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37th PARLIAMENT, 3rd SESSION

Standing Committee on Finance


EVIDENCE

CONTENTS

Monday, May 10, 2004




¹ 1535
V         The Chair (Mr. Roy Cullen (Etobicoke North, Lib.))
V         Mr. Brian Willis (Senior Chief, Sales Tax Division, Tax Policy Branch, Department of Finance)

¹ 1540
V         Mr. Gilbert Ménard (Senior Chief, Business Income Tax Division, Department of Finance)

¹ 1545
V         The Chair
V         Mr. Monte Solberg (Medicine Hat, PC)
V         Mr. Brian Willis
V         Mr. Monte Solberg
V         Mr. Brian Willis
V         Mr. Monte Solberg
V         Mr. Brian Willis

¹ 1550
V         Mr. Monte Solberg
V         Mr. Brian Willis
V         Mr. Monte Solberg
V         The Chair
V         Mr. Gary Pillitteri (Niagara Falls, Lib.)

¹ 1555
V         The Chair
V         Mr. Gary Pillitteri
V         The Chair
V         Mr. Brian Willis

º 1600
V         Mr. Gary Pillitteri
V         The Chair
V         Mr. Brian Willis
V         Mr. Gary Pillitteri
V         Mr. Brian Willis
V         Mr. Gary Pillitteri
V         The Chair
V         Hon. John McKay (Scarborough East, Lib.)

º 1605
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay

º 1610
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay
V         Mr. Brian Willis
V         Hon. John McKay

º 1615
V         Mr. Brian Willis
V         The Chair
V         Hon. John McKay
V         The Chair
V         Hon. Maria Minna (Beaches—East York, Lib.)
V         The Chair










CANADA

Standing Committee on Finance


NUMBER 021 
l
3rd SESSION 
l
37th PARLIAMENT 

EVIDENCE

Monday, May 10, 2004

[Recorded by Electronic Apparatus]

¹  +(1535)  

[English]

+

    The Chair (Mr. Roy Cullen (Etobicoke North, Lib.)): I call the meeting to order.

    We have officials here from Finance Canada to give us some more information on these various small business tax measures. We have had presentations recently on the excise tax, jewellery, brewers and vintners, and taxation issues with respect to cooperatives.

    We have Mr. Brian Willis, senior chief, sales tax division, tax policy branch,

[Translation]

    and Mr. Gilbert Ménard, Senior Chief, Business Income Tax Division.

[English]

    Welcome to both of you. I'm sure you're here to sing the praises of these various tax proposals, so we look forward to hearing from you.

    The floor is yours, Mr. Willis.

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    Mr. Brian Willis (Senior Chief, Sales Tax Division, Tax Policy Branch, Department of Finance): Thank you, Mr. Chairman.

    We appreciate this opportunity to appear before the committee and on behalf of the Department of Finance provide input to the committee's consideration of proposals for excise tax and duty relief for small brewers, producers of Canadian wines, and jewellers, and measures to assist cooperatives.

    We've distributed our opening remarks. I will touch briefly on some of the highlights, as will Gilbert. Then we will be available to answer your questions.

    The Canadian Jewellers Association has asked the government to repeal the 10% excise tax on jewellery. In various submissions, the association has noted that this is a very old tax and the tax is not really a luxury tax. Studies commissioned by the association and the Department of Finance have identified deficiencies in the tax that make it prone to tax avoidance and evasion. The early imposition of the tax in the manufacturing distribution chain favours imports over domestically manufactured goods.

    From time to time, options for improving the tax have been considered. However, to date, no successful improvements to the tax have been made, and the industry has generally not favoured measures that have been considered in the past, preferring instead to work toward the full repeal of the tax.

    If the jewellery excise tax were not already in place, it is less than certain that Parliament would want to legislate one today. But the tax has been in place for more than 80 years and generates close to $100 million per annum. Any decision to repeal the tax would have an impact on the government's overall fiscal planning.

    Turning to the issue of small brewers, federal excise duty is about $2.29 per case of 24 bottles. The excise duty is payable by the brewer at the time of packaging, or, in the case of imported beer, by the importer at the time of importation. Exports are exempt. The rate has not been increased since 1991. All Canadian provinces and territories also tax beer, and eight provinces provide rate reductions for small brewers.

    Although the provincial tax rate may be lower than the federal excise duty for certain volume thresholds of small beer production, the provinces generally tax beer at much higher rates than the federal government.

    The Canadian Association of Small Brewers has proposed various models for a reduction in the federal excise duty on beer produced by small and mid-sized brewers in Canada. The association's most recent proposal, made before the committee last week, was for a variable reduction in the excise duty rate ranging from 90% for the first 2,000 hectolitres of beer produced each year by a brewer with production under 300,000 hectolitres, declining in stages to a reduction of 15% in the excise duty rate on production between 50,000 and 75,000 hectolitres.

    For the committee's information, a hectolitre is about 12 cases of 24 bottles. So you're talking about a fairly substantial volume here.

    The association estimated that this would provide tax savings of between $50,000 per annum for a very small brewer and close to $700,000 for brewers producing between 75,000 and 300,000 hectolitres. There are approximately 90 microbreweries and 100 brew pubs operating in Canada. Most produce less than 10,000 hectolitres per annum.

    From a tax policy perspective, the current excise duty system is fair. Excise duty applies on both domestic and imported products at the same rate. Exports are exempt. The excise duty system does not place small producers at a disadvantage relative to large producers or importers. What small brewers are requesting is a benefit delivered through the tax system to increase their margins and strengthen their position in the market, which is already a growing one for small brewers.

    It is reasonable to concur that such financial assistance, whether provided through a reduction in excise duty or by other means, would assist this industry to become more profitable, to expand, and to create jobs. Such an outcome would likely occur in most small business sectors were the government to provide the level of financial assistance proposed by the small brewers.

    To put the small brewers' proposal in perspective, it is useful to compare it to the small business income tax deduction. This deduction, which reduces the basic federal corporate income tax rate to 12% for the first $250,000 of active business income of a Canadian-controlled private corporation, reduces income taxes payable by most small businesses by up to $22,000 per annum.

    In comparison, the small brewers' proposal would delivera benefit to small brewers of between $50,000 and $684,000 per annum.The brewers have estimated that their proposal would cost the federal governmentabout $11 million per year. About 45% of this amount would go to the seven largestmicrobreweries.

    The Small Brewers Association has also stressed the need for Canada to provide anexcise tax regime comparable to what exists in a number of other countries, and inparticular the U.S. In fact, in a number of provinces, small brewers already enjoymuch more beneficial treatment than is available to small brewers in the U.S., throughprovincial tax reductions.

    The Canadian Vintners Association has requested an exemption from excise duty onthe first 500,000 litres of wine produced exclusively from Canadian grapes and agraduated phase-in of the duty between 500,000 and 900,000 litres. The full rate ofduty would apply to production above 900,000 litres.

    The vintners have not suggested that there are any particular problems with the taxsystem. Rather, like the brewers, they are proposing measures that would providegovernment financial assistance to certain types of production in their industrythrough a reduction in federal excise duties.

    The federal excise duty on wine is currently 51.2¢ per litre--about 38¢ on a typical 750-millilitre bottle of wine. Compared to provincial levies, the rate of excise duty on wine isvery low. For example, the provincial levy is approximately $5 per litre on anaverage-priced wine in Ontario, and in Alberta it's about $3.45 per litre on wine of any pricecategory.

    At a rate of only 51¢ per litre, there is little evidence that the federal excise dutyis an impediment, even for very small vintners.

    Gilbert.

¹  +-(1540)  

[Translation]

+-

    Mr. Gilbert Ménard (Senior Chief, Business Income Tax Division, Department of Finance): I'll be very brief, Mr. Chairman.

    I believe you met with representatives of co-operatives on April 29 last to discuss two specific tax-based measures for agricultural co-operatives. The first is a deferral of taxation of patronage dividends paid in shares, while the second is a federal co-operative investment program, similar to the one currently in place in Quebec which would provide deductions for agricultural co-operative members and employees. In Quebec, this deduction is currently equal to 125% of the original investment.

    Let me just mentioned four facts about the proposed measures. In terms of the tax system, paying dividends to co-operatives has its marginal advantages. I could address this issue further if you have questions later, but for now, I invite you to consult the table on the last page of the document where we compare the tax treatment of a dividend, corporate dividend distribution and trust distribution. The column on the far right shows the proposed tax treatment of deferred patronage dividends.

    The second point I want to focus on is the cost of this measure. Co-operative representatives have quoted various figures. The important thing to remember is that this is indeed a tax deferral measure. People sometimes have a tendency to quote figures based on current values, but in terms of tax costs, and annual foregone tax revenues, it is estimated—and these estimates have been corroborated by Ernst & Young—that a similar measure at the federal level would cost in the neighbourhood of $30 million in terms of foregone revenues during the first year, and about $100 million over five years. Obviously, the losses would gradually diminish over time as tax payments were made.

    The third point I wanted to make concerns the fairness of these measures. As I said, the current tax treatment of co-operatives doesn't present any disadvantages as such. Introducing a measure that benefits co-operatives in particular would create an inequity. Furthermore, despite the fact that agricultural co-operatives are regional organizations, some are also very large operations. For instance, the Coopérative fédérée de Québec posts over $2.5 billion in sales each years. Therefore, fairness becomes an issue when a measure would give a very large cooperative an advantage that would not be available to a smaller business.

    Moreover, as co-operatives have mentioned and as you are doubtless aware, Ernst & Young have prepared a report on the capitalization of co-operatives. The report put forward 13 recommendations, nine of which were not of a tax nature. For instance, several of the recommendations called for co-operatives to resort further to the use of rationalized subsidiaries to obtain financing. This is one interesting option.

    Mention is also made of coordinating federal and provincial legislation to eliminate impediments to co-operative mergers. Again, this could be one solution to certain capitalization problems.

    That concludes my comments on the subject of co-operatives.

¹  +-(1545)  

[English]

    If you will allow me to conclude, most of the proposals before the committee for relief from the excise tax and duties, and assistance for cooperatives, have been on the table a number of occasions. They all imply fiscal costs, so lower taxes in one or more sectors will reduce the revenues, requiring higher taxes in other areas, lower spending, or reduced debt payments.

    The key question is whether these are the best measures for assisting Canadian businesses, given the fiscal resources available.

    That concludes our remarks. We're here to answer your questions. Thank you very much.

+-

    The Chair: Merci beaucoup, monsieur Ménard.

    Thank you, Mr. Willis.

    We'll go to a round of questions now, starting with Mr. Solberg. Let's make it a ten-minute round.

+-

    Mr. Monte Solberg (Medicine Hat, PC): Thank you very much, Mr. Chair. I appreciate the chance to ask some questions of you.

    I haven't been available for all these hearings, even though I'm pretty familiar with some of the issues from previous times with the finance committee. I think the most obvious one that has to be changed is the jewellery excise tax.

    I simply don't buy the argument that because they've been treated this way for the last 80 years and we've become hooked on this $100 million, we can't give it up. The jewellers also point out that it costs a lot of money to collect this, but I didn't see any reference to that in your document. Do you have any idea how much it costs to collect the excise tax?

+-

    Mr. Brian Willis: Yes, sir. There are a couple of numbers we have in that respect. I've seen numbers kicked around in the order of $7 million and $14 million, which the Jewellers Association put on the table recently. I'm not aware of where they would have found those numbers.

    In the tax evaluation report done in the nineties by the Department of Finance, the estimate was under half a million dollars as the collection cost. They put an upper bound of perhaps 1% of revenues at the extreme. In fact, they called into question some of the numbers that were kicked around at that time. More recently, I spoke to the CCRA to ask them for a current estimate, and their number was at most $1.5 million for the collection cost.

    In addition to that, obviously there are some compliance costs the industry faces in complying with the law. Previous studies in that regard have indicated that for large manufacturers the costs are negligible--they have it well set up in their computerized systems--but for smaller manufacturers the cost may be approaching 1% or 1.5% of their revenues.

+-

    Mr. Monte Solberg: So it's not insubstantial.

    I'm also sure that the fact that we have this excise tax distorts buying decisions too. Are there any studies on that, do you know?

+-

    Mr. Brian Willis: The various studies touched on a number of things but tended to focus more on some of the technical difficulties. There was certainly some mention from an economic perspective of the non-neutrality of this kind of tax and hence the effect of depressing sales in this particular sector. I don't recall any of those studies giving any particular estimates of the magnitude of that effect.

+-

    Mr. Monte Solberg: On the issue of the brewers, you mentioned that the provinces already tax the small brewers relatively lightly, which helps make up somewhat for the fact that they are more heavily taxed overall than their counterparts in the U.S. It sounds like you're using that as a justification for not lowering the federal tax, the fact that provincial taxes are already fairly low. Isn't this just moving into their tax room to some degree?

    In this case it's not necessarily that you're going to increase taxes, but really, it's the same kind of concept, where you're justifying not lowering taxes on the basis that the provinces have already lowered them. I don't know if that's a very good argument.

+-

    Mr. Brian Willis: Well, the brewers have pointed to other tax jurisdictions, saying that around the world various countries offer reduced rates for small brewers.

    The point we were referring to, which I made in the opening remarks, is that if you look closely at the structure in Canada, both the provinces and the federal government tax beer and wine. In general, the provinces tax beer and wine at much higher rates than the federal government, but for small brewers a number of provinces have a very substantial rate reduction. If you look at the total picture, the amount of the rate reduction small brewers enjoy in Canada is actually much larger than it is in the U.S. For example, in Ontario, which is one of the best cases, Alberta, or Quebec, you have rate reductions that run from $1.35 to $4.75 per case of 24, whereas in the U.S. a typical reduction would be about $1.20 to $1.35 per case of 24.

    It's not a matter of arguing that we shouldn't be considering things federally; it's a matter of pointing out that one of the key points brewers have made about what has happened in other jurisdictions applies to Canada as well.

¹  +-(1550)  

+-

    Mr. Monte Solberg: But that's through the provinces, not necessarily through the federal government. When the provinces propose things like cutting taxes for small brewers, do they do this in consultation with the federal government?

+-

    Mr. Brian Willis: No. The provinces operate their own tax systems and they act independently on these issues both on the upside and the downside.

+-

    Mr. Monte Solberg: Thanks.

+-

    The Chair: Thank you, Mr. Solberg.

    Mr. Pillitteri.

+-

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Mr. Willis and Mr. Ménard, I think we should put down on the table a little more clearly the numbers and the figures you brought out for our colleagues.

    The handling of liquor and beer is not in your jurisdiction; it's provincial jurisdiction. That's quite clear. Therefore, you should be talking only about our jurisdiction, which is federal jurisdiction and not provincial.

    Mr. Willis, I hate to hear you mention that $3.50 in Alberta is a tax and almost $5 in Ontario is a tax. They are not taxes; that's markup. In Ontario, for a minimum price the Liquor Control Board of Ontario, under its jurisdiction places a product at the price it can sell it for. In the case of Alberta, it is the privatization of Alberta's liquor stores, which charge the wineries throughout the world equally. It is a tax. It's by giving up their rights to sell the product to the liquor control board and actually privatizing it.

    The two don't really jive and I think we should explain why. If the federal government does not care what happens to the grape and wine industry in Canada, I can understand that. It's the same thing for small breweries. We're talking about small brewers and how they create a lot of jobs.

    We should also explain that in the province of Ontario, when we went in with NAFTA back in 1988--well, in the case of the wine industry it was 1987, two years earlier--actually what it did was it really made two large groups in Canada. It gave them a licence to print money, and any other small entity that started after that was really up a creek, as the expression goes, for the simple reason that the stores that were private were totally grandfathered. Therefore, they had the ability to have that markup they would benefit from, and no stores could open after that. It's a private club. It became totally a private club; let's be truthful.

    So the federal government only cares about collecting money, 51.2¢ in excise tax. But does it do anything for the grower? And it blames the provinces: the provinces have higher taxes.

    You know, in Canada at least when we negotiated free trade, we put every province in line to comply with NAFTA, to comply with North American free trade, but the United States never did. There are 34 states in the United States that are in contravention of GATT, the free trade agreement, and the World Trade Organization because the jurisdiction over liquor and wine is given into the hands of the states. They have never even complied.

    So if we're going to talk about taxes...we're trying to save these breweries, and the wineries are saying they want to be treated equally because there would be some trouble within GATT if our tariffs and our charges were lower.

    I think it's quite simple. If the cost factor for these small breweries and small wineries is much higher, they won't have access to the marketplace like the large ones, which were grandfathered prior to free trade. Do we want to forget about these people who exist? That's fine, but let's not bunch them together and say they only charge more money here or more money over there. Specifically, the Province of Alberta privatized it; now let's see how it works.

    I would rather see that across the country. It works to say that every individual selling to the province of Alberta no longer buys a product. Everyone sends it; they own it and once it's in there, the private dealers go to the stores and sell the product, and the province delivers it--the province still holds the product--collects the money, keeps its taxes, and sends the rest to whoever sent the wine or the beer there. That's the private sector.

    At least in privatizing it they made it more equal, but for all the other provinces, I'm sorry. It's all one bag of mixed tricks.

¹  +-(1555)  

    The problem is with the smaller wineries and smaller breweries. Even though they might have some access to the liquor board to sell these products, they have so little margin to get prices up—because they have to be competitive—that it doesn't really pay for them to be competitive; they become non-competitive.

    That's why they were asking for a reduction of the 52¢ of the excise tax, because while taxes are put on when other products are coming in, it is in the domestic market where the money is, for any small brewery or small winery. Within their domestic market, if somebody is being helped in another country where the product doesn't cost them anything and they have export enhancement programs and it comes in here—they don't care; they've been subsidized by their country—they have a problem in their own marketplace.

    Is the federal government willing to alleviate some of these problem imbalances that occur outside of the country that these people have to compete with? Two, are they willing to take some responsibility within the jurisdiction of the provinces? The provinces, so long as they make the money, don't care. We have in Ontario now labour unions saying, don't privatize: we're making $1 billion; don't privatize. They're not telling the truth, because the Province of Alberta prior to privatization only made $300 million; now they're making $600 million. You have vested interests from groups outside the producers that make their own decisions.

    Is the federal government willing to look at this excise tax to try to make these entities more viable so they can survive? It has a lot to do with it.

    When we say “product of Canada” on wines we're going to need grapes that are produced in Canada. That only accounts for not even 8% of the total sales in Canada. I don't know where you get your figures. My figure is 8%. It means of all the wine sold in the province of Ontario, 8% is Canadian product; the rest is not Canadian product.

+-

    The Chair: Mr. Pillitteri, do you want to give him a chance to answer?

+-

    Mr. Gary Pillitteri: Would you like to answer some of those questions: what specifically they're willing to do, if they're willing to do anything; and how much is there more than that 8%?

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    The Chair: Those are political decisions.

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    Mr. Brian Willis: Mr. Chairman, perhaps I can respond in two ways.

    First of all, the first thing we have done in looking at these issues—and we've met on numerous occasions with the small brewers and the representatives of the vintners in Canada—is to look at the tax system. Do we have a problem with the federal tax system with respect to the application of tax to wine and beer?

    The answer to that question is that the tax system is operating in a very fair manner. It doesn't discriminate. It doesn't create problems. In fact, the wine producers who were in to see us haven't suggested that it is a particular problem originating from the tax system.

    The second question becomes one of whether, if the tax system is working in the way intended and in a fair way for these producers, there is a case made that financial assistance should be provided, whether through the tax system or by other means, to assist these businesses. In that respect, the conclusion we've come to, and in fact even that they have come to, is that the same case can be made for many small businesses. Were the government prepared to provide financial assistance to small businesses of these types—the small wineries, the small beer producers—yes, they create jobs, and they would expand their investments in their businesses, and they'd increase their profitability, but that same case can be made for most small businesses in Canada.

    Last week, in fact, Mr. Thompson, who was representing the small brewers, acknowledged that, in saying that many small businesses need greater access to capital.

º  +-(1600)  

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    Mr. Gary Pillitteri: Certainly the people who come to see you about the wine industry are all happy. There are only two groups of them. They control 87% of the total marketplace. One group stays just under the 70%—they don't want to be charged under the Competition Act—at 68% to 69% of the marketplace in the wine industry. Between both of them they have 87%. Then you have, in the province of Ontario, over another 100 wineries fighting for the 13%.

    Now, if you think they're all happy, when you have half of those 100 other wineries in trouble, but the only two groups that come to see you with representations are those two who hold 87%.... Sure, for them, there's no problem. They have over 300 products within the chain stores of the liquor control board. They also have some 350 stores, which would be equal to 350 wineries, where they have a mark-up for themselves. Everything is grandfathered; no other competition could be against them. So everything is nice and dandy; there's no problem with them.

    I have a problem, though, sir. I have a big problem when I know what's happening in the industry. I understand the problems of the small brewers. They're the ones who are creating jobs. I'm the one who is creating jobs within the wine industry, not the larger ones, sir. If you take one of those large groups—free trade came in fourteen years ago—they only had so much of a small percentage of the market. Today, with the free access they have and control of the marketplace, they've become the third largest in North America, sir. And they have money to burn because of the lopsided tax system and delivery system.

    An hon. member: That's not just sour grapes talking, is it?

    Mr. Gary Pillitteri: Without a doubt.

+-

    The Chair: Thank you, Mr. Pillitteri.

    Would you like to respond, Mr. Willis?

+-

    Mr. Brian Willis: Mr. Chairman, if I could ask for a point of clarification, the only group we have met with is Mr. Bill Ross, who represents the—

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    Mr. Gary Pillitteri: Yes, I know who he represents, sir.

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    Mr. Brian Willis: My understanding is he represents the smaller members of the wine-producing industry, and he has made representation primarily focused on the producers of Canadian wines from Canadian grapes, as he did before this committee.

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    Mr. Gary Pillitteri: Any time you want to have a meeting with me, I'd be more than happy to meet with you and give you facts and figures, sir.

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    The Chair: Thank you.

    Mr. McKay.

+-

    Hon. John McKay (Scarborough East, Lib.): Thank you, Chair, and thank you, witnesses.

    I just want to focus for the initial part of my time on the jewellery issue. A presentation that impressed me a great deal was made on May 5 here before this committee. I can't remember the name of the witness, but his presentation was that this is lousy tax policy. I thought he made a fairly compelling argument that we have lousy tax policy when it comes to the imposition of excise tax.

    His first point was that the tax violates the principle of neutrality. The point he made was it applies to $3 items of jewellery but doesn't necessarily apply to a $50,000 luxury automobile.

    His second point was there's no social or economic policy reason for singling out jewellery—again, why jewellery, as opposed to cars or fancy desks, or nice clothes, or things of that nature?

    His third point was that the burden of tax is highly variable across the products in the jewellery industry, depending on the trade and marketing channels. In other words, depending whether you were designated for some purposes as a retailer, you have a certain tax; and if you are designated as a wholesaler, you have another tax; and you could be the same person at the same time. That's creating a great deal of frustration.

    The tax distorts competition because of its uneven application among the various players in the industry, and the tax favours imports and discriminates against domestic manufacturing. One example had to do with somebody who was intending to get married, went down to Florida, purchased a $750 diamond engagement ring, came back, and would actually bring it in tax-free, unless they decided to get married several different times while they were down there. But buying the same ring up here would attract basically a $75 tax.

    So on the issue of tax policy, I'd be interested in your answer, because his argument struck me as quite forceful.

º  +-(1605)  

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    Mr. Brian Willis: Mr. Chairman, I don't think I could refute any of the arguments that were made by the witness. In fact, studies done by the association and by the department for a number of years have identified a number of weaknesses with this tax. Some of these studies go back to the days of the old manufacturers' sales tax. You'll recall it was widely acknowledged that the tax suffered a number of these same problems of uneven application, import bias, and so on.

    The issues are well researched at this point and are widely accepted. The primary issue that it has come down to is a matter of priorities. This is a tax that suffers from a number of deficiencies and weaknesses. It has been a matter of the other competing priorities that the government has faced in terms of tax reductions and limited fiscal resources.

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    Hon. John McKay: I'll accept your point that the department basically takes the view that this is not the greatest tax policy ever invented by mankind. The question then boils down to how to replace the revenues, from the government's standpoint.

    Is that where we're at on this particular issue?

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    Mr. Brian Willis: Certainly that is one of the issues, yes.

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    Hon. John McKay: Your gross is in the order of $100 million. You argue your net is in the order of $99 million. They argue that it's maybe closer to being in the order of $90 million through $85 million. I don't really know. I don't know what the figures might be. But in theory, doesn't this $100 million just simply go directly into the gross profit of the jewellers? If you cancelled this $100 million in tax today, they would have $100 million in their piggy banks, presumably directly to their profit line.

    Is that a fair assumption?

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    Mr. Brian Willis: I know the jewellers have made representations that at least for some in their industry this is coming out of their profit. I'm not sure that is necessarily the case for some of the larger retailers of jewellery, such as the chain stores, the department stores that are marketing primarily imported and lower-cost jewellery. I think the point is probably valid to a certain extent; there's a certain amount of backward shifting of this tax. But I don't think it would be 100%.

    And I'm not aware of any studies that have really quantified that, by either the association or the department.

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    Hon. John McKay: I take your point that maybe the profit enhancement, shall we say, is not as noticeable for the larger entities as it would be for the smaller entities. Still, in terms of return to the treasury, you would have another huge whack of money on which you would levy corporate income tax, I would think.

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    Mr. Brian Willis: In that regard there were a couple of studies done--one by the association and an evaluation done by the department in the early 1990s. They were looking at this idea that if the tax were removed, there really would be minimal cost to the federal government, and in fact both studies concluded that wasn't true—the one done for the association and the one done for the department.

    Essentially what some of those studies looked at was the effect of the removal of the federal sales tax in 1991, when the 13.5% tax was replaced by the GST. They looked at whether that resulted in more declarations, whether the underground economy was brought back into the legal economy, and hence whether there was an increase in other revenues.

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    Hon. John McKay: Even ignoring all the theory of increased business activity by virtue of removal of the tax, aren't you going to get a big chunk of this $100 million back in corporate income tax right off the top?

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    Mr. Brian Willis: These particular studies looked at it from the point of view of bringing the underground economy into the legal economy. If that were the case, then yes, you would get more. But the studies concluded that there was no evidence to support that, and in fact the evidence that existed suggested that this was intrinsic and there was no reason to believe that taking the tax off would necessarily result in more revenue.

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    Hon. John McKay: That's not my question. Whether this brings the underground economy into the mainstream economy, I don't really know. You tell me your studies are ambiguous on that point. I believe you.

    My question is that on the face of it, the federal government is giving up $100 million worth of revenue, but simultaneously, that should increase the profitability of the corporations that are in the mainstream economy. If that's true, then there is a tax attributable to that increased profitability, so the loss is not $100 million. The loss is...I don't know.

    Have you any thoughts on that?

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    Mr. Brian Willis: I understand your point. I understand what you're saying, and there would obviously be some.... If these people are already declaring income and paying the excise tax, presumably it would increase their profit margins. For those who are not profitable, it would potentially make them profitable. For those who already are profitable, yes, I understand your point.

    I do not have numbers as to what the percentage would be. It could vary quite widely, Mr. Chairman. It could be small businesses at the low small business rate, it could be larger businesses at a higher corporate rate, or it could even be individual proprietors who are not incorporated.

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    Hon. John McKay: The department has never done a workup on that point.

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    Mr. Brian Willis: No. Generally speaking, when we look at consumption taxes, when removing a consumption tax, reducing it, or imposing a new consumption tax, we don't follow through to the multiple order effects as to what the impact would be down the road on income taxes or other levies.

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    Hon. John McKay: If you have lousy tax policy and uneven application, and it has been there for years, the industry complains. Consumers are unorganized, so they don't complain all that much.

    Surely, in terms of trying to make the system become a more workable, smooth system, the department should be actively considering ways in which this $100 million loss can be replaced.

    For instance, on the GST question, the tax would still remain in place. I don't know whether taking $100 million out of excise tax actually stimulates economic activity. In theory, it should. In theory, it's somewhat of a replacement revenue, albeit at 7%, not at 10% across the board. Those are reasonable assumptions in terms of trying to replace the revenue that will be clearly lost.

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    Mr. Brian Willis: Mr. Chairman, there are perhaps two points in that question.

    One is that any time you reduce taxes by $100 million, regardless of where you do it, you would expect some spinoff economic effects. There's no indication that the jewellery tax is necessarily better than a number of other options.

    The second thing is really a matter of choices. Over the last number of years the government has chosen to emphasize income tax reductions as opposed to taxes such as this.

    Another option you've indicated is that the department should be looking at options. In fact, the department did consider, and discuss with the industry on a number of occasions, the possibility of making some improvements to this tax. It obviously remains an option. To this point, no improvements have been made, and the industry really hasn't favoured improvements to the tax.

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    Hon. John McKay: The industry didn't seem to be too thrilled with making improvements. They thought it was a deeply flawed tax and it would be better to be gone. Whether it's public posturing, I don't really know.

    Let me ask you, where's the fix? Do you do the fix in the threshold? Is that an obvious place to put it?

    Instead of putting it at $3, do you run it up to $100, do you run it up to $500, or do you do something of that nature? Is it a fix that makes any sense?

    I assume there are some intersecting curves here, where you end up with what appears to be a fix, and it turns out to be more costly than whatever it could have been worth.

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    Mr. Brian Willis: Certainly, moving the thresholds up, whether it's the threshold for the point at which the tax applies or the small business threshold that exists on the $50,000 exemption, it certainly raises issues. There's no question about that.

    Some producers would benefit, at the risk, though, of increasing the import bias. You would have more imports coming in under that threshold, at the risk of a disadvantage to producers on the small $50,000 licensing exemption threshold above whatever threshold you pick. All of the thresholds are arbitrary, so they pose some questions as to whether they would be effective in relieving the problems that have been identified.

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    The Chair: Okay. Thank you very much, Mr. Willis.

    Merci beaucoup, Monsieur Ménard.

    We're going to adjourn now, and then we're going to briefly regroup in camera.

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    Hon. John McKay: Are we going to ask any more questions?

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    The Chair: We've all had a ten-minute round.

    Ms. Minna, do you have any questions?

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    Hon. Maria Minna (Beaches—East York, Lib.): No, I don't have any.

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    The Chair: Okay. Thank you very much.

    We will go in camera, please, and talk about what we might do with the report.

    The meeting is adjourned.