Finance Committee on May 21st, 2013

[Peggy Nash, NDP, Parkdale—High Park, ON]

Why do you think this change is in the budget?

[David Phillips]

It's perplexing. We don't come before this committee and ask for a lower rate; we don't ask for a handout.

We're quite comfortable with it. Desjardins is comfortable with it, and, as far as we know, so are the banks. It's pro-competitive in its impact, so why mess with it? It just is not clear.

We've had a couple of unenlightening discussions with Finance officials since the provision was brought in. But we react to this with perplexity: to us, it seems to contradict the government's agenda on jobs and growth and also what the government is trying to do to bring more competition into the financial services sector.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Would you say it's anti-competitive?

[David Phillips]

The provision as it is now is pro-competitive. So when you take the provision away, when you increase the tax rate, what you're really doing is supporting greater concentration in the Canadian financial services industry. It's really a tax on the growth of credit unions.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I understand that Quebec eliminated a similar provision back in 2003. Can you tell us about that? What was the impact? Was it a similar provision, and what was the impact?

[David Phillips]

We're talking about federal tax policy, not Quebec tax policy. I know nothing about Quebec's tax policy. We don't operate in Quebec. We're credit unions that operate in the rest of Canada. Desjardins is not here, but I know that they support our concerns about this change. They certainly are concerned about the fact that there was no consultation. But the Quebec issue for me is irrelevant; we don't know what other compensating factors there are. The fact of the matter is that this is a good tax provision that is being phased out. At least that's the proposal in the budget.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Let's stay on the credit union issue.

Mr. Manness or Mr. Phillips, maybe you want to elaborate on what the impact of these changes could be on a sector that is really a Canadian success story.

[The Chair, Conservative, James Rajotte]

Do you have brief comments, Mr. Manness or Mr. Phillips?

[Garth Manness]

I'd like to comment, Mr. Chairman.

As David Phillips indicated, the credit unions build capital through retained earnings. Anything that reduces net income will impact the ability to build that capital. At the same time credit unions, like all other financial institutions, are facing increased regulatory requirements and capital requirements.

So it's almost a double-edged sword for us, in that we're going to have to find ways to generate more income to meet regulatory requirements, and a bigger chunk of that income is going to be taken away in the form of tax. That is going to impact our competitive ability.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

Mrs. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you to all the witnesses for being here early after, hopefully, a great holiday weekend for everyone.

I'm going to start my comments with Mr. Lavoie. I know you focused on three areas, but I also noticed the Canadian Manufacturers and Exporters in their post budget comments did talk about the preferential tariffs. I quote: “The government's decision to modernize this foreign aid program by removing some countries from the GPT list is a good decision...”.

It's been 39 years since we've updated it. It was meant to help developing countries like Hong Kong and Singapore. We were giving them preferential tariffs while their per capita GDPs were higher than Canada. The solution is what the government is doing, trying to negotiate free trade agreements with countries around the world so that we will not only drop our tariffs, but they drop their tariffs as well.

I guess I'd like to have you expand on those comments. As the countries that have been removed from the GPT list are developing countries, how do you see their removal as facilitating free trade agreements?

[Martin Lavoie]

From the start I would say that in all of this debate about the GPT, we've confused a number of different issues. The original rationale for this program was that it would be a foreign aid program. We should keep that in mind when it comes time to look at this decision.

I think we're confusing this. Some people have said that it's a measure to close the price gap between Canada and the U.S. or that it's a measure to make products available to customers at a lower price, with lower tariffs. Let's keep that in mind.

In terms of the elimination of tariffs, in my ideal world there wouldn't be any tariffs. In reality, there are tariffs and most of these countries impose tariffs on Canadian products that are much higher than that in most cases. So I think you need to keep in mind that if we start eliminating all of our tariffs, just in having a narrow view of the price gap with the U.S. or a consumer view, we're limiting the ability of foreign officials to negotiate free trade agreements based on a level playing field.

What's the motivation of a country like Korea to come and sit down with us to negotiate a free trade agreement if they already have a broad access with no tariffs to our consumer market? It's in that view that we're saying that in order to leverage our negotiating positions with these countries, we need to keep a level playing field.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

As we try to export into a country like Brazil, for example, can you talk a little bit about how that impacts Canadian companies' ability to be successful and do business?

[Martin Lavoie]

I don't want to overestimate the impact of tariffs, but I don't want to underestimate it either. I think it's an important issue. On certain products it's so high it's actually a barrier to export. I think there are also non-tariff barriers that are important. That's why you see these new free trade agreements being much broader than what we used to have 20 or 25 years ago. Now you get into patent laws, you get into government procurement regulations.

But I think the rationale behind it is always the same: if you start giving access to your domestic market in terms of procurement, or by having more flexible legislation on patents and stuff like that, then what's your negotiating position in regard to these countries? I think the same rationale applies.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

I'd like to go to Mrs. Proud. We talked about the elimination of tariffs on certain goods and that being a test case. Can you talk a little about how you're actually going to analyze it? Have you set the framework? Do you know how you're going to approach this using this as a test case?

[Karen Proud]

We're in the process of working with the officials in the Department of Finance to develop the testing plan. They are the ones who are developing the plan to monitor what is actually going to happen in the marketplace when we start to see the results of the tariff elimination. We're feeding into that process.

They're looking at getting a third party to do some of this analysis to make sure it's well accepted when that happens, and I understand that they're in the contracting process right now. As I mentioned, we're working very closely with them, just to give them an understanding of how the retail industry works. We're hoping to be able to report findings as we move along.

I've cautioned, not only the officials, but others as well, that when the tariff is eliminated we're not going to see a change in the market overnight, because retailers have already sourced products. For instance, they had already sourced their products for the summer months well before the budget came in. We're hoping to start the monitoring around July to see what happens in the cycles when the retailers are sourcing products for the fall.

This pilot project is very much a partnership.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. McLeod.

Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

I'll start off with Ms. Proud.

With regard to the issue of cross-border shopping, has that grown significantly in recent years, to the detriment particularly of retailers in communities in proximity to U.S. retailers?

[Karen Proud]

Well, we've certainly seen that happen. Statistics Canada has released results that show cross-border trips are increasing substantially year upon year. In discussions with our retailers who have stores on both sides of the borders, they've seen tremendous increases in Canadians shopping in the U.S.

The retailers on the border are certainly hurting, which is why we're advocating whatever we and this government can do to reduce costs so that retailers can sell at comparable prices to the U.S.

[Scott Brison, Liberal, Kings—Hants, NS]

Does this $250 million net tariff increase in this budget implementation act have the potential to increase the delta between U.S. and Canadian prices, thereby actually increasing this trend toward cross-border shopping?

[Karen Proud]

It's hard to make all the correlations. But we certainly believe that in those areas where retailers are not able to find alternative sources of product.... So that's the time factor we've asked the government to give us, so that where there are other sources our retailers can find them. If they can't and there is an increase in the bottom line price of the product, there's going to be an increase in those prices, and we know that's a driving factor for cross-border shopping.

For those products that are affected, and those products where we can't find other sources, and those products where other tariffs are not eliminated, then the changes in the GPT would likely affect them.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much.

Mr. Phillips, certainly since 1997 we've seen banks pulling back from rural and small communities and branches that have been closed. At the same time, there's been an increase in the presence in those same communities by credit unions.

Does the change proposed by the government in the budget implementation act have the capacity to lead to the potential closure of branches in some of those smaller communities that may be marginally less profitable?

[David Phillips]

Yes, it would, and Mr. Manness has referred to this.

A lot of credit unions in communities where they're the only physical presence through mergers within the credit union system are branches of larger credit unions, and those larger credit unions would be affected by the tax increase. As a way of accommodating the change, it certainly would lead to possible closures. Now we're careful about this because I don't want to predict that this is going to happen to any great extent. But certainly the credit unions will have to cope with this in some manner, and that would be one of the options.

I was looking over the list of credit unions in small communities across the country where they're the only presence. If you look at some of these communities, the population is 97 in one case, and 86 in another, and 150 in another. We're talking about very small communities that have a presence of a credit union—a small, physically present financial services provider. This certainly doesn't help in terms of their being able to maintain that presence in those communities—and there are hundreds of them across the country.

[Scott Brison, Liberal, Kings—Hants, NS]

And in those small communities, credit unions are very active in small business lending. The other feedback I get from the small business community is that it's tougher to get credit today from traditional financial institutions than it was a number of years ago. The smaller the community, the tougher it is.

Does this have the capacity to reduce small business lending by credit unions in Canada?

[David Phillips]

It sure does, because—