Evidence of meeting #90 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was industry.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Luke Harford  President, Beer Canada
Murray Souter  Board Member, Canadian Vintners Association
Carl Sparkes  President and Chief Executive Officer, Devonian Coast Wineries
Joyce Reynolds  Executive Vice-President, Government Affairs, Restaurants Canada
Jan Westcott  President and Chief Executive Officer, Spirits Canada
Frank Rider  Chairman of the Board, Canadian Association of Mutual Insurance Companies
Normand Lafrenière  President, Canadian Association of Mutual Insurance Companies
Nicholas Rivers  Associate Professor, University of Ottawa, As an Individual
Marc André Way  President, Canadian Taxi Association
François Pepin  President of the Council, Transport 2000 Québec
Maëlle Plouganou  Secretary of the Board, Transport 2000 Québec
Louis Marcotte  Director General, International Business Development, Investment and Innovation, Department of Foreign Affairs, Trade and Development
Roger Ermuth  Assistant Comptroller General, Financial Management Sector, Office of the Comptroller General, Treasury Board Secretariat

4:10 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you both.

We turn now to Mr. Barlow.

4:10 p.m.

Conservative

John Barlow Conservative Foothills, AB

Thank you very much, Mr. Chair.

I appreciate the opportunity to speak today.

Thank you very much to our witnesses as well for bringing forward some very eye-opening testimony.

Mr. Sparkes, you kind of mentioned something briefly, and I'm only going to ask our witnesses to touch on it a little bit more. My riding is in rural southwest Alberta. Unfortunately, we don't have any wineries, but we have a couple of meateries that have been started, and I do have six craft breweries that are under construction. I have two distilleries under construction.

These have brought amazing new economic opportunities to rural communities. You touched a bit on what the impact has been in Nova Scotia. These are economic opportunities in these rural communities that would just not have been there. They're jobs. They're filling up real estate, but they're also bringing tourism to these communities.

Luke, I'm going to ask you this first. Jan talked a little bit about it, but we're seeing this great growth in the beer industry across Canada. We tried this tax regime in the 1980s and it was a disaster for the spirits industry. Jan and I have talked about that before. Can you maybe elaborate a little bit on what the impact was on the craft beer or beer industry and what you see as the possible ramifications of this escalator tax on the beer industry in Canada, especially for the craft brewers?

May 15th, 2017 / 4:10 p.m.

President, Beer Canada

Luke Harford

I want to emphasize that excise is a manufacturer's tax. It is the obligation of the producer to pay that tax once the product is produced. So if excise increases every year, it will increase the cost of a brewer being in business. That leaves less money for employees, employee training, trucks, brands, and development in any kind of way.

Every producer will try, as the government anticipates, to try to recover by pushing that tax increase onto the consumer via higher prices. Consumers react as they react to higher prices.

The brewers, especially the small producers, live in a very competitive market place. They don't get to set the price. The price is dictated to them as it is in everybody else's sector, and we compete against wine and spirits. They are not always going to be able to push that price onto their consumers. Consumers are not always going to pay that price, which means you have raised the costs of producers, and that will leave less money on the table for them to invest in their business.

4:10 p.m.

Conservative

John Barlow Conservative Foothills, AB

When I look at this decision in the budget, I see that alcohol was not included in a Canadian free trade agreement. It was exempt from that agreement, so not only was the opportunity to allow free trade across Canada to open up new markets for you producers denied, but now you're also getting this additional tax. It's almost like a double whammy in the last few months.

How are both of those things going to impact your industry right now? It seems like we had two opportunities for our beer, spirits, and wine producers in Canada, and both times in my opinion the Liberal government failed them.

Can you talk a bit about what both of these missed opportunities may mean for your industry?

4:10 p.m.

President, Beer Canada

Luke Harford

In terms of the free trade agreement, as we have said in our public remarks on this, we understand that it's complex, as is excise. We're happy to be part of the process that will go forward in trying to open up the trade environment in Canada. On the trade file, what concerns us and what makes it very strange is that the government would at this time impose something like the escalator. We have a U.S. administration trying to repatriate jobs, repatriate manufacturing capacity, and making trade more difficult for Canadian producers.

At this time, when there's that level of uncertainty affecting big, medium, and small brewers, we're now going to add to their problems by increasing excise every year.

4:15 p.m.

President and Chief Executive Officer, Devonian Coast Wineries

Carl Sparkes

I would like to comment on that as well.

One of the challenges, as my colleague mentioned, is the new U.S. administration. It is focusing on tearing up NAFTA, or renegotiating it. But three industries have been singled out: dairy, softwood lumber, and wine. The United States covets market share in Canada. We are among the fastest growing wine markets in the world, and as a destination for U.S. wine, it's a big deal.

The problem is that within Canada, we get into a trade negotiation. Softwood lumber is about $19 billion, I believe. The dairy industry here is $21 billion. Our industry on a revenue basis, while we punch above our weight class—we're $9 billion in terms of economic impact—is slightly under $1.5 billion in revenue.

As an industry going into this fight, who's going to be sacrificed? We could be a pawn in this whole negotiation with the United States, and that scares the you know what out of us.

4:15 p.m.

President and Chief Executive Officer, Spirits Canada

Jan Westcott

This is going to make it even more difficult. As people have alluded to, we're facing a series of challenges on the trade front and on the internal agreement. As you said, alcohol is left out. We're seeing an increasing balkanization of the country. You have to remember that, as Canadian businesses, we need a strong, vibrant, domestic market, because the people who we're competing with come from much larger companies, which gives them huge economies of scale and opportunities. If we can't have free trade inside Canada, we're shooting ourselves in the foot.

We're optimistic. We hope that the structure that's been set up to look at alcohol will pay some dividends, but at the moment it's getting worse and worse as the country continues to put barriers in place to products from one province to another province.

We're starting to see the emergence of small distillers. That's a great thing, right? Innovation, as you say, economic development and investment, by those small players, is a great thing. It doesn't matter whether they're a vinery, a brewery, or a distillery, because they will be the hardest hit by government reaching in and taking the money first. So, as I said, we are contending with all different kinds of challenges right now.

We have been big supporters of CETA. This is happening on the eve of CETA, which is critically important to Canada, because it is the first time that Canada will have a distinct tariff advantage over the United States in a huge market. So here we are going into this, trying to finalize this when some are balking about it in Europe, and we're likely going to have a trade fight because of it, and you could not have worse timing. There are a number of factors that we're all trying to contend with. Stripping investment out of the business—it doesn't matter which one—is going to be extremely counterproductive.

As I said, we had this experience in the 1980s. Before we had indexation in the 1980s, Canada was the second-largest producer and supplier of whisky to the world—second only to scotch. That last decade of the eighties is when we took our eye off the international market and stopped investing, and we're now number four and are becoming a distant fourth. More pressure on us isn't going to turn this around.

4:15 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, John.

Mr. Dusseault.

4:15 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you, Mr. Chair.

I thank the witnesses for being with us today.

It is rare that we see such unanimity among a group. I hope this will affect our future deliberations.

Just before question period today, the Minister of Finance admitted consulting the BlackRock firm about the creation of the Infrastructure Bank. That firm, which was extensively consulted before the creation of this bank, will certainly profit from it.

In the same vein, I would like to know if some of you were consulted before changes were announced in the context of Bill C-44.

4:20 p.m.

Board Member, Canadian Vintners Association

Murray Souter

I think I can probably speak for everyone. I don't think anybody was consulted.

4:20 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you.

This shows that there is a double standard when it comes to consultation. In certain cases, some parties were consulted repeatedly, whereas others were not consulted at all. I hope that as for other aspects of Bill C-44, the government will be open to amendments to part 3.

My first question concerns beer, and is addressed to Mr. Harford. You mentioned the possibility that it may be unconstitutional to increase taxes year after year without the authorization of Parliament. In fact, Parliament's authorization is present today in Bill C-44, but it will not be there in the years to come.

Concerning that aspect of the proposal, do you have legal or constitutional advice you could provide to the committee?

4:20 p.m.

President, Beer Canada

Luke Harford

No, I don't. I looked at it strictly from the principle of Parliament and the elected people in Parliament to protect Canadians from taxation without representation. I did not seek a legal opinion on this.

4:20 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you.

This is a question the committee could discuss later.

My next question is about spirits, a topic I have examined, and which I know a little about, consequently. According to what I understood, excise duties are collected at the end of the process, so when the product leaves the business.

Is that correct?

4:20 p.m.

President and Chief Executive Officer, Spirits Canada

Jan Westcott

Yes, it's a production tax. As soon as the alcohol comes off a still, it's liable for tax. It goes into bond, because, as one of my colleagues was saying, some of our businesses are kind of crazy.

We're mostly in the whiskey business and you have to age whiskey in Canada. The legal minimum is three years. Most of it is 5, 7, 10, or 15 years, increasing as the consumer moves up the quality scale. With premium whiskeys, the average is 8 to 15 years.

When it comes out of maturation, you pay the excise. It's a production tax right at the very first. Other than the producer's own cost to buy the grain and to employ the people to run the distillery, it's the first external cost applied on the product.

4:20 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Fine.

So the excise tax would be levied on a product that is aged for a minimum of three years, and for much longer in other cases. The excise tax would be paid when the product leaves the still, and not 10 years later when it is sold. That tax would be paid when the product leaves the warehouse and is sent to a retailer?

4:20 p.m.

President and Chief Executive Officer, Spirits Canada

Jan Westcott

Excise is paid. It goes into bond. It's held in bond and you can't do anything with it. Excise is paid when it comes out of bond. As it comes out of the warehouse, out of the barrel for blending and packaging, excise is paid at that point.

The producer has seen no revenue but has incurred a tremendous amount of cost: (a) to make it, and (b) to hold it for a long period of time. The producer has seen no revenue but has paid excise.

4:20 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you for the clarification.

Mr. Sparkes, currently the majority of profits from wine production are reinvested directly into the business to allow it to grow. Is that correct? Have you evaluated the negative impact over time of a decrease in the profit margin on reinvestments in Canadian wine businesses?

4:25 p.m.

President and Chief Executive Officer, Devonian Coast Wineries

Carl Sparkes

The impact on wineries of my size and larger—certainly in the top 10 wineries in the country—would be profound. Much of it, as I mentioned earlier, relates to our overall financial structure, including our lenders. It would have a serious negative impact on our bottom line. Mine would be cut in half. That's serious.

However, I think of more concern to this committee would be the other 690 wineries in the country that are smaller, many of whom don't have a bottom line. They have a job.

I grew up on a farm. There was no profit. It was basically what we earned to live on.

These are farms. Chairman Easter knows all about the farm industry in Atlantic Canada; it's on a shoestring. Without question, at the end of the day, we will be punishing and harming a lot of small farmers in this country with the implementation of this escalator.

4:25 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Thank you.

4:25 p.m.

Liberal

The Chair Liberal Wayne Easter

Pierre, there is time for a very quick question, if you have one.

4:25 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

You think that European wine producers are going to challenge this at the WTO. If I understood you correctly, there is no doubt that that is what will happen when these new excise duties are implemented. I put this question to the official from the Department of Finance, but he declined to comment.

Mr. Souter, can you confirm that there is no doubt in your mind that following this increase in excise duties, there will be a challenge at the WTO?

4:25 p.m.

Board Member, Canadian Vintners Association

Murray Souter

Have they told us that they're going to do it? No, not at this point, but all the indications are that European and U.S. wineries particularly will be challenging us on this issue.

It hits them two ways. It hits them both on the excise, because they've lost the tariff; and it also benefits us because their prices will increase whereas the domestic VQA wines, which are a much smaller market, won't.

We anticipate that they will challenge it. They've indicated in private conversations with people recently that they will challenge it at the WTO, and why wouldn't they? We're a large market.

4:25 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, both.

Mr. Morrissey, welcome to the finance committee. The floor is yours.

4:25 p.m.

Liberal

Bobby Morrissey Liberal Egmont, PE

Thank you, Mr. Chair.

Mr. Sparkes, I'm not sure if this is a public statistic, but in various industry clusters like dairy processing, a very efficient operation operates with about 1.8% net operating profit. You looked at restaurants and I believe you said theirs is 4.3%. What is that number within the winery, just at the winery level, not the farm level? I'm curious. Is that a public number? If it's something confidential, then—

4:25 p.m.

President and Chief Executive Officer, Devonian Coast Wineries

Carl Sparkes

No, it's for publicly traded companies. Obviously it is public. I come from 25 years of running food companies in Canada and the United States. Coming in as an investor into the wine industry, the actual financial ratios were not that different. The margins at a gross profit level are probably lower. It's not that far off, under 5% at a net level in many cases. Once again, it is the smaller producer who doesn't really have a percentage because there are jobs. I don't know what the number would be, but there are a lot of jobs that are actually directly related to owner-operators.