Finance Committee on May 8th, 2017

[Trevor McGowan]

Very briefly, the good news on that front is that any employee who wants a paper copy has a right to get a paper copy. After they request it, the employer has to provide it in paper format. In addition, there are protections built into the rules, so that if an employer cannot reasonably expect that their employees have access to them, two specific examples were included in the bill: one, if they're on extended leave, or two, if they are former employees. If you can't reasonably expect that they'd have access to a computer, then you can't provide it electronically. It has to be in paper format. So there are these protections built into the provisions to ensure that people don't miss out on their T4s.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Ouellette.

Mr. Deltell. and then Ms. O'Connell.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you so much, Mr. Chair.

Gentlemen, welcome to the House of Commons.

As a Quebecer, I am clearly proud to see that four of the six officials from the Department of Finance here today are francophones. That's something to write home about, as they say.

Mr. Chair, I would now like to have a conversation with Mr. Coulombe. In my little segment, we are going to talk about the excise duty on alcohol and tobacco.

Let's talk first about the tax on alcohol.

According to the notes at our disposal, the increase proposed in the 2017 federal budget should increase government revenue by $30 million in the first year, $60 million in the following year, then $95 million, $125 million and $160 million in subsequent years.

First of all, it must be said that this is very technical. I would like Mr. Coulombe to explain to us how the government revenue can increase so exponentially.

[Gervais Coulombe]

Thank you for the question.

In the first year, 2017-2018, the $30 million increase in revenue is the result of the immediate 2% increase in the excise duty.

In subsequent years, for the excise duty to keep pace with inflation, the forecast is to increase it on April 1 in each of the following years. Let us assume that inflation is at 2% next year. On April 1, 2018, therefore, there will be an increase, a readjustment of 2%. That is what explains the growth in additional revenue forecast for subsequent years.

If we compare that to what we are collecting at the moment, we see that, in the public accounts for the financial years that ended last March 31, the federal government took in about $1.6 billion dollars in excise duty.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

That is exactly the problem, and my thanks to our senior official for explaining it. That is what the late Jacques Parizeau used to call an escalating tax, which operates much like a staircase. In other words, it goes up but it never goes down. It always goes up. It means an additional burden on taxpayers, the customers, but also on the companies with employees, like restaurants or licensed premises.

That is why the association that represents the manufacturers of alcoholic beverages was really unhappy following this announcement. Here is what its CEO said in a media release:

We are absolutely shocked and dismayed that the federal government has decided to saddle Canadian Spirits manufacturers with higher taxes at this time...

A little further into the release, he gets directly to the heart of the problem:

The budget proposal to automatically adjust federal excise duties to CPI is a return to the failed policies of the past. Between 1981 and 1986, annual automatic adjustments to alcohol excise duties resulted in massive job losses, and plant closures across the country.

I understand that we are not in a partisan arena. So I will ask a technical question in the hope of getting a technical answer. Has the Department of Finance evaluated the consequences this might have on manufacturers of alcoholic beverages and the businesses that sell them, like licenced premises and restaurants?

[Gervais Coulombe]

With the revenues projected for future years, given the very small increases proposed, there was no adjustment factor based on a drop in consumption of alcoholic products in Canada.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

The question was not so much about a drop in consumption as about the consequences this could have on the manufacturers and licensed vendors.

[Gervais Coulombe]

There are a number of parts to your question.

In terms of imported alcohol, excise duties generally apply in their entirety. What I mean by that is that a bottle of wine imported from France is going to be hit with excise duty at customs. For a 750 ml bottle, the customs duty will be about 47¢. By contrast, the same product made in Canada with 100% Canadian agricultural products is hit with no excise duty. So many of the products covered under the federal excise scheme are already exempt from excise duty in Canada.

In terms of beer, another product subject to excise duty, small producers pay less duty. Without going into details, I can tell you that, depending on the production volume in hectolitres, microbrewers find themselves paying greatly reduced rates of duty. Those rates will be subject to the future increases. That said, the exemption, or rather the reduced rate structure—I don’t like using the word “exemption”—is maintained in the government’s proposal.

Another part of your question touched on retail sales. In Canada, and most provinces, except Alberta, a monopoly exists; that is to say that the liquor control boards or corporations take care of the revenues. They play a major role in the way in which final prices for products are established. The impact of the measure will therefore depend on the way those organizations adjust to it all.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

In all sincerity, I really appreciate the quality of our guest’s reply. We really have gotten into a lot of the fine details.

However, it is a concern for manufacturers. Their profit margin has gone down over the years. Once it was 8.4%, now it is 4.3%. Competition plays a role, but the associated taxes, which are now actually becoming escalator taxes, also play a major role.

That is why the restaurateurs association said the following:

This inflationary approach to beverage alcohol taxes was tried unsuccessfully in the 80s and resulted in sales declines and job losses.... [O]ur future is at risk as is our ability to create jobs and spur economic growth.

When you create an escalator tax, as they are called, it has a direct effect not only on the people on the front lines, but also on the entire industry.

I quote the wine and spirit manufacturers association once more:

Higher excise taxes will reduce industry investments in our plants and brands, force a scaling back of innovation, depress sales, reduce our grains' purchases from Canadian farms, and lower our new export market development.

My sincere thanks to the witnesses who are here to give us precise explanations. But, in reality, this escalator tax, invented, created and imposed by the Liberal government, is going to have a negative effect on the Canadian economy.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Deltell.

Mr. Coulombe, go ahead.

[Gervais Coulombe]

Thank you, Mr. Chair.

I would like to add one tiny little technical detail.

Mr. Deltell, you mentioned a comparison with a particular adjustment mechanism for the previous excise duties that existed at the beginning of the 1980s. I would like to add a clarification. The automatic inflation mechanism that is being put in place by the government here is based on the general consumer price index. The one at the beginning of the 1980s applied only to alcoholic products. So, as a result, there was a kind of escalating, spiralling effect, so to speak.

That is not what is on the table here. The use of the consumer price index, as proposed in the bill, matches the model currently being used for tobacco products. It is also used in income tax matters to make sure that a number of minimum thresholds are maintained.

The particular feature of using fixed excise duty rates is that they are expressed in current dollars per litre. If you do not adjust them to take into account inflation over time, there is an actual reduction. Often, that reality is not seen in provinces with monopolies, with organizations like liquor corporations, because their profit margins are expressed in percentages.

Thank you.

[The Chair, Liberal, Wayne Easter]

Just before we turn to Ms. O'Connell, I do have a couple of questions on this area.

You said there is a real drop in the value of these taxes, but that's the minister's decision in any budget. If there is a real drop based on what departmental officials are coming forward with to the minister, the minister can—is it not correct?—impose or bring in a budget with a stated value of excises taxes to cover that.

We don't need the inflationary adjustment in order to accommodate that drop in value. The minister can make that decision at any time he so decides in a budget, can he not?

[Gervais Coulombe]

You're right in the sense that these are all political decisions, as the minister has the ability to propose to Parliament an automatic mechanism that makes those adjustments occur in the future. These are ultimately all political decisions.

[The Chair, Liberal, Wayne Easter]

I come from maybe a time that makes me think the ministers need to make these decisions and accept responsibility for them at the time.

The other question I have is this. We know that provinces in Canada certainly put this adjustment factor or inflation factor in the escalator. Can you name us some countries that do this, that have escalator clauses in their tax regimes for wine, beer, and alcohol as a regular or standard procedure, rather than their minister making the decision annually or whatever? Do any other countries do this?

[Gervais Coulombe]

I would like to check that information.

But what I can tell you is that there is probably nowhere in the world where there is federal taxation and a provincial distribution monopoly. That is very unique to Canada. I would be very cautious before making any generalization at all on federal excise duty in terms of any taxation rules used in unitary states.

Currently, in the United States and in a number of European countries, there are no automatic adjustment rules. Is that a good thing or a bad thing? Those are political decisions.

In the case of tobacco, for example, in recent years, all international organizations have recommended the establishment of mechanisms that allow for periodic revisions of excise duties.

As I was telling you earlier, writing that into the legislation so that it is done automatically, or using informal mechanisms are decisions made at a higher level than mine.

Thank you.

[The Chair, Liberal, Wayne Easter]

You can get back to us on that.

The other point I would raise on the escalator is whether or not there has there been any kind of analysis done by anyone on the implications for the Canadian grape industry of potential trade remedy actions that we might face when we handle imports differently than 100% Canadian wines. Has there been any analysis done in that area in terms of the escalator specifically?

[Gervais Coulombe]

To my knowledge, there has been no specific analysis done based on the presence of the escalator specifically. All the analysis was done as part of the overall proposed measure. As mentioned earlier in my presentation, a 2% increase that effectively resulted in about ¾ of a cent of additional excise revenues on a bottle of wine has not been deemed to potentially reduce any type of consumption or production patterns in Canada.

In respect to the grape industry, for instance, Canadian wine produced from 100% Canadian grapes continues to be fully capable of claiming the exemption, and there is no federal excise duty currently charged on this type of wine.

[The Chair, Liberal, Wayne Easter]

That's why I raised the question of trade remedies. I do think you need to look at that.

Ms. O'Connell.

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

Thank you, Mr. Chair.

Some of my questions have already been asked but I'm going to start by following up where you left off. In terms of the excise tax on alcohol and the escalator, you mentioned that for foreign imports, for example, approximately 46¢ would be charged for a 750-millilitre bottle. This is an escalator that will apply, arguably, forever. Are imports also subject to an escalator? I ask because if not, there will come a day when we would be paying a higher tax on alcohol here than on foreign imports. If there's an escalator only on one and not the other, at some point it would catch up.

[Gervais Coulombe]

The proposed excise duty rates apply equally to imports and domestic products subject to taxation. For instance, you do have some wine that is blended in Canada. These types of wine are blended from foreign and domestic products, meaning grapes. These wines are also subject to the increased excise duty according to the proposed measures. So there are no discrepancies in respect of these products over time.

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

Okay. Then I guess I'm confused about your earlier testimony talking about the 46¢ being charged on foreign imports, for example, a 750-millilitre bottle. If you are saying about the escalator that it there is a foreign blend, they would be subject to this tax, what then were you talking about earlier on the 46¢ foreign import tax? Is that in addition to....?

Could you clarify your testimony?

[Gervais Coulombe]

Basically, this is how it works. You have an excise duty. This excise duty is imposed under the Excise Act, 2001, in respect of wine produced and packaged in Canada. An equivalent duty is imposed under the customs tariff when the wine is imported at the border. This application of the duty applies only once. So, you could have bottled wine imported from Spain or Australia that arrives here in big containers, and because they are delivered to certain entities that further manufacture that product, the duty is suspended and will be imposed only at the time the bottle is packaged and remitted. It is very technical. There is one main agent. You have hundreds of people administering that at Canada Revenue Agency and Canada Border Services Agency for us, who are trying to spend it as we can take it.

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

That makes sense. Thank you.

I want to move on to the medical practitioners for persons with disabilities. This is a very good thing. Could someone please explain, through the chair, how many people they think this would allow to be certified now? What research was done? Do we anticipate there being a higher uptake for persons with disabilities, for example, in more rural or remote communities?

I know that Atlantic Canada, for example, was specifically concerned about this. I'd like to hear the rationale and how many people you think will now be able to access these benefits.

[Pierre LeBlanc, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance]

Thank you for the question.

What we could say is that the policy objective is to make it easier for individuals with severe disabilities to be assessed for purposes of the disability tax credit. As you mentioned, in many outlying rural regions, the nurse practitioner is often the first point of contact. We don't have a specific estimate of what the uptick or increase will be in eligibility for the disability tax credit.

We'll see how it plays out. Our sense is that for a good number of individuals, it might apply to them now, but they have to jump through more hoops and find a medical practitioner who is farther from them to get certified. That, in many cases, will make it easier for people, too. It's that reduction in time, and possibly costs, that will be of benefit to Canadians with disabilities.

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

Thank you.

I want to make sure I understand the tuition tax credit correctly. Previously, tax credits were applicable to post-secondary institutions, but this is now somewhat expanded to ensure that tuition fees for occupational skills courses are eligible. Am I understanding that difference correctly?