Finance Committee on May 12th, 2016

[The Chair, Liberal, Wayne Easter]

I would like to call the meeting to order please. Pursuant to the order of reference for Bill C-15, an act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures, we're here to hear from a number of witnesses in two sessions today. Then we'll go to committee business.

To the witnesses, welcome.

We have from the Canadian Convenience Stores Association, Alex Scholten; from the Canadian Federation of Independent Business, Dan Kelly; from the Canadian Wheat Board Alliance, Anders Bruun; and from the Canadian Chamber of Commerce, Hendrik Brakel.

We'll start with you, Mr. Scholten. Welcome, you have up to five minutes.

[Alex Scholten, President, Canadian Convenience Stores Association]

Good morning and thank you, committee members, for giving me the opportunity present on behalf of the Canadian Convenience Stores Association. My name is Alex Scholten, and I'm president of the association.

The Canadian Convenience Stores Association is a trade organization that represents over 26,000 convenience stores operating in Canada that employ over 230,000 people from coast to coast to coast. Many of these stores may be small businesses, but together we contribute significantly to Canada's economy and serve at the centre of many communities. To give you an idea of our economic footprint, Canadians purchased over $51 billion in goods and services from members of our industry last year alone. These sales resulted in over $18 billion in taxes collected for both the federal and provincial governments. We're also significant employers to new Canadians, providing newcomer entrepreneurs an opportunity to own and operate their own small business.

When I presented to this committee during the pre-budget period, I highlighted two priority areas for our association that fall under the purview of the Minister of Finance. The first was the impact of excessive merchant credit card fees and the second was the persistence of illegal untaxed tobacco that is sold throughout Canada. These are two very important issues for our retail members.

Lower credit card merchant fees will have a positive impact on small businesses, allowing them to employ more people and make capital improvements in their businesses. It also offers a potential benefit for consumers, as it will allow these businesses to offer more competitive pricing. Conversely, the persistence of illegal tobacco in Canada undermines the work of our law-abiding retailers who sell legal tobacco in a controlled, regulated manner to consumers who are of age. We are government's partner in the controlled and regulated sale of these products.

We're very pleased to see mention of both of these issues in the report tabled by this committee ahead of the budget, and we would like to thank committee members for their attention to our issues during these consultations. Admittedly, we were disappointed that there was no mention of these measures to fight illegal tobacco or cap merchant credit card fees included in the 2016 budget.

As Canada's tobacco landscape continues to change, addressing contraband and counterfeit tobacco products is critically important for our law-abiding retailers, for governments that benefit from the taxes on these products, and for Canadians in general because the contraband and counterfeit markets support organized crime and undermine Canada's tobacco control strategies. In the face of additional proposed changes to tobacco regulation, including flavour restrictions as well as plain packaging, more must be done to address the already robust illegal tobacco industry operating in Canada.

It is very important that members of this committee understand the impact that changes to these regulations will have for our retailers, for government tax revenue, and for the safety and security of Canadians in general. For example, our association is aware of several illegal tobacco outlets operating in Canada that are retailing at least 30 different types of menthol tobacco products that are now restricted in many provinces. These products are sold without required taxes and are non-compliant with Health Canada regulations. The variety available is actually far greater than the amount of legal, taxed menthol tobacco products available for customers in our stores across the country.

As the government considers banning menthol tobacco products in Canada, it is important to draw attention to the lack of resources present to fight Canada's robust illegal tobacco trade. Banning these products for our retailers will not remove them from the store shelves of illegal retailers. This, ultimately, undermines the intention of the ban to begin with. We are hopeful that situations like this will be taken into account in future budgets.

Since the tabling of the budget, there has been productive movement on the issue of credit card merchant fees. It is no secret that merchant credit card fees in Canada are amongst the highest in the world and have risen sharply over the past number of years. As committee members may be aware, there is presently a private member's bill before the House of Commons that proposes to lower or cap merchant credit card fees.

The Small Business Matters Coalition—a group of 24 business trade associations, including the Canadian Convenience Stores Association, which represents in excess of 98,000 small businesses operating in Canada—is supportive of this bill.

We're hopeful that members of this committee will consider lending their support to this bill once it comes up for a vote in the House.

As a final note, I'd like to draw attention to the commitment made to lower the small business tax rate to 9%, which is slated for budget 2017. This is a measure that Canada's convenience stores would greatly benefit from. Having lower business taxes would free up revenue for our stores to invest in improving their business, training employees, and offering the best possible service to customers. We look forward to seeing this change made as part of the next federal budget.

We appreciate the opportunity to present to this committee and look forward to continuing to work with you on behalf of small businesses in Canada.

I'll gladly take any questions from the committee members.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Scholten.

Turning to the Canadian Federation of Independent Business, we'll now hear from Mr. Kelly.

[Daniel Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you so much for the opportunity to be here. We are thrilled to be in front of the finance committee to share with you a few views from small and medium-sized firms about the budget and the budget implementation. Just as a reminder, CFIB has 109,000 members across Canada. All of them are small and medium-sized independently owned and operated businesses, none of them publicly traded corporations. Of course, we represent our members on a variety of public policy issues; finance is obviously quite high on that list.

The total tax burden is right at the top of our members' priorities. That is followed by government debt and deficit, and then government red tape and regulations. Progress has been made on some of these issues, but more progress is needed definitely on others.

I did want to start with the small-business corporate tax rate, because I represent a lot of very puzzled small-business owners right now. We were thrilled, in the election campaign, when all four national political parties, starting with the NDP, committed to reducing the small-business corporate tax rate from 11% to 9%. After the NDP first made the promise, the Tories then put it in the budget and legislated the commitment to the 9% rate. We were thrilled when now Prime Minister Trudeau endorsed that policy and committed to that policy dozens and dozens of times on the campaign trail. Elizabeth May, the leader of the Green Party, also committed to do the same. So you can imagine our surprise on budget day when we heard that, “Budget 2016 proposes that the small business tax rate remain at 10.5 per cent after 2016”. We're very pleased that the new government did move forward on the first quarter of that commitment to reduce it to 10.5%, but many small-business owners are deeply upset that the government has now chosen to abandon that promise with no prospect for reinstituting it whatsoever. In fact, as you see on slide 5, the very best advice that small-business owners give the government in terms of what would help them strengthen their own business performance at this rocky point in our economy is to reduce the current federal small-business corporate income tax rate. That was the number one suggestion from small-business owners in advance of the budget.

We've been trying to figure out why the government did this. Some reasons have been floated. I have to say, after meeting with several cabinet ministers, and many MPs of all parties, there has been no suggestion as to why the government chose to take this action. Some have suggested that small businesses are now categorized in the mind of the government as being in the category of the rich. I just wanted to draw your attention to slide 6 that shows that the average income of small-business owners resembles very much that of the general public. There are four times more small-business owners earning less than the low-income cut-off than there are those earning $250,000 or more, a definition of the rich.

Another theory that we explore on slide 7 is that the small-business deduction sometimes traps small businesses and they don't want to grow beyond that $500,000. When you look at the number of medium-sized firms in Canada, that might stand as a theory. But what slide 7 shows is that while there is a little bit of a crystallization—a small bump of businesses around the $500,000 threshold—the vast majority of businesses are way under that threshold, many of them earning under $50,000 a year in their business. We remain puzzled by this, and we would love if through the committee presentation we could explore why the government chose this action.

I will say a second issue that we're very serious about right now is the passive income rule. Right now we have members—campgrounds and self-storage facilities in your ridings across Canada—that are losing access to the small-business corporate tax rate because they have fewer than five employees. Through a weird interpretation, the government is now considering small firms with fewer than five employees in these sectors as being too small to access the small-business corporate tax rate. We did get the previous government to commit to reviewing this policy in the 2015 budget. The 2016 budget says that the review is over and the current rules stand, and now we have campgrounds and self-storage facilities that are being audited. Many of them suggested they will go out of business because they are being reassessed by the CRA. We need some help in terms of clarification on those issues.

The third issue I wanted to raise is the cancellation of the youth hiring credit. One of the things we loved about the government's platform was the idea that small businesses would have employer premiums on EI waived for 2016, 2017, and 2018, and that would help them hire youth between ages of 18 and 24. That was the promise.

That too appears to be scrapped and replaced with a committee to study youth employment. I'm not sure that we're going to get any new youth hired in Canada by creating yet another committee. I do want to remind the committee that small businesses will in fact see their employment insurance rates go up slightly in 2017 at about the worst possible time that one could imagine.

Finally, we are very worried that the finance minister has made a personal commitment to increase the Canada Pension Plan in the year ahead and said that 2016 will be the year that a deal is delivered.

I do want to say, though, that we really do encourage you to resurrect the Emmanuel Dubourg's private member's bill on business succession. That was a bill that he introduced in the last Parliament as a PMB. We love that idea. Bill C-691 would allow small-business owners to transfer their businesses to their children without incurring huge capital gains. In fact, many businesses say that it is more cost effective for them to sell their business to a stranger than it is for them to pass it on to their kids, and we provided some background in our document to explain why that's so powerful.

So I do urge you to reintroduce Emmanuel Dubourg's bill at the earliest possibility.

Thanks so much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Kelly.

We turn to the Canadian Wheat Board Alliance.

Mr. Bruun, welcome.

[Anders Bruun, Barrister and Solicitor, Canadian Wheat Board Alliance]

Good morning, Mr. Chair and committee members. I thank you, on behalf of the Canadian Wheat Board Alliance, for the opportunity to be here this morning. I can say that it is a special honour for me to appear before a committee that my own member of Parliament, Mr. Ouellette, is on. I appreciate that. Thank you very much.

I make this presentation on behalf of the Canadian Wheat Board Alliance, a voluntary prairie-wide group of farmers, in place of Mr. Ken Sigurdson, who was invited but is unable to attend.

Farmers continue to deal with the fallout from the dismantling of the Wheat Board.

Section 38 of Bill C-15, budget implementation act, 2016, gives us a window into that process. Now, if you have had a look at section 38 and the provisions relating to the tax treatment to be accorded to certain instruments that are being issued in relation to the Wheat Board, you will understand my next comment.

Section 38 is a tangled mess of verbiage, maybe the most tangled I have seen in the 40-plus years since I started law school, and I say that with the greatest respect for the drafters in Justice, the Canada Revenue Agency, and so forth who crafted this. I am sure the provision does what it is intended to do in a competent and efficient way, but I want to get on to talking about the underlying units that whole section deals with.

On November 2, 2011, the then Minister of Agriculture, Gerry Ritz, appeared before the legislative committee on Bill C-18, which had just been introduced in October, and proposed to dismantle the Wheat Board, effective the following August 1.

At that time, Mr. Ritz stated, in answer to a question from Mr. Valeriote, “Mr. Valeriote, I fully believe in the strength of farmers. Yes, they will elect their own board after the interim period. After the interim period, where we control it as a government, yes, they will elect their own board, should they decide to do that.”

I have a copy of the transcript from that portion of that hearing, if anyone wants it.

Much has transpired since that date.

The government removed the farmer-elected directors a few weeks after Mr. Ritz made this statement, in mid-December, 2011, and the former government operated the Wheat Board behind that veil since. No financial information relating to the operations of the Wheat Board after July 31, 2012 has ever been released. Nothing has ever been released.

The government-controlled board even had a hand in finalizing the Wheat Board's annual report for the 2010-11 crop year.

Then, on April 15, 2015, Minister Ritz announced that the Wheat Board was to be transferred to a joint venture of Bunge Canada and Saudi Agricultural and Livestock Investment Company (SALIC), called G3. You can see their website, g3.ca.

This brings us back to section 38 of Bill C-15.

G3 has promised to issue to farmers delivering to it wheat, in addition to the purchase price that is negotiated, $5.00 in trust units for each tonne of grain delivered to it. G3 will pay nothing for the Wheat Board and its many assets to government or to farmers, except for these trust units. That's it. That is all. There is a lot of value there. That is all anyone in Canada is receiving.

Section 38 deals with the applicable tax laws governing these trust units.

Now, what are these trust units?

A portion of order No. 7163, issued by the Manitoba Securities Commission on July 24, 2015, is attached to this submission. I have just taken pages 20 to 23 and attached them to the submission I have made to members. I have a copy of the entire order here, if anyone wants that.

This is all that farmers are getting. Not only are these trust units exempt from security laws, but farmers receiving the units must agree that they “will not have any statutory rights of action in the event of a misrepresentation”.

The only thing we're getting are these pieces of paper and, if there's a misrepresentation made somewhere along the line that induces someone to do business and they get this piece of paper and it doesn't pan out well, they have no statutory rights and no securities law protections with respect to these pieces of paper. The whole thing with these trust units is that they're exempt from registration. See section (j), which is on the second page of that attachment.

It is because of this total veil of secrecy relating to the operations of the Wheat Board—not a single number since August 1, 2012—and the uncertain value of the trust units—remember, you have no right to sue even if you're fooled into a transaction that gives you one of these things—that we recommend and urge in the strongest possible terms recommendation 48 of the final report of the House of Commons Standing Committee on Finance regarding its consultations in advance of the 2016 budget, and that recommendation reads:

The federal government provide Western Canadian grains and oilseed farmers with a full and transparent accounting of the disposition of the Canadian Wheat Board’s assets since the Marketing Freedom for Grain Farmers Act received Royal Assent, and of the effects on the grain handling and marketing system since that time.

I submit to you that this review needs to be done externally, and it needs to be done by people who know what they're looking at. It almost needs to be a forensic sort of review; it cannot be the typical whitewash review.

[The Chair, Liberal, Wayne Easter]

I'll have to cut you there, Mr. Bruun. We're over your time.

[Anders Bruun]

I thank you, and that was the last thing I was going to say. Of course, we offer any assistance the committee may want going forward.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Bruun.

We are turning to the Canadian Chamber of Commerce, Mr. Brakel.

[Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy, Canadian Chamber of Commerce]

Thank you very much, Mr. Chair and committee members.

It's such a pleasure to be here with you today on behalf of the Chamber of Commerce, a network of 200,000 businesses across the country that have a lot of interest in the budget and a lot of questions about it. I think business is really excited about the budget, and it's because a lot of the things that they're most interested in are soon to come. The infrastructure phase two and the export corridors are absolutely critical to getting our products to market. We've seen a big surge in exports in the last year in manufacturing, and a lot of Canada's road supports, airports, and infrastructure are under pressure. We really appreciate that.

The innovation agenda that's soon to come is an amazing opportunity that we're excited about. Canada already has high public expenditure on R and D. We're one of the highest in the OECD, but where we lag is in commercialization, and that's why there's a role for private sector innovation through venture capital incentives and maybe through a patent box where, if you develop a patent here in Canada, you would be taxed at a much lower rate.

Other things that were soon to come in the budget that we talked about were the review, reform, and re-examination of tax credits. That line in the budget caught our attention. We think it's a great idea. We've been talking about tax simplification for years. I remember tax accountants telling us that the tax code is very complicated, and when tax accountants are telling me that things are complicated, probably it's a challenge.

I want to definitely emphasize Mr. Kelly's comments on the tax rate for small business, the deferral of that. A great way to stimulate the economy is putting more money into the pockets of Canadian businesses. When they have extra cash left over at the end of the year, that's when they invest. It's absolutely critical to a strong economy to have more money in the pockets of Canadian business. We've heard about from members across the country how important that is.

The other one that's really of interest to members is Canada Pension Plan reforms. The challenge is whether Canadians don't save enough. It's not a universal problem that requires a universal solution. There certainly are Canadians perhaps who probably.... Various studies point to about 15% to 20% of Canadians who will see a sharp drop-off in income on retirement. So what we would say is that really we need to target those particular Canadians rather than having across-the-board increases because we know absolutely that it would be a dead weight on the economy to have taxes across the board. Effectively CPP contributions act like a payroll tax, so that's why pulling more money out of employers' resources or out of employees' cheques will be detrimental to the economy. We think there are really an interesting targeted measures that would work.

Finally, on EI reform, we would like that to go down to the break-even rate, and lowered EI premiums are critical for our members.

Those are some of the key issues that came to us from our members.

I'm happy to answer any questions. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Brakel.

Thanks to all of you for your testimony this morning.

Turning to questions, we have Mr. MacKinnon, for seven minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses for being here today for the consideration of the Liberal government's important first budget.

Although we are considering this first budget, we are always thinking about preparing the second budget and the subsequent budgets, which will define this Parliament and this government. I would like to think that some of the issues that you have all listed and mentioned will be effectively addressed in this government's future budgets.

I will speak to the points made by Mr. Brakel, of the Canadian Chamber of Commerce, and by Mr. Kelly. I am referring to simplifying taxation in Canada, whether income tax or tax in general. This has often been a topic of discussion in this committee during the preparation of the budget and in response to it.

I would like to hear more about the kind of reforms or simplifications that you would like us to make. Where would you start? Mr. Sholten might have some thoughts on this. I would like each of you to comment on simplifying taxation and the benefits of doing so.

[Hendrik Brakel]

I can start.

We are thinking about a complete overhaul of the entire tax system in Canada since there are so many tax credits. An expert panel or a royal commission of inquiry could look into the effectiveness of all the tax credits and determine which ones are effective and which ones are not. For our part, we maintain that eliminating many or the majority of tax credits would reduce tax rates. That is what we would like to focus on. Eliminating certain tax credits would make it possible to reduce tax rates.

[Daniel Kelly]

This is a tricky one for us. We certainly are supportive of the idea of tax simplification. There's no question that a plethora of new credits have been created, some of which do need to be analyzed as to whether or not they're accomplishing the public policy goals they were set out with. There is no opposition whatsoever from us with respect to tax simplification.

However, in our experience at CFIB over 45 years, most governments that embark upon large tax simplification studies and measures end up using that to delay any tax reductions, so that we spend a lot of time studying the tax code and what can be simplified and very little time studying what can be done to actually inject more of businesses' or consumers' own dollars back into their own pockets.

For tax simplification, we would prefer that it be focused on working with the Canada Revenue Agency and some good momentum in previous budgets. I will say that one of the elements of the 2016 budget that we did like is that there were some measures taken with the CRA to simplify and help better interpret tax policy for small business owners. Those are good measures, very practical measures, to help small businesses—and to help any Canadian, really—in dealing with the very complicated tax code.

I have to say that would be probably our first choice: focusing on CRA as opposed to a global review of every credit that exists.

[Steven MacKinnon, Liberal, Gatineau, QC]

Mr. Scholten.

[Alex Scholten]

I would echo Mr. Kelly's comments as well. Our members are finding the tax codes very complicated.

As our friend from the chamber noted, when tax accountants have difficulty interpreting it, small business members are going to find it extremely difficult, which means that they're going to end up paying a lot more money to get their tax returns done on a yearly basis, and that costs them even more. Simplification and clarification for small business is absolutely something that we would support in the future.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you to all three of you for that.

I am going to leave a little bit of time for the parliamentary secretary Mr. Champagne, but I do have a quick question for you, Mr. Bruun, and thank you for coming here.

I think we all watched the process of the dismantling of the Wheat Board with some consternation and specifically with regard to the ability of farmers to be heard in that process. As we consider the measures in this budget, knowing that a lot of the damage has been done and probably indelibly so, can you tell us a bit about the process or consultation, or lack thereof, that characterized the dismantling of the Wheat Board and how you've been frustrated in your attempts to get the kind of information you talked to us about today?

[Anders Bruun]

The former Canadian Wheat Board Act, under section 47.1, provided that farmers were to have a vote on whether any grain was to be added to or removed from the marketing mandate of the Canadian Wheat Board. I had another client who challenged the government on this. We were unsuccessful for technical legal reasons, but we pushed that process up to the Supreme Court of Canada. Farmers were indeed denied any vote, which, under the previous legislation, they had been promised. Further, my client groups were never invited to any meetings on the legislation. I think the government of the day did listen very selectively to certain small farm groups that were strongly linked with big ag and big chem and big fertilizer and so forth, and it took its advice from that faction rather than listening to our group.

The Wheat Board at that time ran its own vote parallel to the sort of vote that would have been held under the Canadian Wheat Board Act, and about 62% of farmers said they would prefer to retain a Wheat Board, a single-desk marketing power, over having to sell to many buyers, all of whom compete against each other to offer the lowest price to the Japanese or the English or the Chinese or whoever.

One of my clients reported that he lost—

[The Chair, Liberal, Wayne Easter]

We're over time. Mr. Champagne will have to wait until the next round.

[François-Philippe Champagne, Liberal, Saint-Maurice—Champlain, QC]

I'm allowed to let you finish. Will you finish?

That's not even me. Okay, I apologize.

[The Chair, Liberal, Wayne Easter]

We are well over Mr. MacKinnon's allotted time, so we will turn to Ms. Raitt, and we'll hopefully get you a chance later.

[Lisa Raitt, Conservative, Milton, ON]

Thanks.

I'm just going to ask for a quick clarification.

Mr. Scholten, you said in your presentation that your understanding is that the deferral on the corporate tax freeze is going to be lifted in 2017. Is that your testimony today?

[Alex Scholten]

It's our understanding that the full reduction that was in the Liberal Party platform, going to 9%, wasn't done in this budget but that it would be done in future years.

[Lisa Raitt, Conservative, Milton, ON]

Can you show me in the budget where it shows that? You're giving the committee some information that we don't have, Mr. Chair.

[Alex Scholten]

It's not stated in the budget.