réjean Laflamme: The comment I could make about that is that Canada Mortgage and Housing Corporation has certain rules which, unfortunately, are not very favourable to housing cooperatives. The only recommendation I could make is to work with your colleagues and convince the people at CMHC to change the regulations and make sure that housing coops are the kind of business that can get CMHC's support for the kind of project that the people in Chéticamp have developed. I think that senior citizens have tremendous needs in rural areas and that housing coops could meet those needs but we need the CMHC to do this and that is not possible under existing rules. So we'll need some changes to existing regulation.

[English]

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    Mr. Rodger Cuzner: Do you see this in other areas? Is this a situation that's not unfamiliar?

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    Mr. Réjean Laflamme: Oh yes, all across Canada it's the same issue, because CMHC has the same regulation all across Canada.

[Translation]

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    The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Cuzner.

    I would like to thank our guests. I would also like to publicly thank and congratulate our colleague Mr. Duplain for his work. He has not only created awareness in the departments but in the whole caucus and I believe he spearheaded this whole campaign. So, Claude, on my behalf and on behalf of the members of this committee, thank you very much.

    We have challenges, but the Minister of Finance actually threw down the glove. There are some irritants in some aspects, so we'll try to analyze them and make concrete recommendations shortly. That will depend on what the Prime Minister decides next week.

    Thank you very much.

    Members of the committee, I'd like to inform you that we're planning a meeting with the micro-breweries Tuesday afternoon as well as with representatives of the wine industry.

[English]

    It's the jewellery industry on Wednesday. So keep those tentatively open: Tuesday afternoon and Wednesday afternoon.

[Translation]

    Mr. Richard, you have the last word.

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    Mr. Denis Richard: Thank you for giving me the last word. I would also like to thank Mr. Duplain, who has helped us enormously. La Coopérative fédérée is a producers' co-op and as our business is a democratic one we make a point of not hiring lobbying firms to present our cases. We are used to democracy, we think that Canada is a democratic country and we trust democracy so much that we thought we would be able to defend our position with the help of our elected representatives.

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    The Vice-Chair (Mr. Nick Discepola): And it's a lot less expensive.

    Some hon. members: Oh, oh!

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    Mr. Denis Richard: So I hope your deliberations will be favourable to our cause and that we will be meeting again.

-

    The Vice-Chair (Mr. Nick Discepola): Thank you very much and have a good trip back.

    The meeting is adjourned.