Finance Committee on Oct. 28th, 2014

[The Chair, Conservative, James Rajotte]

I call to order meeting number 52 of the Standing Committee on Finance. Our orders of the day, pursuant to Standing Order 83.1, are for us to continue our 2014 pre-budget consultations.

Colleagues, again we have two panels here, with five organizations or individuals per panel. We're still waiting, I understand, for two; they may be at security downstairs. We do have three present, so we will start with them and move on later to the other two.

First of all, from the Canadian Chamber of Commerce, we have Mr. Hendrik Brakel, senior director of economic, financial, and tax policy. Second, from the Canadian Federation of Independent Business, we have senior vice-president Corinne Pohlmann. From the Canadian Labour Congress, we have Ms. Angella MacEwen, senior economist. From the Green Budget Coalition, we have Mr. Andrew Van Iterson. As well, we have from the Retail Council of Canada Mr. David Wilkes, the senior vice-president.

I'd like to thank you all for being with us this afternoon. You each have a maximum of five minutes for your opening statement.

We will begin with Mr. Brakel, please.

[Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy, Canadian Chamber of Commerce]

Thank you.

Good afternoon, Mr. Chair and committee members. I'm very pleased to be here on behalf of the Canadian Chamber of Commerce.

I'm so proud and so glad to be here in Canada's Parliament and to see everything back to business after last week's troubling events. I'm honoured to be here with you today.

Thank you everyone.

The Canadian Chamber of Commerce represents 200,000 businesses of all sizes in every industry and every region of the country.

On today's theme of maximizing the number and types of jobs for Canadians, this is so important for us in the business community. On the demand side, the best thing anyone can do for business in Canada is to have a wealthy, successful Canadian population that is buying lots of goods and services. On the supply side, survey after survey has shown that the number one challenge for Canadian business is not the dollar, or access to capital; it's finding qualified people.

With the U.S. economy picking up, and exports up 12% so far this year, the problem is becoming more acute. How can we make sure that we provide the maximum number of really great jobs for Canadians?

First, we need to make sure that Canada is at the leading edge of innovation so that the new technologies and products of tomorrow are built right here at home. Canada is really good at research, but we lag somewhat at commercialization. That's why we're proposing an innovation box regime for R and D tax. ln lieu of the current scientific research and experimental development program, where we give tax credits for certain R and D activities, the idea is that, instead, a business that creates a patent or innovation right here in Canada would see the revenues that arose from that innovation taxed at a much lower rate. A number of countries, such as the U.K, the Netherlands, lreland, and Switzerland, have adopted this approach. It's worked well, because it's really driving commercialization rather than just having generalized activities.

A second key priority for the chamber and for our members is infrastructure. Over the past 30 years, investments in core public infrastructure have dropped off significantly. According to the Federation of Canadian Municipalities, 30% of municipal infrastructure is at risk. Traffic congestion costs the Canadian economy close to $15 billion per year. Research at the chamber has found that a sustained 10% annual increase in infrastructure investment has the potential to reduce the cost of manufacturing by 5%. It's about getting things to market and getting our components in more quickly. It's really about the future productivity of Canada. We really appreciate the government's Building Canada plan, but we think even more can done.

A third priority for the Canadian chamber is to invest in labour market information. We've all heard a lot about the gap in skills and the labour shortages in various areas in the country. It's a huge challenge for employers and for the government. Unfortunately, we lack sufficiently granular and reliable labour market information in a number of areas. We believe that the job vacancy surveys should be expanded from the level of economic regions to the local level. We'd like to reintroduce the workplace and employee survey so that we can really understand what the skills gaps are in what regions, and where we are having the biggest problems.

That would help us in addressing priority four. We're asking the government to review the impacts from the changes to the temporary foreign workers program. Look, here at the chamber we get it; we understand that this is a very difficult political problem that has received some pretty scathing media attention. It's radioactive right now. But the thing is that the issue has real consequences for Canadian business.

A few weeks ago, the Alberta Chamber of Commerce released a survey showing that of the Alberta businesses using temporary foreign workers, almost 60% of businesses were likely or somewhat likely to reduce their hours of operation; 80% were likely to be unable to grow their business in the future; and 23% were either very likely or somewhat likely to have to close their business in the future.

This is not just an Alberta issue. Businesses from coast to coast are screaming about the changes to the temporary foreign workers program. Canada's remote and northern communities have been particularly affected. We're asking for a review of the impact of the changes. Have businesses been able to cope? Have operating hours been reduced? We're optimistic, but we can only maximize jobs for Canadians if business can prosper and grow.

Thank you very much for the opportunity to speak to you today. I'd be delighted to answer any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to CFIB, please.

[Corinne Pohlmann, Senior Vice-President, National Affairs, Canadian Federation of Independent Business]

Thank you.

You should have on your iPad a slide deck that I would like to walk you through, if possible. If you can search for that on the iPad, I would really appreciate it.

CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small and medium-sized businesses across Canada who collectively employ more than 1.25 million Canadians and account for $75 billion in GDP. Our members represent all sectors of the economy and are found in every region of the country. Addressing issues of importance to this group can have a widespread impact on job creation and the economy. I'm hopeful that you have been able to find the slide deck as we walk through it right now.

On slide 2 you will see that the top issue of concern to small business is total tax burden, which I will get to in a minute, but the second highest priority issue for small business is government regulation and paper burden. We were pleased to see movement on the recommendations of the red tape reduction commission, which included plans to measure overall burden, set service standards, and implement a system of ongoing oversight and accountability. However, while we are encouraged by the one-for-one rule and small business lens, we have concerns that they are not always properly applied, and we had hoped to have a comprehensive baseline count of regulatory requirements made public by now. So there is still room for improvement on red tape, and so we encourage the government to maintain its focus and continue to move forward on this critical file.

The third highest priority from our membership is government debt and deficits. Small business owners understand the importance of paying down debt, and so we are very pleased that the federal deficit is on target to be eliminated in 2015.

As mentioned, though, the top issue of concern to small businesses is their total tax burden. With so many taxes, it is important to understand which have the biggest impact on the growth of their business. As you can see on slide 3, payroll taxes have by far the greatest impact. Why? Because it is a tax on jobs. lt must be paid regardless of whether the business has any profit or not. This is why we spend so much time as an organization trying to address issues related to federal payroll taxes like El and CPP, both of which have had a significant impact on small business employers and their employees.

As you can see on slide 4, lowering El rates and freezing CPP premiums are most effective in maintaining or strengthening business performance, along with reducing the small business tax rate, which I will discuss shortly. Small business owners were relieved that the federal and provincial finance ministers decided not to move forward with increases to CPP last year. ln a survey of small business owners, 72% told us that increasing CPP would lead to increased pressure to freeze or cut salaries, and 55% indicated that it would reduce investments in their business. CFIB strongly recommends that the federal government reject any plans to increase CPP in the future.

As for El, CFIB was very pleased with the introduction of the small business job credit, as it will provide small businesses with a credit that will essentially lower their El rates by 15% over the next two years. As you can see on slide 5, they will use the credit to help pay down debt, increase employee compensation, and invest in new equipment. Another one in five will use it to invest in additional employee training, which I will also discuss a little more in a moment.

However, one of the toughest aspects of El for small business owners is that they pay 1.4 times more than employees. The small business job credit provides a bit of a break for a couple of years, but we would like to see this move to a 50/50 split on an ongoing basis. At one time employers and employees each paid 40% and the government contributed 20%, but about 25 years ago the governments pulled out, stopped paying, and moved their portion to employers. Given that almost 30% of benefits are considered special benefits, those related to parental leave, sickness, and compassionate care, for which employers have little or no say, there is certainly an argument to be made that perhaps El should be more evenly split between employers and employees. We believe 2017 would be an ideal time to lower the employer rates as it would not cause employee rates to increase at that time; in fact, they would still experience decrease.

As you can see on slide 7, 80% of small business owners indicated that a reduction in the small business tax rate would be an effective measure to maintain or strengthen their business performance as well. The value of the small businesses tax rate has gradually eroded compared to the general corporate tax rate. ln 2000, the small business rate was at 12%; the general rate was at 28%. Today, the small business rate is 11%; the general rate is at 15%. ln previous budgets the federal government promised to make further tax relief for small businesses a priority once the budget is balanced. We recommend that the government lower the small business tax rate from 11% to 9% in the next budget.

Finally, I want to share the CFIB research that found, in the first quarter of 2014, 312,000 private sector jobs had gone unfilled for more than four months, representing a vacancy rate of 2.6 percent. This rate has steadily increased since mid-2009. And as you can see on slide 8, the smaller the firm, the higher the job vacancy rate. This is very real issue for the smallest firms.

One way they are trying to address this issue is through training. As small businesses often face different realities than their larger counterparts, the types of training they provide can also be different, more informal, on-the-job-type training. That is why CFIB supports approaches that include investing training dollars in the workplace, as this is the most effective way of getting people trained for the jobs needed in the current labour market. We have provided several recommendations for governments to consider when reviewing the labour market development agreements, which include allowing employers access to LMDA funds for training that are tailored to their needs, recognizing informal, on-the-job training, and including provisions to offset training costs for employers, such as a tax for EI credit focused on training.

The final slide summarizes everything I've brought forward to you today. I thank you for your time, and I'll be happy to answer any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now go to the Canadian Labour Congress, please.

[Angella MacEwen, Senior Economist, Social and Economic Policy, Canadian Labour Congress]

Thank you.

On behalf of the 3.3 million members of the Canadian Labour Congress, we want to thank you for the opportunity to present our views today.

The CLC brings together workers from virtually all sectors of the Canadian economy, in all occupations and in all parts of Canada. The most important economic problem faced by Canadians today is not government deficits, and the solutions are not to be found in returning to balanced budgets too quickly. The most pressing problems faced by Canadians are a sluggish economic recovery, a stalling job market, record-high levels of household debt, along with inadequate employment insurance coverage and a lack of retirement security. Canadians expect their federal government to tackle these problems.

Exports have been slow to rebound after the recession and predictions of stronger economic growth have repeatedly been moved back. Business investments are not where they have been at this point in previous economic cycles. The October, 2014, monetary policy report released by the Bank of Canada suggests that this is because of a semi-permanent loss of capacity in several manufacturing export sectors. We should not expect to see business investment and hiring pick up until it is clear that the Canadian economy is on more solid footing.

The overall labour force participation rate and the employment rate have still not recovered to their pre-recession levels. On the contrary, they have stagnated since mid-2012. The Bank of Canada's labour market indicator shows that labour market slack is larger than just the unemployment rate alone illustrates. Specifically, many economists are concerned about elevated levels of long-term unemployment and involuntary part-time work, as well as high levels of unemployment among vulnerable groups, such as new Canadians and racialized workers. Employment growth has been shallower than labour force growth for core-age workers, and the labour force participation rate is at its lowest level in 10 years.

So in that context, what can government do to spur economic growth and good jobs? The International Monetary Fund's recent World Economic Outlook suggests that the time is right for governments to make some much needed infrastructure investments. They go so far as to suggest that clearly identified infrastructure needs could be financed through borrowing, without increasing debt-to-GDP ratios, and, in fact, possibly reducing debt-to-GDP ratios faster than would otherwise allow us to do. Since public infrastructure investment increases growth in both the short term and the long term, all of the conditions that the IMF has identified as ideal for public investment are present in our economy right now. We are experiencing an extended period of labour market slack and low business investment. Canada has a very low level of public debt, borrowing costs for the federal government are and will remain very low for some time, and many needed public investments yield a high rate of return in terms of immediate job creation, public benefits, and the growth of private sector productivity.

National economic research has identified major public investments that would be largely self-financing, since the positive impacts on economic growth and on private sector productivity boost future government revenues. For example, the Toronto board of trade argues that major investment in mass transit would substantially reduce business costs due to traffic congestion, boosting productivity. The leading Quebec economist Pierre Fortin calculates that the annual costs of the Quebec child care subsidy is covered by the benefit of the increased labour force participation rate of parents.

The initial costs of a major public investment program could be covered by raising the federal corporate tax rate, which we estimate would raise between $4 billion and $5 billion dollars per year in additional revenues. The current no-strings-attached cuts to the corporate tax rate have had very limited impacts on new private-sector investment, although I would like to note that the CLC continues to support targeted support for new private-sector investments through investment tax credits for write-offs for new machinery and equipment investment.

[The Chair, Conservative, James Rajotte]

You have one minute remaining.

[Angella MacEwen]

Okay, thank you.

Such a program of investment would include increased support for basic municipal infrastructure, mass transit, affordable housing, energy conservation through building retrofits, and renewable energy projects. We also urge an investment in soft infrastructure, such as home care as part of the public health system and long-term care for the elderly. These programs would create new jobs while increasing efficiency, productivity, and well-being.

The other area that we're very concerned about is skills training and apprenticeship programs. These are key components for creating good jobs. Canada falls well below the OECD average in the number of hours of job-related non-formal skills training for employees and for employer investment in skills training. Lifelong learning is critical to a high skills knowledge economy and it's essential for Canada to remain competitive in the global marketplace. The CLC urges the federal government to take steps to foster a training and skills development culture in Canadian workplaces.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you very much for your presentation.

We'll go to the Green Budget Coalition, please.

[Andrew Van Iterson, Manager, Green Budget Coalition]

Mr. Chairman and honourable committee members, thank you for inviting the Green Budget Coalition to speak to you again. I'd also like to introduce the Green Budget Coalition's co-chair, James Brennan, from Ducks Unlimited, who can also answer questions.

As many of you know, the Green Budget Coalition is unique in bringing together the expertise of 14 of Canada's leading environmental organizations, collectively representing over 600,000 Canadians and ranging from Ducks Unlimited to Greenpeace. Our mission is to present an analysis of the most pressing issues regarding environmental sustainability in Canada and to make a consolidated annual set of recommendations to the federal government regarding fiscal and budgetary opportunities.

The coalition has welcomed the Government of Canada's progress on the GBC's recommendations, including the Prime Minister's May announcement of the national conservation plan, reductions in tax preferences to the extractive industries, funding for fresh water and infrastructure, and the proposed measures to enshrine the polluter pays principle into law in Bill C-22.

However, many more federal actions are still needed to conserve Canada's natural heritage, to ensure Canadians can live healthy lives, and to play a responsible role in advancing global environmental sustainability

For budget 2015, the Green Budget Coalition is recommending that the Government of Canada pursue three strategic agendas, each of which has a number of associated recommendations. First is energy innovation and climate change leadership with an integrated agenda to capitalize on the blossoming global clean energy economy and to demonstrate leadership on climate change when it is increasingly clear that it its needed. Second is to advance Canada's national conservation plan and make progress on protecting our life-support system starting by meeting our international Aichi biodiversity targets of protecting 17% of our lands and fresh water and 10% of our oceans. Third is to ensure healthy communities for all Canadians, featuring a new environmental health equity agenda to ensure that all Canadians, including vulnerable and disadvantaged populations, can enjoy the same level of protection from preventable environmental health hazards.

Implementing these agendas together could lead to pivotal progress on each of the finance committee's consultation themes, as outlined in the executive summary of our submission, creating prime environmental, economic, and human health benefits.

Given today's focus on jobs, I'd like to outline the key actions we're recommending to accelerate progress on energy innovation and climate change leadership. First is to continue progress on phasing out inefficient fossil fuel subsidies, honouring our commitment to the G-20 by committing to not provide new subsidies to liquefied natural gas or renew the mineral exploration tax credit. Second is to announce and implement a well-designed price on greenhouse gas emissions as has been endorsed by the World Bank, the IMF, the Canadian Council of Chief Executives, our friends here from the Canadian Chamber of Commerce, and, I suspect, others at the table here, in 73 countries and over 1,000 companies. Third is to fund fast-charging stations for electric vehicles around major urban centres and provide accelerated capital cost allowance for all forms of power storage to remove key barriers to an efficient Canadian energy system. Fourth is to play a leadership role in United Nations climate change negotiations, including committing $400 million annually for climate change adaptation and mitigation in developing countries. Fifth is to protect Canadians and our environment from increasingly volatile weather events, building on the funding for disaster protection that was in Budget 2014, by renewing and expanding the adaptation funding under the clean air agenda before it sunsets in 2016 to at least $45 million per year, and to complement that, by integrating adaptation considerations into all infrastructure project planning and assessment under the Building Canada plan.

Before my time is up, I would also like to highlight a few of the other recommendations we're supporting: renewing and increasing implementation funding for the Species At Risk Act; mapping conservation value across Canada to support the success of the government's national conservation plan; promoting the new environmental health equity agenda, by building on a model that's already in place in the United States; and establishing a tax credit to help Canadians remediate radon, which is the second-leading cause of lung cancer, in their homes.

Thank you all for your time.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We will now go to the Retail Council of Canada.

[David Wilkes, Senior Vice-President, Grocery Division and Government Relations, Retail Council of Canada]

Thank you, Mr. Chair, and members of the committee for inviting RCC to present some of the key issues that we had outlined in our pre-budget submission for the upcoming federal budget.

Before beginning my specific remarks, I would like to take time to express the condolences of our association, as well as those of mine personally, for the losses to our military last week. As Corporal Cirillo is laid to rest today, I think it's important to take time to pause and reflect on that.

I would also like to reiterate what was said by my colleague and thank the members of this House for getting back to work so quickly. I've often said that it is an honour and a privilege that part of my job allows me to be here in these buildings and take part in this process, and I'm very glad that we're back to work. So, thank you very much.

As many of you well know, the Retail Council of Canada is the voice of retail across this country. Let me illustrate three key facts that demonstrate the importance that the retail industry has to the economy of this land. Retailers sell over $486 billion worth of goods in communities from coast to coast. Our employees, within our membership and within our industry, generate over $53 billion in salary on an annual basis. We are the country's largest employer employing over 2 million Canadians, or one in nine jobs across the country.

The Retail Council of Canada represents some 45,000 store fronts and our members include grocers, specialty retailers, clothiers, and electronic retailers. Our membership ranges from small independent retailers to large multi-store companies.

As we sat back with our members and developed the recommendations that we wanted to bring forward to the committee, we ensured that we focused on those areas that were identified as the themes. One, we wanted to bring forward recommendations that would support families and help vulnerable Canadians; and two, provide opportunities for improving taxation policies that govern our land.

Mr. Chair, we have focused on two key areas that are consistent with these themes. First, we want to recommend further elimination of import tariffs that are no longer serving their original purpose of protecting domestic manufacturing and are just adding costs or taxes to the system. Secondly, we want to ensure that the budget commitment that was made in 2014 to lower interchange fees from merchants, that started with credit card costs, is brought to its closure and fruition.

Let me focus the majority of my introductory remarks on tariffs. As members of this committee may recall, in Budget 2013 there was an initial reduction of $79 million in tariffs for baby clothes and certain sporting goods. This has had a real impact on Canadian families and shortly I'll show you the savings by way of example that have been generated for hockey equipment. We believe the time is now for more tariff free elimination because of a couple of other factors that are being introduced in the economy in the coming year. The first and probably most significant is the transfer of over 72 of our trading partners from GPT tariff status to MFN. This includes large trading partners like China, India, and Brazil, and by the government's own calculation will result in $333 million more in additional tariffs across the economy.

I'd also like to highlight a tax or an import levy that the Minister of Agriculture is considering on fresh raspberries and strawberries, as well as some other products, which could add an additional $2.4 million in cost for these basic products that Canadian families rely on every day to have a healthy diet.

I just illustrate these by way of example that there is an opportunity to level this playing field to continue to reduce costs for Canadians and to continue to update our taxation policy.

The Retail Council has highlighted four areas which are noted on the screen here—children's clothing, linens, gloves and mitts, and footwear—where we believe there is an opportunity for further tariff relief. The criteria that we have used is articulated in the box on the left-hand side.

As I mentioned, we have seen real benefits for our consumers. For the youth hockey player that you equip from helmet to skates, a family that was doing that would save approximately $51 in cost.

Our story on tariffs is an important one because Canadians are not only looking to shop around the corner, but we're seeing that more and more Canadians are going online to research and purchase their goods. It is vital that we continue to level the playing field between our two economies.

My final slide is a quick one. We are appreciative of the government's commitment to address interchange fees. This need has only grown since that time and we're looking forward to conclusion on this file.

Mr. Chair, thank you very much. We are very keen for the questions and discussion that follow, and I thank you for the opportunity to present our views.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Colleagues, we'll begin members' questions with Mr. Cullen for seven minutes.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, Chair.

To Mr. Wilkes and Mr. Brakel as well, thank you for your comments at the opening of your statements. I think they're well received, certainly by myself and my colleagues.

The work continues. So now we've heard from the restaurant association, from Mr. Wilkes and his association, as well as from Ms. Pohlmann, on these merchant fees, these pesky merchant fees. Help us understand exactly the prescription that we need to write.

Ms. Pohlmann, maybe you can start us off. Why is this such an intractable problem? Why is it so hard to stand up to these credit card companies and the banks that collect the fees, and help Canadian consumers out? Why has the government struggled with this?

[Corinne Pohlmann]

Well, I think it's something small businesses have been facing now for about seven to eight years. With the introduction of premium cards into the market back in 2008, we suddenly saw pretty significant increases in the merchant fees being collected by small business merchants, as well as larger merchants. It was pretty much overnight. There is a total dominance in the industry by MasterCard and Visa in this particular area. Small business is known as price takers, not price makers. It's very difficult for them to push back. Basically, it's difficult to say no to accepting credit cards today. The response we often get from the credit card companies is that, well, businesses don't have to accept credit cards, but many small business owners have no choice. Their consumers demand it, so they basically have to take it.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

To be clear, does the law now allow them—these small businesses or even some of the large ones represented by Mr. Wilkes—to charge differential rates for consumers if they're...because some of these credit card fees have very, very high merchant rates? Is that essentially being absorbed by those small and medium businesses? Can they not just simply charge a different amount for a product depending on which card the customer swipes? Is that not an option?

[Corinne Pohlmann]

No. That's not an option. They have to honour all cards regardless of the type of card they accept, even if they can recognize which card is actually a higher rate or a lower rate. That's a problem in and of itself; it's often difficult. What you may think is a rewards card is actually sometimes a lower merchant rate card.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

We have a free market here. Why is this the responsibility of government?

[Corinne Pohlmann]

Well, it's because there's such a market dominance by these two industry players, and in fact we need to have some oversight of those industry players. We felt the code of conduct was a great first step, and it helped to sort of bring them into the—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Is that a mandatory or voluntary code of conduct?

[Corinne Pohlmann]

It's a voluntary code of conduct. Yes, and it at least started to bring some fairness into the system, for example, by allowing merchants to get out of contracts when they change rates, which was not really allowed previous to this, but obviously we need more. We see the rates continue to go up, and we'd like to see more movement by the industry to recognize that this is time to pull back a little bit on increasing rates, going forward.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

You're going to find support from us.

Mr. Wilkes, did you find anything to add in there?

[David Wilkes]

Yes, I do, and thank you very much for the question.

The last part of your question is why this is a government responsibility. I think there are two key points I'd like to raise there. The Competition Tribunal, approximately a year and a bit ago, ruled that the market practices of Visa and MasterCard—I'll paraphrase here—were distorting the market and that the normal influences that would be in place to regulate prices were not functioning within the Canadian economy. That's first. The evidence that was brought forward to the tribunal really resulted in that conclusion. Second, we look at international experience. More than 37 countries around the world have chosen to cap and regulate fees because they recognize that the normal indicators, the normal price functions, do not work in this market because the fees are hidden.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

So is that a market failure, in a sense? I don't want to be judgmental about what's happening, but you suggest that other countries have realized that there's a distortion in the market, as has been realized here, and that in the market, as of right now, the to and fro between consumer and supplier has not been able to capture the realities of this market distortion.

[David Wilkes]

I would agree with that statement, and let me give a couple of examples of the type of action that has been taken.