Finance Committee on Oct. 3rd, 2018

[François Bélanger]

We do not really work in the farming sector. We work more in food processing. We are not following that issue very closely.

However, I can tell you more about the tariff on aluminum.

The issue of the 10% tariff on aluminum has not been resolved by the agreement. As we understand it, the parties have given themselves about 60 days to reach an agreement. That agreement could take the form of a quota on aluminum exports. Everything still has to be confirmed. Clearly, it is a great concern for people in Quebec. It must be said that aluminum production in Canada is basically concentrated in Quebec, with the exception of the aluminum smelter in Kitimat, British Columbia.

That poses a problem, even for the Americans, because 97% of the American aluminum industry is in secondary and tertiary processing. Not a lot of large aluminum smelters are left in the United States. Alcoa’s main smelters in North America are located in Quebec. So it is important for governments to make sure that the quotas do not limit exports to the United States too much, because that would not be in the interests of the American industry either.

Right now, companies involved in secondary and tertiary processing are complaining about the price increases that the tariff is causing. Their costs are going up and their profits are going down. Somewhat like the automotive sector, the aluminum sector in North America seems to be integrated, and we have to get our trading partner to understand that.

As for milk and milk proteins, I will let the UPA representatives give you the answer.

[Pierre Patry]

I would just like to add a word on supply management. We represent about 2,000 workers in the food-processing sector, making yogurt and other products, who may well be indirectly affected by the supply management issue. That's the first thing.

The second thing is that it may have repercussions on a lot of regions of Quebec because many of them depend on agriculture. We all depend on agriculture to put food on our tables, but there are regions where the economy depends on it directly. We have to be very careful, I believe.

Earlier, the UPA mentioned that they want compensation programs in response to these very recent negotiations. We at the CSN are in complete agreement with that.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Do I have any time left, Mr. Chair?

[The Chair, Liberal, Wayne Easter]

No. You're way over.

Madam Alleslev, go ahead.

[Leona Alleslev]

Thank you very much.

My questions go to Ms. Bouffard.

Thank you very much for your excellent presentation. It contains a lot of recommendations.

I would like to explore three issues: first, the effects of the carbon tax and your recommendations on the matter; second, the effects of climate change and your recommendations on the matter, and third, transferring agricultural companies to the next generation.

First of all, you have a number of recommendations about the carbon tax. Can you provide a more detailed explanation of the real consequences of the tax, and what your recommendations are?

[Isabelle Bouffard]

I know there are ongoing discussions. I will try to explain clearly what this is all about. A bill has been introduced at the federal level to ensure that the provinces that do not have a carbon pricing system in place are subject to the Canadian program. What we are realizing is that, in the provinces with a carbon tax, and even the federal bill provides for the same thing, the agricultural sector is exempt from the carbon tax. Therefore, there are no additional costs for fuel.

What is special about Quebec is that we are already subject to a tax. Quebec has decided to show leadership in carbon pricing, and farm businesses pay a tax through the fuels they buy.

I went a little faster over that part of our brief, but what we are calling for is a federal compensation program to ensure interprovincial fairness. Quebec grain or hog producers share the same market as other farm businesses in Canada. This tax requires substantial payments. We are therefore asking that a federal program be created.

We are also asking for support to develop and implement offset credit protocols tailored to the agricultural context. There are credit protocols in other sectors, but the agricultural sector is complex. There are very few existing protocols for the agricultural sector, and if we are subject to this pricing, there should be protocols tailored to our industry.

We also recommend approaches that encourage the participation of small companies in the carbon market. As you know, it is extremely expensive to join the carbon market system. In particular, financial audits must be carried out. For an agricultural company, this is very expensive. We are asking that farm businesses be able to form groups to participate in the carbon market.

Those are basically our recommendations for the carbon sector.

[Leona Alleslev]

Are the impacts significant, compared to other provinces?

[Isabelle Bouffard]

In Quebec, we have estimated that the annual price on carbon is from $2,000 to $2,500 for a field crop company, meaning grain. This is a recurring cost that goes up every year, since the goal of the carbon market is to go up. Ultimately, the costs will be $2,500, $3,000 or $4,000. One company has to cover those costs, while another company does not.

[Leona Alleslev]

Second, I would like to talk about the effect of climate change. What are your recommendations on that?

[Isabelle Bouffard]

Everyone has to deal with climate change. Last week, we met with the executive directors of the Canadian Federation of Agriculture. All of Canada, and not just Quebec, has experienced drought and heat waves this summer. Agricultural producers are the first to be directly affected by climate change. Extreme events will keep happening at a faster rate.

This affects crops, animals and access to water. Some farms in the Lower St. Lawrence no longer had water for their herds. They would dig a second well and not find water, then they would dig a third well. Climate change is having a significant impact on the agricultural sector.

In this context, we are asking the government to ensure that the necessary funds are made available to producers to meet their needs during natural disasters.

What we found is that the federal AgriRecovery program may apply in one province, but not in another. Let's take the example of apple fire blight. Producers in New Brunswick were able to use that program, but those in Quebec, whose apples were also affected by the disease, did not have access to it. When dealing with the same problem or disease, all producers should have access to the program, regardless of the province.

Funding should also be provided for projects and tools to improve the management of climate risks faced by companies. Companies will have to adapt, they have no choice. To prepare for those changes, analysis is required. In Quebec, we explain to producers what climate change is, what the future holds and how they need to change their business. However, money must be made available to help companies.

I am talking about climate change, but there are also all the various societal expectations. For example, we are hearing more and more about animal welfare. Investments must be made for that. The same is true for us in agri-environment. If we want to evolve to better meet society’s demands, we must have the necessary funds. In the market, farmers never get back the money invested. Even if I raise free-range hens, I will get the same price for the eggs. There is no added value. This is important to us.

[Leona Alleslev]

How much do you need, approximately? What could the government do to improve the situation?

[Isabelle Bouffard]

Are you talking about money?

[Leona Alleslev]

I'm talking about money, either as percentage or as an approach. How do we determine the needs?

[Isabelle Bouffard]

We haven't done the math. All we can tell you is that the Canadian policy framework, the new Canadian agricultural partnership, has had the same envelope since 2007. In real dollars, that's abject poverty.

I am not saying that the government is not investing in this area, but that it is investing significantly less than before. We are asking the government, at the very least, to index the amounts. There are already programs in place, but their envelopes need to be increased, especially since the government says that agriculture is a key sector for the Canadian economy. We must invest in agriculture.

[Leona Alleslev]

Absolutely.

Third, I would like to talk about the transfer of farm businesses to the next generation. You recommended changes to the tax system and incentives for financial institutions.

[Isabelle Bouffard]

In terms of taxes, I will let my tax colleague answer. I asked him to come with us for that very purpose; I'm glad he's here. Just beforehand, however, I will respond quickly to the other points.

As for the next generation of farmers, the first few years when a company starts up are critical. Let me remind you that the funds allocated to the business risk management programs have not gone up since 2007. Existing programs should provide more funding to young farmers or reduce their costs. Those programs should specifically be able to adapt to situations that may arise in the first five years. If anything really bad should happen, companies would be better protected financially. The fees to access the program should also be lowered. Basically, our recommendations are about that.

There is also the issue of access to land. Agricultural assets are extremely expensive. We ask that incentives be created so that financial institutions and governments provide patient capital. This does not mean that the next generation will not repay it one day, but could they wait five or 10 years before starting to repay the capital? Those are the sorts of things we wanted to talk to you about today. We must begin to raise awareness among financial institutions and governments.

As for the other part of the question, regarding section 84.1, I will let Mr. St-Roch answer it.

[Marc St-Roch, Coordinator, Accounting and Taxation Service, Direction recherches et politiques agricoles, Union des producteurs agricoles]

Good morning, everyone.

In terms of the intergenerational transfer, under the Income Tax Act, when individuals sell shares from their own incorporated company to a company with which they have a relationship, for example, if parents sell their shares to one of their children who owns a company, the proceeds of the sale are not considered to be a taxable capital gain. However, it becomes a taxable dividend for the seller. If that person instead sells the shares to an arm's length company, such as a neighbour, the income for the seller retains its status as a capital gain. In this case, they can take advantage of the capital gains deduction, which is available for certain assets, including company shares and farm property.

Family transfers create inequity. You can't do the same thing if you sell your shares to your own children or if you sell them to strangers. Some tax benefits granted to shareholders when they sell their business are not available when it is a real family transfer. That's how it works in agriculture. That is why we ask that the provision not apply to real transfers between members of the same family, between relatives.

[The Chair, Liberal, Wayne Easter]

Thank you.

We will turn to Peter Julian, for seven minutes.

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

Thank you very much, Mr. Chair.

My thanks to all the witnesses. It's very interesting.

I have a lot of questions. I'll start with you, Ms. Bouffard.

You talked about the business risk management programs, which do help farmers when they are hit hard. However, we heard people say that the agreement signed this week was going to be catastrophic for many people in the agricultural sector.

Do you think the next budget should include emergency measures to help farmers, especially dairy farm owners, when they are hit hard, and the agreement that has been signed is one of the blows?

I would like to know whether the UPA is of the opinion, as many stakeholders are, that this agreement is catastrophic for all farmers and for supply management.

[Isabelle Bouffard]

I will answer your first question, but I will first rephrase it to make sure I have understood what you asked me. You want to know whether the next budget should already provide for compensation programs.

Let me give you an example. Since the agreement was signed, which took place overnight from Sunday to Monday, or at least very late on Sunday, agricultural producers have been concerned. Already, some of the new members have decided or are in the process of deciding to leave the agricultural sector. Farms have been worried before. Remember, there were a number of other agreements. The cumulative effect must be taken into account. There was the CETA, with Europe, and the CPTPP, with Asia-Pacific. Now we're adding another layer. We have to keep in mind that, initially, the United States was supposed to be part of the CPTPP. They would have had access to 3.25% of the market, and now we are at 3.59%.

To answer your question, we do believe that assistance programs should already be included in the next budget. We must send a strong message to the agricultural sector. Prime Minister Trudeau was talking about full compensation. That's where we are at now. We have already given; we have already passed “Go”. Once again, the final agreement was made at the expense of supply management. If we want family farms to survive—remember that in Canada we are talking about family businesses, not multinationals—we must include money for that purpose in the next budget.

Is it catastrophic? The cumulative effect makes it so. Market after market is opening up. In the long run, our companies are losing significant market share. We are in the process of analyzing the texts. I won't hide the fact that we haven't finished our analysis. There are market openings, but there are also milk classes. For example, there are classes 6 and 7. This is a loss for producers. We have to see what will happen, but our first analysis shows that it will be very difficult for the Canadian dairy sector.

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

Thank you very much.

I will now go to Mr. Patry and Mr. Bélanger.

Thank you for mentioning the whole Kinder Morgan issue. I come from British Columbia and I can tell you that most people there are concerned not only about the project's impact on the environment, but also about its negative impact on the economy. This project threatens jobs in the tourism sector and in the fishing industry, among others. It's huge. The fact that you mentioned it is most appropriate, given that the budget is coming up.

In your opinion, instead of spending $15 billion to buy an old oil pipeline that leaks everywhere, it would be better to invest in green energy, renewable energy, which is the way of the future. Is that correct? That's my first question.

In addition, in your brief, which is a very good document, you mention the need to redefine competitiveness in Canada. You talk about our health care system and the fact that it gives a competitive advantage to our Canadian companies, since they do not have to bear the costs of it, unlike our U.S. competitors. Could we say the same about a national drug plan or a child care program? Would all those factors contribute to how competitive our companies are?

[Pierre Patry]

I will answer the first question, and Mr. Bélanger will answer the second.

With regard to Kinder Morgan and, more generally, the fight against climate change, we only have to look at the summer we have just had. You may say that it's only one summer, but the series of natural disasters we are experiencing proves that the problem of climate change is real. If we don't address the issue, humanity's very survival will be threatened.

We were delighted when Prime Minister Trudeau went to France in 2015 to approve the Paris Agreement, which agrees to limit global warming to 2 degrees Celsius compared to pre-industrial levels and, if possible, to 1.5 degrees. Indeed, even a 2 degree increase would begin to be catastrophic. However, we are almost at 2 degrees today, or maybe 1.5 degrees. In any case, the global temperature is already more than 1 degree higher than in the pre-industrial era. So there is an urgent need for action to combat climate change.

We were pleased that the Trudeau government signed the Paris Agreement, but the actions it since then have been inconsistent. The government and the National Energy Board were rebuffed by the Federal Court of Appeal because they hadn't adequately consulted the various communities in British Columbia affected by the project, including the indigenous communities. So action must be taken on this issue. Further consultations are needed, and we hope they will be conducted correctly so that we can know the truth.

We fundamentally believe that we must slowly abandon oil in favour of renewable energies. I think Canadians have a strong interest in doing that.

I will let Mr. Bélanger answer the second question.

[François Bélanger]

Your second question was about taxation, wasn't it?

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

My question was about the elements that increase the competitiveness of our companies, such as investments in health, pharmacare and child care.

[François Bélanger]

In our brief, we drew a parallel with U.S. tax reform. The United States has decided to adopt much lower tax burdens in the hope of stimulating investment. However, many economists and thinkers in Canada believe that we should do the opposite. In any event, a comparison of the governments, provinces and federal taxes of the two countries shows that tax reform in the United States has put American companies on equal footing with Canadian companies in terms of their taxation.

So we should instead focus on the factors in our brief. With a highly developed public health system in Canada compared to the United States, the costs to Canadian companies are significantly lower. Here, health-related costs represent 4% of business spending, while in the United States, it is more like 20%. From a strictly accounting point of view, we have a competitive advantage in this area.

Another advantage that is more difficult to measure but equally important, is that health care provided to Canadians, including workers, is fully covered, which isn't the case in the United States. As we have seen, the Americans were forced to establish Obamacare. With the American tax reform, we now fear that the Republicans will come back and try to weaken this system, which would cause a large part of the American population to lose their recent health gains.

Canada is also competitive in other respects, such as through more proactive investments and the use of renewable energy. We saw in the current government's last budget that it had adopted a more proactive approach than the previous Conservative government, in particular by setting up certain industrial clusters in sectors of the fourth industrial revolution.

We can do a lot. We could invest in education and training of the labour force. As we said in our brief, we must continue to be a welcoming place for immigrants, which currently distinguishes us somewhat from the Americans. This is a very positive elements and an important solution to the scarcity of labour and the lack of workers in Canada and Quebec. These are factors that must be emphasized.

According to the Trump government, U.S. tax reform was expected to attract major investments. In the short term, however, this isn't the case. It hasn't let to increases in workers' wages in the United States, either. For the time being, this reform has only resulted in the repurchase of shares by some American companies and additional dividend payments, which benefits the managers and investors of these companies, but represents no gain for the middle class or for workers.

The measures we are recommending are pretty much in step with those proposed by the government's Advisory Council on Economic Growth, which is chaired by Dominic Barton, if I'm not mistaken.