FINA Committee Meeting

37th PARLIAMENT, 1st SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Thursday, April 11, 2002

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0905

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. Bryon Wilfert (Parliamentary Secretary to the Minister of Finance)

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0910

¿

0920

The Chair

Mr. Rahim Jaffer (Edmonton--Strathcona, Canadian Alliance)

Mr. Bryon Wilfert

Mr. Brian Willis (Senior Chief, Excise Act, Sales Tax Division, Tax Policy Branch, Department of Finance)

Mr. Rahim Jaffer

Mr. Brian Willis

Mr. Rahim Jaffer

Mr. Brian Willis

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0925

Mr. Rahim Jaffer

Mr. Bryon Wilfert

Mr. Rahim Jaffer

Mr. Bryon Wilfert

Mr. Jaffer

The Chair

Ms. Picard

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0930

Mr. Bryon Wilfert

Ms. Pauline Picard

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0935

Mr. Bryon Wilfert

Ms. Pauline Picard

Mr. Bryon Wilfert

Ms. Pauline Picard

Mr. Bryon Wilfert

The Chair

Ms. Pauline Picard

The Chair

Mr. Nick Discepola (Vaudreuil--Soulanges, Lib.)

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0940

Mr. Bryon Wilfert

Mr. Nick Discepola

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Bryon Wilfert

Mr. Brian Willis

¿

0945

Mr. Roy Cullen

Mr. Brian Willis

Mr. Roy Cullen

Mr. Brian Willis

Mr. Roy Cullen

The Chair

Mr. Scott Brison (Kings--Hants, PC)

Mr. Bryon Wilfert

Mr. Scott Brison

Mr. Bryon Wilfert

Mr. Scott Brison

Mr. Bryon Wilfert

Mr. Scott Brison

Mr. Brian Willis

¿

0950

Mr. Scott Brison

Mr. Brian Willis

Mr. Bryon Wilfert

Mr. Scott Brison

The Chair

Ms. Carolyn Bennett (St. Paul's, Lib.)

Mr. Brian Willis

Ms. Carolyn Bennett

Mr. Brian Willis

Ms. Carolyn Bennett

Mr. Brian Willis

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0955

Ms. Carolyn Bennett

Mr. Brian Willis

Ms. Carolyn Bennett

Mr. Brian Willis

Mr. Bryon Wilfert

Ms. Bennett

The Chair

Mr. Penson

Mr. Bryon Wilfert

Mr. Charlie Penson

The Chair

Ms. Patricia Malone (Chief, Excise Act Review, Sales Tax Division, Tax Policy Branch, Department of Finance)

À

1000

Mr. Charlie Penson

Ms. Patricia Malone

Mr. Penson

Mr. Brian Willis

Mr. Charlie Penson

Mr. Brian Willis

Mr. Charlie Penson

Mr. Brian Willis

Mr. Penson

Mr. Brian Willis

Mr. Penson

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

À

1005

Mr. Bryon Wilfert

Mr. Pillitteri

The Chair

Mr. Bryon Wilfert

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 086

l

1st SESSION

l

37th PARLIAMENT

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EVIDENCE

Thursday, April 11, 2002

[Recorded by Electronic Apparatus]

¿  (0905)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning, everyone. This is the Standing Committee on Finance. The order of the day is Bill C-47, An Act respecting the taxation of spirits, wine and tobacco and the treatment of ships' stores.

    We have the following witnesses: Bryon Wilfert, the Parliamentary Secretary to the Minister of Finance; and, from the department, Patricia Malone, who is chief of the Excise Act review and who is with the Sales Tax Division of the Tax Policy Branch; Brian Willis, senior chief for the Excise Act, Sales Tax Division, Tax Policy Branch; and Ron Brazeau, senior tax policy officer, Excise Act review, Sales Tax Division, Tax Policy Branch.

    Before I turn it over, I would like to welcome our new critic from the Canadian Alliance, Mr. Charlie Penson, to the finance committee for his first meeting.

    Officially, Mr. Penson, you'll be joining later, but I know today is your first time with us, so welcome.

    Mr. Wilfert, please commence your presentation.

    Mr. Bryon Wilfert (Parliamentary Secretary to the Minister of Finance): Thank you, Madam Chair. On behalf of the department officials, I'd like to thank you for the invitation to appear before the committee today to discuss Bill C-47. This legislation updates Canada's archaic Excise Act. I use the word “archaic” because the Excise Act is one of the oldest taxing statutes in Canada, with some of its provisions pre-dating Confederation. Except for periodic amendments over the years to deal with specific issues, the Excise Act has never been thoroughly reviewed and revised until now.

    Several factors have pointed to modernizing the excise framework. The existing Excise Act is not equipped to accommodate the technology in use today, or the new product marketing and distribution initiatives that have been introduced by the industry. Foreign competition has increased in the Canadian markets for beverage and non-beverage alcohol. Pervasive controls mandated by the act imposed high compliance costs on the industry and impair the competitiveness of Canadian producers. As well, the Excise Act has become increasingly difficult to administer and impedes the ability of the Canada Customs and Revenue Agency, the CCRA, to fully adopt modern administrative practices.

    There is also a need to address certain wine contraband issues that have arisen. As members of the committee may know, wine, which is currently taxed under the Excise Tax Act, has no substantive controls placed on its production and possession.

    Finally, Madam Chair, tobacco manufactured in Canada is currently taxed under both the Excise Act and the Excise Tax Act, a factor that has resulted in complexities and inefficiencies for both government and industry.

    I'd like to take a moment to look at the Excise Act review.

    Prompted by the need to update the Excise Act, the Department of Finance and the CCRA jointly released a discussion paper on the Excise Act review in 1997. This paper outlined the proposal for a modern legislative and administrative framework for the taxation of alcohol and tobacco products.

    The review was guided by three key objectives: first, to provide a modern legislative framework for a simpler and more certain administrative system that recognizes current industry practices; second, to facilitate greater efficiency and fairness for all parties, leading to improved administration and reduced compliance costs; and finally, Madam Chair, third, to ensure the continued protection of federal excise revenues.

    Draft legislation and regulations were subsequently released in 1999, and that release was followed by public consultations with affected stakeholders. Bill C-47 is the result of that process. It introduces a modern legislative and administrative framework for the taxation of spirits, wine, and tobacco products under the new Excise Act. It should be noted that this new framework does not address substantive tax rates or base matters for alcohol and tobacco products, nor does it address beer, which will remain under the existing Excise Act for the time being.

    I should just digress for a moment, Madam Chair, to point out that the Brewers Association of Canada has proposed to the government that the excise duty on beer produced by small brewers should be significantly reduced to assist that segment of the brewing industry. Department officials are currently reviewing the brewers' proposal. Once they've done that, we will then decide what steps to take. In addition, this particular piece of legislation, Bill C-47, is not the appropriate vehicle for implementing reductions in the excise duty on beer, since the bill does not deal with the taxation of beer. I just wanted to underline that very clearly.

    I'd like to provide a brief overview of some of the key alcohol and tobacco measures in the new Excise Act, beginning with those that pertain to alcohol. As an overview of the new Excise Act's alcohol measures, Bill C-47 introduces core elements of the framework outlined in the 1997 discussion paper, including maintaining the imposition of duties on spirits at the time of production, and replacing the existing excise levy at the time of sale for wine with a production levy at an equivalent rate; the deferral of the payment of duties on spirits and wine to the wholesale level; and modern collection tools.

¿  (0910)  

    At the same time, this bill helps to address the government's ongoing concern with the smuggling of alcohol—and let me be more specific. The production levy on spirits and wine incorporate strict controls on the production, importation, possession, and use of non-duty-paid alcohol, and significant penalties are imposed for breaking the law. These controls replace the outdated and onerous controls on premises and equipment that hinder the spirits industry. This will provide businesses with greater flexibility to organize their commercial affairs in order to respond more quickly to market changes.

    The bill requires anyone producing or packaging spirits or wine to be licensed. However the small manufacturers' tax exemption will be maintained for wine produced by vintners whose sales of wine do not exceed $50,000 in the previous twelve months. Individuals who produce wine for their personal use will continue to be exempt from having to be licensed and pay duty. And the new warehousing regime for deferring duty on packaged alcohol will put domestic and imported packaged alcohol on equal footing. This measure will also accommodate certain provincial privatization initiatives for the warehousing of liquor.

    In order to protect federal excise revenues derived from beverage alcohol, there will be comprehensive controls on the non-beverage use of spirits and wines. These controls include the licensing or registration of users; the approval of product formulations for which spirits and wine may be used without the payment of duty; and the specification of denaturing standards. The bill also eliminates the nominal rates of duty on spirits for certain non-beverage uses—such as spirits used in pharmaceutical goods—as they are inconsistent and onerous in application and disadvantage domestic producers.

    While the fundamental controls over non-beverage alcohol remain unchanged, new measures for imported industrial alcohol will ensure the integrity of the domestic alcohol market and the protection of federal revenues. For example, imported denatured industrial alcohol will be required to be sampled and tested to ensure that it meets Canadian denaturing standards. As well, the comprehensive controls on the possession, distribution, and use of non-duty-paid spirits and wine will significantly improve the offence structure and enforcement function with respect to alcohol.

    The bill also provides, Madam Chair, for substantially increased fines for alcohol-related offences, and extends proceeds-of-crime provisions to serious alcohol offences.

    With respect to the tobacco provisions in Bill C-47, the new excise framework incorporates the revised tobacco tax structure that Parliament passed last spring as part of the government's comprehensive strategy to reduce tobacco consumption. The new framework merges the current excise duty and excise tax on tobacco products, other than cigars, into a single production levy. This will result in improved administration and reduced compliance costs for the industry.

    While Bill C-47 provides a more streamlined framework for the taxation of tobacco, it maintains the fundamental controls over tobacco that currently exist within the excise framework. In particular, the stamping and marking requirements of tobacco products will continue to apply, as will the current offence provisions relating to the illegal production, possession, or sale of contraband tobacco. Both have proven to be effective enforcement measures.

    This brings me, Madam Chair, to the new administrative provisions in the bill that will enable the CCRA to improve its level of service to clients, and its overall administration of excise framework for alcohol and tobacco products. These provisions are consistent with the CCRA's integrated accounting initiative, and include: a return and duty remittance structure harmonized with commercial accounting periods and the goods and services tax and harmonized sales tax legislation; new assessment and appeal provisions similar to those under the GST–HST legislation; and a range of modern collection mechanisms, such as certificates of default, garnishment, seizure and sale of goods, and directors' liability. In addition, licensees, registrants, and others dealing with excisable goods who fail to comply with the new act will be subject to a range of administrative penalties.

    Madam Chair, this new framework will ensure that the excise duties on alcohol and tobacco are collected in a more effective and efficient manner. As well, it will provide an array of modern administrative and enforcement tools for ensuring compliance with the new act.

    In summary, the new legislative and administrative framework for the taxation of spirits, wine, and tobacco products will provide a simple and more certain taxation structure; equal treatment for all parties; improved administration and lower compliance costs; greater flexibility for business to organize its commercial affairs; and enhanced protection of excise revenues.

    Before closing, I want to mention three additional measures in Bill C-47. The first concerns changes to the ships' stores provisions under the customs and excise legislation. These changes were announced on September 27, 2001, in response to a recent Federal Court of Appeal decision that ships' stores regulations went beyond the scope of their enabling legislation. Therefore, Bill C-47 provides the proper legislative authority for these regulations.

    A second measure implements a temporary fuel tax rebate program for certain ships travelling on the Great Lakes and lower St. Lawrence River that are not engaged in international trade, and which will no longer qualify for ships' stores relief after June 1, 2002. The rebate will apply on fuel purchased between June 1, 2002, and December 31, 2004, and will provide affected operators with adequate time to make the transition to new ships' stores rules.

    A final measure legislates the federal tax increases on tobacco products that were announced on November 1, 2001. These increases are also part of the comprehensive tobacco strategy that I referred to a few moments ago. They re-establish a uniform federal tax rate for cigarettes across the country. They amount to $2 per carton for cigarettes for the sale in Quebec, $1.60 in Ontario, and $1.50 in the rest of the country. They are coordinated with provincial tobacco tax increases, and these measures are one more step toward the process of restoring tobacco tax rates to pre-1994 levels in ways that will minimize the risk of renewed contraband activity.

    Madam Chair, Bill C-47 is an important piece of legislation. It introduces a modern legislative and administrative framework for the taxation of spirits, wine, and tobacco products. It also rationalizes the ships' stores provisions and implements tobacco tax increases to reduce tobacco consumption.

    Officials from the Department of Finance, as you have indicated, have joined me here today, and we'd be pleased to answer any questions from members of the committee.

    Thank you very much.

¿  (0920)  

    The Chair: Thank you.

    From the Canadian Alliance, Mr. Jaffer, would you like to go ahead? You can take up to ten minutes.

    Mr. Rahim Jaffer (Edmonton--Strathcona, Canadian Alliance): Thank you, Madam Chair, and thank you, parliamentary secretary and the rest of the team here for the presentation today.

    Obviously, it's clear that there's a strategy to the bill, outside of the administrative changes that are going to be making everything easier when it comes to collecting the excise taxes. I think that's something we generally agree with on the Alliance side. The goal is also to try to reduce smoking.

    I'm sure the parliamentary secretary and others have done studies on the relationship between increasing prices and the reduction of smoking. I'm wondering if the parliamentary secretary would be able to provide some proof of that correlation so that we can in fact get behind him on this, because we're obviously concerned about the increased tax grab on some of these products.

    Mr. Bryon Wilfert: I'll make a few comments, and then I'll ask the officials to respond.

    I think it's fairly clear, Madam Chair, that there is a direct correlation between price and the consumption of tobacco, particularly among young people. As a former president of the Canadian Parks and Recreation Association, I worked with Health Canada on a program called Break-Free All Stars, and I can tell you that the program, Madam Chair, Mr. Jaffer, was aimed at 6- to 12-year-olds, if you can believe it. The fact was that we were seeing minors that young who were able to obtain tobacco products.

    The fact is that tobacco, of course, and the use of tobacco.... Tobacco is a commodity, particularly among young people, that often is used to be in vogue at times, to be part of the in crowd. Obviously, if the price goes up and young people have limited dollars that, that increase will affect them. Specific studies that Health Canada has done indicate that correlation—and the finance department has done them as well—in terms of being able to demonstrate that.

    In terms of the specific references, I would ask Brian Willis to specifically address those.

    Mr. Brian Willis (Senior Chief, Excise Act, Sales Tax Division, Tax Policy Branch, Department of Finance): Generally speaking, the studies have been done in the health community and in the academic community. I don't have a list of all of the studies in front of me. We're not the people who do those studies, but we rely on them. It's a very long list of studies that have been done over a period of twenty to forty years, in terms of looking at the relationship between price and consumption of cigarettes.

    Generally speaking, what those studies have found is that if you have a 1% increase in price, for adults you'll generally have a decrease in consumption of about 0.4% to 0.7%. In other words, it's a product that's inelastic, but you still do affect its consumption. So with a somewhat less than 1% increase in price, you get some decrease in consumption, in the range of 0.4% to 0.7%. For youth, these studies have generally shown that the decrease in consumption that accompanies a 1% increase in price will be about 1.4%. That's one of the primary reasons why the government has used the tax structure over many years to increase the price of tobacco products. It does have a very significant effect on youth, according to the studies that have been done.

    Mr. Rahim Jaffer: Is it possible to get a listing of some of those so that we can refer to them?

    Mr. Brian Willis: Yes, I can provide the committee with a list of the studies. It's a fairly lengthy list, and I will send it to the committee chair.

    Mr. Rahim Jaffer: That would be great.

    Is there still a concern...I know the initial reason for the reduction in the overall prices of taxes of tobacco was the issue of contraband, of people bringing in cheaper cigarettes, especially in one of the places that I know, Alberta. There was a concern there about the way the prices were still being reduced on the reserves because of the tax structure being different for aboriginal groups. How is this bill going to be able to fight some of the problems on that level, especially as it relates to the sale of tobacco on reserves, and the fear that there still could be increased activity on the black market with increased taxes?

    Mr. Brian Willis: Certainly, Madam Chair, the issue of contraband is one that is of great concern to us, and a lot of work has been done on that issue over the last decade. In 1994, the government had to reduce taxes in order to regain control of the situation, largely in central Canada, but in other parts of the country as well. Since then, the policy of the government has been to increase tobacco taxes gradually, both in an attempt to restore them and in order to achieve its health objectives without setting off a new contraband problem.

    A considerable number of resources have been allocated to the RCMP and the CCRA to maintain control of the problem, and the structure of the way in which these taxes are imposed has been changed dramatically over the last decade. There are new penalty provisions, and there are marking and stamping provisions to identify a non-tax-paid product. We have an export tax on products that are leaving the country, in order that we do not have Canadian-made cigarettes priced at a level that is enticing to the black market.

    Dealing with the issue of reserves, under the Indian Act, yes, native populations do have entitlements to purchase products without direct taxes when they're for consumption on the reserve. That does not affect the excise levies that are imposed under this bill. The excise levies, excise duties, and excise taxes are levies and taxes that are imposed at the manufacturing level and are payable by the manufacturer. Those levies are imposed on all products sold in Canada, including tobacco products for export. When we increase those levies, all Canadians pay them.

    The issue that you're referring to is an issue in which direct levies, direct taxes, are not payable by Indians located on reserve. At the federal level, that issue primarily affects the GST, and exemption is provided, as required by the statute. And it also affects provincial levies.

    With the marking and stamping provisions, what we have done—and what the provincial governments have also done with their marking and stamping provisions—is take steps to ensure that products that are duty- and tax-paid are clearly identified as such. Products that do not have certain levies on them are not shown as duty- and tax-paid.

¿  (0925)  

    Mr. Rahim Jaffer: Thank you.

    My final question is on the issue of...from what I had read, I think the federal excise revenues on tobacco products are forecasted to increase by $240 million. I might be wrong on that, but I'm wondering if the government has a plan—and maybe the parliamentary secretary can address this—for this money that's going to be generated. Is it going to be earmarked for health care spending, tax reductions, paying down the debt, or programs that actually continue to educate young people or others on the negative effects of smoking. Or is this just going to go into general revenues?

    Mr. Bryon Wilfert: Madam Chair, I thank the member for the question.

    Last April, $480 million was earmarked for health care alone in terms of revenues, so we take the issue very seriously. As you know, tobacco and alcohol consumption often leads to health issues, so the government took action last year in terms of those additional revenues.

    Mr. Rahim Jaffer: Is there a possibility, then, that it might be earmarked for specific, targeted spending on health care? This is a significant increase for the government, after all, so I'm just curious about whether or not there are some long-term plans for some sort of educational program or something along the lines of health care spending or....

    Mr. Bryon Wilfert: Madam Chair, I can certainly assure my colleague that the government continues to have this as a top priority, and we will continue to make sure appropriate funding is available and will be addressed in terms of continuing on these fronts he has outlined today.

    Mr. Rahim Jaffer: Thank you.

[Translation]

    The Chair: Ms. Picard, please go ahead.

    Ms. Pauline Picard (Drummond, BQ): Thank you, Mr. Chairman.

    Mr. Wilfert, you said that Bill C-47 was not the appropriate vehicle to talk about micro breweries or small wineries. When we ask about the excise tax, we are told that it is a tax that is applied on products at the manufacturing level. Why are you telling us that Bill C-47 cannot applied to micro breweries and small wineries? I believe that we are talking about manufactured products. I do not understand. These trade associations have met the Minister of Finance and the Minister of International Trade and they relied on the promise made to them by both ministers that they would help them to bring some changes to the excise tax. As you may know, at the present time, the excise tax that these people have to pay is higher than their profits, which prevents them from being competitive on the market. Here we pay 28¢ per hectolitre, while in the United States, they pay only 9¢ for the same hectolitre.

    People expected that Bill C-47 would lower the excise tax rate in order to allow these micro breweries to be competitive . When you want to export products on the international market, you must first be able to produce these products. Let me give you an example. There were 19 micro breweries in Quebec and now only 6 of them are left.

    What vehicle are you proposing to change the excise tax for micro breweries and small wineries? What will you do if there is no provision to that effect in Bill C-47?

¿  (0930)  

[English]

    Mr. Bryon Wilfert: Madam Chair, I appreciate that question.

    The discussions went back to 1997. When the initial paper came out in 1999, we did not have a consensus with regard to the issue dealing with beer. In order to move forward with this legislative bill, we decided—in conjunction with organizations like the Brewers Association of Canada, I might point out—to deal with that in a separate legislative forum.

    We are very cognizant of the issue of excise duties on beer produced by small brewers, no question. You mentioned the nineteen in the province of Quebec. We obviously want to assist that particular segment of the brewing industry.

    We received concurrence or support to move forward, and, as I said, officials are looking at those proposals very carefully for the brewing industry. So they have not been forgotten. Once that review has been done, I can assure members of this committee that the government will decide whether or not excise duty reductions are warranted. We will then be back before the committee.

    The view was that, because of the areas in which we had agreement—the areas of spirits and alcohol, ships' stores, and tobacco—this would not be the appropriate vehicle to, shall I say, Madam Chair, muddy the waters with the issue of beer. The bill doesn't deal with the taxation of beer at all, but the comments of the member are appreciated, they're noted, and we will in fact be back to deal with that segment of the industry, which is, of course, very important.

[Translation]

    Ms. Pauline Picard: Madame Chair, let me tell you that I am not at all happy with this answer. It seems very complicated. As Mr. Willis said earlier, the excise tax applies on products at the manufacturing level. Micro breweries and small wineries... This happens not only in Quebec, but everywhere in Canada. In Ontario, there are problems as well. Since the tax applies at the manufacturing level, I believe that everyone is surprised by your explanation. Micro breweries manufacture beer. They pay the excise tax.

    This debate started in 1997, five years ago already. Why was that not included in Bill C-47? In my view, it is an oversight, but a bill can be amended. The Bloc Québécois is generally in agreement with Bill C-47, but we find unfortunate that micro breweries have not been included. For how long are we going to study this issue? We have been studying it for five years. How many more studies will we need before we can lower the rate of this tax? It is clear that the tax is too high for micro breweries, and we are not supporting them at the present time. How long will it take to find an appropriate vehicle? You know full well that the law cannot be changed overnight. It takes years and years. Five years from now, micro breweries and small wineries probably won't exist anymore.

    I don't understand. I find your answer totally irresponsible. Find something else.

    That was the only question I had for you. Thank you.

¿  (0935)  

[English]

    Mr. Bryon Wilfert: Well, Madam Chair, the answer was extremely serious, just as the question was, so let me put it in a nutshell, through you to the member.

    As I've said on a couple of occasions here, the purpose of this legislation is to modernize the administrative structure for the taxation of spirits, wine, and tobacco products. It is not—and I emphasize that—to address issues concerning the tax rate or base.

    We have talked about these issues. The member indicated studies. Well, in fact, we are now doing an analysis, and that analysis will not take another five years. Once the analysis is done, I have indicated that the undertaking of the department will in fact be to make recommendations that obviously would be in legislation before this committee, if need be. But the bill is simply not to address the issue concerning the tax rate or base.

    And I did indicate to members of the committee that with regard to the issue of small wine producers, vintners whose sales do not exceed $50,000 within the past twelve months, they again will be exempt.

    So with all due respect to Madame Picard, the fact is that we are addressing it. This is not the vehicle to address the issue she has raised, but it is certainly front and centre.

[Translation]

    Ms. Pauline Picard: What will be the appropriate vehicle? Do you have a suggestion?

[English]

    Mr. Bryon Wilfert: I would suggest to you that since the industry itself has indicated that it is prepared to see this bill move forward, and since the discussions and the analyses particularly germane to the issue of beer are being dealt with by the department currently, that was the vehicle. If there was no agreement, obviously it would have been part of or could have been part of this bill. The decision was to move forward in the areas outlined in the bill, and to deal with the issue of beer separately. That is in fact being done.

[Translation]

    Ms. Pauline Picard: I do not understand how you can claim to have the support of the trade association, because the association supports small breweries. The association's representatives will appear next week, and it seems to me that you will have to find some other answer because they agree with what I am saying now. They support micro breweries and small wineries. I do not know where your information is coming from, but you will have to find something else to stand on and stop saying that these are agreements that you have made with the association.

[English]

    Mr. Bryon Wilfert: Madam Chair, I stand by my remarks.

    The Chair: Thank you.

[Translation]

    Is that all, Ms. Picard?

    Ms. Pauline Picard: Yes.

[English]

    The Chair: Mr. Discepola, followed by Mr. Brison and Mr. Cullen.

[Translation]

    Mr. Nick Discepola (Vaudreuil--Soulanges, Lib.): Thank you, Madame Chair. I would like to follow Ms. Picard's line of questioning. As she indicated, the industry is practically undermined in Quebec, and I imagine that it is the same elsewhere in Canada.

    Mr. Wilfert, it is unfortunate that you would say that this is not the appropriate vehicle. Our committee will hear some witnesses on April 17, if I am not mistaken. Why should we go to the trouble of inviting them to make a presentation if you don't consider it the appropriate place?

    I am not convinced that the appropriate vehicle would be a new bill aimed at solving the problems of corporations such as Microsoft, and in which we would include provisions for small computer businesses. Micro breweries have pressing needs and time is of the essence. I would like you to give me the assurance that our government will act as swiftly as possible. Otherwise, micro breweries might disappear.

    Being a small businessman myself, I understand their concerns, and you said yourself that...

[English]

    You said the pervasive controls mandated by the act impose high compliance costs. This is the case with the microbreweries directly. I don't have any questions, really. I just want to make the comment that I think you should impress upon the ministry that they should act as quickly as possible to solve their inequities and give them fair treatment with the U.S. Maybe we should not wait for another year while we try to address the brewers' problem. I think the brewers' problem is quite distinct and quite different from the microbreweries' problems.

    Thank you, Madam Chair.

¿  (0940)  

    Mr. Bryon Wilfert: Thank you, Madam Chair. I thank my colleague for his comments.

    Again, the issues that he raised really belong, I would say, in the budget process. Obviously, again, we're not addressing the concerns of tax rate or base.

    The issue of the microbreweries has been noted, Madam Chair. I'm not going to be able to add anything that I haven't already said, but I've certainly have noted it. I certainly will flag it with the minister. Beyond that, I cannot say much more at this point, but I take the comments of both Madam Picard and Mr. Discepola on the microbreweries very seriously, and I will be in conversation with the minister regarding particularly the issues you have both raised regarding microbreweries.

    Mr. Nick Discepola: I have no other questions or comments.

    The Chair: Mr. Cullen, would you like to take the balance of his minutes?

    Mr. Roy Cullen (Etobicoke North, Lib.): Yes, thank you, Madam Chair, Mr. Discepola.

    I have two questions. One relates to the beer, and the other to tobacco.

    With respect to beer, I'd just make a comment. In my riding of Etobicoke North, I have a big Molson brewery and a big Labatt brewery. The major, large breweries have actually been very supportive of the small breweries getting some relief on the excise tax, because of the competitive issues with brewers south of the border. In fact, Madam Chair, in last year's pre-budget consultations, this committee recommended that something be done about it. I know the minister was generally supportive, but then we had September 11.

    Who knows where this will go, but I think there's a lot of sympathy and empathy for the issue of the small brewers. I just don't believe it has to be put into this act. In fact, I think that would be erroneous. If the government, in its wisdom, wants to make a change in the excise tax for small brewers, it can do so through a ways and means motion, probably through a budgetary item.

    The brewing industry does have some concerns there. They're logistical concerns having to do with bulk beer, having to do with exports of beer. A lot of fine points need to be dealt with, so I don't support putting this excise tax issue in this bill. However, I, for one, am sympathetic to the plight of the small brewers, and I think we should move on it.

    I don't know if the parliamentary secretary or the officials have any comments on that.

    Mr. Bryon Wilfert: Madam Chair, I'll make a brief comment, and then I'll ask Mr. Willis to talk about the competitiveness issue.

    Very clearly, Mr. Cullen, you have again reiterated my comment with regard to the budgetary process. That can certainly be reviewed, which is why it's not in here. The fact is that we do take the issue very seriously, and it is not being ignored. I think that is extremely important to emphasize.

    But on the issue of competitiveness specifically, I think Mr. Willis can share a few comments.

    Mr. Brian Willis: Madam Chair, a number of members have raised the issue of the international competitiveness of small brewers. Perhaps I should clarify that the way in which the excise duty system operates does not place these individuals or these companies at a disadvantage, either relative to the industry in Canada, relative to imported products, or relative to export markets.

    When beer is exported from Canada, whether it's exported by a small brewer or a large brewer, there is no application of Canadian duties. It is a zero. Those exported products will be subject to the duty in the country of consumption. When products are imported into Canada from foreign breweries, they also come into Canada without the levies of their domestic country. They are taxed or subject to duty in Canada at exactly the same rates that are applied to domestic brewers. It's not a situation in which the duty is higher on a domestic product than it is on imported products or, conversely, on exports that leave Canada and are subject to duty.

    The issue that small brewers are raising, and what we are looking at, is whether or not, because of the higher costs that they incur relative to large brewers in Canada, the Government of Canada should reduce the rate of duty on products that small brewers produce in order to assist them in competing with the big brewers in Canada. That's the issue we're analysing right now. It essentially is a request for assistance.

¿  (0945)  

    Mr. Roy Cullen: Normally I agree with you on every point, Mr. Willis, and I think you're probably right in a sense, but correct me if I'm wrong. Some of the U.S. microbreweries are taking market share from some of the Canadian microbreweries. That may mean the Canadian microbreweries' beer is not as good, but it would be interesting to have data—if you have data—on what kind of share is being taken up by U.S. micros.

    And before I leave you, I wonder if I could ask about the tobacco tax. One of the things the government introduced was the imposition of the tax at the door of the plant so that the risk of smuggling and contraband is minimized. I'm wondering if the RCMP and Solicitor General have been monitoring that to see if, in fact—although it's unlikely—there would be any increase in contraband activity in terms of tobacco products.

    Mr. Brian Willis: Madam Chair, the information that we have to date does not show any significant increase over the past year. We are continuing to work with the RCMP and the CCRA on that type of analysis, and they in turn are working with U.S. enforcement agencies on exactly those sorts of issues. But they have not seen any evidence to date of an increase as a result of the most recent increases in tobacco taxes.

    Mr. Roy Cullen: If I could finish off on that point of market share, do you have any comments? Are the U.S. microbreweries taking share from the Canadian microbreweries? If so, do you have any theories as to why?

    Mr. Brian Willis: At this point, I don't have any concrete information on that, but I will look into it. The information that we have in general on the microbrewing industry both in Canada and the U.S. is that it is really not heavily export-oriented. In general, it serves a local domestic market, much more so than the export market. In fact, in beer, even for the large producers, it tends to be largely a domestic market, with relatively little export in any direction when compared to other industries. But we'll certainly take a look at the issue you've raised, in order to see if any information is available.

    Mr. Roy Cullen: Thank you.

    The Chair: Mr. Brison, please go ahead.

    Mr. Scott Brison (Kings--Hants, PC): I just have a question on the changes to the excise tax on cigarettes. What will be the revenue gain from those changes?

    Mr. Bryon Wilfert: It's $240 million.

    Mr. Scott Brison: Earlier, Mr. Jaffer asked a question relative to what amount of that will be utilized in terms of marketing to encourage smoking cessation, but I didn't hear it answered.

    Mr. Bryon Wilfert: You may not hear it either.

    An hon. member: Oh, oh!

    Mr. Bryon Wilfert: Madam Chair, I indicated that in April of last year, the government had earmarked over $400 million with regard to the issue of health strategies dealing with tobacco.

    Again, you can be assured, Mr. Brison, that the issue of prevention, which I think of as a very important aspect of any strategy, is a high priority. But if you're asking for what the specific dollars are today, I wouldn't be able to tell you that. In the public mind, however, this is clearly an important issue, and I talked earlier about particularly the issue of the young people and youth and how we are trying to deal with that issue very effectively.

    Mr. Scott Brison: Was that $400 million an annual amount, or was that over a period of several years?

    Mr. Bryon Wilfert: Five years.

    Mr. Scott Brison: Over five years.

    Are these changes to the excise tax projected to raise $240 million per?

    Mr. Brian Willis: Madam Chair, the government does not specifically earmark revenues from tobacco to health. It funds its health initiatives according to the needs identified by the health minister and the health department. The $480 million was the amount of money that they indicated would be useful and helpful to them over five years in order to mount very effective anti-smoking campaigns and other initiatives under the purview of the health department

    The revenues from tobacco products, like the revenues from all taxes, go into the Consolidated Revenue Fund, and they are used to fund a broad range of programs that the Government of Canada provides. But $480 million over five years was what the health minister identified as the sum of money necessary to mount effective health programs against smoking in particular.

¿  (0950)  

    Mr. Scott Brison: So it wouldn't be appropriate for the government to infer that the additional revenue from these changes in the excise tax as applied to cigarettes would have any relationship whatsoever to the investment in marketing to urge people not to smoke.

    Mr. Brian Willis: These revenues are not earmarked for anti-smoking campaigns. From the health perspective, the biggest issue in terms of these tax changes is that the higher cost results in a reduced consumption of cigarettes. According to the Canadian Cancer Society and other groups interested in discouraging smoking, that is one of the most effective tools available to them.

    Mr. Bryon Wilfert: The issue of price and consumption was the main thrust of my comments, but obviously, again, it isn't up to the finance department to determine health. It's up to the health ministry, and obviously they indicate that it's as Mr. Willis has said. Again, though, I think the government's record has been pretty clear. In terms of our determination to particularly make sure that we can reduce significant consumption, particularly among young people, you can be assured that it will continue to be a part of the strategy, I'm sure.

    Mr. Scott Brison: Thank you.

    The Chair: Ms. Bennett, please, for ten minutes.

    Ms. Carolyn Bennett (St. Paul's, Lib.): I was just interested in the part about marking the tobacco. Do you think we have the best there is on that in terms of whether the tax is paid or not paid, as opposed to ways that can be counterfeited and copied? What exactly is the marking going to be for a cigarette package in order to show the tax has been paid?

    Mr. Brian Willis: I'm not sure I have all of the details on the issue of counterfeiting. The CCRA is the agency that looks after the rules relating to the actual details of how the tear tape is controlled. In general, though, what we a require under the statute is that a stamp be put on all products that are duty- and tax-paid, and that a mark be put on products that are not duty- and tax-paid.

    The number of products available that are not duty- and tax-paid that are produced in Canada is very limited today. With the changes that were made in April of last year, we're really down to sales to diplomats and to very small levels of exports for consumption outside of Canada, on which a rebate can be paid for the taxes that are levied at the time of production. The vast majority of tobacco products produced in Canada are stamped, and the stamp is a combination of an indication on the pack that the duty and taxes have been paid, and a tear tape around the pack.

    On the issue you're referring to, that being the possibility of counterfeiting, counterfeit production of these tear tapes by people engaging in contraband is clearly an issue. It's one that I understand the CCRA understand has been working on, but I can't really give you updated information on the kinds of requirements they are considering or have put in place.

    Ms. Carolyn Bennett: Is it possible to get that? I think working groups from the Canadian Cancer Society to everybody else are hoping we would move to the international best practices on this issue so that tobacco taxes would never be seen to be increasing counterfeiting, because the enforcement would be so much easier.

    Mr. Brian Willis: Madam Chair, I will undertake to get what information I can from the CCRA on this issue, because it's not one within our area of responsibility. If I may, however, I might add that Canada is very much a leader in this area.

    The changes that were made in April of last year, when we extended our domestic tobacco taxes to exports, to products sold through duty-free shops, to products that are brought in and have been brought in by travellers in the past, free of tobacco taxes...all of those are in the forefront. In fact, Canada is involved in international discussions on ways in which we would cut down on the duty-free availability of tobacco products, but we are very much in the lead of virtually every other country in the world in terms of controlling tobacco by using the tax system to raise the cost of the product.

    Ms. Carolyn Bennett: I should have prepared better, but what we used to lovingly refer to as the smuggling fee...in terms of the reduction, we would like it to go to zero. Happily, you reduced it a little, but when can we see it going to zero?

    Mr. Brian Willis: I apologize, but I think that's an issue you would probably have to address to the minister. As you can appreciate, it's a decision taken by the minister. Certainly, his policy, as he has enunciated, has been to try to eliminate that reduction—a reduction which, by the way, currently sits at $3.50 per carton at the federal level. The objective is to eliminate that, to move back to the same levels or even higher levels than those that existed prior to 1994.

    As other members have already posed in some of their questions, however, the difficulty comes in making sure we do not lose control of the situation again, winding up with levels of contraband that essentially undermine the government's tax and health measures and health policies. That's an issue of which we have been very conscious: How do you restore tobacco taxes to the levels that will discourage smoking without setting off contraband that essentially immediately winds up in the schoolyards?

¿  (0955)  

    Ms. Carolyn Bennett: But is there not now an east-west problem that we are looking at more than the cross-border one? Are we aware of interprovincial smuggling now because of the difference in the provincial taxes?

    Mr. Brian Willis: There certainly is a problem with the interprovincial movement of tobacco products. We've taken the steps that we can to control it, but much of that now rests with the provinces, since the federal government no longer has differential tax rates by province. We have a uniform rate.

    You're quite correct that the situation on the international side is very much under control, but concern continues to exist, particularly at the RCMP and the CCRA, about the availability worldwide of duty-free tobacco products. The problem in the past was the Canada-U.S. border, but there is widespread availability around the world of tobacco products at very low prices, with no duties or taxes paid on those products.

    One of the issues the RCMP is most concerned about is the movement of those products in container loads that come from places like Amsterdam, that are on board vessels moving up the St. Lawrence, and that are off loaded in Canada. They have provided us with information and advice that the Government of Canada should continue to exercise restraint, should make sure it's aware of these issues, and should not set up a situation in which we encourage the re-establishment of that kind of trade. Consequently, a balance has to be struck between the levels of taxation, the health objectives, and the risks of contraband.

    Ms. Carolyn Bennett: Are those Canadian cigarettes coming back in, or are they Dutch cigarettes?

    Mr. Brian Willis: At this point, they would not be Canadian cigarettes, Madam Chair, they would be foreign-manufactured cigarettes. Because of the export taxes on Canadian cigarettes, the quantities of Canadian-manufactured products on world markets are very limited. Most of these would be non-Canadian-manufactured, but they would be cigarettes of a type that Canadians smoke, those being Virginia Blend cigarettes.

    Mr. Bryon Wilfert: And I might say, Madam Chair, as I did in my remarks, that the minister is obviously very keen to get back to at least 1994 levels. But again, as Mr. Willis has indicated, one of the problems, particularly from cities like Cornwall...I remember that in the early 1990s, the late mayor of the City of Cornwall was particularly concerned about this impact and what kinds of strategies needed to be developed. I think strategies have been developed since the early 1990s, and the intent certainly is to move as quickly as we can, again with monitoring in order to make sure we have that balance and to make sure it doesn't tip one way in terms of more smuggling.

    Ms. Carolyn Bennett: Thank you.

    The Chair: Mr. Penson, for five minutes, please.

    Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you.

    First of all, I'd like to understand something a little bit better. If you exclude the tobacco levy—I understand it's going to raise another $240 million for general revenues—are the other measures contained in this bill revenue-neutral?

    Mr. Bryon Wilfert: Madam Chair, the answer is yes.

    Mr. Charlie Penson: Thank you.

    Maybe I'm the only one in the room who doesn't understand exactly what kinds of measures you're talking about on page 3, when you say:

Bill C-47 introduces core elements of the framework outlined in the 1997 Discussion Paper, including maintaining the imposition of duty on spirits at the time of production, and replacing the existing excise levy at the time of sale...at an equivalent rate; the deferral of payment....

Can somebody walk me through that in language I can understand?

    The Chair: Who'll try to do that? Ms. Malone? Thank you.

    Ms. Patricia Malone (Chief, Excise Act Review, Sales Tax Division, Tax Policy Branch, Department of Finance): Currently, the duty on spirits is a production levy. The proposal under the new act is to continue to tax spirits at the production level. A duty will apply at the time the spirits are produced, and it will become payable at the time of packaging. However, distillers will be able to defer the payment of duty if they put their packaged spirits into an excise warehouse. The payment can be deferred to the wholesale level, and payment will then only be required once the spirits are removed from the excise warehouse for sale to retailers.

    The system essentially remains the same for spirits; however, for wine, we currently have a sales levy. It's an excise tax, and the excise tax is payable by the manufacturer at the time the manufacturer sells their wine to a purchaser. The bill proposes to move the sales levy to a production levy in order to facilitate enforcement and to make it easier to identify a contraband product. However, this same measure for the deferral of duty will apply. The duty becomes payable when the wine is packaged, but the wine producer can defer the payment of duty if the wine is put in an excise warehouse. It will only be payable when the wine is removed for sale to a retailer.

À  (1000)  

    Mr. Charlie Penson: In other words, it puts wine in the same category as spirits.

    Ms. Patricia Malone: That's correct.

    Mr. Charlie Penson: Okay.

    I'm not sure whether I have any time left, but my third question picks up on Ms. Bennett's question about how this affects interprovincial movement, and whether or not we can have smuggling of tobacco products across provincial borders because of the different levies. Isn't it pretty ironic that, in a country like ours, we can't get this thing straightened out? We have better standards internationally on our national product than we have within our own borders. What's going to improve here?

    Mr. Brian Willis: The issue of movement of product between provinces is not really a federal issue, because we have to—

    Mr. Charlie Penson: But can't you get cooperation? Can't you get some kind of interprovincial—

    Mr. Brian Willis: There certainly is cooperation and there is assistance from the RCMP, but the provinces require the federal stamping structure, meaning that the provinces use same structure as we do. By using a particular colour on the tear tape, they identify product that is for sale in their province. If you take a look at a pack of cigarettes, you'll see that the tear tape is coloured according to the province in which it's intended for retail sale. That colouring is the identifier that they use to attempt to control the movement of these products.

    The difficulty that one of the other members of the committee referred to is that, in some circumstances, people will purchase these products in a low-tax province like Ontario and then repackage the product. They won't change the whole carton, but they will change the tear tape and change the colour on it. Attempts are therefore being made to try to find ways to limit that.

    The ultimate solution, and certainly the solution health groups would like to look for and we would prefer to see, is a moving together of the tax rates across Canada. We have been working with the provinces for a number of years to try to encourage more harmonization of tax rates on tobacco products across Canada.

    Mr. Charlie Penson: But it's only a problem if there is an illegal act by somebody changing the tape, is that the point?

    Mr. Brian Willis: It wouldn't even have to be a case of changing the tape. If you're heading out to B.C. to visit your friends and relatives, the difference in price between Ontario and B.C. is such that people are tempted to throw a number of cartons of cigarettes in their suitcase. The government can't be everywhere, searching every suitcase that goes from here to B.C. A number of combinations and—

    Mr. Charlie Penson: Surely some kind of harmonization needs to be worked on very badly.

    Mr. Brian Willis: We have been working on that. Unfortunately, the provinces clearly have their own responsibilities in these areas, and their own authority to act. Some provinces have taken a very tough stance on tobacco and have a very high tax rate, particularly in western Canada. Other provinces, recognizing the problems that they've had with contraband in their jurisdictions, have had lower tax rates and have maintained those rates. As a result, we now have very large differences, and ones that have been growing even larger over the last number of months.

    But from a federal point of view, yes, I think the point you're making is a very valid one, and we have been striving as hard as we can to encourage more harmonization to address this problem.

    Mr. Charlie Penson: Thank you.

    The Chair: Thank you.

    Mr. Pillitteri, for five minutes.

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair. I'm sorry I got here a little late this morning. I know this would have been be a very interesting conversation for me, for the simple reason that only a few years ago, specifically in the wine industry, there were only a few wineries. I represent an area in which there are a lot of wineries, as there are in the riding adjacent to mine as well.

    Ms. Malone, having sometimes worked with you on this excise tax, I must commend your awareness of the problems the small cottage industry has in terms of the excise tax, and for making it more understandable to small industries in terms of allowing them to thrive. It was hard on the smaller wineries, especially the small cottage wineries, when they had to pay the excise tax up front on their production.

    Some of you are aware that it was quite a chunk on the part of the federal government, at some 51 or 52 cents a litre. For small cottage wineries and what you call the home producers, that's quite a lump to pay up front, so it certainly does help in the sense that we were able to really.... It's an industry that only had its birth some fifteen years ago, but you have over a hundred licensed wineries in the province of Ontario today.

    The thing that also really makes it a plus in terms of the changes to when the excise duties are paid is that they.... Just in Ontario alone, it was known that more bootleg wine was being sold and manufactured. And by the way, it was not in the countryside, it was manufactured in the cities, and not in the basements, but in the warehouses and so on. They were avoiding the tax system.

    So, in a sense, I must congratulate you for having taken this route in order to hold on to the tax levy at the time of sale. What can I say? There are no changes. We're done as far as the amount charged is concerned, but it certainly does a lot in terms of the way it's paid. I think the cottage wine industry and the home brewers are quite thankful for that.

    Other than that, I really don't have much of a question, except to ask if any changes are being made to the amount of the levy and excise tax being applied to spirits.

À  (1005)  

    Mr. Bryon Wilfert: Sorry, no, there is not.

    Mr. Gary Pillitteri: Thank you very much.

    The Chair: Madame Picard? No?

    Mr. Brison? No?

    As I see no further members on my list who wish to question at this time, it behooves me, on behalf of all the committee members, to thank you for your appearance here today. I'm sure we'll see you again at some further time. Thank you very much.

    Mr. Bryon Wilfert: On behalf of the finance department officials, Madam Chair, I want to thank you and the members of the committee.

    The Chair: Thank you, Mr. Wilfert.

    We'll suspend for a couple of minutes, and then we'll come back in camera, as the full committee, on some other items of business.

    [Proceedings continue in camera]