Mr. Speaker, I am pleased to rise in debate on Bill C-47, an act respecting the taxation of spirits, wine and tobacco and the treatment of ships' stores. Members of my caucus have already addressed the principal aspects of the bill, which we intend to support, while I note that we have certain very pertinent concerns. My colleague from Edmonton--Strathcona outlined them as they relate to the provisions of the bill dealing with the excise tax on tobacco products, which will increase revenues to the federal treasury by at least $240 million.
It is our concern that this could lead to an increase in the black market in tobacco products and furthermore that the $240 million will find its way into general purposes in the general revenue fund. We believe that any targeted tax increases of this nature, which are designed to achieve a certain social outcome such as the reduction of tobacco use among youth, ought to be offset by a commensurate reduction in general tax rates elsewhere. To do otherwise is to fail to recognize that Canada continues to have an inordinately high tax burden, which disadvantages Canadian industry entrepreneurs and reduces the amount of capital available in the country for investment in job creation. I share those concerns with other members of my caucus.
I would like to take most of my time to join with the member who just spoke in addressing a pertinent issue that did not find its way into the bill, namely, the treatment of microbreweries, which are an important part of Canadian industry. The bill would have been the perfect place in which to address the inequity of taxation of microbreweries. Indeed, the government has received representations from the Brewers Association of Canada, as has the House of Commons finance committee, to rectify the discriminatory application of excise taxation on these very small, entrepreneurial, craft style breweries.
The House of Commons finance committee heard from the Brewers Association of Canada last October, when it recommended in a very compelling submission that the government reduce by 60% the excise taxation for the first 75,000 hectolitres of production for microbreweries, which the association defines as those that have an annual production output of less than 300,000 hectolitres per year.
Currently small breweries pay $19 million a year in excise taxes. Those are the 53 breweries in Canada that produce less than 300,000 hectolitres a year. That $19 million in federal excise tax exceeds by nine times the $2.1 million of collective profits reported by those 53 companies. In other words, the amount the federal government is taking from these struggling entrepreneurs outstrips by nearly a factor of 10 the profits they are able to retain to reinvest in their companies to purchase capital assets that are necessary for these companies to continue. This is a very grave situation for the microbrewery industry in Canada.
Several provinces have addressed this. British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland have all adopted a lower rate of provincial excise tax to be applied to microbreweries. Indeed, this reflects international precedents throughout the world and among our major economic competitors in the United States.
About 21 million hectolitres of beer are sold and consumed annually in Canada. Of that enormous amount only 3.4%, and I admit to having contributed to a small part of the figure, has been produced by small breweries, namely those with a production of less than 300,000 hectolitres per year. This gives us an idea of how small a piece of the overall market they are.
I am a partisan of microbreweries. I am a big fan of what I think is Canada's finest microbrewery and finest brewery, period. It is known as Big Rock and it happens to be in my riding. It produces tremendous products like Traditional Ale, Grasshöpper Wheat Ale, Warthog Cream Ale, and my favourite, McNally's stout. Its products are famous throughout Canada. It is an award winning microbrewery founded by distinguished Calgary lawyer Ed McNally. It has done very well notwithstanding the discriminatory tax regime it finds itself fighting against.
It is interesting. There are only four companies responsible for 93% of the beer sold in Canada, and they support the proposal for the government to adopt a lower rate for smaller breweries. They are not threatened by the small microbreweries. They see microbreweries like Big Rock in my riding and Unibroue in Chambly, Quebec as an opportunity to increase their market share by increasing beer consumption. They are not afraid of this kind of competition. They see that the application of one excise tax to all companies of all sizes is not fair.
Total excise duty revenues to the government for beer currently amount to about $580 million. If the government were to adopt the recommendations of the Brewers Association of Canada, remembering that they produce only 3.5% of the product and pay about $19 million in excise tax a year, the reduction would represent only 2% of the total excise for beer collected by the federal government. A 60% reduction in the excise rate for small brewers on the first 75,000 hectolitres would be a tiny reduction in government revenues. As the brewers association points out, “the impact would be no greater than could be felt from the market effects of poor summer weather”. It would have no significant impact on the federal treasury.
Were we to allow these breweries to generate a small profit and reinvest it we would see them expand their market share and exports. Even at a lower excise rate the federal treasury would see an increase in the total amount paid by the companies. It would likely see total excise tax revenues for microbreweries increase at a lower rate given the incentive it would create for new investment, production and consumption in the industry.
I will illustrate the magnitude of the tax and address the impact it would have on small brewers. Excise is the highest federal tax paid by the brewing industry. It is the highest cost borne by microbrewers. It is currently $27.98 per hectolitre. That means the excise duty equals the average cost of operating a small brewery. The cost is estimated to be about $30 per hectolitre. Direct labour costs are estimated at about $27 per hectolitre. This means the excise tax, which is insensitive to profit and is charged and collected even if a brewery is losing money, equals the total cost of running a small brewery in Canada.
A benchmark study conducted by the brewers association in Ontario in 1995 found that taxes represented the largest category of costs, amounting to the equivalent of total production costs including raw materials. The study said the tax burden was extremely high “particularly considering that microbrewers are effectively small businesses often competing with large companies”.
Most of the companies reviewed in the study lost money. Normal rates of return fell short by $17 per hectolitre. The companies are producing a great product, they are working hard and they are entrepreneurial. Yet they are not able to generate a profit. That is why many of them are going under. There is a high bankruptcy rate in the microbrewery industry in Canada.
The findings suggest the federal excise rate places brewing companies at a significant disadvantage compared to other small business in Canada. The Income Tax Act sets out a preferential lower rate for small businesses as opposed to large businesses. We do not expect family owned corner stores with capitalizations of a few hundred thousand dollars to be able to compete while paying the same fixed level of taxation as a Safeway or Loblaws. It is not possible given their much smaller economies of scale and higher costs. That is why I think all parties in this place support the principle of a lower small business tax rate.
The brewers association is simply asking that the same logic be applied to the brewing industry. This would allow us to recognize that the costs of producing microbrewery products in small operations are much higher than for Labatt or Molson, companies which retain profits and have huge factory operations across the country, enormous economies of scale and great capitalization. They can afford to pay a higher excise tax rate. Indeed, they have endorsed the idea of a differential rate.
Another important factor is international competitiveness. The United States has a much lower federal excise tax rate on microbrewery products. It charges only $9.35 per hectolitre for products sold in the United States while Canada charges $24.06. That is a difference of 146%. When Big Rock Brewery in my constituency, Granville Island Brewery in Vancouver or the brewery in Chambly, Quebec try to export their products into the United States they are at a 146% cost disadvantage because of the difference in federal excise tax rates. That means we will never be able to penetrate the U.S. market with our superior products as we should.
This has been raised at the GATT panel. In 1992 Canada filed a complaint to the panel of the General Agreement on Tariffs and Trade. The panel reported that the U.S. was violating free trade rules by not permitting national treatment in terms of excise tax on microbrewery products sold domestically.
However the United States has not corrected the problem. Most countries in the European Union have adopted separate lower excise tax rates on the output of small breweries notwithstanding trade action that has been taken against the European Union. They have retained the differential as a matter of policy, which makes it difficult for Canadian microbrewers to sell their product in the European Union.
It is interesting. Adopting the proposal of the Brewers Association of Canada would reduce the premium paid by Canadian brewers from $16.30 per hectolitre over like sized U.S. competitors to $1.26 per hectolitre, or 11% as opposed to the 146% I quoted earlier. The suggestion the Canadian Brewers Association is making would not bring us precisely in line with the domestic excise tax rate in the United States. It would simply bring us into the ballpark so Canadian brewers could sell their product in that country at much higher levels without the penalties we impose on them in Canada.
Canada currently receives microbrewery products from about 95 different breweries throughout the world. About 60% of the companies that sell microbrew products in Canada receive favourable excise tax rates in their domestic markets. We are putting our companies at a competitive disadvantage. The trade actions we have taken have not resulted in national treatment for our products in those countries. We have only one policy option left, and that is to do what the Americans and Europeans have done. We must come up with a second, lower rate for small brewers.
I will quote from the submission of the Brewers Association of Canada to the House of Commons finance committee. It said:
Over time, as other countries have failed to introduce trade compliant policies, the industry has concluded that competitor neutrality within the small segment can only be achieved by introducing a tax measure that has come to be accepted internationally as a means of supporting small brewers.
The official opposition calls on the government to take up the matter urgently in the strongest possible terms. There is no sound policy or fiscal reason why the recommendation of the brewers association ought not be accepted with due haste to allow the microbrewing industry in Canada, an important fledgling value added industry, to survive and prosper both here and abroad.
Once more, the recommendation we and the brewers association are making to the government is a 60% reduction in the rate of duty on the first 75,000 hectolitres of production for brewers producing not more than 300,000 hectolitres annually. An excise duty reduction for small brewers in Canada would be consistent with policies adopted by major beer producing nations like the United States, Belgium, Austria, Denmark, Germany and the Czech Republic. The countries providing the benefit account for about a third of worldwide beer production. The reduction's impact on government revenues would be minimal but the benefit to the small brewer segment would be significant.
There is a precise reason the Brewers Association of Canada came up with a figure of 60%. A 1994 study indicated average Canadian small breweries were falling behind in the amount of money they should be reinvesting to purchase new capital assets, by $16.89 per hectolitre. The study said a 60% reduction in excise tax for such breweries would return about $16.80 to the sector.
There is a clear symmetry here. The reduction in excise tax would not be a giveaway to the industry. It would allow small struggling breweries to run just enough of a profit to invest in needed capital assets so they could sustain themselves and grow in the future. It would create thousands of new jobs. It would generate prospectively tens of millions of dollars in revenue to the federal treasury. It would help our country become more export oriented in this important industry.
I hope the government takes heed and soon introduces legislation to adopt the recommendations presented at the finance committee.