Finance Committee on Nov. 9th, 2006

[The Chair, Conservative, Brian Pallister]

We are back. Welcome to our guests this morning.

Pursuant to Standing Order 108(2), in the orders of the day we have a briefing to study the implications of the notice of ways and means motion tabled by the Minister of Finance on September 25, 2006, concerning amendments to the Excise Tax Act,

particularly the elimination of the visitors' GST rebate program.

We have witnesses to give us testimony this morning.

Thank you for taking the time to be with us. You have been given five minutes to do a brief introductory statement. I will give you an indication when you have one minute remaining, or less, and then we'll unceremoniously cut you off at five to allow time for an exchange with our committee members. I give you that warning in advance.

We'll begin our five-minute presentations with the Hotel Association of Canada, Anthony Pollard, president. Welcome, sir. You have five minutes.

[Anthony Pollard, President, Hotel Association of Canada]

Thank you very much. I appreciate the opportunity to be back here again with you. It seems like it was only about six weeks ago.

My name is Tony Pollard. I am president of the Hotel Association of Canada. We represent all of the lodging industry across Canada. I'm not going to name out all the members because I'd eat up my five minutes in doing that.

As I said, I was here on September 19, when I pointed out that tourism is a growth industry worldwide. I also pointed out that Canada is losing market share in this growth market. I underscored the impact of the western hemisphere travel initiative--passport, dollar, energy--and I'm not going to get into all of that again at this point.

However, we are now even more threatened with the proposed elimination of the GST visitor rebate program. Just in terms of the size and scope of our industry, in the hotel industry we generated $14.2 billion in 2005. The value-added is about $12.8 billion. We employ 301,000 people right across Canada. The important point I love to remind the people in government is that the hotel industry alone generated $5.7 billion in tax revenues, of which $2.5 billion goes to the federal government, and I continue to reinforce that point.

Where are we today? Unfortunately, Canada is losing market share. We slipped from 12th place to 7th place worldwide. Our U.S. market is in a free fall. While international visits are increasing, they cannot make up this deficit on their own. Here's some new news for you: two days ago, on Tuesday, November 7, the World Tourism Organization released a study that shows that travel internationally worldwide is up by 4.5%, whereas Canada's travel is down 4.1%. We have the dubious record in the Americas of only being exceeded by Montserrat, Aruba, and Uruguay as being places where people travel to less than Canada.

Funding for the CTC, the Canadian Tourism Commission. Our colleagues from the CTC are here. I always like to point out that we need more money to support the Canadian Tourism Commission, that an investment of $50 million would result in $1.2 billion worth of new business, that a $100 million investment would alone give the feds $620 million of new revenue.

Let's get to the GST, the reason we're here today. At the outset, let me say that perhaps we as an industry could have done a better job of quantifying the impact of the GST visitor rebate program on our convention, tour, and group business. We are very much aware of and support the fact that the government is casting a discerning eye on all government programs that spend taxpayers' dollars. We support that completely.

Let me give you a couple of numbers very quickly. In 2005, total tour, group, and convention business in Canada generated in excess of $1.28 billion. This proposed program cut is putting in jeopardy all of this business because it's making it 6% more expensive. The new Government of Canada prides itself on its competitive agenda, but I don't think they quite understand--I think they're getting it now--this impact.

Let me just tell you how. The government is shooting itself in the foot, because what they are doing is jeopardizing tax revenues of $496 million on the $1.28 billion that we generate just in the group, tour, and convention business if this exemption for business coming into Canada is eliminated. Of that $496 million, which is going federally, provincially, and municipally, $218 million of that goes directly to the federal government.

Let me expand on that very briefly. I'll be the first one to say that all of that $218 million to the federal government will not be lost, but even if half of it is lost, what it means is that you're trying to save $75 million, but forgoing $109 million as a result. I can name various cities and what it means, the impacts there. I won't get into that right now. However, let me just say that around the world foreign competitors are just showing so much delight and glee because we are 6% more expensive.

Ladies and gentlemen, our commitment to you and to the Canadian taxpayers is accountability. We are not asking for handouts, but simply your commitment to this program. This will, in turn, provide the government with funds for other critical programs you're undertaking.

Thank you very much, Mr. Chair and ladies and gentlemen, for this opportunity.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Pollard. It's nice to see you again.

We'll continue with the Retail Council of Canada, Kim Furlong, director. Welcome, and proceed.

[Kim Furlong, Director, Federal Government Relations, Retail Council of Canada]

Good morning, Mr. Chairman and members of the committee.

My name is Kim Furlong, and I am the Director of Federal Government Relations at the Retail Council of Canada.

The Retail Council of Canada represents over 40,000 storefronts from coast to coast and is the voice of retail in this country.

I would like to thank you for the opportunity to speak to you today about the elimination of the GST visitor rebate program and the impact it will have on the retail sector. Since the September 25 decision, we have surveyed our small, medium, and large members and have found two trends.

Members who understand the program well have adopted it in their sales promotion techniques. They are successful users and want to see the program preserved.

The other trend is that a number of our members only had a peripheral understanding of how the program works and are ambivalent about its efficiencies. This trend I believe can be explained by the level of visitors these members interact with. The members who would be most strongly impacted by this cut are the merchants located near convention centres, in airport terminals, and near land borders. Our duty-free members have suffered this year already with changes to the security measures relating to carry-on liquids. The elimination of the VRP would add to an already very difficult year.

In addition to points of exits and convention centres, merchants located in small tourist destination areas such as the Niagara Peninsula, Stratford, Lake Louise, Whistler, Jasper, Banff, and North Hatley, and in large urban centres such as Vancouver, Calgary, Toronto, Montreal, and Halifax, which attract a good number of visitors to Canada every year, would be impacted as well.

Our high ticket item merchants have also commented on the cut of the GST visitor rebate program. Many of these members advertise this program successfully and have found that the 6% advantage has had an impact on sales. From the tour planner who sells Canada as a destination because of a 6% competitive advantage, to the hotel chain that in turn also offers a discount to visitors, these people eventually will walk into our merchants' shops and are often keen to spend because they are on vacation. The use of the 6% additional rebate on an item is often enough to make the sale.

The bottom line is that the many industries represented at the table today are interconnected and work together to fuel the Canadian economy. The health of Canada's tourism industry is important to the retail sector because retailers benefit from the inflow of visitors to Canada every year.

The tourism industry is already facing many challenges, as you all know--gas prices, the Canadian dollar, the western hemisphere travel initiative. Eliminating the VRP is simply adding to the hardship of this industry. The VRP is important to our industry but equally as important is the ability of convention centres and tour operators to waive the GST so they offer more competitive products to our visitors.

Our coalition has met several times with Minister Flaherty's office and his officials since the decision to cut the VRP was announced. These conversations were valuable to both sides, I believe. We, as a group, were able to bring a perspective that this cut is larger than a simple program cut, and we have gained an understanding of the inefficiencies of the current model and its cost to the government.

As you will hear in the subsequent presentation by Christopher Jones of the Tourism Industry Association of Canada, the industry has come together and is ready to offer an alternative to a government-run VRP. The Retail Council of Canada supports a pay-per-use program where the user and not the taxpayer assumes the cost of the program. Our members have been very clear that they would like to see a streamlined and efficient process without adding any burden to doing business, and I believe that the alternative that has been designed by the VRP coalition achieves that objective.

I will end my presentation here. Please feel free to ask your questions in English or French. Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, madam.

The next witness will be from the Tourism Industry Association of Canada, Christopher Jones, vice-president.

Welcome, Mr. Jones. Over to you.

[Christopher Jones, Vice-President, Public Affairs, Tourism Industry Association of Canada]

Thank you, Mr. Chair.

The Tourism Industry Association of Canada represents 400 members and approximately 200,000 tourism-related businesses in Canada, of which 80% are small- or medium-sized enterprises. We contribute about $26 billion to the GDP of this country annually. We employ in the tourism sector directly 625,000 people. In total about 1.6 million people, or 10% of Canada's workforce, work in tourism-related businesses.

I'll say a brief word about the coalition, because we're here in that capacity today. It makes up 14 national business and industry associations on both sides of the border, and this is a substantial part of the Canadian economy.

To jump to the quick, the implications of the cancellation of the existing program are pretty clear: the loss of a substantial portion of volume convention, package tour group accommodation, and trade show business; the loss of related spending on retail, meals, entertainment, and other ancillary items--for example, business services--by both convention delegates and foreign visitors.

We also believe that Canada will lose business in the international convention market, as the 6% premium will render us too expensive. A convention planner facing a choice between Toronto and Las Vegas will be more tempted to go to Las Vegas. We also know that tourists will opt for other tour packages to other destinations, as Canada will lose its competitive edge.

This comes on top of a number of challenges that have faced the industry in recent time. The Canadian currency appreciation has made us about 20% less competitive as a destination in the last year. The increase in fuel prices of the spring and early summer was certainly a disincentive to travel, and that's been reflected in the number of visitors to Canada from the U.S. Also, the uncertainty occasioned by the WHTI has confused quite a few U.S. travellers as to what the appropriate documentation is. Finally, I think Canadian domestic air travel costs continue to be somewhat higher than they are in the U.S., so those are also a disincentive.

So in a nutshell, essentially what's happened is that between 2000 and 2005 Canada has sustained a 28% reduction in visitors from the United States. That's substantial. If you look at cross-border drive-ups, same-day visits, they're down by 41%. There's been a substantial impact on border towns in this country. The communities of Niagara, Windsor, and Victoria, B.C., are all dependent on tourism. Our travel deficit--in other words, the amount Canadians spend versus what Americans spend in Canada--is now minus $5.5 billion. In other words, we're spending more in the U.S. Canada has slipped down in the world rankings of tourist arrivals from seventh in 2002 to twelfth in 2005.

To reiterate the point that Tony made, we're here to be constructive today. We accept that the existing program was administratively burdensome and was characterized by fairly high overhead costs. We would like to try to work out an accommodation here.

As a result, we've prepared a proposal that would see the private operation of the program. We've only had time to prepare this in English, given the short notice of this meeting. I've sent it out to the clerk. We'll translate it and get it to you guys as soon as possible, but you do have it in English.

I think it's imperative that we retain the existing exemption for group package tours, conventions, and trade show businesses, as these earn Canada substantial revenue in the international markets.

We also believe--and I want to make this clear--that Canada should continue to offer a rebate to individual foreign guests as this incents substantial spending by these visitors. Canada would be alone amongst major OECD tourist destinations in not offering a value-added tax type of rebate to visitors. We think that's not a distinction we want to have.

We think this program can be operated successfully at no operational cost to government, as our proposal lays out. As I say, we'll let you read this document at your leisure, and we'll be happy to chat about it with you.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Just to save your organization a little time, we'll have it translated here. You've provided us with the English, and we'll have it translated. Committee members, it should be available to you by Tuesday next.

We'll continue now with the president of the Union of Taxation Employees, Dawn Hardy. Welcome, and over to you.

[Dawn Hardy, President, Local 90006 (PEI), Union of Taxation Employees]

I'd like to thank the finance committee for inviting me to appear before you today.

My name is Dawn Hardy, and I'm the Local 90006 president of the Union of Taxation Employees.

The Union of Taxation Employees, a component of the Public Service Alliance of Canada, represents more than 22,000 members of the Canada Revenue Agency. My local has approximately 700 members who live in P.E.I. and work at the Summerside Tax Centre.

Other organizations participating in this panel will outline the impact on the hotel and convention industry. I will focus directly on the job loss for my members and the Summerside economy.

In the context of the government's overall workforce and budget, the impact on the workforce of the decision to end the visitor rebate program is relatively insignificant. But in the context of Summerside, in the context of P.E.I., and for the members who I am privileged to represent, it's significant. Somewhere between 60 and 80 people employed by the CRA will lose their jobs when the program is cancelled, and additional jobs will be lost in the private sector in Summerside. The local economy will lose between $3 million and $4 million in wages currently paid to my members who administer the rebate program.

This is not the first cut that we have been subjected to within the CRA in Summerside. In the last two years we have absorbed almost 40 employees due to the losses within the tax centre due to the relocation of our human resources compensation section, which has moved to Winnipeg. Moreover, our finance and administration section was moved to Halifax. I'm sure that all the committee members understand that absorbing federal government job cuts in P.E.I. is far harder than in locations like the national capital region, where workers can more easily move from one government job to another.

My plea to the committee is to urge the government to reconsider the decision to eliminate the visitor rebate program. Failing that, I would urge you to locate new or expanded CRA services in Summerside so that the local economy and financial security of my members will be protected.

Thank you.

[The Chair, Conservative, Brian Pallister]

I welcome Alex Fritsche, on behalf of the Conference Board of Canada. We're glad to have you here.

Five minutes, over to you.

[Alex Fritsche, Economist, Canadian Tourism Research Institute, Conference Board of Canada]

Thank you, Mr. Chairman and members of the committee. I'm very pleased to be here today on behalf of the Conference Board.

Basically, I'm here today with the Conference Board to be an objective voice and an impartial adviser, to some extent, even though this is clearly an issue that also affects many of our members from provincial governments, city governments, and businesses in the tourism industry throughout the country.

At this point, what we're trying to do is understand what the potential impact might be of the elimination of the visitor rebate program, and perhaps even the likelihood of it going forward or possibly being revoked.

That being said, there is a definite potential for a serious financial impact on the Canadian tourism industry. The Conference Board of Canada has been instrumental in doing impact analyses on a number of issues that have affected the industry, most notably the WHTI impact on the tourism industry from the U.S. Right now, though, what we have to say is that there isn't quite enough statistical analysis done and not really enough data to thoroughly conclude that the impact would be minimal. It could potentially be quite large.

We believe the impact could be significant, because the convention business represents a significant chunk of the visitor rebate program and the competitiveness of that industry. Also, many foreign tour operators don't price in the GST when they offer their products to foreign visitors.

A lot of the feedback we receive from our panels that we follow in the U.S. and overseas markets shows that they're very concerned about the impact of the visitor rebate program and what it will do to their offerings into Canada. And as we've heard before, Canada is already suffering from a competitive decline.

As a country, Canada has become more expensive against virtually every major foreign competitor out there. We've seen that in the numbers. We've seen the numbers slip in terms of overseas arrivals, certainly the numbers of American arrivals. For instance, the U.S. cost of travel to Canada has gone up almost 50% over the past two years. A trip that used to cost, let's say, $700 may now cost $1,000. That's a significant increase.

On balance, we'd like to urge the government to be very diligent when they do go ahead and implement this cut in the visitor rebate program, because it does affect the competitiveness of the Canadian tourism industry as a whole.

[The Chair, Conservative, Brian Pallister]

Thank you very much. We look forward to questions later on.

The next presenter is Karin Zabel from the Canadian Tourism Commission. Welcome.

[Karin Zabel, Vice-President and Chief Financial Officer, Finance, Canadian Tourism Commission]

Thank you for inviting us to appear before you today.

As a crown corporation of the Government of Canada, the Canadian Tourism Commission is specifically legislated to sustain a vibrant and profitable Canadian tourism industry; to market Canada as a desirable tourism destination; to support a cooperative relationship between the private sector and the governments of Canada, the provinces, and territories with respect to Canadian tourism; and to provide information about Canadian tourism to the private sector and the Government of Canada, the provinces, and territories. We do this in collaboration with industry and all levels of government.

Through the CTC, the Government of Canada has been at the forefront of working nationally with the tourism sector to maintain its competitiveness and market Canada as a destination of choice for international travellers. Our ultimate goal is to grow tourism export revenues. The commission focuses on attracting visitors from nine international countries where we generate the most revenue. These markets represent 64% of international revenue and 91% of international visits to Canada.

Tourism is an export industry. Marketing messages transmitted abroad to come to explore Canada helped bring $17.5 billion in foreign exchange into Canada last year. The Canadian Tourism Commission drives new dollars into the Canadian economy, which is why Canada has invested in one of the most competitive and fastest-growing industries in the world. Global consumers spend $623 billion U.S. a year on their trips to other countries. Within our own borders, Canada's tourism industry generates $62.7 billion in revenues. The taxpayer is well served. Thirty cents out of every tourist dollar goes directly to government. The federal government's share alone amounted to $9.3 billion last year.

However, consumers have more destinations than ever to choose from. Thirty-five years ago, Canada was second in the world's ranking of tourism destinations. As air travel became more affordable and more countries started getting into the tourism business, Canada and many others started to lose market share. We are now ranked at twelfth place in the international tourism revenue our country is bringing in. Despite the slide Canada has shown some growth. Overseas travel, for example, was up by 7% last year.

Competition is fiercest for the American traveller. The U.S. continues to be our most important international market. It accounts for 57% of Canada's international tourism revenue. While U.S. plane arrivals into Canada are still doing better than what we've seen in the last couple of years, overnight automobile trips from the U.S. have seen the sharpest decline. As of July, overnight auto trips from the U.S. were down 7.3%, while plane arrivals from the U.S. were down 2.7% for the year as of July.

Our research shows that U.S. awareness of Canada as a travel destination is weak. In America, the CTC and partners have about a 4% share of voice. Our collective investment in the U.S. market makes up just a fraction of what our competitors are spending. As a result, U.S. consumers are much more aware of destinations in Europe, Mexico, and the Caribbean. This uphill battle makes fostering tourism's growth all the more important.

It is within this context that the proposed cancellation of the visitor rebate program could impact the competitiveness of Canada's international convention, tour, and group business. This has the potential to make it 6% more expensive to do business in Canada. We believe the visitor rebate program has assisted in attracting meetings and conventions from the U.S. In 2005, we invested $4.6 million in the meetings, convention, and incentive travel market in the U.S. Our investment contributed to the American business traveller spending $1.5 billion in Canada last year.

Tours from other countries such as Japan and France will also be impacted by these changes. At this point, however, we are still assessing what potential impact this may have on our ability to attract tours, meetings, and conventions to Canada--a very important line of business for us. We continue to stress to international partners that Canada is still one of the world's top travel destinations, offering world-class facilities, services, and experiences.

The Canadian Tourism Commission's five-year strategy will reposition Canada and make it more relevant to the international consumer. Our objective is to see international tourism revenues climb by 10.9% to nearly $20 billion by 2011. To get there, we are attracting more high-yield customers from a wide range of lucrative markets. Our focus is on markets where we'll get the highest return on investment.

The consistent application of a brand that builds powerful personal relationships between international consumers and Canada is the heart of our strategic approach. With our brand as the base, industry partnerships, cutting-edge research, and the world's most advanced e-marketing techniques, we'll improve Canada's standings in the global tourism rankings by turning us into a must-see-now destination.

This concludes my opening remarks.

[The Chair, Conservative, Brian Pallister]

We'll conclude our presentations now with Global Refund Canada Ltd. Kevin Boughen, over to you.

[Kevin Boughen, President, Global Refund Canada Ltd.]

Mr. Chairperson and members of the committee, thank you for inviting me to speak before you today.

I am Kevin Boughen and I'm president of Global Refund Canada Ltd. We are a subsidiary of Global Refund Group, incorporated in the Netherlands. Global Refund Group provides 80% of all tourist tax refunds in the world. Since its inception in 1980, Global Refund Group has grown to a point where we now service 30,000 travellers each and every day. We operate in 37 countries, across four continents.

In 2002, we began facilitating visitor tax refunds here in Canada and currently employ 60 people across the country. Over the past five years, we have invested several million dollars growing our Canadian operation. Today, Global Refund Canada offers instant cash refunds to visitors at all five of Canada's largest airports. We are the largest third party service provider in Canada, with 80% of this market. No other organization has the depth of experience and knowledge we have in this area. We know what makes visitor rebate programs work in all the various countries that offer them. And there are many common elements that distinguish the best-run programs.

What brings me here today is my understanding that government officials recommended that the Canadian program be eliminated because it was expensive to administer and vulnerable to fraud. Rather than eliminate the program, however, we believe there are several simple, easy steps the government can take to solve both of these problems.

Our proposal will accomplish three main things. First, it preserves the value of a visitor tax refund system that stimulates growth in the tourist numbers and stimulates growth in tourist spending. Second, it eliminates the costs for the government that are associated with its operational responsibilities. And third, it will significantly improve the security and minimize fraud.

There are two essential components to our proposal. The first is that the tourist, and not the taxpayers, should fund the system. Today, Canada stands as only one of three OECD countries with a taxpayer-funded visitor rebate program. By changing Canada's model to a user-pay, the government can shift the administrative burden to the GST refund operators, the tourists they serve, and thereby eliminate all its costs in operations.

Under the current system, the tourist can apply for a refund in one of any number of ways.

First, the tourist can apply directly to the government's rebate office in Summerside, P.E.I., and receive 100% of their GST back in six to eight weeks' time. Alternatively, if they're travelling by land, they can stop at a participating duty-free shop and receive 100% of their GST back in Canadian dollars instantly. A third option would be for them to visit a third party, such as Global Refund, at an airport. At the airport, they would receive an instant refund, but it would be discounted by a 20% administration fee. In most OECD countries and in our proposal, the only way a visitor should receive a rebate is by paying an administrative fee at the point of exit.

The second essential element we recommend is to enhance program security. In our view, when it comes to fraud prevention, the current Canadian visitor rebate program lags well behind the best practices used in other countries. Today it is far too easy for people to defraud the system by generating false rebate claims and using phony receipts. To strengthen the integrity of the program, we recommend that Canada take a page from the security playbook used in other OECD countries by adopting simple but important changes to document verification, proof of export, and visitor eligibility.

The most important of these changes is the introduction of secure forms, which are supplied by GST refund operators, provided directly to the visitors at the point of sale by participating retailers and hotels. These forms include security features such as bar codes and serial numbers to enable tracking and to provide an audit trail. Secure forms distributed by merchants offer a level of security that ordinary shopping receipts simply cannot.

Today, more than 230,000 merchants, from Louis Vuitton, to Nike, to Apple, use Global Refund as their facilitator of tax rebates for visiting shoppers. These merchants all provide secure documents required to provide a secure program.

In conclusion, tourism is an export industry. The decision to cancel the program arbitrarily revokes the tourism industry's export status, even though it continues to serve as a significant source of revenue. Singling out the tourism industry as the only export sector required to charge GST is punitive to our already challenged industry.

Our proposal can help revitalize an important tourism program while effectively removing the administrative costs from the government. At the same time, the security of the program is enhanced significantly to meet the standards set by other OECD countries. In addition to these important features, the program changes we are recommending would result in a significant increase in the visitor refunds being spent and cycled in the Canadian economy at the point of exit.

We ask the government to accept our recommendations and preserve the program.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir, for your presentation.

Thank you all.

We'll move now to questions. Mr. McCallum, we'll begin with you, for six minutes, sir.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, and thank you very much to all the witnesses for being here today.

It was our initiative to bring you here. We think this is a very important issue. I wouldn't characterize this decision by the government as the most meanspirited--that would probably go to the cutting of literacy programs--but it's certainly the most economically boneheaded, and I think we have heard this in spades collectively from you.

[Rick Dykstra, Conservative, St. Catharines, ON]

I have a point of order, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Mr. Dykstra, on a point of order.

[Rick Dykstra, Conservative, St. Catharines, ON]

I was just wondering what the topic was today. Mr. McCallum seems to be on a different one.

[John McCallum, Liberal, Markham—Unionville, ON]

I will endeavour to do so, Mr. Chair.

I would just like to say, in terms of this boneheadedness issue, that we also were recommended to do this when I was the Minister of Revenue and the chair of the Expenditure Review Committee. We rejected it for reasons that all of you have very ably explained. So I think that your collective testimony gives a really strong case for the government to capitulate on this decision, whether it's administered privately or under the status quo.

My question would be to the Conference Board, a neutral body. The point was made that this could be seen as removal of the export status of the tourism industry. I think not all Canadians understand that, but it is an export industry. Would that be a fair way to characterize this action?

[Alex Fritsche]

In the sense that tourism is an export, absolutely. It is an export that we export throughout the world, and right now we don't have a tax on that export.

[John McCallum, Liberal, Markham—Unionville, ON]

So tourism would be the only export industry on which this tax is imposed. It's a 6% additional cost on the convention business, and we're one of the very few countries to do this. Are all of those statements correct?

[Alex Fritsche]

The 6% is a bit of an issue, because it doesn't necessarily apply to everything that people here pay, so the actual amount might be below the 6% rate. But it can certainly approach that depending on how—

[John McCallum, Liberal, Markham—Unionville, ON]

At least 6% on the things that are subject to GST?

[Alex Fritsche]

That's right.