Special Committee on Cooperatives Committee on July 27th, 2012

[Bill Dobson]

UFA governed Alberta until 1935, at which time they were defeated. During this period, UFA's farm supply business was also flourishing. In 1932, it was felt that the formation of a centralized cooperative would be the most effective way of serving the needs of agriculture in Alberta. Today, the political involvement and farm lobby efforts are long gone, but the cooperative business continues to grow and improve the livelihoods of rural Albertans.

The UFA sees three areas of focus, quite distinct from one another, that should be of significant interest to the federal government: the business environment for larger existing cooperatives; support in rural Canada for emerging cooperatives; and cooperative-based foreign aid.

Of most significant interest to UFA is the business environment for larger existing cooperatives, and therefore today's comments will be largely directed towards this point. However, we'll make a few observations on the other two at the end of our presentation.

It is certainly our belief that being a cooperative should provide neither an advantage nor disadvantage to a Canadian business. Co-ops have a unique way of operating that needs to be recognized and respected. UFA operates through its own, specific provincial charter, but federal taxation rules have a profound influence on our business. Also, the raising of capital in a cooperative structure continues to be a significant challenge.

Historically, cooperatives started small, from a common need, and gradually grew over a long period of time. In today’s corporate world, it is vital that a business quickly be of a certain scale to be competitive and relevant. This is true in the cooperative world. We would like to see the federal government re-establish a permanent interdepartmental cooperative committee. The unique nature of cooperatives needs to be understood and leveraged so that rural communities succeed. We would also recommend that a small group of financial experts be assembled to determine if there are areas of inequity that could be rectified to ensure that cooperatives and corporations operate on a level playing field.

Our chief financial officer offered us the following suggestions as to how tax rules might be modified to simplify and clarify reporting.

First, exempt cooperatives from part VI.1 tax. Part VI.1 tax tends to be an additional tax burden for most cooperatives that are carrying on business in limited or constrained jurisdictions. It is based on an assumed combined federal and provincial tax, which deviates from the specific provincial tax rate where the cooperative is doing business. In addition, paying out this extra tax reduces the ability of the cooperative to pay out more patronage dividends to its members, whom it is mandated to serve. And it is an added burden when co-ops are operating at a loss.

Second, classify the cooperative as a unique business model, for tax purposes. We would recommend that cooperatives be uniquely defined to avoid having to amend sections of the tax laws where there is an intention for a cooperative benefit.

Finally, extend the tax deferred cooperative share, the TDCS. The TDCS was set up by the 2005 budget reforms to assist agricultural cooperatives in their capitalization needs by deferring patronage dividends paid by way of the TDCS to the members. This program is scheduled to end in 2016, but we believe that it is worth extending, as capitalization remains a crucial challenge in the coming years. We also request that other measures be considered to ensure that there are no barriers for cooperatives that are seeking capitalization outside of their member base.

Hopefully these ideas could be given consideration and discussed with other cooperatives across Canada.

UFA is concerned not only about the cooperative but about our member-owners, as well. The third of seven International Co-operative Alliance principles is entitled “Member Economic Participation”. We feel that it's vital that we live up to that obligation. It is very important that our members receive fair tax treatment in regard to patronage allocations and that they also have the ability to invest in their own cooperatives.

The third point, regarding co-op shares, is advantageous both for the cooperative and the member. We would recommend working with our national cooperative associations to ensure that together we create the optimum environment for member support and investment in the co-op sector.

On emerging cooperatives, UFA has not always been a large, successful co-op. Like any other business, we had a beginning. That start was, at many times, challenging and difficult. Through experience, we are confident that the cooperative business model is a very effective way of doing business. It creates a good working atmosphere for owners and employees. There is a sense of loyalty among members, who are also customers.

There is certainly a public interest and benefit in maintaining a strong rural Canada. We would hope that your committee will examine ways the federal government can assist in stimulating growth in rural communities through the development of the cooperative system. Although the cooperative development initiative, CDI, was designed to foster this type of partnership, we understand the need for fiscal restraint and the efficient use of tax dollars. We are not here to complain about the end of that program but rather to encourage an examination of just what the role of the federal government should be in the future. We would be pleased to further discuss ideas on how government and industry could partner in the development of emerging cooperatives, especially in rural Canada.

Also, our membership in the Canadian Co-operative Association is an avenue that we utilize to forward our ideas for such initiatives.

Although cooperative foreign aid may not be the primary focus of this committee, we feel that it is worth briefly mentioning. Canada has a proud history of providing foreign aid to those who are born into circumstances beyond their control. We are probably all in agreement that the wisest use of aid money is to help people help themselves. Canadian cooperatives and credit unions fund several international development programs that partner with others, including CIDA, to provide funding for people who face extraordinary challenges. Cooperative enterprises definitely help people help themselves. We are willing do our part, and we invite you to work with us. We encourage you to continue partnerships that will provide cooperative-based foreign aid programs.

In conclusion, we thank you for the opportunity to address this special committee on the future of cooperatives. We are pleased to answer any questions you may have.

[The Chair, Conservative, Blake Richards]

Thank you very much.

I think you must have practised that, because you were pretty much bang on 10 minutes.

We'll move now to the Canadian Worker Co-operative Federation.

Who's giving your presentation?

[Hazel Corcoran, Executive Director, Canadian Worker Co-operative Federation]

I'll start. We will both present, though.

[The Chair, Conservative, Blake Richards]

Okay, that's fine. It's 10 minutes, and you can use it as you see fit between the two of you, but I will turn the floor to you now for 10 minutes.

[Hazel Corcoran]

Thank you very much for inviting us to appear before the Special Committee on Co-ops to represent the worker cooperative movement.

Thank you for inviting us to appear before this committee.

And that's the last French I'll speak.

My name is Hazel Corcoran, and I am executive director of the Canadian Worker Co-operative Federation.

Worker cooperatives are employee-owned businesses, and generally small businesses that operate according to the cooperative principles. Worker co-ops are a form of collective entrepreneurship whereby people come together to become entrepreneurs in a co-op framework. They are present in many different industry sectors, such as forestry, IT, food production and services, fair trade, and more. Examples include: Taxi Co-ops; the Multicultural Health Brokers Co-op of Edmonton; the Big Carrot Natural Food Market in Toronto; La Siembra Co-operative in Ottawa, which makes Cocoa Camino chocolates and is one of our most popular members; Promo-Plastik of St. Jean-Port-Joli, Quebec; and Just Us! Coffee Roasters Co-op in Wolfville, Nova Scotia.

Today, there are about 350 worker cooperatives in Canada employing over 13,000 people. An estimated two-thirds of these are in Quebec. The Canadian Worker Co-operative Federation is their national, bilingual federation and it includes many members in Quebec. CWCF provides services, including support for start-up and ongoing management, a small worker co-op investment fund called the Tenacity Works Fund, research, and an RRSP program that allows our members to invest in their own businesses.

We have four main points to present: first, the distinction between the established and emerging sectors; second, the challenge of capitalization; third, the problematic changes in the RRSP rules; and fourth, worker co-ops and succession planning.

Our first point is that the co-op sector is neither monolithic nor homogeneous. There are the large, well-established parts of the sector, such as the credit unions, the large consumer co-ops, agricultural co-ops, UFA, etc. In contrast, worker co-ops and other emerging-sector co-ops are basically small business start-ups or conversions that have no operational ties to the established cooperatives. These two broad categories bring completely different sets of needs and present distinct opportunities to Canadians and warrant a different understanding by government.

To become involved with a credit union or large consumer co-op, one simply has to take out a membership and start using their services and buying their goods. To start a worker co-op, one must develop a market-driven business, develop the legal structure, and help develop the worker-members all at the same time. This is not an easy task and is best accomplished with the support of an experienced co-op business developer.

It is also important to note that many of the larger and very successful co-ops did receive this kind of support at their start-up stages 40, 50, or even more than 100 years ago. The challenges for emerging co-ops are exacerbated by the fact that lawyers, accountants, and others are usually not familiar with this business model. In parts of the world where knowledgeable support is made available for worker co-op starts-ups through direct government support or favourable regulatory environments, the sector has hundreds of thousands of employees and tens of thousands of worker co-ops. So although our sector has been one of the fastest growing co-op sectors in Canada, we think it still has huge potential for employment creation in the future.

I would now like to have our financial officer, Peter Hough, present about our second point, capital.

[Peter Hough, Financial Officer, Canadian Worker Co-operative Federation]

Thank you.

One of the key differences between cooperatives and conventional corporations is the role of capital within the enterprises. In a simplistic but accurate description, in a cooperative the capital serves an instrumental function. It is one of the many tools required to achieve the goals of the co-operative. Under most cooperative acts and in conformity with cooperative principles—

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

I have a point of order.

[The Chair, Conservative, Blake Richards]

Sorry, we have a point of order here.

Madame Blanchette-Lamothe.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

I am sorry to interrupt you, sir, but in French it's taking a bit longer, so maybe the chair will give you one more minute just to make sure that both languages are accessible. Thank you.

[The Chair, Conservative, Blake Richards]

You're just having a little trouble keeping up with it? Okay.

If you would try to slow down just a little bit, that would be appreciated.

[Peter Hough]

Under most cooperative acts, and in conformity with the cooperative principles, capital receives a limited financial return. Most shares have a par value, that is, the value of the share is the same on the date of purchase and on the date of redemption. So there is no potential for capital gains. In a corporation, the primary goal is to maximize return on capital for the owners and to generate an increase in the value of their shares. In many cases, on the selling of these shares, the small business owners are eligible for the capital gains exemption, which encourages them to invest retained earnings in their enterprise.

In seeking capitalization, emerging cooperatives have two barriers that conventional corporations do not face. First, the democratic structure of one member, one vote, and the limited returns on capital mitigate against the usual sources of venture capital, which require high returns and significant control of the enterprise. Second, because co-op par value shares do not generate capital gains, members do not receive the same tax incentive from the government to reinvest in their enterprises.

There are various approaches that are designed to address these barriers.

The Canadian Co-operative Association is currently leading an initiative to develop a national co-op development fund to invest in cooperative expansions, conversions, and in the emerging cooperatives as a legacy project for the international year. The fund to attract co-op sector capital is designed to provide a market rate to its investors. Hence, it will have to manage its portfolio risk carefully. This means that it will have to limit its involvement in the emerging co-ops and focus primarily on expansions and conversions. Because of this limitation in the fund's ability to address the needs of the emerging co-ops, the CCA had discussions with the Government of Canada requesting a $70-million contribution, which would give the fund, in combination with its sector investments, the capacity to meet the needs of the emerging co-ops in Canada, and in the long term to generate a constantly growing pool of capital.

With the wish to return to a balanced budget after the recent recession, such a large investment is now unlikely. However, I would urge this committee to recommend to the government a more modest investment of at least $20 million. This contribution by the government would eventually be returned to the government treasury through increased employment via personal and corporate taxes. As one of the key legacy projects for the International Year of Cooperatives, this is an opportunity for the Government of Canada to invest in the future of cooperatives all across this country.

Another opportunity to support the development of co-ops is to balance the capital gains exemption with a cooperative investment program. This would be essentially an investment tax credit for the investment into equity shares in the cooperatives.

Hazel will now speak about the RSP issue.

[Hazel Corcoran]

Thank you.

Unfortunately, there's been one recent change that has hurt the capacity of worker co-ops to capitalize themselves through member investment. The measures regarding self-directed RSPs in the 2011 budget have rendered co-op shares ineligible for RSPs for members who hold more than 10% of any class of shares issued by the cooperative. This has eliminated a pool of members' capital that used to be available to help capitalize their co-ops. Many worker co-ops have fewer than 10 members. Whereas it used to be perfectly fine to hold more than 10% of a class of shares in a co-op within an RSP, if under $25,000, it is no longer acceptable. If an individual is affected, there are very high penalty taxes—even higher than for deliberate fraud in some cases. We believe these provisions are putting jobs at risk.

CWCF objected strongly last summer to the Ministry of Finance regarding these changes, as did CCA, CCCM, the Canadian Institute of Chartered Accountants, and the Canadian Bar Association. We implore the federal government to revoke these measures enacted in the 2011 federal budget.

Our fourth and last point is business succession using worker cooperatives. As we are sure you understand, there's a wave of business-owner retirements coming. The Canadian Federation of Independent Business has estimated that number to be 200,000. Although the process is already under way, we are currently witnessing only its earliest beginnings, and retirements should reach their peak between 2017 and 2020. This phenomenon will also likely manifest itself earlier in rural areas.

The social and economic risk is substantial and many companies risk closure, as a result of which tens of thousands of jobs could disappear. However, we also know that a solution is available, namely, that the employees of these companies can mobilize to save their jobs and communities by creating worker cooperatives. In Europe, this process is already well under way. The European Commission, and particular countries within the European Union, are actively encouraging the cooperative solution in the transfer of companies to their employees.

We strongly feel that the Canadian government needs to develop programs and approaches similar to those elsewhere so we can maintain locally owned jobs and services. Specifically, any development in this area should ensure that employee-owned co-ops are included and supported as one of the key options.

I will now turn it back to Peter Hough to give an example of a conversion and to conclude our presentation.

[Peter Hough]

The Careforce Home Care Worker Co-operative is a good example of the potential in rural areas for worker co-op successions. This small business provides market-based home health-care services in the Annapolis Valley region of Nova Scotia.

At the time the owner decided to look at the options for succession, it was providing modestly paying employment to about 20 people. With support from the owner, and resources provided by the CWCF and the co-op development initiative, a worker co-op of employees was formed to purchase the business. I would like to emphasize the importance of the support this co-op received from the co-op development initiative.

It is now over three years since the transition was completed. As well as being profitable every year, the co-op now has 65 employees and has received a number of business awards, including the Eastern Kings Chamber of Commerce outstanding new business award. It is also close to being debt free, having repaid most of the debt financing required to purchase the business. This is an example of how employees with little or no ownership experience, but with the right supports, can not only take over an enterprise but make it grow and thrive, benefiting themselves and their community.

In closing, we would also like to say that we support the submissions of the CCA and the CCCM, and we appreciate being invited. We also appreciate the work of this committee.

Thank you very much.

[The Chair, Conservative, Blake Richards]

Wow. That was two presentations in a row that were bang on 10 minutes.

The pressure is now on you, Ms. Goussaert.

You have 10 minutes, give or take a second or two. The floor is yours for 10 minutes.

[Vera Goussaert]

Thank you, Mr. Chairman.

Mr. Chairman and members of the special committee, thank you for the opportunity to speak to you today. I compliment you for your efforts to review and explore the important role of cooperatives in this International Year of Cooperatives.

My name is Vera Goussaert, and I am the executive director of the Manitoba Cooperative Association, or MCA. The Manitoba Cooperative Association is a provincial association of cooperative organizations, created by our members to enhance and support the development of a united, growing, and influential cooperative movement in Manitoba.

MCA has been around, informally, since the 1970s and 1980s, when a small group of cooperators would meet to discuss issues of importance to the cooperative movement. However, MCA formalized in the late 1980s and early 1990s, with the creation of two key programs that are still in existence today: the Manitoba Cooperative youth leadership program and the Manitoba Cooperative awards program.

While MCA has been around for a number of years, it was not until 2005 that the organization was able to hire its first full-time executive director and begin delivering cooperative development services. This was thanks to the federal co-operative development initiative advisory services funding that was received by our association.

With increased capacity at the association, in 2007 MCA entered into partnership with the Government of Manitoba and

the Conseil de développement économique des municipalités bilingues du Manitoba.

Along with this partnership, the Government of Manitoba announced $1.25 million to be spent on cooperative development over five years. What followed was the co-creation of a vision and a strategy for the cooperative community in Manitoba.

The implementation of this strategy is ongoing today, but we are very proud of the work we have already accomplished.

Some of the initiatives include, for one, the introduction of resources on cooperatives for high school teachers, in both French and English. These resources, known as the All 4 Each program, were developed by the Ontario Co-operative Association in partnership with provincial associations across Canada.

We've also been successful in the introduction of a course on the management of cooperatives at the University of Winnipeg's Faculty of Business and Economics. We are continuing to work with the university to strengthen our relationship and to pursue other activities to enhance cooperative education at the post-secondary level.

We also have been successful in the creation of an interdepartmental co-op group within the provincial government, recognizing that cooperatives operate in many industries and within many sectors of our economy and should not fall under the responsibility of just one government department.

We have seen changes to our Manitoba Cooperatives Act to allow for the creation of multi-stakeholder co-ops. And we've seen some other changes to our act that have made it easier for existing cooperatives to operate.

Finally, one of the more notable initiatives that resulted from the strategy was the creation of a co-op development tax credit, the first of its kind. It allows co-ops and credit unions across Manitoba to make contributions to a fund managed by MCA. In turn, they receive a substantial tax credit. MCA then uses the funds we receive from these co-ops to deliver technical assistance and to offer small grants to new and existing co-ops.

MCA has been actively working with groups and providing technical assistance to co-ops since 2005. In that time, capacity at MCA has increased. We now have a full-time co-op developer on staff who works with groups to help them develop their co-ops.

MCA also delivers small grants for co-op development. They come from three pools of funding. The first is CDI advisory services funding. The second is co-op tax credit funds, and the third is co-op assistance funds, which we receive from the Province of Manitoba. These grants assist with things such as group development, technical expertise, incorporation fees, the development of business plans and feasibility studies, and small capital expenses.

One of the groups we have been able to assist is the Peg City Car Co-op in Winnipeg. This co-op has been operational for just over one year. They received grants and technical assistance from MCA. They also received a large grant through the cooperative development initiative innovative cooperative projects program. Peg City currently has over 80 members, three vehicles on the road, and employs two people. This co-op is growing and has visions of operating across Winnipeg, with numerous cars and serving numerous members.

Another example is the Western Manitoba Seniors Non-Profit Housing Co-op in Brandon. It received small grants and some technical assistance from MCA. It is currently under construction, building a 34-unit, mixed-income housing complex for seniors.

The Mondragon Worker Co-op in Winnipeg is another example. It received small grants from MCA to expand its business into a restaurant, bookstore, and organic grocer. This co-op has been operating since 1996 and employs 16 to 20 youths in downtown Winnipeg.

Finally, another example is the Compo-stages Manitoba Services Co-op out of La Broquerie, which received small grants and technical assistance. It is currently in development to provide composting consultancy and services to livestock operators and municipal waste departments.

As you can see, there's a variety of areas in which these cooperatives are starting.

We encounter many challenges working with groups trying to start and grow cooperatives. First and foremost, there's a general lack of understanding of the cooperative model. Economic development officers, lawyers, accountants, and the people who generally assist in business start-ups, are not familiar enough with the co-op model and often discourage groups from pursuing that model of incorporation, even though it might be the most suitable for the project.

Also, given that co-ops are groups of people working together for a common purpose, typically a lot of time needs to be spent on group development, and this can take a lot of patience and resources.

Finally, access to capital has been a long-time struggle of cooperatives. We have seen some co-ops dissolve in order to meet the capital requirements needed to grow their businesses.

Moving forward, we would like to build on the success and momentum we have achieved in Manitoba. This work has been a direct result of working in partnership and having ongoing and open dialogue between government and members of the cooperative community. Working in partnership, we can develop strategies to address the needs of the co-op sector, as well as the needs of government.

We also need to see that co-ops can access relevant programs at all levels of government. Co-ops are often excluded from the vernacular of government programs. But even if they are included, sometimes they are discouraged from accessing programs due to lack of understanding and awareness of the co-op model.

Finally, we would like to see the creation of a national co-op development fund, developed by the sector in partnership with government. This could address some of our needs for access to capital.

I want to thank you again for giving me this opportunity to be with you today. I am open to any questions you might have.

[The Chair, Conservative, Blake Richards]

Thank you very much for all of your presentations. They were very informative.

We will move to questions from members.

Up first in our first round is Madame Brosseau. You have five minutes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Thank you, Mr. Chair.

Thank you, everybody, for being here this afternoon.

Ms. Goussaert, what programs do cooperatives have access to at the federal level?

[Vera Goussaert]

Certainly, there are a lot of business development programs and things of that nature that co-ops can access. However, it's not commonly known that they are accessible to co-ops, and that's where I spoke about the vernacular. Co-ops are not included in the language of these programs, and that is seen as a big barrier.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

So the government has an opportunity to raise awareness about these programs—

[Vera Goussaert]

Yes, absolutely.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

—and make them more accessible. So it would be a red tape issue, a reduction kind of.... Advertising.

[Vera Goussaert]

Perhaps, yes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Okay. The justification given for ending the CDI is that it has fulfilled its mandate and that the cooperative sector is healthy. For the last few days we've heard that it's very healthy. It's thriving. But I don't think that's a good reason to just end it. There needs to be a renewal, or something, on the horizon.

What do you foresee?

[Vera Goussaert]

There's a lot of opportunity within our economy to grow cooperative enterprises. Because of the track record of cooperatives—and we've seen their success rate—and the strength of the movement, we know it is a successful model that works in our economy.

That being said, co-ops take a lot more support to start up. If we want to grow the sector, we need to see ongoing support for the development of new cooperatives. That's what we would like to see.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

I know that in my riding—it's a rural riding and very agricultural—we see a lot of students and young people leaving. We want to try to keep them here. It's very expensive to take up a farm. It can be complicated.

Do you do a lot of education with youth?