Special Committee on Cooperatives Committee on July 24th, 2012

[The Chair, Conservative, Blake Richards]

Oh, I am terribly sorry. We had originally scheduled it that way. I do apologize. You are absolutely correct.

We will continue with the meeting.

Next we have Monsieur Gourde, for five minutes.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for being here this morning.

My question is for all three witnesses.

The cooperative system is extremely beneficial, particularly in terms of the relationship between members and the cooperative. There is also the relationship with the board of directors. As Mr. Malloy mentioned earlier, at the end of the day, it's the board of directors that decides what direction the cooperative will take.

As you said, there are years when cooperatives do well and other years when they don't do so well. As regards profit distribution, the board of directors can divvy up all or part of the profits in a given year among members. That is a legitimate decision the board of directors makes. Some boards, however, keep a portion of the profits for recapitalization, whether to fund projects or bolster their balance sheet. There are also years when the board decides to pay out a little more.

In those years when cooperatives make a bigger profit, what would you say is the best strategy? Is it preferable to allocate a portion, say a third or half, to long-term recapitalization, or just redistribute the money to members? The second option could in fact weaken the cooperative's financial standing.

A number of strategies are possible. As I see it, every cooperative can decide for itself, but I would like to hear what you would recommend.

Mr. Malloy.

[Jeff Malloy]

A balance obviously works best.

Because of the type of co-op we are, and because of the history of it.... It was formed by a group of fishermen who had a tough time selling their products, had a tough time getting a decent return. They have, over the past number of years, tried to use the co-op for that purpose, to get more money out of their product and back into their pockets. Whenever we can we obviously try to do that.

A co-op is always a balancing act. There are times we would probably have liked to have kept more money within the company, but in order to encourage new members—because we always have people retiring—and because the margins are so low for the fishermen themselves, we try, when we can, to give them some back so that there is an obvious advantage to being a member of the co-op. But again, you don't do the types of projects and stay ahead of the game as far as the marketplace goes without putting a lot of money back into capital investment.

Thankfully, our membership has seen that and have always struck that balance. The more informed your membership and board of directors are and the more they know about the business in general, the better off they are. When you run into trouble is if you have a board of directors who aren't well informed and a membership who aren't well informed. That's when you have a problem with their wanting to take out every cent they can. But once they know the business and where it's going, it's pretty easy for them to make those decisions to reinvest in their company.

[Bryan Inglis]

Jeff is right on.

In my experience, when the co-op boards are educated and they understand their cooperative strategic plan.... There are a hundred co-ops that are member-owners of Co-op Atlantic, and almost all of them have strategic plans that are very focused on the future, and it's a blend of the savings. In the consumer cooperatives we deal with, the consumers are buying the product at market, so everything beyond that on a rebate or a dividend is actually a premium. And there are not big expectations of that premium; they would rather see money stay within the cooperative to reinvest in and grow their cooperative.

That's why I think you're seeing that cooperatives that are older and traditional and have been around for a while are quite strong. It's the young ones that have the problems. The young ones are having trouble trying to find capitalization to get going and/or getting enough money up ahead to be able to grow their business.

[The Chair, Conservative, Blake Richards]

Thank you very much. Time has expired.

We now move to Mr. Butt for the next five minutes.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you very much, Mr. Chair.

Thank you to all the witnesses for appearing in front of the committee today.

I will start with Dr. Webb, because I was interested in this issue you mentioned, that it's either virtually impossible or very difficult to invest in a co-op. I wonder if you could give me an example of a co-op the general public can invest in. That's the first part of the question.

Second, what would you see as positive changes this committee could look at or consider that would make it easier or more acceptable, or whatever, for the general public to invest in cooperatives? I was always under the impression that in cooperatives, really the investors are the members. I think you're suggesting that people who may not have any direct day-to-day involvement in whatever the cooperative is doing should also be able to invest and make a rate of return through RRSPs or whatever other investments they're making.

Can you give me an example of a co-op the general public can invest in and get a return on right now? And then can you clarify what you think we could be looking at to encourage more people from the general public to potentially invest in cooperatives?

[J. Tom Webb]

Let me start at the end of the question.

One of the models we should be looking at very carefully is the one in Italy, where cooperatives are taxed at a different rate. They're taxed at a different rate in recognition that the objective of the business is not to maximize return to shareholders, but to meet community and member need.

They also, then, have a different expectation. The expectation is that a percentage of the surplus or the profit they produce in a year will go into a cooperative development fund. There is also an expectation that a percentage of their surplus or profit each year will go into reinvestment in the cooperative.

Cooperatives in many ways are no different from investor-owned companies, except with regard to where the return or that surplus is going. If you think about it, you can have the situation—we very often do have the situation—where you have an investor-owned company that is not reinvesting in its company; it is simply sucking the money out, paying it to shareholders, and allowing the company to collapse and wither and die.

You had that, for example, in the case of the coal mines and the steel mills in Sydney, Nova Scotia, where Hawker Siddeley just sucked money out for years and years. You had mines and steel mills that were inoperable, really, and the government moved to take them over.

So the problem of where the surplus goes, whether it gets reinvested in a way that's sustainable, is the same for all business. The advantage of cooperatives is that because the business is locally owned, people have a greater tendency to look at it and ask the question, “What do we need to do?”

That's part of the essential question for our Centre of Excellence in Accounting and Reporting for Co-operatives. It's to have cooperatives develop a systematic way of saying “What is it that we need to invest in the co-op to have it viable for our community for the future?” That's an important question.

In terms of outside investment, where I think we have many co-op members, people like me, who would like to invest in cooperatives.... We have the UFA, for example. If I lived in Alberta—and I'm not sure exactly what the conditions would be—I could become a member of UFA and I could buy UFA preferred shares. But I don't live in Alberta. If I did that, I'm not sure whether they would be eligible to be part of an RRSP investment. I wouldn't likely be able to take my RRSP and invest it in UFA preferred shares. I would get a tax break for investing it in something else, but not in the co-op in which I had an interest.

Those are the kinds of issues that need to be looked at, and there's no question in my mind....

Securities legislation is another example. Bryan will remember that Co-op Atlantic used to offer preferred shares for sale. It got out of the business of doing that. It got out of the business because they didn't want to raise $100 million; they wanted to raise $1 million. To raise $1 million, they had to spend $100,000 in preparing a prospectus, the same as if they were Enron. Well, this doesn't make any sense. This is just not appropriate. This is not appropriate regulation and it's not useful, and what it meant was that they got out.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

[Inaudible--Editor]

[J. Tom Webb]

Yes, I agree.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

I said that, indicating my time is out, or that your time of my time is out.

Anyway, thank you.

[The Chair, Conservative, Blake Richards]

That is actually correct, in both instances. Thank you very much.

Before we move on, I have to note that both Dr. Webb and Monsieur Bélanger have mentioned their desire to be able to invest in UFA. As a proud Albertan, I have to say it's just one more of the many reasons why everyone should want to be in Alberta.

Anyway, we will move on now to the third round of questioning, as the second round has closed.

First up in the third round of questioning, we have Ms. Gallant, for the next five minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

Mr. Inglis, you started to touch on co-ops for seniors housing. In your models, do any of them include assisted living, people who don't need to be in a nursing home but do need somebody to ensure they're being fed?

[Bryan Inglis]

In our existing models, yes. In the model we're developing now and the new model coming down the pipe, the answer is yes as well. What is happening is that we have, for example, ten elderly couples who want to get together. They have money. They've retired back to the communities they've grown up in. What they want to do is get together, form a cooperative, build themselves a small seniors home, and hire someone within the community and have that person work with them and look after them as needed. Then, as they move beyond that, the equity they've built in that small cooperative they can sell to another couple who comes along.

This is not social housing. This is creative cooperative housing for seniors couples who have money. It's just a new model.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Do any of these cooperative housing projects for seniors have an affiliation with the local municipal or county governments?

[Bryan Inglis]

We only have this one model. There's only one happening right now. This is the model we believe has growth opportunity. So no, at this point, there is not.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Since this committee started up, I've been paying more attention travelling around through the riding and am looking at where co-ops actually exist. I asked some business owners why it was that they joined a co-op to set up their business. They said that it has tax advantages.

Mr. Malloy, could you explain what tax advantages there would be for a selection of businesses in an industry, along the same lines, that would benefit from having a co-op model?

[Jeff Malloy]

To be perfectly honest with you, I don't know. Perhaps Mr. Webb would be a better person to answer.

To my knowledge, there's no real tax advantage to it, in our case.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Your having been in business is why I asked.

Dr. Webb, are you aware of it? I was of the understanding that they're taxed the same way, but they said that there's a tax advantage. What would that be?

[J. Tom Webb]

I have to say that I'm not sure. I'd love to talk to the person you talked to.

First of all, taxes are different across the country. You have federal and provincial taxes. I don't know what the tax advantages for that particular business might have been. There may have been one in that particular area, but generally speaking, there are no huge tax advantages for cooperatives. That's the way it is.

[Bryan Inglis]

I think if a cooperative has a surplus, and they issue the surplus as member shares, and the member shares stay in the cooperative, then at that particular time, they don't pay tax on their member shares, because they haven't actually taken the cash out. It could be that. But as Tom Webb mentioned, I don't understand who the business people are or how their business works or how they were members of a cooperative or what benefit they got for being members.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

It's a matter of shares, then.

There is also the 10% rule that was referred to. In an RRSP, investing in an RRSP reduces your income for that year. So if we compound that reduction in the taxes one has to pay with the reduction in the taxes due to the company through the shareholders, as you just explained, it would almost result, or will likely result, in even further tax avoidance. Perhaps that has something to do with that 10% rule.

Mr. Inglis, You gave the example of a smaller start-up or less successful co-ops that would benefit from government funding. I'm just trying to understand how I could explain it to a blueberry farmer in my riding, for example, who is successful and pays taxes into the system and is having his taxes used to subsidize a blueberry organization, a group of businesses, who are, in turn, in competition with him. How would I explain that this is what we're doing?

[The Chair, Conservative, Blake Richards]

The time has expired, but I will allow a brief response.

[Bryan Inglis]

I guess it's not about explaining it specifically to him. It would be about explaining it to a group of blueberry farmers in northwest Nova Scotia who do not have a way to market their products, because they decided that the big guy didn't want to take their blueberry products that year, because he had too many. What we're talking about is that small group of farmers getting together and forming a cooperative so that they can have enough volume to actually sell their products. So it's not about the big guy. He has his market. It's about establishing a group of farmers who can grow their business in rural Canada.

[The Chair, Conservative, Blake Richards]

Thank you.

Ms. Leblanc, you have five minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you, Mr. Chair.

Once again, I want to thank each of the witnesses for their very informative answers and comments. You are confirming the fact that the cooperative movement allows the economy to serve members and communities, and you've done a good job of articulating that.

I would like to pick up on a few things: how important the ability to start up new cooperatives is, what role the federal government should play in terms of helping them set up shop and how that could in turn address youth or regional employment problems.

Mr. Inglis, could you comment on the importance of having new cooperatives enter the market and the ways in which that could address certain challenges?