International Trade Committee on Nov. 6th, 2017

[The Chair, Liberal, Mark Eyking]

I call the meeting to order.

Good afternoon. Welcome, everyone, to the Standing Committee on International Trade. We are continuing our study on progressive Canadian enterprises and small and medium-sized enterprises through e-commerce.

Sorry for our delay, but today is a very special day in Parliament. We are celebrating 150 years of Parliament being on the Hill, so we had some good speeches in the House.

Without further ado, we're going to continue with our study. This is our final meeting on e-commerce.

With us today as witnesses are the Business Development Bank of Canada, the Canada Post Corporation, Canadians for Tax Fairness, and Export Development Canada.

Folks, in case you're coming to committee for the first time, we'd like you to keep your presentations to five minutes or under, if you can, so we can have lots of dialogue with the MPs afterwards.

Without further ado, we're going to start with the Business Development Bank of Canada. We have Shannon Glenn, assistant vice-president for government relations.

Go ahead, Shannon. You have the floor.

[Shannon Glenn, Assistant Vice-President, Government Relations, Business Development Bank of Canada]

Thank you very much, Mr. Chair.

Good afternoon. It's a pleasure to be here. My name is Shannon Glenn, and I am assistant vice-president of government relations at the Business Development Bank of Canada, or BDC.

I'd like to start with a brief overview of the bank, after which I'll address the subject of the committee's study.

We are the only bank dedicated exclusively to entrepreneurs, and we are a financially sustainable crown corporation that does not rely on Canadian taxpayers. We work closely with 50,000 entrepreneurs operating in a range of sectors across the Canadian economy, and we provide support in the forms of loans, investments, and advice. We do not provide grants or subsidies; rather, we operate on commercial terms and support creditworthy businesses for viable projects.

E-commerce is one of the most powerful digital technologies and is transforming the economy by creating new online markets. In fact, we have recently released a study on emerging trends shaping the Canadian business landscape. Our study highlighted the rise of e-commerce as an important trend.

The growth of e-commerce presents an excellent opportunity for Canadian companies to access a new world of competition. For many businesses, using technology to connect and engage with customers is no longer optional. The reality is that Internet and mobile devices are transforming the way consumers search for new products, get recommendations, interact with companies, and make payments.

Our chief economist, Pierre Cléroux, is projecting that retail e-commerce sales will double to $56 billion by 2020, in large part from consumers living in an increasingly hyperconnected, high-speed world. Consequently, this means that any small shop can actually become a micromultinational, if you will, as low-cost e-commerce apps now allow any small enterprise to sell worldwide.

These findings are consistent with a growth strategy recommended in a 2015 BDC study, which explored the challenges faced by SMEs and recommended implementing an e-commerce strategy to target new markets and take opportunities previously only available to larger companies.

I'd like to take a moment to share a story about a company called From Rachel, which is a Montreal-based business founded by Carolyne Parent, Alyeska Guillaud, and Mélanie Heyberger in 2014. They provide an online subscription service offering great-looking, high-quality stockings to women who sign up to receive stockings every two, three, or more months.

Despite what seemed like a good idea, they experienced slow sales growth. To address this, they changed strategies. They conducted surveys and focus groups to identify how From Rachel could improve its customer experience. They realized they were sending out the same style of stockings each time, and that women actually wanted recommendations and a selection personalized to their tastes and needs. This proved to be a major turning point.

They developed an online questionnaire to identify customer preferences, and sales took off. Since then, they've quadrupled their sales each year. They have been featured on the French version of Dragons' Den and are now exploring plans to expand into the U.S.

This example demonstrates that e-commerce presents new opportunities for small companies to access international markets far more easily and cheaply than ever before.

However, these advantages are accompanied by some unique challenges. Consumers are approaching companies armed with more information than ever before, as the borderless nature of e-commerce is increasing the speed and intensity of competition. Also, with less than one-quarter of businesses with fewer than 20 employees currently using e-commerce platforms, our small enterprises have some catching up to do when it comes to digital technology adoption.

For these reasons, we have focused on building capacity through advice for our clients. We have a number of recommendations, which I can review in questions.

To conclude, we want more companies like From Rachel and we stand ready to support them to achieve their goals. Through its offerings, BDC continues to increase support for smaller firms in becoming more competitive globally, encouraging them to pursue digital technology adoption so that they can capitalize on the opportunities that e-commerce presents.

Thank you very much for taking the time. I'm happy to take questions.

[The Chair, Liberal, Mark Eyking]

Thank you very much, Ms. Glenn.

We're going to the Canada Post Corporation. We have Mr. Hart, vice-president, parcels.

Go ahead, sir.

[Rod Hart, Vice-President, Parcels, Canada Post Corporation]

Thank you, Mr. Chair.

I'm pleased to have this opportunity to speak to Canada Post's role in enabling retailers to succeed in e-commerce. I'm joined by Dennis Jarvis, general manager of international product management at Canada Post.

First, here's some background. In 2015 Canada Post became the country's number-one parcel company, a position we still hold. We chose e-commerce as our growth strategy back in 2011. Within five years, we grew our annual parcels revenue by $521 million. It reached $1.74 billion in 2016, and we expect to exceed $2 billion at the end of this year. We are a vital part of the e-commerce ecosystem.

We expect to see much more growth in e-commerce, both domestic and international. Canadian retailers lag both the U.S. and the U.K. in e-commerce sales as a percentage of total sales. The research firm eMarketer forecast that 10% of Canadian retail sales will be online in 2020, but the U.S. figure is 12.5% in 2020, and the U.K. is even higher than that.

Canada is also behind as an e-commerce exporter. Research by the International Post Corporation, or IPC, reveals that only 2% of global online shoppers bought from Canada, while 67% bought from the U.S. The IPC also says that Canada's biggest e-commerce customers by far are the U.S., which accounts for 42% of exports by dollar value, and China, at 27%. Next come Australia at 4% and France and the U.K. at 3%.

There's an enormous opportunity for Canadian retailers to sell into foreign markets. For example, a recent Ipsos study found that 72% of U.S. consumers are open to purchasing from Canada, but only 20% have done so.

By adopting a global perspective, entrepreneurs and innovators can encourage the development of uniquely Canadian offerings and sell more of them to the world. However, the global opportunity is not the same for everyone. If your offer is uniquely Canadian, you have an opportunity. That said, Canadian businesses face many time-consuming challenges and may view exporting as complex. It is one more item on a long list of issues they need to address.

Let me speak to how we enable e-commerce. We are more than a delivery company; we are a critical enabler of e-commerce. We have helped small e-commerce start-ups grow out of their garages and become multi-million-dollar enterprises exporting to the U.S. We are interconnected with e-commerce platforms such as Shopify, Magento, and WooCommerce, whose software powers e-commerce. We integrated our shipping and delivery tools into their platforms to help merchants operate effectively and ship abroad. We partner with them to educate the market.

In 2012, we invited retails' brightest lights to shine at the first Canada Post E-Commerce Innovation Awards. This annual event helps us identify the rising stars in the industry; then we help them grow. We're an active partner, an enabler, a catalyst.

We also survey thousands of Canada's online shoppers to understand their evolving needs and preferences. We share our findings and insights with retailers in white papers, reports, and blogs on canadapost.ca. Our content helps them make better business decisions and improve their operations.

We also cross the country to industry conferences and partner conferences and host our own events. We've partnered with the e-commerce marketplaces eBay, Etsy, and Paypal to make shipping easier for merchants on these platforms. We've partnered with industry associations such as the Retail Council of Canada, and together we offer ongoing education.

Our Solutions for Small Business program saves about 530,000 members time and money as they ship orders, market their business, and run their online store.

We also work with international postal associations and in bilateral partnerships to better enable shipping services for e-commerce across our border.

A stronger e-commerce sector means a stronger Canada Post and a stronger Canada. For these reasons, we are committed to working with Canadian entrepreneurs and retailers to help them launch businesses, grow, innovate, and succeed in Canada and abroad.

In their early years, small and medium-sized enterprises tend to focus on the Canadian market. Exporting is a bit more challenging. They walk before they run. We help them. To run, and run well, they need more current and relevant trade data that would help them identify the export opportunities. They need to leverage resources, solutions, and tools to effectively take advantage of those opportunities. They could also benefit from more help to promote their brands abroad.

We hope this review has helped identify some of the opportunities and challenges. We would welcome your questions.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Hart.

I would also like to recognize with you today Mr. Dennis Jarvis, general manager for international product management. Thank you for coming, sir.

We are going to move over to Canadians for Tax Fairness. We have Mr. Howlett, the executive director.

Go ahead, sir. You have the floor.

[Dennis Howlett, Executive Director, Canadians for Tax Fairness]

Thank you very much for this opportunity to meet with you.

My main message is that Canadian e-commerce companies face a huge competitive disadvantage because their big foreign-based competitors are able to compete in the Canadian market without facing any taxes in terms of GST or corporate profit taxes. E-commerce companies, particularly big ones like Netflix, Google, Amazon, Facebook, Uber, and Airbnb, are capturing a huge and growing share of the Canadian market, but pay little or no taxes. They have been exempted from paying taxes by the Canada Revenue Agency because they have no physical presence in Canada and therefore are deemed not to be carrying on business in Canada. This policy is outdated.

You can't talk about how the government can support Canadian business to be able to compete and grow through electronic commerce unless you address the need to level the playing field. The foreign-based e-commerce sector now has revenues of more than $20 billion a year from sales in Canada. Just Google and Facebook together capture 64% of all Internet advertising dollars spent in Canada, over $2.4 billion. Internet advertising is growing rapidly and now captures 34% of all ad spending, compared to 30% for television, 13% for daily newspapers, and only 14% for radio. Foreign e-commerce companies are squeezing out many Canadian media companies, taxi services, hotels, and retailers, including many small businesses. Good jobs are being lost. Canadian companies are losing, because of unfair competition, to foreign companies that pay little or no taxes.

The European Union, New Zealand, Australia, Norway, South Korea, Japan, Switzerland, and South Africa have all modernized their tax laws to respond to changing e-commerce reality. The OECD, in its base erosion and profit shifting action plan on “Addressing the Tax Challenges of the Digital Economy”, has recommended ways that governments can collect value-added taxes where the product is purchased to help level the playing field between foreign and domestic suppliers. The OECD has just recently provided further technical advice in “Mechanisms for the Effective Collection of VAT/GST”.

While the 2017 federal budget did include a requirement that ride-share businesses pay the GST, other foreign digital economy players have not been forced to play on a level playing field. Failure to update our tax policy creates unfair competition; causes significant job losses in the journalism, media, and cultural sectors; threatens the vitality of Canadian culture; and squanders the opportunity to raise several hundred million dollars in tax revenue for both federal and provincial governments.

We recommend that the Canadian government level the playing field by making all e-commerce companies with Canadian income above a certain threshold—perhaps a small business threshold of $500,000—pay corporate income taxes on profits from products or services sold or rented in Canada. It's hard to say exactly how much this would raise, because many of these big companies don't report their profits by country, but it could raise maybe $600 million a year.

At the very least, we need to start charging GST and HST for electronic commerce services that sell to Canadians above a certain threshold, and require them to collect and remit GST and HST on their sales in Canada to federal and provincial governments. We estimate that this could raise over $2 billion a year. Mind you, two-thirds of that would go to provincial governments, but they may need the money even more than the federal government does. That would be a good thing for all Canadian citizens.

Thank you very much.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Howlett.

We are going to move over to Mr. Winterhalt. He is the vice-president of global trade for Export Development Canada.

Go ahead, sir. You have the floor.

[Todd Winterhalt, Vice-President, Global Trade, Export Development Canada]

Thank you.

Good afternoon, Mr. Chair and honourable members.

Thanks for much for inviting Export Development Canada to be before the committee today. We appreciate your interest in our work with Canadian exporters and our perspective on international trade, and more specifically on Canadian opportunities in the export sector through e-commerce.

As mentioned, I'm Todd Winterhalt. I am the vice-president of the global trade group at EDC. Maybe I'll add a little bit of context to our story. We are also a financially self-sustaining crown corporation operating at arm's length from the government, providing financial products, insurance, and expert advice to Canadian companies as they seek to export their goods and services throughout the world.

In 2016, just over 7,000 Canadian companies took advantage of EDC's services to pursue international business opportunities representing $104 billion. That includes some 6,000 small and medium-sized businesses that received EDC support to facilitate export trade and investment abroad, activities totalling more than $15 billion.

E-commerce has brought about one of the most important paradigm shifts in the world of international trade and has certainly pushed EDC to adapt its financial solutions to meet the needs of this growing segment.

Globally, we see Chinese and American markets are very substantial, making up about 70% of the total global market share for all e-commerce sales. In 2017, together China and the U.S. e-commerce sales will reach nearly $1.6 trillion, presenting a massive untapped market for Canadian companies. Online growth rates in both countries also outpaced their offline counterparts, with e-commerce annual sales growth rates at approximately 20% in China and 10% in the United States, compared to 3% in offline retail sale growth.

In Canada we conservatively estimate at EDC that there are over 10,000 Canadian companies with the potential to immediately sell their products on international e-commerce platforms. Unfortunately, today Canada’s share of that total market is quite limited. For example, only about 30 Canadian companies are actively selling their products on Alibaba, China’s largest online retailer.

Our research has further shown us that although e-commerce allows Canadian companies to sell globally, sometimes from their own homes, most exporters, as my colleague from Canada Post mentioned, still prefer to test the waters in the U.S. first. Fortunately, of course, our American neighbours host the world’s second-largest e-commerce platform in Amazon.com, last year boasting sales of about $136 billion.

China and the United States aside, we see key markets in the United Kingdom, Germany, and France, all of whom, of course, are positively impacted or implicated in the CETA trade agreement. Another country with which Canada has a free trade agreement in force, South Korea, had $40 billion in online sales in 2016. Clearly, the growth here and the potential for growth is staggering. We do understand, however, that many Canadian companies selling to e-commerce platforms are small and that the world of international trade can appear daunting to a first-time exporter.

This is where EDC hopes to play a bigger role. To respond to what we’re learning in this space, EDC has begun adapting our own services to ensure that Canadian e-commerce companies are fully supported as they seek to export, whether it is for the first time or for the thousandth time. Shopify, for example, represents a great Canadian success story that EDC is happy to be a part of. Our work with Shopify has helped us to better understand the needs of e-commerce companies in Canada and how EDC's financial products can help. Understanding these needs has presented an opportunity for EDC to put a unique spin on many of our own financial offerings.

I'll detail very quickly three of those.

The first is matchmaking.

EDC, often in co-operation with the trade commissioner service, engages in matchmaking efforts to introduce Canadian suppliers to e-commerce platforms like Amazon, JD.com, or Alibaba. In two recent events over the past few months, for example, EDC has helped to introduce well over 200 Canadian companies to two Chinese e-commerce giants in order for them to pitch their products.

Quite simply, these connections matter. It’s no surprise that e-commerce companies have a different set of financial needs from traditional exporters or brick-and-mortar retailers. We have been working to expand our financial products to meet these unique needs, but we have also been changing some of our traditional products, such as accounts receivable insurance, to take on some added flexibility. Indeed, accounts receivable insurance is our most-used product by Canadian e-commerce companies. They need to know that if they ship something overseas, they are covered in the case of nonpayment.

For small companies, losing one shipment to a foreign buyer and not being paid can mean losing a year's worth of cash flow, or even the end of their business altogether. In 2016, EDC provided risk-mitigating insurance to over 70 Canadian companies selling on Amazon, to name just one platform.

Finally, there is working capital. Our working capital solutions can be a great fit for Canadian companies that experience the immediate success that often comes online and that need to ramp up production almost overnight.

Finally, with every segment we see unique challenges and hurdles. However, the growth opportunities in the e-commerce space, coupled with the incredible market access that Canadian companies have through free trade agreements, position our companies to be among the world leaders in this sector.

Thanks again for your time. I look forward to your questions.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

I thank all the witnesses for their presentations.

We're going to open up dialogue with the MPs, starting off with the Conservatives for five minutes.

Mr. Allison, you have the floor.

[Dean Allison, Conservative, Niagara West, ON]

Thank you very much to our witnesses here today. I give a shout-out to EDC and BDC. I love the work you guys do with entrepreneurs to help them grow their businesses. I know we've had a chance to hear from you guys a lot over the years.

Ms. Glenn, you talked about recommendations that you didn't give us, which you said you could talk about afterwards. Do you have those recommendations?

[Shannon Glenn]

Sure. I understand that my notes have been circulated. I would refer you to the third-to-last paragraph. There are specific solutions for businesses, such as suggestions that they create a digital ecosystem that has a mobile-friendly website with e-commerce capability and that they really emphasize their social media pages. They should avail themselves of tools that are readily available, such as Facebook ads or Google AdWords and so on, to really boost their online presence.

[Dean Allison, Conservative, Niagara West, ON]

Perfect.

It was good to hear about two billion packages going through. Does that include Purolator?

[Rod Hart]

No, it was two billion dollars' worth of goods.

[Dean Allison, Conservative, Niagara West, ON]

Sorry.

You talked about the 2% that don't ship from Canada. I think it was exactly 2% versus 67% that comes from the U.S.

My question to you and also to Mr. Winterhalt is, what are some of the complexities? Is it because of border issues? What are the things? Is it the size of our market versus the largeness of the U.S. and how far Europe is? We have trade deals, obviously, with some of these things that you would think would make it easier, but really we're talking about tariffs when it comes to deals. Talk to us about the complexity of what that actually is.

[Rod Hart]

What we've seen is that Canadian small businesses, which we're very close to, start off needing to get online, period. When they are looking at that, they think domestically only. The thought of crossing borders is a bit daunting.

What I think we've heard from them in recent years is that they need to have awareness of the international export opportunities available to them. I don't think they have that readily available. How they take advantage of them, what kind of regulatory hurdles they might need to go through in terms of paperwork or crossing borders or returns, as well as marketing and financial things, all come into play, and sometimes it all becomes a daunting prospect for a lot of the companies to grapple with.

A lot of them do, in fact, end up using some of the big marketplaces in the rest of the world, but I think many of them are fearful because of the unknown. We as a team of individuals here who have totally unique offerings to bring to the market. We need to improve the awareness level with regard to the financial opportunities and export opportunities abroad.

[Dean Allison, Conservative, Niagara West, ON]

Mr. Winterhalt, could you also tack on to that?

I'm hearing that filling out paperwork and all of those things are part of that difficulty, but what has your experience been?

Obviously Shopify and a lot of these online platforms probably help make that easier. We heard the other day from Startup Canada that a lot of new businesses are actually more online-savvy than maybe some of the older ones are.

Do you have any comments on that?

[Todd Winterhalt]

Yes, the timeline is interesting. If you go back five years, you would have seen a lot fewer companies even prepared to go global, as we say at EDC. Still, about 65% of all new exporters test out the U.S. market first and try to get their feet underneath them before they look to either a free trade market or an emerging market.

That's true in the e-commerce space as well. It's not just traditional exports. There is certainly a great deal of comfort with either a domestic online sale or perhaps an American platform vis-à-vis something further afield.

I had mentioned we estimate there are about 10,000 Canadian companies that are quite likely to be successful should they move into the e-commerce space, but many of those—the vast majority, probably in excess of 8,000—are very small firms. These are firms where the president is also the mailroom person, the CFO, and the lunchroom monitor. They're trying to do everything. To think about putting their product or service on Alibaba or on JD.com is very daunting.

Some of it is awareness. I would 100% agree. Some of it is market factor as well. There's a comfort with a certain culture, and a risk aversion that's very much Canadian that I think goes along with that. I would argue that the telling of success stories from those few companies that have started to be successful would be very beneficial in trying to raise that awareness and make more companies interested in taking the leap.

[Dean Allison, Conservative, Niagara West, ON]

Thank you.

[The Chair, Liberal, Mark Eyking]

Mr. Dhaliwal, you have five minutes.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

Thank you, Mr. Chair, and welcome to the presenters.

Even though all of you are very key for us in making decisions in the right direction, I'm going to focus on Mr. Dennis Howlett's presentation, because there is one issue he touched on that hits home. All politics is local, and locally it affected me a lot.

You mentioned important commerce companies are squeezing out many Canadian media companies, taxi companies, hotels, retailers, and also small businesses. If I look at my riding, my constituency of Surrey—Newton, I see that it's 85% small businesses. There are a large number of taxi owner-operators living in my constituency as well, and this has been a key in British Columbia, even though Uber hasn't come there yet.

They have taken a risk in their lives. When they are on the road, there's always a danger. They have invested their capital in buying those plates and maintaining them, and then they work long hours. Now all of a sudden Uber comes in, and their capital goes down the drain. They're at an age when their children are going to university, and it's even much harder now.

What could the government have done to avoid this situation, or what could the taxi companies have done, on the other hand, so this would not have occurred, even though we charged some GST? I think it's more than just putting a GST on Uber.

[Dennis Howlett]

We're not saying to shut out foreign e-commerce. You can't do that, but at the minimum you need to level the playing field.

In Uber's case, for example, Uber drivers were legally required to remit GST if they had an income above a certain level—I think it's $30,000 or something like that—but Uber would not let them collect any cash or charge anything above what the Uber rate was. If they were going to be legal, they had to pay that out of their own pockets.

It's very good that the Liberal government has taken steps to correct this problem in the case of Uber, but the question I asked was, what about other areas? For example, there's Airbnb. It's one thing when it's a family that has an extra room or whatever and so on, but in the big cities, such as Toronto and Vancouver, a majority of the Airbnb places are businesses. They buy a whole condo and rent out all the rooms in the condo apartment. It is providing much more direct competition, and it doesn't help a small Canadian family that is trying to make ends meet by renting out a room. They should be required to pay at least the GST.

We argue that businesses should also pay corporate taxes, especially the big ones like Netflix, Google, Amazon, and Facebook. These companies are really huge in terms of the Canadian market.

Globally, there is a new consensus that value-added taxes should be paid in the country where there are sales, no matter what the platform. Similarly, corporate income taxes should be paid on the profits generated in that country. That's the new international consensus. The OECD is recommending this. It's time that Canada got with the times.

If we want to support Canadian businesses, they usually have to be able to get going in the Canadian market before they can move globally. It's not fair if their competitors here in Canada don't have to pay taxes and they do. We need to level the playing field so that Canadian companies will have a better chance of establishing e-commerce competence and will be able to move into the global market.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Dhaliwal and Mr. Howlett. We're going to move to the NDP.

I'd like to welcome Mr. Dusseault, from Sherbrooke.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

[The Chair, Liberal, Mark Eyking]

Welcome to our committee. You have the floor, sir, for five minutes.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

Good afternoon. Welcome to the committee. I'm glad to be here with you.

My question is for the Canada Post officials. I'd like you to help me with some fact-checking. It has to do with certain things I've been told by people in my riding and elsewhere.

Is it true that a seller in China pays just 99¢ to send a package to Canada?