Finance Committee on Sept. 19th, 2018

[Jan Westcott, President and Chief Executive Officer, Spirits Canada]

Thank you, Mr. Chair.

Canadians are rightly concerned with the decline in the competitive position of Canadian business. Canadian spirits manufacturers are to a great extent the proverbial canary in the coal mine of the effects of policy-makers taking their eye off the ball and allowing a competitive challenge to deteriorate to a crisis. Canada has long imposed higher excise duties on spirits than those imposed by our American competitors, but a significant historical competitive disadvantage has in recent years devolved into an existential threat.

Canada has a dozen commercial-sized distilleries and some 170 small local producers. From the largest and the oldest to the newest and the smallest, we all agree that the core problem with Canada's excise duty structure is the automatic annual escalator clause introduced in the March 2017 budget. The automatic escalator clause made a bad tax even worse.

Alcohol excise duties are among Canada's oldest taxes and fail the most basic principles of sound, modern tax policy, things like transparency, equity, effectiveness, neutrality and being broadly based. The decision to automatically increase excise duties annually irrespective of the economic realities of the day, all without any input or oversight by members of Parliament or this committee, magnifies these structural deficiencies in the excise duty framework.

Some have postulated that the annual increases are only pennies a bottle and are largely insignificant. As finance department officials admitted themselves, however, these changes were adopted with no analysis or consultation. I want to say that again—no analysis or consultation.

With the increase coming into effect on April 1, 2019, the federal treasury will have stripped nearly $50 million off the top from the resources available to Canadian spirits companies to deploy in the market over the coming 12 months, and $50 million is a lot of pennies. That's $50 million not available to develop and introduce a new Canadian whisky brand, $50 million not available to take advantage of the new free trade agreement between Canada and Ukraine, $50 million not available to get ready to enter Vietnam once the CPTPP comes into effect, $50 million not available to buy new barrels to lay down whisky distillate, $50 million not available to upgrade equipment in our facilities and $50 million not available to promote and compete in the marketplace.

I mentioned earlier that a huge weakness in the automatic escalator clause is that it does not consider the current economic environment. What is that environment? Well, in March 2017, inflation in Canada was running at 1.5%. In July 2018, it hit 3%. So, the escalator clause will be double that anticipated at the time of its introduction.

At the same time, as Canada decided to automatically increase excise duties on alcohol, the United States adopted a historic decrease in its own excise duties. Now we have a situation where Canadian spirits manufacturers have some $50 million less to invest in the market in 2019, while American bourbon and spirits companies have $285 million in tax relief to deploy. That's simply a scenario for disaster for investment in Canadian spirits manufacturing or in the Canadian whisky franchise.

From excise duty officials' point of view, all of this is largely irrelevant. Their sole perspective is the revenue stream for treasury derived from the application of excise duties, and these federal revenues are the same whether the product is Canadian, made by Canadians from Canadian-grown barley, corn, rye or wheat, or whether the product was made halfway around the world.

Canadians will always drink spirits, and excise will always get its pound of flesh. The question before us is whether or not we will be the last generation of Canadians to enjoy the economic benefits accruing from a vibrant, globally competitive domestic spirits manufacturing industry. No country in the world so disadvantages its signature beverage alcohol export in its own market. Scotland doesn't do it with scotch. We just talked about the tax relief provided to American bourbon, and certainly Mexico takes great pride in supporting tequila's growth around the world.

Here in Canada, Canadian whisky and Canadian rye whisky are hammered with exorbitant fiscal burdens, often restricted in places they can sell and now subject to further annual increases in excise duties. It's simply not sustainable.

I close and call on your support for three recommendations to help sustain more than a century-old primary manufacturing industry filled with tradition and craftsmanship.

The first is that the government eliminate the automatic escalator annual increase on federal excise duties on beer, wine and spirits.

The second is that the government reduce federal excise duties on Canadian spirits to mirror those imposed on American spirits by the United States government.

The third is that the government ensure that Canadian out-of-province alcohol manufacturers are provided the best policy treatment available to licensed in-province producers—the interprovincial barriers, which my colleague alluded to.

Thank you for your time and consideration.

[The Chair, Liberal, Wayne Easter]

Again, thank you all for your presentations and your earlier submissions. We'll have the first three questioners for five minutes. Ms. Rudd will start, and Mr. Sorbara might have time for one question.

Ms. Rudd, go ahead.

[Kim Rudd, Northumberland—Peterborough South, Lib.]

Thank you, Chair.

Thank you all for coming. As someone said, it's quite the mix of presentations today.

I want to start with you, Ms. Bradley and Mr. Mantler, on your Roots of Hope. I was very interested to read your brief and to learn about the incremental work you have done in the three provinces, with not a huge amount of money.

Do you have any data yet, any numbers, that could be extrapolated? I think I read in your brief that you are in negotiations with three other provinces as well. Can you talk about any data you may have and where you can see you are having the greatest impact? Is it particularly in rural communities? Is it more urban? Is it able to fill a void where there is no access to other mental health services, or is it complementary to those? Can you expand on that?

[Louise Bradley]

Yes. Thank you.

It's very early days, unfortunately. As I mentioned, we were here a while ago. In that period, we have spent all of our time negotiating and trying to find money in each of the provinces for this, so it's too early for data just yet.

As my colleague told you, this model has been tried in several European countries. Also, there is a similar model in Quebec. The areas that utilize this model saw a 20% to 25% reduction in the suicide rate within two years.

As Ed also mentioned, among some of the very early outcomes we are seeing is the elimination of a wait-list in a community in Newfoundland, chosen because it had a higher rate of suicide than anywhere else in the province. Now they have a zero wait-list.

[Kim Rudd]

Are you working through schools, employers, agencies? How are you identifying where the crisis is?

[Louise Bradley]

That's an excellent question.

[Ed Mantler]

Each community is unique. The project works with a coalition of community members with interest and expertise in their community. They look at the specific demographic at risk within that community and build on the strengths already in place within that community. It really does look different in every community, in terms of implementation based on their need and their situation.

[Kim Rudd]

Thank you. Could you provide us with the model used by other countries, or even the Quebec model? I think it would be quite fascinating and helpful for us to read. Could you provide that to the clerk?

I want to turn to canola and Mr. Froese. The biggest contributor to the GDP in my riding is agriculture, so I have a vested interest in it. There are a couple of things in your brief that I was very happy to see. I was interested to see that you are talking about the clean fuel standard, not just support for the standard being put in place in a collaborative way, but what that could mean to the canola growers and the industry itself.

Could you elaborate a bit on that, please?

[Jack Froese]

First of all, the emissions from canola biodiesel are 90% less.

[Kim Rudd]

Emission-free....

[Jack Froese]

Obviously, if we could have an inclusion or a mandate for a percentage of the canola oil in the biodiesel, that would help the industry greatly. It would mean more acres, but it's not necessarily about more acres. We're trying to increase productivity by making sure we get more per acre. As we produce more per acre, productivity goes up and the amount of hydrocarbons emitted goes down.

[Kim Rudd]

Do I have time for a quick follow-up?

[The Chair, Liberal, Wayne Easter]

You have time for a very quick one, yes.

[Kim Rudd]

Certainly canola farmers in general have become much more adept at getting more produce per acre. Do you think the industry is currently able to ramp up to fill that need?

[Jack Froese]

We can most certainly do that.

[Kim Rudd]

Okay. Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Richards, go ahead.

[Blake Richards, Banff—Airdrie, CPC]

Thanks, Mr. Chair.

I'm going to start with Beer Canada, Spirits Canada, and the Vintners Association, purely because all three of you raised two of the same issues.

The first one is the interprovincial trade barriers. I think all three of you raised that issue. We're having a lot of trouble in this country right now dealing with trade negotiations with the United States and other countries, but it's crazy to think that even within our own country we have these issues around trade. I think about the fact that some of my favourite wines are from Prince Edward County. When I'm here, that's fine, but if I'm at home in Alberta, I can hardly find them anywhere. The same goes for B.C. The B.C. wines are great wines. I can usually get them in Alberta, but here it's a little more of a challenge. I think about some of my favourite beer. One of my favourite beers is from the chair's home province. I'm not trying kiss up here or anything, but there's Sir John A's Honey Wheat Ale, and it's great, but I can't get it in Alberta. Those are some examples. It's crazy to think that here in Canada we can't even trade these products across our own provincial borders. That's just astounding.

The other issue was the escalator tax, or the excise tax. I just want to give you all an opportunity to talk a bit more and briefly touch on the impacts it would have on your industry. I want to hear a bit more about the impacts that you see from that escalator tax, in particular when you think about the fact that that's essentially taxation without representation. What happens there is that taxation gets increased every year, and not one single politician, not one single person who's representing anyone in this country, has to stand up and be counted for the changes that are being made and the taxes that are increased every single year. Tell me about the impact that this will have on your industry. I particularly want to hear about the smaller ones, the craft distilleries, the craft brewers and the ones that are trying to get started.

I often hear this from winemakers, and you'll know this one, Mr. Paszkowski: "How do you become a millionaire in the wine industry? You start with $10 million."

[Dan Paszkowski]

You produce beer.

[Blake Richards]

That's also true.

I just want to hear a bit about the impact it will have on those trying to get started, and particularly on our smaller craft distilleries or craft breweries.

I don't know who wants to start. You're closest to me, Mr. Westcott, so why don't you start? I would like to hear a comment from all three of you on the impacts you think it will have.

[Jan Westcott]

I'll give you two perspectives. First, I'll give you a bit of a global perspective. Canada has always had higher excise rates than our competitors in the United States, and if you go back prior to the introduction of the escalator tax, Canada's excise rates were about 60% higher than those in the United States. Assuming we'll have a 3% increase next April 1st—and that number will be set on September 30—that difference will go up to 85%. What this means is that no one will invest in a Canadian spirits business, no one. Why would you invest when that's what you have to look forward to? The United States is our biggest market and our biggest competitor, and they're fierce competitors. Our ability to compete is being eroded dramatically. That's one perspective.

The second perspective I would give you comes from a meeting that CJ and I had with the two fellows who run a small distillery in Vaughan, just north of Toronto. Still Waters makes very good whiskey, Stalk & Barrel. We shipped a supply of Canadian whiskey to Kiev to help the Canadian embassy celebrate the successful signing of a Canada-Ukraine free trade deal. We happened to be at a meeting with them late last fall. They produce a product called Stalk & Barrel, and they're just at the point where they need to go out and raise more capital to grow their business and be able to sustain themselves. They're a small business. They hired a fellow to help them go out and beat the drums for financing, and one of the early things they did was take a hard look at their business and build a five-year business plan with pro forma profitability. Just based on the 1.5% annual increase, which was estimated when the escalator tax was brought in, that sucked up all the profit in that small business over those five years. One of them looked at me and said, "How are we expected to raise investment dollars for our business when all of the money that we hoped to be able to return to the investors is now going to go to the federal government on excise?"

I offer those two different perspectives about those kinds of impacts. Smaller companies have less capacity to absorb those kinds of things. Of course, then you have the whole issue, particularly with some of the smaller companies, where they're saying, "I thought Parliament's supposed to make decisions on taxes." Those are the two perspectives I would offer.

[The Chair, Liberal, Wayne Easter]

I'm sorry to have to cut off beer and wine, but we're out of time.

Mr. Julian, go ahead.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair.

Thanks to our witnesses.

Mr. Lemaire, thank you very much. I wasn't aware that 90% of fresh fruit and vegetables purchased by Canadians came from your members. That's very important, particularly in light of climate change and the fact that consumers are increasingly looking to purchase produce that's close to home. People are increasingly concerned about the environmental costs of flying produce around the world.

I think the committee has heard your eloquent plea for changes to the small-business deduction. That does make sense. I wanted to come back to the issue of the national food policy council and see if you could elaborate a bit more.

Are you concerned about issues of food sovereignty, which is a growing movement as you know, including in the fruit and vegetable sector? Is that something you are looking to provide some direction on, that if we look at a national food policy council, one of the issues we should be looking at as Canadians is increasing food sovereignty?

[Ron Lemaire]

There's a combination there: respecting and driving a domestic industry is essential for our economy, and for Canadians to enjoy fresh fruit and vegetables or meat or dairy over the course of their lifetime.

The elements around the need to deal with the issues within civil society and how we address access to food, how we address food prices, can be supported through a strong domestic and sovereign strategy. We have to recognize that we operate in a global economy and there is a balance between the two, especially recognizing how we're currently in unique trade agreements with some of our partners. We're dealing with challenges on export markets for some of our producers, which is also important.

When we see opportunity for driving business globally for Canadian producers, we have to take that in hand with a domestic market that also wants to enjoy product.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much for that.

Ms. Bradley and Mr. Mantler, thank you very much for your very eloquent plea. You're talking about the costs of $1 million per suicide.