Finance Committee on May 21st, 2013

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you to each of you for being here today. You've all made very compelling statements.

First of all, Mr. Paton, I'd like to discuss what you said initially in your remarks. You talked about the accelerated capital cost allowance being stimulative. Could you expand upon that? How much better is it to have a program like the accelerated CCA being stimulative within an industry such as yours versus having government spending and higher taxes being stimulative? Could you expand on that for me, please?

[Richard Paton]

Sure. It's stimulative because it creates incremental investment, i.e., investment that would not normally occur in Canada. As the Chemistry Industry Association of Canada, we are very committed—in fact our strategic plan is to seize the opportunity of this shale gas environment, the competitive environment we're in today, to get these large investments for Canada.

It's stimulative also because large investments are 20- to 40-year investments. You don't build a chemical plant—and Mr. Jean would know this from the ones that are out in Alberta—for a two-year, five-year, or ten-year period. You build it for a minimum of 25 years, or 40 years. That's the kind of investment that builds communities, that creates corporate tax revenues, that you can link up to community colleges to start to build skills, and develop engineers, and raise technical people. It becomes part of the fabric of the economy.

It also ends up producing products that are then used by other manufacturers. Most of our products go into cars, into pulp mills, into mining, etc. They become key parts of the economy.

I don't know how to compare that to an infrastructure project—infrastructure does produce long-term benefits sometimes—but these are really significant ways of building your economy, diversifying it, and moving beyond just a resource-based, get-it-out-of-the-ground, sell-it-to-Japan kind of economy to one that adds value and adds manufacturing strength to the economy.

[Mark Adler, Conservative, York Centre, ON]

And the focus, of course, is that these are full-time, high-wage jobs.

[Richard Paton]

Yes. The average wage in our industry is $70,000 to $80,000.

[Mark Adler, Conservative, York Centre, ON]

Could you also talk about how an initiative like the accelerated capital cost allowance is important from an internationally competitive point of view? You talked about the 60% declining balance writeoff in the U.S. tax code. Why do we need an accelerated CCA type of initiative in this country, just to be competitive on the international scene?

[Richard Paton]

The U.S. has this 60% double-declining balance, as it's called, and it's in their tax code. We have a company right now that's considering a major investment. They're looking at the Gulf Coast where a lot of the investments are going. Probably a big part of the $72 billion in the U.S. will go to Louisiana, and Texas, and places like that. When a company makes an investment of a billion dollars, and NOVA just announced that investment in Joffre, for about five years they're spending money. They're spending that billion dollars. While they're building that plant, there is not one single cent of revenue. Then they start up the plant and it may take a year to get the bugs out, to get the product specifications right, etc., so now you're talking about five to six years and you haven't earned a bit of income. What the accelerated capital cost allows you to do is to write off those investments once the machinery has actually arrived on the ground, as you're making those expenditures. I think the CME has done some very good modelling of this, indicating that it produces about $30 million extra of tax deductibility on, say, a $100-million investment that you wouldn't otherwise have. This allows you to have the capital to keep making investments. So it's extremely important.

The companies that have been making those investments are saying, “I can do it in the U.S. or I can do it in Canada.” The ACCA, combined with the corporate tax and other things, at least puts us in the game. I wouldn't say it makes us super-competitive, because they have something that's longer term, but it puts us in the game where we can make the argument that at least we have this benefit, and it does enable us to make the investment in a relatively good financial situation.

[The Chair, Conservative, James Rajotte]

Okay. Thank you.

Mr. Côté, go ahead.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

Ms. Proud, let's continue in the vein of what my colleague Guy Caron was talking about.

Could you give us an idea of what proportion of products are affected by the elimination of the general preferential tariff? I am talking about the proportion of products for which you cannot ensure an easy supply outside the country of origin your members usually get their supply from.

China is a good example. Sometimes, there is no alternative owing to insufficient production capacity. So you entirely depend on importing a proportion of certain products because no alternative exists in Canada.

[Karen Proud]

I wouldn't be able to give you that information at this point. It's something that we're looking into with our members and we've discussed with the department. As I mentioned earlier, there are 1,400 pages of the Customs Tariff—2013. Going through that, there's a significant number that have a GPT-eligible tariff rate, but at this point I couldn't tell you what sort of percentage we'd be looking at at all. We've asked the department for time to do that analysis and to really understand what the impact could be.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay, excellent. Thank you very much.

Mr. Lavoie, I would like to continue discussing the general preferential tariff.

I really liked your take on that debate, which is definitely not simple. The last thing we want is to adopt a simplistic approach when it comes to this.

I think one particular aspect has not received enough attention, since the government has really been focusing on countries like China. Among the 72 countries, there are a number of African and Caribbean countries that don't really have significant industrial infrastructure in place. Therefore, those countries could still take advantage of the general preferential tariff without harming the Canadian economy.

A simplistic solution was applied to such a complex issue. Would you like to comment on that?

[Martin Lavoie]

As for the actual list of countries, I am not really an expert on the criteria taken into account to decide whether or not those countries should be on the list. The list is definitely long, as it contains 72 countries. In addition, this program has not really been changed since 1974.

I would not call this solution a simplistic one. Perhaps greater transparency would have been appropriate in terms of the criteria used to determine whether a country is developing and whether it should be on the list. According to the Canada Gazette, some consultations have already been held on the issue. I was still a bit surprised to see 72 countries on the list. That being said, I think that the government must make a decision at some point.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Yes. Thank you very much.

That will be all for now, Mr. Chair.

Are you ready to ask questions? I will let you use the remainder of my time.

[Murray Rankin, NDP, Victoria, BC]

I'd like to start with Mr. Lavoie, but would first thank all of the witnesses for being here. I'll have another chance, I think, in a moment.

Mr. Lavoie, you talked about SR and ED a little bit in your introductory remarks on business R and D, and you had questions about equity of access, both geographic and vis-à-vis certain manufacturers. Could you speak a little bit more about that?

[Martin Lavoie]

I was putting these new direct support mechanisms for business R and D in perspective, because I think it's a response to the cuts that have happened to the SR and ED program last year.

My point was that we took some of this money to provide new direct support mechanisms for private companies to perform research and development. So you have recapitalization of the automotive innovation fund. You've had a recapitalization of the SADI program for our aerospace innovation, plus some additional money. The first two sectors got some money.

And there's a new fund for FedDev Ontario, available for events and manufacturing projects in southern Ontario.

Let me just put it this way. If you are a manufacturer not in southern Ontario, not in forestry, automotive, or aerospace, you don't get what you lost under SR and ED with this new program. So the point was that the fund that will be implemented in southern Ontario, for example, could maybe become a model to be applied across the nation without regional economic development agencies.

In last year's budget there was some money announced for Western Economic Diversification for innovation. We haven't seen this program yet, and it's been one year now since the announcement.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll come back to you, Mr. Rankin.

Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

I would like to talk a little bit about the keystone markup, which most retailers have on their goods. In fact the keystone markup is such—and correct me if I'm wrong, Ms. Proud—that it's a 100% markup on any goods that cost them. Most books and most professionals suggest that if you don't have a keystone markup, you can't stay in business for a long period of time. It's a full 100% markup for retailer to sale. Is that fair to say? Are you familiar with the keystone markup?

[Karen Proud]

Not at all, and I would be shocked to hear that there's 100% markup on retail products when my retailers are telling me that their margins are 4% to 15% max.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Don't be shocked. I've been in the retail business for 30 years, and I can promise you that as a wholesaler, manufacturer, and a retailer, that's what it is. If you look at most things on the website, it talks about 100% markup, and in fact says that without a keystone markup, most Canadian North American retailers can't stay in business.

What I was going to talk about is that markup because I know for a fact, as an importer from Hong Kong and Taiwan—I would like to take, for instance, the lapel pins, as an example. I know that for the most part for manufacturers at the time that I was doing this, it would cost them about 6¢ or 8¢ for a pin. They would turn that over to an importer, who would make a few points on each one, and they would usually have a cost of about 10%, sell the pin for 15¢. The wholesaler would then take that, and I was a wholesaler at the time, and it would cost them about 15¢, as I say. They would then in turn resell that to a retailer for 30¢ to 60¢, and the retailer would sell it for $1.20. That's consistent with what took place back in the seventies and eighties, and I can promise you that I have a lot of records to prove it, and very much competition.

The reason we stopped buying from Canada was that Canadian manufacturers were not competitive. Now I find out through this budget that there has been a tax advantage for foreign manufacturers such as those in China. Frankly, I don't think it's been fair, and now I understand why Canadian manufacturers were put out of business during that period of time. I think it's fair to say that you would agree with that.

[Karen Proud]

As I mentioned, we completely understand where the government is coming from with the fact that countries like China shouldn't necessarily benefit from a preferential tariff for boosting their exports. We understand that. What we had asked for are things that will allow the retailers to prepare for and manage that.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

And I do understand that over some sort of time period.

But again, we're talking about a 3% or a 5% increase, or elimination of that advantage, which means we're talking about the increase on 15¢ for every dollar. In my particular business, that's what it would mean. So we're talking one or one and a half cents on a dollar item.

From my point of view, that can pretty much be absorbed by transportation through the money markets, which is how it's usually done. That's how people buy and sell and get an advantage on their play in the money markets.

Or, in fact, it could be absorbed by retailers or wholesalers without even an increase. Most retailers, as you know, publish the suggested list price. That suggested list price is two or three years on the marketplace. Retailers use that, and then they use the margin as a discount. They will discount their products 50%—and here I see you nodding your head in agreement—and then they'll usually discount it at Christmastime or another time that's popular another 20%, and then another 10%, and sometimes another 5% or 10% to make up the marginal difference. In fact, many times you have a dollar product that you sell and you're paying only 35¢ or 36¢ for that particular product.

I would suggest to you that the 2% to 4% or 5% tax advantage that was given to foreign countries, such as China and others, will be absorbed in the current suggested list pricing. We can debate that, but having been in that marketplace, I can't see it making a significant difference.

I would like to talk briefly about credit unions.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Karen Proud]

Sorry, could I respond?

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Certainly.

[Karen Proud]

Our main area of concern with the review of the GPT is not necessarily those countries that are going to come off the GPT list, but the effect on the lowest-developed country and the fact that the rules of origin state that if they get inputs from GPT countries who would no longer be there, the rules of origin would mean that those products wouldn't necessarily originate from that country. Those can be 18% tariffs, as opposed to zero now.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I do understand that. I just don't have a lot of time. I probably have—