Finance Committee on Feb. 4th, 2020

[Dr. Trevin Stratton]

The de minimis issue, when it came to the negotiation of USMCA, was certainly a concern for the chamber. We are at a point right now where, in terms of a lot of the uncertainty it has created in the national economy, getting rid of that cost and the negative impact on our economy is something we really need to move forward with.

That's why we are encouraging the government to move forward with a swift ratification and implementation of USMCA. Certainly it's not perfect. We have come out and said that it's NAFTA 0.8. It's not necessarily 2.0, but when it comes to the uncertainty it's created in our economy and what will help enhance our growth and actually help us get to growth potential looking forward to 2020, the timely ratification and implementation of that act is going to be very important.

[The Chair, Liberal, Wayne Easter]

We're out of time, Brian.

We're turning to Mr. Cumming and then going back to Mr. McLeod.

Keep in mind that we have one witness on video conference here, in case you have questions for him as well.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you.

Mr. Stratton, often we will hear from chambers that are talking about debt levels. I'd just like to see what the chamber's position is on current debt levels and this anchor of debt-to-GDP. Are there any concerns that with current spending practices Canada could render itself uncompetitive because of our tax levels?

[Dr. Trevin Stratton]

Absolutely. We've been advocating for a plan with concrete timelines to get the federal books back to balance.

I certainly understand the argument of debt-to-GDP as a fiscal anchor; I think it's often misunderstood. A lot of the arguments come from a fellow economist, Olivier Blanchard, who used to be the chief economist of the IMF. When it comes to the argument that deficits are not always a concern, I think his argument is that cyclical deficits are okay, and that if there's a downturn, engaging in counter-cyclical spending and running a deficit can be useful in stopping downturns from becoming as bad as they used to be in the Great Depression and in the panics in the 19th century.

But one of the issues with our current fiscal situation is that we have a structural deficit, which will impact our ability to run a cyclical deficit in the event of a downturn. I certainly understand the argument that when interest rates are low, it's a good time to borrow, but the economy doesn't exist in a vacuum, and interest rates aren't always low.

Similarly, if there's a downturn, then it's likely that governments will probably spend more, particularly since we don't have that much monetary policy room to cut interest rates even further, which can produce inflation. To get inflation under control, you need to raise interest rates. When that happens, what happens to our public sector debt? What happens to household debt? I think it's very important when we're talking about the fiscal situation and debt-to-GDP to think of it in a temporal context.

[James Cumming, Conservative, Edmonton Centre, AB]

You've talked a bit about competitiveness in the regulatory environment. How aggressive do you think we should be on reducing regulations? Often, you hear “one for one”. Should it be two for one? Also, along with that, with this compliance regulation, with the variety of things with CRA, can you say how big a burden that is for business right now?

[Dr. Trevin Stratton]

It's a huge burden. Once again, there's an IMF study that says it's a 4% hit on GDP per capita in Canada.

It's also potentially even a low-cost or no-cost way to improve productivity and generate economic growth in this country. The business community was generally receptive of the initiative taken in the fall economic statement in 2018, but the issue is that the number of regulations that pose an undue burden on Canadian business still has increased since that point.

One of the promises made at that point was to include economic mandates and regulator mandates to look at the competitiveness of the different regulations and the impact on the economy. The Canadian business community would certainly welcome that. A two-for-one rule is certainly what we're looking at, too. Considering that the number of regulations that place a burden on business has even increased since some of those promises were made, implementing a two-for-one rule would help reduce those massive regulations.

[The Chair, Liberal, Wayne Easter]

Mr. Morantz, I believe you had a supplementary.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Yes. I see Mr. Goodridge, from my hometown of Winnipeg, sitting there.

How are things?

[Ken Goodridge]

A little cold right now.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Are you going to the Jets game tonight?

[Ken Goodridge]

No, I'm going next week.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

By the way, thank you for your presentation.

In the last session of Parliament, a number of different tax changes took place that were fairly fundamental in terms of how our tax system operates vis-à-vis small business. I'm referring to the restrictions on what was called “dividend sprinkling”, or splitting income through the use of dividends, and the new rules on passive income. I want to get what your experience is on the ground there with your firm's clientele in terms of how they're coping with that burden.

[Ken Goodridge]

We're still trying to cope with it. We have a number of clients who are affected by this. As you're probably aware, a great many taxpayers set up family trusts for the purpose of dividend sprinkling, which was considered legitimate at the time. It's often part of an estate freeze. What's happened is that we've simply wound up a lot of those trusts, because they're not required anymore.

The tax on split income, which is really what this is all about, has created a lot of extra work, mostly just trying to get a handle on all of it and trying to figure out everything that it affects, because it was such a comprehensive change.

We have trusts that are being wound down. We're working on making sure that we can still take advantage of the capital gains exemption, and things like that. It's hard to really describe all of it because it has had a major effect on a number of clients. Our clientele is primarily small business owners, Canadian-controlled private corporations, professionals. Many of our clients have been affected by this.

As I said, we're still struggling to cope with all of it. It affects almost all of our clients in one form or another.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chairman. Thank you to all the presenters, and thank you for the submissions you've made.

I wanted to talk a little about the Chamber of Commerce submission that was made to our committee, in particular the attention that was paid to the infrastructure needs of northerners. I think everybody knows that the north is on the front lines of climate change. There's a very urgent need for infrastructure that meets both our current and future landscape.

Your recommendation proposes a new northern infrastructure fund, in addition to both a pan-territorial infrastructure strategy and an all-season road network strategy, all of which I would love to see in budget 2020. I want to ask a couple of questions, just to get some more detail on what your thinking is.

First of all, how do you envision the structure of these new funds and strategies? What role does the federal government need to play?

[Aaron Henry, Senior Director, Natural Resources and Sustainability, Canadian Chamber of Commerce]

Overall, when we're looking at a strategy, we would like to see something similar, probably, to the way the Canada Infrastructure Bank would be guided. That is something we're also looking for, a strategy that would be comprehensive, that would look towards opportunities to actually create more trade-enabling infrastructure. As a caveat to that, we would probably also be looking more towards resiliency infrastructure as well.

When we think about northern development, we see a lot of opportunities. There's an opportunity in terms of climate change mitigation, well in advance. As we try to respond to the transition to a global economy, sort of transition to a lower-carbon economy, there's certainly also an opportunity to pair that infrastructure development with further support of mining in minerals, especially when it comes to the minerals and resources that are going to be key to the transition to a lower-carbon economy, from precious metals and onward.

Increasingly, as well, there are opportunities for those linkages to be used to get those communities off diesel, which is often their primary power source. In terms of net emissions reductions for Canada's overall emissions, that isn't huge, but what is huge is bringing down the costs for businesses to operate in northern communities, as well as creating the conditions for more stable fibre optic infrastructure. That would be part of that infrastructure process, to make sure that our northern and remote communities are digitally connected. That is going to be key to participating in the global economy as it matures.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you. I think you'll hear the Northwest Territories Chamber of Commerce and NWT & Nunavut Chamber of Mines both echo what you're talking about.

When we talk about the north and the barriers for development, infrastructure is the biggest one. It costs a lot of money to do business in the north.

What kinds of projects do you think the northern infrastructure fund should support? You mentioned a few of them. Should it be strictly transportation, energy, housing, telecommunications? Maybe you could narrow it down a little.

[Aaron Henry]

Of course. I think we could probably focus on three key buckets. On the one hand, the infrastructure to make sure that those communities are connected, both physically and digitally, should be a key investment strategy. At the same time, we could think about long-term investments in greater resiliency.

I think we could think about that in two parts. On the one hand, there is the concern of ensuring that communities are well equipped for climate change resiliency, but the other side is to actually to make them energy-resilient. I think that is the key portion of investment, because in many respects when we talk about, for instance, greater connected communities, when we talk about making those communities drivers of economic growth, the key ingredient is in fact reliable, cheap and clean energy.

That is something that these infrastructure projects certainly could support, especially when it comes to longer-term strategic investments, from decisions around transmission infrastructure to SMRs. There's a whole series of options on the table that we could grab at, so I think that should probably be the overall focus that knits things together.

[The Chair, Liberal, Wayne Easter]

We'll go over to Mr. Poilievre, and then we'll close with Ms. Dzerowicz.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much. My question is for Mr. Stratton with the Chamber of Commerce.

The government has increased a number of input taxes on businesses, most notably the carbon and payroll tax increases. Let's start with the carbon tax. The government is fond of saying that the tax won't drive industry out of the country because there is an output-based pricing system, which was meant to largely exempt price-taking internationally competitive industries from the carbon tax and replace it with a regulatory regime.

The problem with that is that there are many businesses that do not qualify for the output-based pricing system; in other words, they have to pay the tax. Many of those same businesses cannot pass the price on to their customers because the price is internationally set.

I think, for example, of our farmers. They have to pay the tax on drying their grains. They don't pay it on their tractors and other on-farm equipment, which is exempt through purple fuels, but for example, drying and off-farm transportation is taxed. Now the commodities that they are delivering are internationally priced, so they can't simply pass the price of a higher commodity on to the consumer. There are countless other industries that are in the same position: no exemption, no ability to pass the price on to customers and therefore a competitive disadvantage.

There has been no compensating tax relief for those businesses. Can you comment on the impact of the tax on those specific industries and businesses that can neither get an exemption nor pass the extra costs on to their consumers?

[Dr. Trevin Stratton]

Maybe what I'll do is answer that in broader strokes, and my colleague, Mr. Henry, can respond more specifically to what you're asking about.

I will start by saying that the Canadian Chamber of Commerce has supported a carbon pricing regime for almost a decade now, but it has to be properly implemented. One of the reasons why the business community has favoured this is that it's a market mechanism that provides flexibility for businesses to meet their emissions targets with whatever works with their business model.

When we are layering some of these other regulatory aspects on top of carbon pricing, that reduces that flexibility, and businesses, no matter what sector—in this instance, agriculture or farming—might not be able to target exactly what will work best with their business model. We have been talking about the increased costs of doing business in pursuing both of these avenues, and also the necessity to recycle the revenue that's gained from carbon pricing for businesses to be able to transform.

I'm not sure if you have anything to add to that.

[Pierre Poilievre, Conservative, Carleton, ON]

You'll have to be quick, because we're very short on time.

[Aaron Henry]

Very quickly, I think that, yes, we have recognized this and we have actually kind of proposed here what we think is a solution. It's a solution that received 90% support from our AGM, and it's ultimately to ensure that there are better mechanisms in place with carbon pricing that allow that revenue to be recycled, which ultimately means that your exposure to the carbon tax needs to be proportional to the actual resources you have to avoid that tax. That is something we'd like to see the government work on.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Next, I'll go over to the Automobile Dealers Association.

In my constituency, I have a marina that sells luxury vessels, and they say that this tax will not reduce sales of those vessels; it will just shift the sales out of Canada. In some cases, vessels like these can be purchased out of the country and kept out of the country, for wealthy individuals who can afford these kinds of things. I'm not familiar with it myself. They can simply purchase a fancy boat in a foreign jurisdiction and leave it there. When they go on vacation, they have access to it and therefore they won't be taxed on it. They'll avoid it, but the domestic vendor, in this case my marina, will lose millions of dollars in business.

Do you think there's a chance that this will simply shift business outside of the country for luxury items like pleasure craft and other items that will be taxed in the proposal?

[Tim Reuss]

In our industry, we've seen exactly that happen in B.C., with customers buying and registering in their secondary residence in Arizona, Florida, California or wherever that might be and/or finding a way to buy and register the vehicle in the next province over, which is Alberta, or buying used vehicles. We definitely have seen that effect in our sector with the B.C. example.

I would refer you to the example in the U.S. in 1990 and 1992. You saw the exact same thing happening there, with people either delaying purchasing decisions or taking other avenues. What we're most concerned about are the jobs that would be affected in our sector. If you're a luxury dealer who has specialized in that segment, all of a sudden 100% of your vehicle sales are affected by this luxury tax. If they're based in B.C., quite a few of our members would be facing the decision of whether to close down the dealership that they have invested millions of dollars in over the last years to get up and running and get imaged the way the brands want it. For them, this tax affects 100% of their business.

Even though the overall market might not be as large for some of our members, it's 100% of their business.