Finance Committee on Feb. 17th, 2016

[Scott Ross]

Yes. We see the major drivers of many of the labour gaps in agriculture, the shortages, are the remote locations involved often for many of the operations. There's not a local labour force available to really meet that need regardless of the wage rates offered.

There are jobs that are less desired by Canadians for which you can spend months and months recruiting and bump up your wage rates. I know, for example, in packing plants they offer very competitive benefits packages and they're still struggling to find people to bring in.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Mr. Wright, I was told the other day that one of the things that's starting to happen with the U.S. economy is.... Of course, the U.S. economy relies largely on a lot of corporate earnings that are outside the U.S. and because of the high U.S. dollar, companies are starting to report fourth quarter earnings and their outlook for going forward is much less optimistic.

Therefore, there's an expectation that maybe other currencies, such as the Canadian dollar, will actually start to increase because the U.S. dollar will start to come down and therefore, the response here in our country would be an increased Canadian dollar.

Do you have any comment on that?

[Craig Wright]

When you look at the U.S. dollar, it has turned the corner, but that's after a 10-year trend of depreciation. It has bounced back from very undervalued levels and that is translating on a quarterly basis into some foreign currency losses as they report back in U.S. dollar terms. That's one of the components in terms of a recent weakness in quarterly earnings results.

For Canada, we saw the flip side of the U.S. dollar weakness when the Canadian dollar went up to parity and beyond. We're now seeing part of the weakness in the Canadian dollar reflecting U.S. dollar strength.

If the U.S. dollar were to turn lower, we'd probably see some upward pressure on the Canadian dollar. Our view is that the U.S. story is stronger growth relative to anywhere else in the major economies. It's the only central bank that's actually raising rates, while others are still cutting and some into negative territory. It's in a better fiscal position and better current account position. It suggests to us that the trend should be predominantly upward over the next couple of years.

[The Chair, Liberal, Wayne Easter]

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you for your presentations.

My first question is for you, Mr. Tapp. The issue of shovel-worthy versus shovel-ready has me somewhat concerned, given my municipal background. I did financing budgets for my region, which had an annual operating budget of about $1 billion. It's not the largest, but it's certainly not insignificant.

For municipalities, the true meaning of shovel-ready is that it's ready to go to tender. I think we all agree that on infrastructure funding and building smart infrastructure, long-term investment is a great thing. But if a municipality has to spend $200,000 to $1 million on environmental assessments, design, and engineering for a bridge only to then have that project sit on a shelf if they don't get the funding, what municipal councillor is going to make that investment for a project that never sees the light of day?

Part of the problem with the former government's infrastructure investment was that you actually couldn't use any of that funding on making a project shovel-ready, so you were filling potholes or doing sidewalk repairs or a park repair because you could do the engineering and the studies in-house.

To your point about managing expectations in the first year, wouldn't it actually be opening up the investment for these big transit projects, rail projects, or whatever the case may be to get those engineering drawings and the environmental assessments and all of that and to actually make a project shovel-ready? Wouldn't that be a better investment in, say, year one?

[Stephen Tapp]

Yes. I think the only caution I was offering to the committee was, as I said, based on the experience when I looked back at the 2009 package. The argument that economists almost always make is that it should be timely, targeted, and temporary, and on this idea of temporary infrastructure, I think that's a problem. This is the reason people argue that we shouldn't use fiscal stimulus to micromanage the economy and the cycles, because it takes so long to get things going. Infrastructure is an area where I think that in general it takes things quite a while to get going.

If your point is that the municipal, provincial, and territorial levels need to do some work before things go to tender and go out, I think that's certainly the case. As I cited before in some of the data, when the government allocates money, that's conditional if it's going to be a third, a third, and a third. Not all that money is necessarily going to be spent because of cost considerations, timing, or that type of thing. It's possible, in terms of ratcheting down expectations—again, as I said—just to make sure that the money that's allocated is allocated not necessarily in a time-sensitive window, but in a flexible manner so that municipalities can access it. If it takes two or three years, so be it.

I think there are certainly detailed issues, and this is the reason it takes things a while to get going.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

Certainly, municipalities would advocate for long-term stable funding anyway, not temporary infrastructure funding. In fact, you could probably go to any municipality.... I know that in mine we have a 15-year infrastructure plan, but you're not going to spend the money on studies if you're not actually going to spend the money in that fiscal year.

Just quickly, because I don't have a lot of time, I'll move to Mr. Ross.

I have an urban-rural riding outside of the GTA, the Toronto area, in Ontario.

One of the biggest issues with agriculture is the fact that land values are so high that most farmers, even when we protect the land, actually sell it to developers because they make so much more money that way, to the point where the province sometimes has to step in and create greenbelt legislation, for example. How do we actually make farming profitable so that families or farmers stay on the land? That's my first question.

Second, for a lot of the land, through greenbelt legislation in Ontario, for example, they now lease the land to farmers so that they can't actually then sell it to developers. What's the length of lease that actually makes it worthwhile for a farmer to invest in the property? Has your organization looked at length of lease? That's the biggest issue. When you have one-year or two-year leases, they're not willing to invest in the land, and it therefore becomes crop farms and does not really produce for food production.

[Scott Ross]

Right, this is a topical subject for our organization.

We're currently getting started on a comprehensive study looking at land use policy, land use planning, and some of the provincial regulations around farmland ownership to try to understand exactly the kind of questions you're asking.

In terms of the profitability of farming, I think it's a complex picture for what drives that. Certainly the amounts of money going through from development pressures are always going to be a concern for farming. Length of tenure, as you suggested, is an issue for farmers.

For ownership and leasing arrangements, having a mix is always optimal in terms of risk management in planning for farming operations. Certainly long lease tenures would be critical. We don't have a number to place on that, but I think it's an important aspect to the long-term viability of operations and the ability to invest.

When it comes to profitability, we've done a lot of work looking at the structure of agricultural research and what can be done on that front. I would echo some of the sentiments of Mr. Slomp in terms of investing in varietal research for Canadian products and also looking at bolstering the next agricultural policy framework to provide access to capital for new entrants.

I think it is a critical piece of the picture to try to keep farms in operation and farming, not just for the profitability of the operation, but so the capital and the flexible intergenerational transfer policy context is there to make sure, where there is a desire to keep it in farming and a committed farm family, they can make that work.

[The Chair, Liberal, Wayne Easter]

I'll have to cut you off there. We'll come to you, Mr. Caron, in one second.

I do have a question for both farm organizations. It is not about budgetary expense. It's on the importation of milk proteins, the biofiltered milk issue, where products are coming in and companies have found a way to get around the border rules on milk ingredients. How much is that costing domestic producers? Do you have a handle on that? How would it benefit the economy if Canada Border Services Agency defined those ingredients as they're supposed to be? It's not a budgetary measure, but it is an important measure for domestic producers.

I'll start with you, Mr. Slomp, and then Mr. Ross.

[Jan Slomp]

To my understanding there is still a border control for milk protein coming into the country.

After the TPP is signed, over a number of years that border control on protein supplements will disappear. That is an open door for processors in Canada to use components elsewhere in the world and get higher yields from Canadian milk. That will mean they either have to grow the market to that level of higher yielding cultured products, or they will have to reduce the amount of milk received from Canadian farms.

I think that is the dangerous part of the TPP. In a few years we will have the door wide open for milk components to be imported without any tariffs. That's the danger there.

[The Chair, Liberal, Wayne Easter]

I'll stop you there.

[Jan Slomp]

I think right now we have a good handle on the importation.

[The Chair, Liberal, Wayne Easter]

Mr. Ross.

[Scott Ross]

Any compositional standards for dairy are certainly a major issue, and I know there are significant costs associated with that. An analog to that same issue is what I was speaking to earlier with the program on duty release and drawback. This is broader than just dairy. It also affects the poultry industry and the egg industry, but I know the costs of the kind of loophole that's being exploited at the CBSA front is costing them. It went from two million kilograms in 2011, through this loophole, to upwards of 96 million kilograms by 2015.

It's about 10% of the market share of the poultry industry.

[The Chair, Liberal, Wayne Easter]

Mr. Caron, I'll give you two minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

It's a short question for both Mr. Tapp and Mr. Wright.

I've been sitting on this committee for three years, and this question comes up often. I don't see much development.

Mr. Tapp, in your testimony you said that what's needed now is a more comprehensive examination of Canada's tax system to make it more efficient and equitable. You have about a minute each to explain why and how we go about it, if at all.

[Stephen Tapp]

One minute for tax reform in Canada. I don't know how we could do much justice to that.

I think the argument I was making to the committee was that simply looking at the tax expenditure review that's planned is not ambitious enough. There are certain tax preferences that we have in the system, for example the children’s fitness tax credit, and then we have preferences ranging from pensions and stock options to these other issues.

I think that's part of the tax system in looking more comprehensively at personal income taxation, and looking at whether the system is progressive enough, and whether it's taking enough revenue in.

On the business side, the same question is there in terms of the rates and whether we get the system to have lower rates and broader bases. I think that is what most economists would argue for.

The pitch I would make would be to not limit ourselves to looking at particular tax preferences, but look at the system as a whole, look at how the federal and provincial levels of government work together, and try to make it more efficient and more equitable.

[The Chair, Liberal, Wayne Easter]

Mr. Wright, could you take 30 seconds, and that's even.

[Craig Wright]

I agree with much of what Stephen said. The only point I would add is while there may be no such thing as a good tax, at least a bad tax could launch a consumption tax, so I'd like to see more balancing toward consumption taxes at the expense of income taxes. You can do it revenue neutral or revenue positive, but I do think consumption tax is a better path to go down. Any regressivity you can correct.

[The Chair, Liberal, Wayne Easter]

Thank you very much to all our witnesses for your presentations, as I said earlier, on short notice. A lot of good information has been provided here, so thank you.

The committee will suspend for five minutes while we bring other witnesses forward.

[The Chair, Liberal, Wayne Easter]

Could members please come back to the table. The witnesses are here.

When we get to the other end and there's no time for questions, members will be asking, “Why didn't we start on time?”

[Raj Grewal, Liberal, Brampton East, ON]

I'd like to say it on the record.

[The Chair, Liberal, Wayne Easter]

We'll come back to order for the second round of hearings this afternoon. As I indicated at the beginning, pursuant to Standing Order 108(2) we're doing pre-budget consultations for budget 2016.

I welcome the witnesses here, and thank you for coming on short notice. I would also indicate that we hope you can limit your presentations to five minutes. If you go much beyond that, I will have to cut you off. Also, the translators have given us an indication that some people are talking too fast in order to get their words in within five minutes, so you'll have to talk at a pace that they can translate.

Starting with the Canadian Association of Petroleum Producers, Mr. Ferguson, welcome, and thank you.

[Alex Ferguson, Vice-President, Policy and Performance, Canadian Association of Petroleum Producers]

Thank you for the opportunity to present today.

As a representative of the upstream oil and natural gas sector in Canada, I want to focus some of our comments today broadly on matters of the investment environment in Canada.

Simply put, we believe that to create wealth for Canadians, significant and ongoing investment is required in the various sectors of our economy, ours included, of course. This includes investments in manufacturing production as well as technology development, people, and communities. We look at it broadly speaking as an investment, as a key criterion for creating wealth for Canadians across the economy.

There's no question that the current economic environment in our sector has been devastating to many individuals and families, not just in Alberta but across Canada. We're feeling the effects of the current commodities cycle across Canada, and we certainly appreciate governments'—plural—recognition of the devastating effects and the willingness to find solutions and ways of mitigating some of those negative effects.

I will also point out a bit of doom and gloom. The situation is not going to be corrected any time soon. We see clearly that things will get worse before they get any better.

There's one thing I do want to talk about in terms of the investment environment for our sector in particular. It's a notable fact that for the last eight to ten years every dollar of cash flow that our industry, our sector, has realized in Canada has been reinvested in Canada. This is a pretty important record. Also, a really important point I will add onto that is that on top of that reinvestment, that cycle that's been pretty steady for the last eight to ten years, there's been a significant direct investment from outside Canada into the Canadian economy through our sector. We'd like to continue that cycle and be ready to come back when the commodity prices come back so that we can be better prepared to function well in a different world.

We believe that government should proceed with a strong sense of urgency on a variety of initiatives that will help create an environment that ensures continued investments in Canada. I'll give you some specific examples and then certainly I'm open to questions afterward.

One area we're most interested in right now is addressing underemployed capital within Canada. I'll give you a few examples that we are looking at and doing some research on, and look forward to engaging with government on this through the budget process.

We believe there's an opportunity to modernize the large corporation tax rule to more effectively deploy what appears to be billions of dollars in capital across the economy. I would point out that this is important for our sector, but it's also very important for many other sectors in the economy. There's an opportunity here that we believe Canada should explore.

We also believe that it's time, given our current environment, or change in environment, to modernize the capital cost treatment for tax purposes for the unconventional oil and natural gas resource wealth that we have in this country. The current rules for capital treatment were devised and implemented many years before we thought of the new technologies and the unconventional nature of some of our resources. It is time to look again at that to see if we can't find better ways to allocate capital to make sure that we get the maximum benefit out of our resources.

I will point out to you another area within the broad bucket of underemployed capital. I think last week a CIBC report came out that identified in the order of $75 billion that we Canadians are holding onto in cash because of our fear of the volatility in the equity markets. The notable thing in that report is that they've indicated that through previous down cycles, Canadians were late getting back into the game and lost significant opportunities for investment returns. So we think, broadly speaking, that there's a pool of underutilized capital in Canada. Within Canada, with our current foreign exchange environment, we believe there's a window of opportunity to strengthen the confidence of those investors and get that money working within Canada for Canadians. Certainly we'd be happy to look at increased investment in any areas of our business.

Certainly, we also believe—and maybe you're surprised I didn't lead with this—in increasing investment attraction for Canadian resource development. That's another way for me to highlight the need for market access, diversifying our access. I will say that this is an issue for the oil and gas business in Canada, but it's also, broadly speaking, about natural resources in Canada, getting them to as many diverse markets as we can so that we maximize the opportunities of that wealth.

I do know from my past experience that the current forest sector is looking at market access issues as well. That hasn't changed, hasn't gone away. We need to address that, broadly speaking, within Canada.

We also believe in and are encouraged by the government's intent to invest directly in Canada. Certainly in areas related to indigenous peoples and community investments which are very important to our sector, those investments are critical for long-term growth in our businesses. We appreciate the economic infrastructure opportunities that are there for Canada, whether strengthening the marine infrastructure, or any of the safety or environmental agencies or issues in Canada. We do believe strongly in the technology and innovation investment opportunities within our sector. We have some pretty stellar examples in our sector to share around Canada's Oil Sands Innovation Alliance and the partnership they recently created with the technology fund in Alberta, as well as the federal SDTC organization.

[The Chair, Liberal, Wayne Easter]

Alex, could you sum up.