Finance Committee on May 15th, 2017

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Mr. Souter, you mentioned that you're one of the wineries that have different tools to finance your activities and whatnot. However, I imagine the market is rather efficient, and you're going to have to say that your profitability will go down because of these increases. Would that be correct?

[Murray Souter]

Yes, that would be correct. We are already fielding those questions right now. We're in the midst of a major expansion that is funded through raising capital in the public markets.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

If you have more options than the majority of wineries out there, then I imagine this will be even tougher for the small and medium-sized ones, particularly those that just got into the market. Unlike in Nova Scotia, where it could be $5,000 to $10,000 an acre, in the Okanagan we're looking at $110,000 to $120,000 an acre.

[Murray Souter]

In Niagara, it's up to $50,000 an acre. It does have an impact, obviously.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Again, the point by Mr. Sparkes earlier was that each acreage is going to be slightly different because of what a farmer has to make to be able to recoup the cost for the mortgage on it, and obviously that raises some issues with the CPI. That's another reason why it's probably not a good thing to link to the CPI right across the board.

I'm going to hand it over to Mr. Lobb.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Thanks very much.

My riding is Huron—Bruce, and we've had a number of breweries and some wineries come on board.

My private member's bill was on excise tax. When I talked to one of Mr. Morneau's staff about it, he said, “You know, you're lucky we don't raise the excise tax instead of lowering it.” I thought he was kind of kidding, but I guess it was true. I couldn't believe it when I heard that he was going to raise the tax. This is going back quite awhile ago.

These businesses face costs: the fire codes that they must meet, the rules and regulations, the effluent that comes from their facilities, and so many things. I know one of the breweries in my riding spent about $5 million, and they figure it probably cost them $2 million more to build it in rural Ontario than in the city.

Jan, could you talk about some of the massive costs—forget the taxes—of doing business here, and the red tape, let alone having to face an escalating excise tax? It's incredible to think about it.

[Jan Westcott]

There's no question that Canada is a complex market, and there are many, many rules around our different businesses that add to the cost of doing business. The one thing I would mention to the committee to keep in mind is that Canada, before all of this happened, already had the highest taxes on alcohol in the world—the highest. So someone suggesting that this is just a little bit more, when you already have the highest taxes in the world...?

Our biggest emerging competitors lately are in fact bourbon distilleries and straight whisky distilleries in the United States. They're not facing this kind of issue. They're not facing carbon taxes. They have free access right across the 50 U.S. states with no impediments, and if there are impediments, they get them sorted out very quickly.

While we're all celebrating Canada's 150th birthday, I would just mention that two of our brands, Wiser's this year marks 160 years of continuous production and sale, and next year, 2018, Canadian Club will be celebrating 160 years. We have a long proud history of making whisky in this country. I'd also mention, by the way, that a Canadian whisky was picked last year as the best whisky in the world by the Whisky Bible.

We know that we make these fantastic products. The single largest challenge facing the spirits business in Canada, because we operate in a global industry, is attracting investment to the Canadian marketplace and the Canadian business.

Imagine yourself as an investor. Where are you going to put your money? Are you going to put it into a business that every year faces an unceasing tax increase that you can't do anything about and it's going to take more and more money, or are you going to look for another opportunity? I think what we're going to see is people voting with their feet, across all of our businesses, not just the spirits business.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Before I turn to Mr. Ouellette, we're dealing with two excise taxes here: one is a 2% adjustment, and one is the inflation factor that some people call an escalator.

I take it that there doesn't seem to be a whole lot of concern about the 2%. What we're mainly talking about here is the policy going forward.

Is that correct?

[Carl Sparkes]

That's correct.

[Jan Westcott]

If I can offer a bit of clarification, the Department of Finance says it's 2% across the board and they want to be fair to everybody. The fact is, it's not 2% across the board, because they've also applied it to whisky sitting in the barrels that was made prior to 2006. On all of that product, thousand and thousands of barrels maturing, it's 7.8%. It is a massive increase. It's not just 2% on our business. A very substantial part of our business is being hit with a one-time 7.8% increase.

[The Chair, Liberal, Wayne Easter]

Can you explain how you get the 7.8% increase?

I listened to the discussion with Mr. Dusseault before, and how do you get to 7.8% on what's stored in barrels, some of it three years, some of it 10 years?

[Jan Westcott]

Historically, excise is a production tax. When it comes off the still, it's liable to pay the tax. In 2006, when the new rates were put in by the government at that time, it was for everything produced after July 1, 2006. Everything produced before that was already produced, so it wasn't liable to the new rate.

This budget breaks with tradition. It reaches back retroactively and grabs money from all that product that has already been produced and is aging in barrels. It is massive. The very heart of our business that is trying to appeal to the premium and super-premium tastes and demands of consumers is actually facing the highest increase.

All of that said, our concern remains the escalation that's being proposed every year.

[The Chair, Liberal, Wayne Easter]

I think that's a good point of clarification on the other percentage as well because I certainly didn't know that. I do think we need an explanation from Finance on that as well.

What would fix that? It was done in 2006 and didn't become a problem.

[Jan Westcott]

In 2006 the budget came out in March or April, and the date established for the new rate was July 1. This one happened the day after the budget and, as I said, reached back to a product that was already distilled and produced.

[The Chair, Liberal, Wayne Easter]

I have one other question before I go to Robert.

Is there a policy of having an escalator on excise taxes in any other country in the world that you know of?

[Jan Westcott]

Not in any modern, westernized economies that have a viable beverage alcohol business.

[Luke Harford]

If I could just add to that, Mr. Chair, the U.S. is a very important market for all of us. The United States does not have an index tied to its federal excise rate.

[The Chair, Liberal, Wayne Easter]

Okay, thank you.

Mr. Ouellette, you have five minutes.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much for coming here today.

I'm going to have a few more pointed questions for you.

One of the things I was reviewing was the health concerns related to alcohol consumption. I was reviewing two scientific articles. One is called “The Effectiveness of Tax Policy Interventions for Reducing Excessive Alcohol Consumption and Related Harm”. It's by Elder, Lawrence, and Fielding. It's in the American Journal of Preventive Medicine of February 2010. They state:

Nearly all studies, including those with different study designs, found that there was an inverse relationship between the tax or price of alcohol and indices of excessive drinking or alcohol-related health outcomes. Among studies restricted to underage populations, most found that increased taxes were also significantly associated with reduced consumption and alcohol-related harms.

Another study here in Canada looked at alcohol pricing and public health in Canada. It was by Stockwell—not Stockwell Day—from the University of Victoria. They recommended using the consumer price index—that was back in 2006—because they said there were grave health concerns related to alcohol consumption in Canada. There hadn't been a significant or any increase in the effective taxation of alcohol, meaning it had effectively become cheaper and cheaper for people to obtain alcohol.

What are your comments on the health concerns related to the consumption of alcohol?

[Jan Westcott]

Let me start. We all are industries that actively promote, and work very hard to promote, responsible consumption of our products. Generally speaking, the majority of people who use them in this country do so. That notwithstanding, Canada has evolved a lengthy series of policies that apply across the country. We have liquor boards, minimum age requirements, and minimum pricing in almost every province. There are legion efforts under way by everybody to minimize, to the greatest extent possible, the misuse and resulting harm that comes from our products.

People are human beings. Nobody is perfect. We all have weaknesses—I'm not sure what the right word is—and some people are susceptible. But to suggest that taxation alone...and I take issue with the studies. There are an equal number of studies saying that taxation is a blunt instrument and very ineffective at getting to the people who are experiencing issues with alcohol.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much, Mr. Westcott.

In budget 2017, we also look at cigarettes. The excise tax is going from $21.03 to $21.56, which is the actual effective charge for cigarettes. When I get into some greater detail looking at the excise tax for distilled alcohol, it's going from $11.696 to $11.930, which is about a 20- or 21-cent increase in retail, at sale. According to The Toronto Sun, it's a 5-cent increase for a case of 24 beers. This doesn't sound like a lot to someone like me who might enjoy a bit of alcohol once in a while.

When I look at the escalator, this actually reduces the long-term political questions related to it. For instance, if you're a business, you'd like to have a long-term, stable environment in which where you can predict how much something is going to cost in the long term. When you look at an escalator, it actually removes the politics from it, so you don't have a government that comes in and says they're going to increase it by this amount or reduce it by this amount, according to how much lobbying you're able to do. It says that every year, the excise will be aligned with the consumer price index, because everything increases in price in this country. The tax officials, who have to go out collecting from and monitoring the distilleries, make sure that this is actually occurring. This all costs money.

I am interested in one other, final thing before I'll let you go. I was reading something from the British Columbia Chamber of Commerce, which was looking at the federal excise tax review for distilled spirits. Apparently, there's actually a difference in the raw material, origin, and size requirements in duty rates. For beer, if you get the raw material from anywhere, there's a size requirement. It's tiered at $0.06 per litre. It's going up a little bit from last year. When you look at wine, if your raw materials, meaning your grapes, are produced in Canada, and.... I'm not sure of the term in English. It would be distilled, I guess?

[Jan Westcott]

Fermented.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Sorry, it's fermented in Canada. In fact, there actually is no duty rate related on all of that.

I was just wondering if you could comment on that.

Spirits, though, have a much higher price. I'm a little bit confused about the relationship of those and that tax policy there, if that's even changing.

[The Chair, Liberal, Wayne Easter]

Mr. Harford—

We'll hear from the two of you.

[Murray Souter]

I'm not sure where the question was in there because we started with tobacco and ended with wine.

On the issue of the excise tax for domestically produced 100% VQA wines, it was negotiated in 2006 that it would be excise exempt. The federal government brought that in at that time and it benefited the industry. The industry saw very strong growth, particularly in British Columbia, where they have a different regime in terms of the provincial legislation there. They saw a significant increase in business there.

ICB brands, which represent 75% of our domestic sales, do attract federal excise. They do pay excise, including the proportion that is domestically produced, so it's a significant part. We do pay the excise. However, the issue is that right now, we have a negotiated agreement with Europe with regards to the exemption of VQA wines from excise. They have gone on notice and said that, if we go ahead with the increased excise tax and the escalator, tying it to the CPI, they will challenge the exemption for VQA wines.

That will add several dollars to the price of one of my bottles of wine and literally put us out of business. We will not be able to compete. We're competing in a marketplace that has billion-dollar companies located in France, Italy, Spain, and the United States, which want our market. The LCBO is the largest buyer of spirits and alcohol in the world, and those companies really want our business. They have 70% of the market and they want more. They've already told us that they will go up against us and they will file a trade complaint in that regard.