Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 45 - Evidence
OTTAWA, Wednesday, June 5, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:30 p.m. to examine and report upon the present state of the domestic and international financial system; and to give consideration to Bill C-47 respecting the taxation of spirits, wine and tobacco and the treatment of ships' stores.
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: We will do two things today: First, continue our examination and report on the present state of the domestic and international financial system — in other words, what we call ``Enronitis'' and we will hear a witness from the Toronto Stock Exchange in the person of Barbara Stymiest, President and CEO.
The second part of our day will be Bill C-47, An Act respecting the taxation of spirits, wine and tobacco and the treatment of ships' stores.
Ms Barbara Stymiest, Chief Executive Officer, TSX Group: I am pleased to be speaking with you today via video conference. This form of communication does not take the place of speaking in person, but I very much appreciate your making it possible for us to link up in this way.
The focus of the committee on the international financial system is especially appropriate at this time. The evolution of global markets is quickening. Immense pressure is on existing financial structures, standards and approaches as the flaws and failings, as well as often protectionist objectives, of existing regulatory practices are laid bare in the creative destruction of globalization.
Important issues of corporate governance have been raised by the Enron collapse and bulked ever larger as some of the largest and best-known companies in the world have been swept up in the aftermath. These issues are not confined to markets or countries. They also have the effect of creating tensions between and among professions, countries and, in the case of accounting standards, continents. Clearly, we are at a critical juncture.
I propose today to provide brief remarks largely focused on the issue of corporate governance, so there will be ample time for discussion on that and other issues. I place my emphasis there because issues of corporate governance are at the nexus of a set of issues that The Wall Street Journal this week described as ``the trust crisis.''
As you know, there are many players involved in building an environment of good corporate governance. The TSX is certainly an important player but there are many others, including associations such as the Institute for Corporate Directors. professional organizations such as the Canadian Institute of Chartered accountants, and for-profit institutions such as Insight. I know that some of these groups have been or will be in front of your committee.
Looking at the Toronto Stock Exchange, we provide the disclosure framework within which senior public companies provide information to their investors to enable them to judge the quality of a company's corporate governance practices. The market can then decide whether to reward or sanction issuers for their corporate governance practices.
What is at stake in all of this change is investor confidence in the underpinning of healthy financial markets, whether local, national or global. Investor confidence is of paramount concern to the TSX Group since we operate two of Canada's stock exchanges. As senators will know, one is the Toronto Stock Exchange, which is Canada's premier market for senior equity securities; the second, with a quite distinct and separate role in Canadian capital markets, is the TSX Venture Exchange, which is the principal avenue for young and emerging companies to obtain public financing. TSX Group also operates businesses that are integrally related to the operation of quality markets, including the development and sale of market data and technology services.
We also own 50 per cent of Market Regulation Services Inc. — better known as RS Inc. — which provides services to regulate the trading activity of market participants on the two exchanges, as well as the activity of competitive marketplaces on a not-for-profit basis.
The TSX Group, along with the Investment Dealers Association, established RS as a separate entity to ensure that exchanges would not and could not be seen to be in a conflict of interest on regulatory matters.
We were the first exchange in the world to take such a step. Our reasons for doing so relate directly to the matter of investor confidence. It is our belief that investor confidence is not enhanced when the marketplace itself disciplines its market participants. It is better to have a separation of the exchanges from the body that sanctions or takes other disciplinary action against market participants. This uniqueness of the separation is only the most recent in our long tradition of trailblazing as an exchange.
We are also trailblazers on the front of corporate governance. In the spring of 1993, the Toronto Stock Exchange sponsored the formation of a committee to explore issues related to corporate governance in Canada, the Dey Committee, named after its chair, Peter Dey. The committee reported in 1994, under the title ``Where Were the Directors?''
The following year, the TSX adopted a requirement for issuers to disclose their practices around the 14 recommendations from the Dey Report. These have become known as the ``corporate governance guidelines.'' I will speak more to that in a moment.
The Dey report had immense influence on corporate governance in Canada. To demonstrate, in 1993, some 2 per cent of Canadian companies had governance committees. By 1999, that percentage had increased to 65 per cent. As a follow-up to the Dey report, the exchange sponsored a reunion of the committee members in 1999, which measured the progress in corporate governance practices during the five-year period from the original report.
Among other things, the report showed that many companies had reviewed the size and composition of their boards and, over time, had decreased the size of their boards while increasing the number of unrelated directors. It also showed that directors were more involved in strategic planning. However, fewer companies had developed position descriptions for directors or assessed performance or met without management present.
Shortly after the second Dey Report, in 2000, in fact, a report issued by Patrick O'Callaghan & Associates found that 62 per cent of TSX-listed companies surveyed divided the board's responsibilities from management by having a non-executive chair.
Following the second Dey Report, and to generate new momentum for improvements in corporate governance, it was agreed that a new examination of the requirements and standards was required. In light of that, we joined with the Canadian Institute of Chartered Accountants and the Canadian Venture Exchange — now the TSX Venture Exchange — to follow up on the work of the Dey committee.
The joint committee, which was chaired by Madam Guylaine Saucier, reported last November as the implications of the Enron collapse were beginning to rise in the public awareness and concern. Over the winter, we examined the Saucier committee's recommendations.
Recently, we proposed changes to our disclosure guidelines that reflect recommendations from this report as well as some of our own thinking. These changes were out for public comment until a few days ago. The changes fall into four categories, and I will spend a moment summarizing these for the committee.
First, we extended the application of these guidelines from just corporations to all forms of Canadian business organizations. Given the increased popularity of investment trusts and the lack of disclosure to the investing public about their corporate governance practices, we expanded the disclosure requirement to these kinds of organizations. Unit holders, like any other common shareholders, need to know the corporate governance system of these entities.
Consequently, every Canadian listed issuer — which is almost 4,000 — now must fully disclose its system of corporate governance every year in its annual filing with the securities regulators. The disclosure must be appropriate to the listed issuers form of business organization, and to the extent that they apply, refer to the established guidelines.
Second, we changed our guideline with regards to audit committees. Of note, our guidelines indicate that all audit committee members be financially literate, with at least one member with accounting or financial expertise.
We amended the guidelines to introduce the notion of an audit committee charter, and, in particular, we recommended that boards adopt a charter for the audit committee that clearly describes its roles and responsibilities to help committee members better understand their function.
Third, we clarified some of our guidelines. We fine-tuned them. We added the ideas of examining risk and opportunity in the strategic planning process to improve disclosure around the role of the board.
We have also recommended that companies have boards that are appropriate in size for effective decision-making. As most of you will know, some corporate boards, at least in years gone by, were large in number. We suggest a more modest size with more effective governance.
Fourth, we introduce practice notes to provide additional guidelines to our issuers. These notes do not form a part of the guidelines, but they represent a practical way to support the underlying principles of several of the guidelines.
I would like to end on two related notes. Your study of these issues is timely. My colleagues in the World Federation of Exchanges will be talking about corporate governance and the role of exchanges when the Federation's working committee meets in Toronto on July 2 and 3.
Europe has advanced new proposals for a continent-wide code of standards on corporate governance. Tomorrow, the New York Stock Exchange is to announce its new governance standards for listed companies. Nasdaq released its rules changes on corporate governance on May 24. These changes are available on the Web site.
I might add that rules coming from the New York Stock Exchange and Nasdaq are just that. They are rules. That is consistent with what happens in the United States. There, the markets and the SEC intensely focus on the audit committee and its composition, which is only one of the aspects covered in Canada. This focus is, compared to what has happened in Canada, recently found.
As I mentioned, we have had disclosure guidelines since the mid-1990s. In the United States, it took until the fall of 1999 for the SEC to issue requirements for public companies to disclose information about their audit committees. In December of the same year, the New York Stock Exchange and Nasdaq issued rules on audit committees to mandate their independence in functioning.
I would note that in the case of Nasdaq, their rules apply only to their largest companies, those with a market capitalization of more than U.S. $25 billion. If that measure were applied in Canada, only a handful of companies would fall under their guidelines. That, in my view, highlights pitfalls of having rules or a one-size- fits-all approach.
In Canada, as I said, our disclosure guidelines are for all companies, so they can describe the regime that fits the size of their company. In the U.S., the rules apply only to the large players, but disclosure is required by the SEC for all listed issuers.
Finally, I would like to talk about the Enron issue directly. I strongly believe that the Enron crisis was a failure of ethics and morality, more than a failure of regulation. That is not to say the regulatory environment in the U.S. is absent of responsibility in this regard, but the issue is more about people than regulatory policy.
I say that this afternoon because, regardless of our neighbours' requirements for the audit committee, they could not prevent Enron. No guidelines, rules, laws or regulations can counter a lack of ethics and fraudulent minds.
Whatever new rules and requirements stock changes or the SEC enact will not guarantee an Enron-free world. We cannot, I suggest, go so far as to burden small companies with regulations that could stifle the great entrepreneurial culture we have in Canada.
Post-Enron, shareholders are now demanding more disclosure and asking more and harder questions to the boards and management of companies, and companies themselves are volunteering more information. This development can only serve to strengthen the overall system and help restore investor confidence. Together with what the TSX is doing in this regard and working with our listed companies in matters of disclosure and governance, we are on the road to improvement.
I will finish with that, and I look forward to your questions.
Senator Angus: Two main areas are coming out of our study to date — maybe more. I categorize them under the headings ``governance issues,'' on the one hand, and ``accounting issues'' on the other. I am starting to think that perhaps the big area is the accounting more than the governance.
People today are a little bit discouraged with the stock market. It is drifting and there is a general malaise about it, which would be of great concern to you as CEO of our major stock exchange in Canada. Some witnesses have told us that this is due to skepticism by the investing public as to the accuracy of corporate accounting. In other words, investors do not believe the numbers any more. We have been told that this is the driving factor behind the meltdown and obviously involved in the Enron situation because, as you say, for other reasons such as morality, the numbers were not right. Do you agree generally that people are skeptical and that our capital markets are now in disrepute?
Ms Stymiest: I would agree with your comment about the degree of skepticism by particularly the retail investor that exists at this time. It is a cyclical phenomenon; investor confidence does ebb and flow with the economy. I think the Enron situation in particular has contributed to that skepticism by the retail investor.
You are right, in that, as the CEO of the two exchanges, we care very much about the issue. We believe that the actions that we are taking on the front of governance is contributing to better investor confidence. It is not the stock market and it is not the market operator that is being held in disrepute; it would be the listed companies and their performance.
Senator Angus: We have also been told that the skepticism in Canada in terms of the numbers and the accounting is partly due to the fact that the Canadian GAPP are not in sync with the US GAAP and with the FASB — the standards board, there is one here and another one in Europe. Everyone seems to be all over the map. Some witnesses tell us the U.S. system is the best, at least for Canada, because there is so much cross-border investing and we would be better to adopt the U.S. standards even though it is a rules-based system.
Others say that we must have uniformity around the world and we have to drive more towards a judgment-based system, as embodied in the international accounting standards that are in force in the UK and Europe. In any event, it seems that Canada is out of step with somebody. I wondered how we could fix things in that regard.
Ms Stymiest: I would answer the question this way: Senators should be aware that there are 184 companies in Canada that are listed on both an American exchange and a Canadian exchange; in other words, they access the capital markets of North America. A handful of Canadian companies are only listed on the U.S. exchanges and therefore are adopting U.S. GAAP. The 184 companies listed on both exchanges are either reporting under U.S. GAAP already or are reconciling between Canadian and U.S. GAAP. I indicated that there are 4,000 public companies in Canada. You should also be aware that, in the U.S., U.S. GAAP does not apply to small companies.
When you parse it down, it is a narrow issue related to a narrow group of issuers, most of whom are already complying with both sets of GAAP. I know you are seeing my colleague on the accounting standards oversight board tomorrow. I think that I would fall into the camp that the differences in accounting standards between the U.S. and Canada are not as simplistic as one being rules based and the other being principles based. There is far more convergence in the two systems, and that definition does not work.
For example, if the principles are not clear enough in Canada, then Canadian accountants often look to the direct guidance they can get in the U.S. GAAP anyway. I do not think there is a huge difference between the Canadian and the U.S. GAAP. We are moving within Canada towards more of a harmonization approach with the U.S. and with the International Accounting Standards Board. We will continue to facilitate access to large capital markets for that small set of issuers who need to expand their capital raising activities beyond our borders. For the rest of Canadian companies — whether they are public or not — Canadian GAAP is equal to or as good as either European GAAP, international accounting standards or U.S. accounting standards.
Senator Angus: That is encouraging to hear. We will take that into consideration as we talk to the people from the CICA and others.
On the governance side, there is no doubt that since the first Dey Report there has been an amazing improvement through the introduction of some standards of corporate governance for directors in this country. I think you are aware that, after two or three years of experience with the first Dey guidelines, this committee conducted its own study on corporate governance with a view to finding out, from a company's point of view as opposed to the stock exchange's point of view, whether the Dey guidelines were practical — I think there were 26 of them.
Ms Stymiest: There were 14.
Senator Angus: We put out a report. At the time we felt it was quite a comprehensive report supplementing what was out there. In the meantime, the reality is that ``guidelines'' is the key word because they were only guidelines. I think you said that you are now making changes such that all listed issuers must file annually some kind of a compliance statement. Is that right?
Ms Stymiest: If I could clarify my remarks: All listed issuers must disclose annually. I like to describe it as a mandatory disclosure regime in voluntary compliance with the rules, which is consistent with the SEC regime. It is only mandatory for the issuers on the New York Stock Exchange, generally the large cap U.S. issuers and the top tier of Nasdaq issuers.
Senator Angus: If I understood that answer, you are saying that the phrase ``must file annually'' does not force people to have the governance. You need to file a statement saying, ``Of these X number of guidelines, yes, we are complying or no, we are not complying in 3 out of 12.'' However, there is no penalty if you have zero out of 14. Would that be right?
Ms Stymiest: That is correct.
Senator Angus: It is just that an investor might think, ``What a shabby company, they are not putting in corporate governance. They do not follow the guidelines.'' Would that be the only sanction?
Ms Stymiest: That is the only sanction. You are probably well aware that, as a market operator, we do not have the ability to sanction listed public companies. We are not a regulator of listed companies; we are a standard setter. The powers of sanctioning fall to the provincial securities commissions, not to the exchange. Our only sanction if a corporation does not meet our listing requirements — in this case of governance — if they fail to disclose, is to delist.
Senator Angus: What I am hearing, and I think many of the other senators are hearing it as well, is that there were the original Dey guidelines and there have been some failures. There was moral suasion to get your act together, to have a governance committee, to separate the chairman and the CEO in the bigger companies, and to have proper audit committees — there was a general improvement in that regard. However, since the Saucier committee has come along — which is the latest iteration — I have been hearing people say, ``It is more of the same. It is motherhood. These are only guidelines. We get some teeth here in Canada?'' I do not know whether that is a valid suggestion.
In your view, is it necessary to legislate something to create more stringent requirements? Your own evidence is clear to the effect that some of these terrible things would not be happening if there was real compliance, real corporate governance.
Ms Stymiest: I believe it would be a great impediment to strong capital markets in Canada were we to be out of step with other marketplaces. I do not believe that mandating the guidelines that are set out as best practices to disclose against makes sense for a corporation with less than $5 million of revenue and a three-person board.
We are trying to suggest that governance needs to be appropriate to the size and type of operations. The best practices, which are laid out in our governance guidelines, make sense for the very largest issuers and are best in class and from a world standard perspective. There is no exchange in the world that mandates the depth and breadth of the disclosure standards that we have set and have made those listing rules; nor are there, to my knowledge, regulators who require all companies to conform with standards as high as those that we require disclosure against.
I attended a conference last year, an international governance meeting, with some of the minds from Europe as well as from North America. I think the approach in Canada around mandatory disclosure and voluntary compliance has been well received in the international arena.
Senator Kroft: I agree with Senator Angus that things are broadly breaking down for us in terms of accounting and governance issues. I was interested to hear you say, under your heading ``Enron,'' that in your mind this is fundamentally a failure of ethics and morality. Certainly, that is coming to be more and more my view.
I am becoming increasingly preoccupied on the governance side because it seems to me that the question we have to ask on issues of ethics and morality is, ``who is responsible for enforcing, imposing or monitoring ethics and morality?'' I am inclined to think — and this is what I would like to explore with you — that the prime responsibility for those areas has to lie with the board of directors, where the interface is personal, the knowledge of company is intense, and the behaviour of management and those advising management is best known.
If the board of directors does not have a clear understanding of what is an accepted standard of morality and what are the rules, if they are not knowledgeable, ready, willing and obligated to impose those, I am not sure where they will be imposed. I do not have a great confidence that filings or accounting-based reports will get to the problem as well.
We had a witness last week reporting on a decision that his institution made: a massive investment disposition of Enron. He pointed out that the disposition had nothing to do with the accounting evidence. It had to do with some notes to the financial statement indicating, for example, that CEO's sister owned half the company that booked all the travel. That is not a very esoteric accounting issue. Somebody has a clear idea of what is right and wrong and somebody was not following that.
My preoccupation is how we get down this course of assuring moral behaviour. You have raised it as the core issue of Enron. Where do you feel the first line of responsibility rests for ensuring that there is an adequate level of ethics and morality in the corporate sphere? Whose is the first responsibility?
Ms Stymiest: I concur with your assessment that the first line or the first level of responsibility is with the board of directors. I think that the current TSX guidelines and the ones that were promulgated by Peter Dey around the separation of the board from management have led the thinking. I think we in Canada are far ahead of the U.S. in understanding the difference between oversight and management and the clear and distinct role that the board must play.
You can tell from the statistics that in Canada, we have adopted far more a separation of the board chair from the CEO of the organization. I think that is a first step to allow boards to carry out their mandate of overseeing the company.
Beyond that, I would agree with your hypothesis that it is difficult to regulate around ethics and morality. One of the commitments we have as an organization is around the training and education of directors. We are devoted to that in both exchanges to provide appropriate courses and orientation for board members for all our newly listed companies and throughout their life on the exchange. We devote many of our resources to the mentoring of those directors and management teams.
Senator Kroft: Many of the things we are seeing in Enron-type situations, and we can only assume — and perhaps this may not be a fair assumption — that some of the same kind of things happen in Canadian companies, are basic. Although I could not agree with you more that education of those with responsibility is important, it does not take much education to know that some things with Enron are wrong.
What are your thoughts about penalties imposed? How severe should penalties be in terms of gross failures of governance, obvious failures of governance, where the issue is not acceptable ignorance, where the issue — and this is hypothesis — is clearly accepting a course of conduct that is obviously wrong? Do you feel that heavier, more severe penalties, and even the imposition of criminal law might be required to fundamentally alter this moral malaise?
Ms Stymiest: I am getting outside my realm of competency, but I do follow with interest the initial report sponsored by the TSX led by Tom Allen on setting up a regime for liability around disclosure, which has been reaffirmed in the recent five-year review of the Ontario securities legislation.
Before we get to a discussion around what degree of sanction is appropriate, we need a regime first and foremost in place so that the appropriate sanctions can be taken. We are still a way from that in Canada. Particularly, I think there are inconsistencies across the various provincial securities commissions themselves in terms of the degree of authority they have to sanction players in the capital markets.
Senator Kroft: I have a question on the governance issue and the ability of directors to be knowledgeable about what is going on within the company. If they are not aware of wrongdoing, they cannot act on it.
The Dey and Saucier reports have both made observations on the numbers of boards that some directors occupy and the obvious implications relating to the time they have available. There have been recommendations made in that respect. I know it is difficult to reduce these to absolute numbers because they are not directly comparable. Do you have a view in this area?
Ms Stymiest: I have a personal view that is probably shared. I believe it is becoming more difficult for corporate directors or for senior people in the community to serve on a large number of boards concurrently.
In my experience, looking at our own governance in selecting board members for the TSX Group, we are clearly biased against individuals who are, in our view, serving on too many boards. I think the marketplace will impose a self- selection mechanism. Given the increasing demands on directors, they will have a difficult time serving and doing their job as a director well if they serve on too many boards. A number of influences are occurring that will likely reduce the number of directorships that any one individual can hold concurrently.
Senator Tkachuk: I have a couple of questions. You raise the issue of ethics and morality rather than regulation as being the major problem that may have caused the Enron fiasco. Would there not have been issues, and do you know what they may have been, that allowed the Enron situation to be tolerated by the market for so long? It is fine to say that these men or women did bad things and committed fraudulent acts. Surely there had to be issues that allowed them to get away with doing the acts for so long without anyone catching on.
What do you think were the issues that allowed the situation to go on for so long, and are there things that we do in Canada that they do not do in the United States that would make it more difficult to perpetuate these actions?
Ms Stymiest: I have read much of the Enron disclosure and documentation and have followed it closely. There was a great deal of disclosure in their documents that was available to the marketplace, and there were certainly both media and research analysts that identified the problems with Enron before things broke in the marketplace last fall.
What were the issues that allowed it to go on? If the information was available to the marketplace, then I think one has to look at what happens beyond the actual disclosure of the information. As you are well aware, there is certain momentum and emotionalism attached to investing. Many people tend not to do their fundamental research and invest along with the crowd. A crowd mentality can occur as many stocks are making large runs.
That situation occurred in Enron, I think it has occurred in other stocks and it will occur again because of the nature of investing. Not all investing is done by those who are knowledgeable and have done their homework. It gets particularly difficult with the size and complexity of the marketplace and the number of issues that are available for investors to follow.
As to whether there is anything in Canada as compared to the U.S. that could prevent this kind of thing from occurring, we have similar disclosure regimes in both jurisdictions. By and large, the marketplace does add a level of protection. There are sophisticated intermediaries and analysts who analyze the fundamentals of corporations and issue profit warnings and research reports. They catch most of it. It would be extremely difficult to imagine a situation where there is perfection, that they will catch every bad apple and see every disclosure for what it is.
As a marketplace, we must remember, given the universe of stocks, these kinds of situations rarely happen in the context of North American and global capital markets.
Senator Tkachuk: I can buy part of your argument. You mentioned ethics and morality. Later on, in answering the question, you mentioned the dynamism in the market. People get on a hot stock, everybody is in, but they are not paying attention. It is not the shopkeeper from Colonsay that is driving the Enron stock; it is professionals — mutual and pension funds, and institutional investors. The shopkeeper is left holding the bag because they are depending on the people doing the research.
If you say that they were disclosed, or some were disclosed, why did no one pick it up? Why were all the other people into the marketplace? Perhaps they were just making a lot of money on something like Bre-X. These are supposed to be the smart people.
Ms Stymiest: My answer, to clarify, is that some of the smart people figured it out, some of the creditors figured it out and reduced their exposure, and some of the investment banks figured it out and were issuing sell recommendations. Unfortunately, it was not the majority until it was too late in the game, in the situation of Enron. There was a fair degree of information. If you look at the basic earnings versus cash flow that was being generated by that company over a span of time, there were clear signals there. However, the marketplace is not sophisticated in a way to catch all the situations all the time.
Senator Poulin: Ms Stymiest, you mentioned the importance of reporting not only by the listing companies but also the financial institutions. You spoke also about the importance of ensuring that Canadians have access to capital markets. Do you feel that the reporting systems we see now when we read the annual reports of our major Canadian banks are appropriate? In other words, the loans that banks make to either SMEs or mid-sized businesses are all lumped in with the very larger loans to institutions.
Ms Stymiest: I would not position myself as an expert on the reporting and disclosure of our Canadian banks in particular. I am an accountant by training. I am not sure that segregating the loans by the size of the party to whom and institution is lending would add quality to the disclosure. I think the trend in bank reporting has certainly been to look at the risks associated with the loans and to set up appropriate provisions against those loans. Clearly, the Superintendent of Financial Institutions plays an important role in that oversight.
I think that the disclosure that is both in the documents that are required of a bank as a public company and the disclosure that is required of banks as regulated entities collectively does a pretty good job of our banking system, from a global context, in terms of protecting both shareholders and depositors.
The Chairman: There really would be no way to give a whole dissertation on the quality of the loan portfolio. The bank does it by taking write-offs. As you may have seen, they are getting larger. We also have OFSI. Perhaps using the bank as an example is extraordinary.
Senator Angus: You have made reference to what we call the Purdy Crawford Report, the review of the Ontario securities legislation that came out last week. One of the things they emphasized was the penalties. They said that all of these insider-trading rules are great, but, if you do an improper act and you make $20 million and simply get a $2,000 fine, it is not a bad deal. Mr. Caldwell was very candid with us last week in this regard.
What do you think of the recommendations contained in the Crawford report?
Ms Stymiest: I have only read some of the summaries of the report to date. However, I am aware of the provisions to which you refer.
I support the Purdy Crawford recommendations in the case of the Ontario Securities Commission: They do need broader powers to at least fine those committing misdeeds. It is not well understood by the public that when there are infractions, as in market manipulation or insider trading, that it is not within the current powers of the Securities Commission of the largest capital market in Canada to find the miscreants. I am supportive of that part of his report.
Senator Angus: In the same vein on insider trading, I believe that both you and Mr. Brown of the OSC are on record as saying that one malaise in our system today is insider trading and that must be cracked down upon and that we do have a problem?
Ms Stymiest: I do not believe I have been on the public record in that regard. However, any form of market manipulation, including inappropriate insider trading or undisclosed insider trading, should be well-disclosed and well- policed.
As I indicated in my prepared remarks, the monitoring for insider trading has gone away from the TSX Group. Regulation Services Inc. now does the monitoring. There are many resources devoted within Canada toward identifying market misdeeds and market manipulation.
David Brown, others involved in capital markets and I would agree that it is appropriate to monitor for inappropriate trading and to take appropriate sanctions. That relates back to your previous question, that we need to ensure that those who have the rules and the rulebooks — which in the case of insider trading is clearly the provincial securities commissions — also have in their toolkit the ability to sanction appropriately. That is somewhat short at the moment according to the Crawford committee.
Senator Angus: In terms of confidence, particularly of the retail investor, we have had an incredible run-up of the tech stocks and the run-down or the bursting of the bubble. Then the little investors always get in too late and get out too late and get hurt the most, in relative terms, to what they can handle or afford. That seems to be human nature. Then they see insider-trading reports that are publicized long after the fact and they are seeing the CEOs and inside management having bailed out while the stock was at $40 and now it is at four cents.
What is your opinion on electronic filing and more instantaneous reporting of insider transactions? Would the people who were hurt in Nortel have been hurt less severely if they had known that John Roth was selling his stock at $68? I do not mean to point a finger at John Roth. I am not suggesting that he did not comply absolutely with the law, but people found out later in a number of companies that the bosses were getting out relatively unscathed. We see that in Enron, as well.
Would electronic filing or a new modality for all investors be prudent, especially the retail investor?
Ms Stymiest: You are absolutely accurate. It is important for the marketplace to move to electronic disclosure of insider training. The provincial securities commissions have been engaged in providing a system for electronic disclosure of insider information — known as SEDII — which was launched in the fall of last year. Due to technical problems, we are still using the paper-based system today. That system is operated by the Canadian Depository for Securities on behalf of the Canadian securities administrators.
We are supportive, as a marketplace, because we believe that that quality and kind of information is important for investor confidence. It should be timely and easily accessible to all of the investing public, be they institutional or retail investors. The first step is to capture that information in an electronic format, which we hope will happen some time later this year when the system for electronic disclosure of information is back up and running. There is still a way to go to get that information disseminated in an appropriate way. We would be strong advocates of that happening in the marketplace as quickly as possible.
Senator Angus: Finally, as someone who is clearly interested in fairness in the marketplace, and for the credibility of our Toronto Stock Exchange, do you think it is possible to have a level playing field between retail and an institutional investor?
Ms Stymiest: I must reflect on that question. The view of the exchange is that we operate on behalf of all issuers and all investors, irrespective of whether they are retail or institutional.
Everything that we are striving to do from the position of the exchange is to operate in the best interests of both institutional and retail investors. We will continue to do that in our mandate.
Senator Angus: When you finish reflecting, I would be interested to know your response. I have been following the securities legislation, the requests for companies to file their disclosure policy and all of the good things that have come out, the conference calls and different dealings with analysts and so on.
I get the feeling that the dice are becoming more and more loaded against the little guy. This is a tremendous problem.
Ms Stymiest: I agree with you. However, it also points to an important role for the intermediaries to play — particularly given the complexity of capital markets, the number of issuers, the types of issuers, across the depth and breadth of all capital markets, including equity, debt and other instruments. In order for the small investor not to be hurt, they should have professional advice.
We all take professional advice in other aspects of our life, such as our real estate salesman who helps us to buy or sell a house. That is no different than when we take control of our financial affairs and look to the experts to advise us appropriately. That does bode well for the future of the intermediaries as well.
Senator Angus: They will be glad to hear that, though the retail guy may not.
The Chairman: I concur completely on your last point.
I imagine that some form of education may be stemming from your organization or elsewhere in terms of getting the retail investor to understand some of the complexities.
I play golf with many guys who tell me they ``play the market.'' You hear that expression time and again. That is what they are doing, they are playing, but it is not a game and they get hurt. I do not know how we will correct that, but it would be interesting to hear your ideas on that in due course.
Sometime in the fall, this committee will come up with a report that will contain ideas, challenges and other messages that we wish to send out to the provinces. We are a federal body and there is a limit to our jurisdiction.
I should like to hear from you after due reflection, if you think there are any areas in which we should be thinking of recommending legislation. It is one thing to have a report and say things are no good, but what do we do about it? If you could think about it and come back again at some point to help us clarify our ideas on what, if anything, can be legislated to prevent future Enrons.
Ms Stymiest: I appreciate the opportunity and look forward to having the chance to respond to your request and appear before you in the fall.
The Chairman: Thank you for your time, and good luck in your endeavours.
We are now moving on to Bill C-47. Our panel of witnesses from the Department of Finance are Mr. Wilfert, Ms Malone and Mr. Willis.
Mr. Bryon Wilfert, M.P., Parliamentary Secretary to the Minister of Finance: Mr. Chairman and members of the committee, this legislation introduces a modern legislative and administrative framework for the taxation of spirits, wine and tobacco products under the new Excise Act, and it implements excise measures relating to ships' stores and tobacco tax increases.
The existing Excise Act is the foundation of the federal commodity taxation system for alcohol and tobacco products in Canada. It is also one of the oldest taxing statutes. Portions of the act date back to the 1800s, and except for periodic amendments, the act has never been thoroughly reviewed and revised until now.
Industry and government have been aware for some time that the excise framework needed to be updated, and from the perspective of industry, the Excise Act is not able to adequately accommodate new technology and current industry practices. Further, the pervasive controls imposed by the act impair the ability of Canadian producers to compete with the increased foreign competition at home. From the perspective of government, the act impedes the ability of the Canada Customs and Revenue Agency, CCRA, to fully adopt modern administrative practices.
At the same time, other excise issues need to be addressed. For example, tobacco manufactured in Canada is currently taxed under both the Excise Act and the Excise Tax Act, which creates complexities and inefficiencies for both government and industry. There is also a need to deal with the problem of contraband wine. Wine is taxed under the Excise Tax Act, and there are no substantive controls on its production.
The government recognized the need for a new excise framework, and in 1997 a discussion paper on the Excise Act review was jointly released by the Department of Finance and CCRA. Draft legislation and regulations were subsequently issued in 1999. Extensive public consultations were an integral part of the review.
Throughout the Excise Act review, the government was guided by three main objectives. First, to provide a modern legislative framework for a simpler and more certain taxation structure that recognizes current industry practices. Second, to facilitate greater efficiency and fairness for all parties, leading to improved administration and reduced compliance costs. Third, to ensure the continued protection of federal excise revenues.
Refinements were made along the way to the original discussion paper proposals, with the result that Bill C-47 has broad support among the spirits, wine and tobacco sectors, as well as the provincial liquor boards and law enforcement agencies. It should be noted that the new excise framework does not address substantive tax base and rate issues for alcohol and tobacco products, nor does it address beer, which will remain under the existing Excise Act for the time being.
Bill C-47 incorporates key elements of the framework outlined in the 1997 discussion paper, including extending the current production levy on spirits to wine, and the imposition of a production levy on spirits and wine allowing for strict controls on the production, importation, possession, and use of non-duty-paid alcohol and significant penalties for breaking the law.
The legislation removes the outdated and onerous controls on premises and equipment. This change will provide businesses with more flexibility to organize their commercial affairs to respond more quickly to changes in the market. Except for wine made by individuals for their personal use, anyone producing or packaging spirits or wine must now be licensed. However, small vintners will continue to benefit from a tax exemption if the sales of wine do not exceed $50,000 in the previous 12 months.
The bill also defers duty on packaged alcohol to the wholesale level. The new warehousing regime will put domestic and imported packaged spirits and wine on an equal footing, along with accommodating the privatization initiatives of some of the provinces for the warehousing of liquor. The current controls on spirits used for authorized non-beverage purposes will be maintained and will be extended to cover the use of wine. These controls will ensure the protection of federal excise revenues, as will new measures for imported industrial alcohol. Imported denatured industrial alcohol, for example, will have to be sampled and tested to ensure it meets Canadian standards.
Bill C-47 also eliminates the nominal rates of duty on spirits for certain non-beverage uses, and these duties have not been applied in a consistent manner and put domestic products at a disadvantage with competing foreign products entering Canada.
Fines for alcohol-related offences will be substantially increased and proceeds of crime provisions will apply to serious alcohol offences. These changes, together with new enforcement measures, will help the government counteract the smuggling of alcohol.
The revised excise framework also extends to tobacco. A single production levy will replace the current excise duty and excise tax on tobacco products, other than cigars — a change that will reduce the compliance cost for industry and improve administration. An important component of the new excise framework is the revised tobacco tax structure, which became law last spring, That structure includes an excise levy on manufactured tobacco sold in duty-free shops; a customs duty on manufactured tobacco imported by returning residents under the travellers allowance; and a revised excise tax and duty structure for exported domestically manufactured tobacco.
Although Bill C-47 provides a more streamlined framework for the taxation of tobacco, I want to ensure honourable senators that the fundamental controls over tobacco under the existing excise framework will be maintained.
In particular, the current stamping and marketing requirements for tobacco products will continue to apply and to play a key role in the enforcement of the tobacco provisions in this bill. The new framework also incorporates the current offence provisions relating to the illegal production, possession or sale of contraband tobacco.
Administrative measures introduced in this bill will enable to CCRA to improve its level of service to clients and its overall administration of the excise framework for alcohol and tobacco products. These measures include: a return and duty remittance structure, harmonized with commercial accounting periods and the GST/HST legislation; new assessment and appeal provisions similar to those under the GST/HST legislation; and a range of modern collection mechanisms. Excise duties on alcohol and tobacco will now be collected in a more effective and efficient manner. As well, the new framework provides an array of modern enforcement tools to ensure compliance with the new act.
Bill C-47 also deals with excise measures relating to changes to ships' stores, provisions and the tobacco tax increases that were announced last fall. The first measure provides the proper legislative authority for ships' stores regulation, which the Federal Court of Appeal ruled went beyond the scope of enabling legislation.
The second measure implements a temporary fuel tax rebate program for certain ships travelling on the Great Lakes and the lower St. Lawrence River that are not engaged in international trade and that will no longer qualify for ships' stores relief after June 1, 2002. The rebate will provide effective operators with adequate time to make the transition to the new ships' stores rules.
The final measure legislates the federal tax increases on tobacco products that were announced last November that are part of the government's comprehensive tobacco strategy to reduce tobacco consumption by Canadians. These measures re-establish a uniform, federal tax rate for cigarettes across the country — one more step in the process of restoring tobacco tax rates to pre-1994 levels in ways that will minimize the risk of renewed contraband activity.
Honourable senators, Bill C-47 brings Canada's excise into the 21st century. A new legislative and administrative excise framework will generate stable and secure revenues and will address contraband pressures without imposing unnecessary or unrealistic costs and burdens. At the same time, the bill rationalizes the ships' stores provision and implements tobacco tax increases to reduce tobacco consumption.
As you indicated, Mr. Chairman, officials from the Department of Finance have joined me here today, and we would be pleased to answer any questions.
Senator Kelleher: I am curious to know why beer was exempted.
Mr. Wilfert: Beer was exempted because we could not come to an agreement at that time and rather than hold it up, the Canadian Brewers Association felt that we would move ahead and deal with it at a separate time.
Senator Kelleher: Will these new regulations, price increases and taxes apply to duty-free shops?
Mr. Wilfert: Yes.
Senator Kelleher: What is the object of calling it a ``duty-free'' shop when we tax the goods being sold? I thought duty-free shops were supposed to be cheaper.
Mr. Wilfert: They will be cheaper, regardless of whether there is additional tax.
Senator Kelleher: There will be additional tax.
Mr. Wilfert: Yes.
Senator Kelleher: How does this compare with the duty-free shops in the United States, from a competitive point of view?
Mr. Brian Willis, Senior Chief, Excise Act, Sales Tax Division, Tax Policy Branch, Department of Finance: Perhaps I should clarify that we are talking about tobacco products, not alcohol. Alcohol is not taxed federally when sold to duty-free shops. There are provincial markups levied on alcohol sold in duty-free shops, but the federal excise duties and taxes do not apply.
This bill, as a previous bill did, applies federal excise levies on all tobacco products manufactured in Canada or imported for sale here, including the products sold through the duty-free shops. We are truly talking about tobacco products. Those same tobacco products sold in the U.S. duty-free stores are also taxed by Canada before they leave the country.
The tax rates on tobacco products manufactured in Canada and sold in a Canadian duty-free shop, or in a foreign duty-free shop, are the same.
Senator Furey: To follow up on that, if you were bringing into Canada cigarettes from the United States that did not already have Canadian duty paid on them, you would have to declare them and pay the duty?
Mr. Wilfert: That is correct.
Senator Furey: Why are rate and benefit changes not proposed in the context of the Excise Act Review? How has the concern of the small breweries been addressed with respect to their request for a graduated 60 per cent reduction?
Mr. Wilfert: Nowhere in the bill do we mention beer or breweries. We will deal with that later.
Senator Furey: How has that concern been dealt with?
Mr. Wilfert: It is being dealt with by an analysis that was done and is currently being reviewed. I presume the minister will comment on it in the future. It is actively being reviewed.
As far as the first part is concerned, I will ask Ms Malone to address that.
Ms Patricia Malone, Chief, Excise Act Review, Sales Tax Division, Tax Policy Branch, Department of Finance: Would you please repeat your question?
Senator Furey: Why are rate and benefit changes not being proposed in the context of the review?
Ms Malone: The review was intended to replace the current Excise Act, which is very old and has a series of problems that were described by the parliamentary secretary. With the new administrative and legislative structure for the taxation of alcohol and tobacco products, the decision was taken at the outset of the review not to deal with rate and base issues because they did not deal with structure of the excise framework and they were potentially contentious issues. Different sectors in the alcohol industry had different views on these matters. We thought it would be preferable to put them aside and deal with them in the context of the budget process.
Senator Stratton: As I understand it, the excise tax will be payable at the time of packaging or bottling, but if the wine is moved into an excise warehouse, the production levy will be deferred until the product is sold out of that warehouse. Is that correct?
Ms Malone: That is correct.
Senator Stratton: The issue is that, as a result of the House study on this bill, there was an amendment at committee stage to exempt wineries with an annual production of less than 150,000 litres from the excise warehouse rule. The government members defeated it and promised a review. Could you explain to us why this was not included?
I will give you further background. A large winery that produces large volumes has warehouses. They take the product, put in the warehouse, lock it and it is secure. Many of the smaller estate wineries may not have that. Where do they put their product? How is it secured? It usually goes on to the shelf when there are smaller volumes. They have a difficult time, I imagine, with the problem of paying the taxes as soon as it is bottled because they have no place to put it.
Is this true with respect to the 150,000-litre maximum that the small wineries try to achieve, with the government members promising a review? Could you give me some background on that? I am confused. The large wineries seem to be fine. The smaller guys are getting hit. That is the perception.
Ms Malone: My understanding of the amendment that was proposed at the House committee stage was that it was to exempt from the payment of tax altogether wineries below a certain size. Since, from the government's perspective, the review is not the appropriate forum for dealing with rate issues, that issue will not be dealt with in the context of the review but is being reviewed in the context of the request from the brewers. The department is reviewing both rate reductions. At some point, recommendations will be made to our minister.
Mr. Wilfert: We did give an undertaking that we would do that.
Senator Stratton: As I understand it, the tax measures on tobacco will bring in an additional $240 million per year. Senator Kolber and I tilted at windmills on this issue a few years back.
A tax like that should at least be revenue neutral. If you are going to say to the public, ``We are going to hit tobacco with an additional $240 million a year in tax to encourage people not to smoke,'' it is a great idea. However, the monies accrued from that should be used to be put into products, educational features or into communications to encourage people not to smoke. In other words, it should be revenue neutral. This is a political question.
Mr. Wilfert: This money will go into general revenue. As you know, we have various tobacco prevention strategies. This is certainly part of it. Health Canada could request monies for such programs. A number of years ago I was involved with a program of the Department of Health called ``Break Free All Stars'' which was aimed at 7 to 11-year- olds. I was president of the Canadian Parks and Recreation Association. The program was aimed at preventing and educating young people not to smoke.
Obviously, the goal is to reduce tobacco-related illnesses. You are right, there will be these additional dollars. I did indicate that we are looking to go back to pre-1994 levels, particularly trying to ensure that we do not get renewed contraband as well. The promotion of prevention is important.
Senator Stratton: When you considered imposing an additional $240 million a year in tax, did you think about saying, ``Look, this is a serious issue. We should give it to the Canadian Lung Association or the Canadian Cancer Society, for example, to use in educational programs to encourage people not to smoke''
This is just another example that we see about every four years of the government bumping taxes in a roundabout way. They go into general revenues, but no additional money is given to where it is needed — that is, on the educational side. Our government tried the same thing on this issue. I think it is important that this money should be taken and used where it should be used best and not just put into general revenues. Do I have your commitment — and I seem to think I have it at least in part — that you will look at that?
Mr. Wilfert: As you know, there is a clear correlation between price and consumption, particularly among young people. There is enough evidence to suggest that.
With respect to prevention strategies, yes, that is one thing the government, particularly the health minister, is strong on. Obviously, I can only tell you that this has been a cornerstone of government policy. Depending on what Health Canada's demands are, there is no question that we are looking at protection, prevention, cessation, and surveillance in part with this approach. This is obviously aimed at young people. The evidence is overwhelming that price has an impact on demand.
Senator Angus: I note there are two witnesses from the Department of Finance but no one from CCRA. Is there any reason for that? I understand, Ms Malone, that you were one party to the project but you had an opposite number from CCRA.
Mr. Wilfert: In fact, senator, if you have a specific question of CCRA, there are officials here in the room who could deal with it.
Senator Angus: I wondered if there was any real reason. It is more in their ballpark than that of Finance.
Mr. Wilfert: Since I have assumed this job, I have found that I am dealing with many issues that may not be directly with the Department of Finance, but I am the lucky candidate.
Senator Angus: This is framework legislation and, as such, part of a larger thing. Last year we dealt with Bill S-23, which was a streamlining of the customs framework laws. We were trying to enhance our ability to move people and goods freely across not only the U.S. border but also the borders of our other friends and neighbours. Subject to you correcting me, I view this law as part of that kind of legislative reform. Is that fair?
Mr. Wilfert: Much of this legislation dates back to the 1930s, and some even to the 1880s. We had the paper in 1997 with input from all stakeholders. It is important that this be modernized. Some provisions are so out of date that, in the modern context, if I were to come into your place of business and rip out some of your walls because I was looking for something that was on the books, or that type of thing, you would say, ``Wait a minute.'' We are trying to modernize the administration and the execution.
Senator Angus: I understand that. I wanted to get to several points, one of which is nomenclature. It may seem elementary to you, but I would like to hear it for the record. We hear about customs duty. We hear about excise duty. We hear about excise tax. Can you give us a lexicon explaining the difference between these various levies?
Ms Malone: Customs duties are imposed under the customs tariff on imported products and they apply only to imported products. They are imposed under customs legislation. You have general customs duties that are, basically, customs tariffs and then more specific customs duties, for instance, that apply to specific products, but they only apply to imported products.
Senator Angus: Are they always referred to as a duty or a tariff?
Ms Malone: Yes.
Senator Angus: Not an excise tax?
Ms Malone: An excise tax is a tax imposed under the Excise Tax Act. It is a specific levy that applies to domestic and imported goods. It applies to all goods. For instance, we have an excise tax on fuel. It applies to domestic gasoline and diesel fuel and imported gasoline and diesel fuel.
Senator Angus: What does ``excise'' mean? How do you differentiate? You mentioned that customs duties apply to imported goods, but also excise taxes apply on imported goods.
Ms Malone: Excise taxes are more general goods. They are simply a tax on a specific product with no regard to whether it is imported or domestic, whereas customs duties are only concerned with imported products.
Excise taxes are very specific levies. The government might decide, for instance, that excise taxes should be imposed on tobacco to discourage consumption or on fuel to raise revenues. They are very specific, and they are targeted to specific goods.
Excise duties under our current system simply apply to domestic alcohol and tobacco products. They are taxes that are imposed at the production stage. They are imposed at the time of production. For instance, the excise duty on spirits is imposed at the time the spirits come into existence, or for beer, at the time of packaging. They are specific production levies on domestic goods.
Senator Angus: As opposed to sales tax, for example?
Ms Malone: That is correct.
Senator Angus: It is an indirect tax.
Ms Malone: The former federal sales tax was an indirect tax. The GST is a value-added tax, but it essentially applies to all goods, with some exceptions. However, the intention is to apply to all goods. Whereas excise taxes and excise duties only apply to specific goods.
Senator Angus: One of my colleagues raised an anomaly about so-called ``duty-free'' shops. It conjures up something different for everyone. Are you saying that in the duty-free shops — as we know them at least in Canada — you are only getting duty-free spirits and tobacco products? Are all those perfumes and little chocolates and that stuff they sell in duty-free shops not duty free?
Ms Malone: Under the customs legislation, duties can have a very general meaning. It can mean customs duties, but it also means all other taxes imposed on goods, including the GST and excise taxes. A duty-free shop would be a shop where goods would be sold free of certain duties, but that would include excise taxes generally and GST.
Senator Angus: I am assuming that in the Canadian duty-free shops, we are dealing with Canadian products, so there would be no customs.
Ms Malone: There are Canadian and imported products. For instance, there is a lot of imported alcohol.
Senator Angus: That duty that would have been paid bringing it in through a liquor commission would be removed if you were at a duty-free shop?
Ms Malone: That is correct.
Senator Angus: It has always been a bit of an anomaly to me. I do not know whether it is designed to confuse.
One area I have had experience with is ships' stores. You have seen fit to amend the law as it relates to ships' stores. Can you help me by saying what specific change is being made here? Will the end result leave our ships in a level playing field situation vis-à-vis the people they are competing with?
Mr. Wilfert: As I indicated from the beginning, those on the Great Lakes and those on the lower St. Lawrence, which were not engaged internationally, were in fact benefiting. We are looking at making those changes. There was a court ruling on this, which I referred to in my comments. B.C. Ferries took its concerns to court and the Federal Court of Appeal ruled the ships' stores regulations went beyond the scope of the enabling authority.
Senator Angus: Was the gist of that decision that looked at the enabling legislation to provide an exemption for various goods that are in an international trading environment, whereas it was being applied in non-international transit?
Mr. Wilfert: Potentially, yes. We realized we have to comply with this court decision. At the same time, realizing you cannot say you had this benefit today and therefore we are going to change it for tomorrow, we have allowed for a three year basic period for them to adjust to the new regulations.
Senator Angus: Why not just change the law so you could continue? That decision sounds like a boon to the fisc.
Mr. Wilfert: If they were not in international waters, why would they be treated as if they were?
Senator Angus: They were being treated that way and it seemed to work well. They are in a kind of a tourist business. We are not talking about cargo vessels. We are talking about passenger vessels that are out cruising the St. Lawrence and up and down the Saguenay and around the Great Lakes, and one attraction is, ``Come on our boat, have a cruise, and buy some duty-free smokes.'' I always thought that was part of the deal, and it was helpful to the people engaged in that business. We are hammering them now.
Mr. Wilfert: The fact is that we recognize there will be an impact, which is why we decided on the temporary fuel tax rebate. It brings the regulations into line with the underlying policy rationale and ensures an even application of tax to domestically operated passenger ships, ferries and tugs, so it applies to all.
Senator Angus: I did mention on the cargo vessels that you have vessels in the Great Lakes and go to the U.S. Great Lakes or from Seven Islands to a U.S. port such as Duluth, and they have four or six passengers on board. They are in international trade, commercially. I understand there is a bond on board and you have your duty-free liquor and cigarettes. Is that true? Is that relevant to this?
Mr. Wilfert: Only to the tugs, the ferries and the passenger ships. You are talking about a ship that might move iron ore, as an example
Senator Angus: Yes. Even some that are owned through a blind trust by the Minister of Finance carry passengers on cargo boats. They have nice cabins and they say, ``Come and sail and have a cruise from Seven Islands to Duluth and back.'' It is a reality. It is not just CSL; it is Algoma Central and the former Patterson and so on. These ships are engaged in a viable lakes trade. They carry passengers. Is there anything in this act that is attacking or exempting them?
The Chairman: I might point out he is not the Minister of Finance.
Senator Angus: I guess I have been out of town.
Mr. Wilfert: I understand the nature of the question, but, no, he does not have any. Mr. Willis may wish to elaborate. I understand you are talking about iron ore.
Senator Angus: Let us be clear. The shipping industry is something I know a little bit about. I am trying to find out whether there is anything in this bill that is changing the current rules in respect to ships' stores — either on passenger vessels or ``passenger cargo'' vessels.
Mr. Wilfert: Only again as indicated: Those in the lower St. Lawrence and the Great Lakes in terms of the fact they were engaged in something, which is not the case, and recognizing the situation and recognizing the court decision, having a three-year fuel tax rebate. Beyond that, that is what it is applying to.
Senator Angus: In other words, the only change vis-à-vis ships is to conform to the B.C. Ferries' decision, with a three-year running-in period. Am I right?
Mr. Wilfert: You are correct, senator.
Senator Angus: Do you include airplanes as ships?
Mr. Wilfert: No, sir.
Senator Angus: Is there anything that will affect the duty-free, such as when one flies from Toronto to Paris?
Mr. Wilfert: Senator, in terms of airplanes, are you talking about when you are on an international flight?
Senator Angus: Yes.
Mr. Wilfert: I have been talking about domestic; for international, the answer is yes.
Senator Angus: There is no change. This will not change the quantum and/or other treatment of the commerce in so- called duty-free goods on board aircraft; is that right?
Mr. Wilfert: There is no change at all.
Senator Tkachuk: I have a question on the $10 being charged at duty-free, and we had quite a discussion when this was instituted. The tax right now is $10 per carton and it is going up by another $1.50. I heard you explain that this was a deterrent, designed to stop young people from smoking. Is that the reason for the tax?
Mr. Wilfert: It is implementing provisions from November 1, 2001. It is, as I indicated, part of the government's anti-smoking strategy.
Senator Tkachuk: For a smoker who lives in Toronto, how much tax is there on a carton of cigarettes? What is the federal and provincial tax? In other words, is a carton of cigarettes still more expensive in Toronto than at duty-free shops?
Mr. Wilfert: I am not a smoker, so I could not tell you.
Senator Tkachuk: You are here defending the tax.
Mr. Wilfert: You have to add provincial taxes as well. As you know, they will go up.
Senator Tkachuk: That is my point. How much does it cost in Toronto?
Mr. Wilfert: The total for a carton of cigarettes is $43.41.
Senator Tkachuk: What does a carton of cigarettes cost in a duty-free shop in Toronto?
Mr. Wilfert: In a duty-free shop, the applicable tax would be removed.
Senator Tkachuk: Therefore, it would be cheaper?
Mr. Wilfert: It would be cheaper in a duty-free shop, yes.
Senator Tkachuk: I am a smoker who buys cigarettes in Toronto. In a duty-free shop, a carton of cigarettes is cheaper. How is that a deterrent?
Mr. Wilfert: The cost is going to go up.
Senator Tkachuk: How is it a deterrent if I pay less at a duty-free shop than I do at the 7-Eleven in Toronto? How is that a deterrent?
Mr. Wilfert: I have my own thoughts.
Senator Tkachuk: You are the Parliamentary Secretary. It is a parliamentary question. You should tell me what your thoughts are.
Mr. Wilfert: Senator, I do not smoke, but if I did, I would suggest to you that any time there is a tax increase, there will be an impact on consumption. I do not care whether it is in a duty-free store or on the street. I presume it will have an impact.
Senator Tkachuk: My point is, if you are at a 7-Eleven in Toronto and you are paying $10 at the duty-free shop, the government is justifying that tax. I find the reasoning of governments difficult. I wish they would say, ``We are going to take your money because we need it,'' rather than trying to justify taking it with an illogical reason, such as, ``We are going to provide a deterrent.''
There is no deterrent if it is cheaper to buy at the duty-free shop than it is at the 7-Eleven. There is no deterrent. If it was more expensive, it would be a deterrent.
Mr. Wilfert: It is a philosophical discussion.
Senator Tkachuk: I am not using the argument, sir.
Mr. Wilfert: You are using the argument, with all due respect. The fact is that you may or may not agree — as is your right — as to whether or not increasing taxes on tobacco is a good strategy to reduce consumption, whether that is at 7-Eleven or a duty-free store. The fact is that when price goes up on a product, people think about whether or not they want to consume that product.
Senator Tkachuk: That is true. I wish the government would recognize that for other tax reasons as well, not just cigarettes. The higher the taxes go, the less the consumer has to spend on anything, and that includes income tax, gas tax and capital gains tax. You do not recognize that argument but you recognize it with regard to smoking.
Mr. Wilfert: Actually, we do. You have heard of the $100 billion tax cut over five years. You know we reduced the capital gains tax from 66 to 50.
Senator Tkachuk: We are happy about that.
Mr. Wilfert: I would point out that, yes, the government has recognized that.
Senator Tkachuk: How much money has the $10 a carton brought in since it was instituted and has it had a negative effect on the duty-free shops?
Mr. Willis: We would not have those revenue numbers by duty-free shops. They are aggregated in the public accounts because the tax is collected at the manufacturers' level when the manufacturer produces a cigarette. The revenue breakdown by location of sale is not something that is available to us.
Senator Tkachuk: You are asking for another $1.50 in addition to the $10 in this particular bill. Is that right?
Mr. Willis: That is what this bill proposes, yes.
Mr. Wilfert: That is correct, Senator.
Senator Tkachuk: This is aimed at the general population and whomever it is that you are trying to stop from smoking. Have you had consultation with the duty-free shops as to how it affects business? I would think cheap cigarettes would draw people to the shop, much as cheap alcohol does. Have there been job losses or have you talked to the duty-free shops about it? In other words, have there been social costs outside of the social cost you are trying to fix?
Mr. Wilfert: We have talked to the industry. It is still going to be cheaper in the duty-free shop, because, as Senator Angus was saying, the taxes are not on those particular products. The margin, it is fair to say, would be there.
Senator Tkachuk: There have not been any negative effects at the duty-free shops because of the $10 tax that you have imposed today, which you are now going to increase to $11.50?
Mr. Willis: I understand there are representatives from the duty-free industry. I think it would be preferable if they spoke to the impact on their industry. We have had conversations with them and certainly they have made suggestions that there has been an impact. Since they are here to appear before you today, it would be preferable for them to give you the facts in terms of their point of view.
Senator Tkachuk: That representation obviously did not have any effect on your decision to increase the tax to $11.50?
Mr. Willis: The government took a health decision. It was decided that it was raising taxes on tobacco generally to try to achieve its health objectives of discouraging smoking, and that included tobacco products for sale in all different forms and places — including duty-free, exports from Canada and re-importations by travellers. It is a health issue, and that is what the government has proposed.
Senator Tkachuk: I do not agree with you that it is a health issue in the duty-free shops. However, we will let that go by, because obviously I am not going to change your mind. I do not believe it is a deterrent.
Senator Hervieux-Payette: How high does the tax have to be for you to stop smoking?
Senator Kelleher: It cannot be high enough to stop him from smoking.
Senator Tkachuk: In the State of California 10 years ago, cigarettes were $2 a pack while here they were around $4 or $5 a pack, and cigarette smoking in California went down by a larger amount than it did in Canada. I do not buy all the arguments. In fact, I think California has the lowest number of people who smoke in all of North America, and their cigarettes are quite inexpensive.
Senator Stratton: He is not going to quit.
Senator Tkachuk: It does not work with marijuana or heroin.
The Chairman: From the Association of Canadian Airport Duty-Free Operators, we have Kathy Kendall, André Bergeron and Remo Mancini.
Mr. André Bergeron, Vice-President, Association of Canadian Airport Duty-Free Operators: We are pleased to appear before your committee on behalf of Canada's duty-free industry and in particular the Canadian airport duty-free shops across the country. Our main intent is to express our concerns about Bill C-47, which is taxing the ``tax and duty-free'' retail industry. It sounds strange, but this is the reality of the day. Rather than reading our individual presentations, each of us will deal with specific damages and/or misconceptions prevailing in support of this ill-advised taxing on our industry.
The first point relates to the legitimacy of our business and the negative impact of this tax. It must be understood that what identifies our business in the minds of our customers and the public-at-large are the words ``tax and duty- free'' printed on our storefronts and our banners. Our market niche is that simple and straightforward statement: ``tax and duty-free.''
When customers now discover that some of the products carried in the stores are being taxed, we lose our credibility as a merchant and as a retailer and we lose the main attraction of the store. When you take away the legitimacy or the credibility of any business — even if it only affects part of the business — you take away the credibility of any retail business.
Customers now no longer believe that we are what we say that we are — we are no longer tax and duty-free. When this tax was imposed last April, consumer perception about duty-free began to erode almost immediately. In fact, a new perception emerged, here and internationally, that in Canada ``duty-free'' no longer means duty-free and that ``tax and duty-free'' shops are no longer tax and duty-free. As tobacco has a high profile in the duty-free retail industry, it has been some kind of yardstick to identify that it is true that these products are tax and duty-free.
Whether or not you smoke or buy tobacco products, when you identify that one of the main categories of commodities is no longer what the business has always maintained in the past you reduce your visits to the shop. The shop suffers reduced sales, thereby directly affecting our suppliers, our employees, the rent we pay to the local airport authority and ultimately the Canadian government through Transport Canada.
We know the current plight of local airport authorities across the country and their lobbying efforts to get some relief from their overall federal fees. A significant portion of those funds is generated by concessionaire rents. It is worth noting that the duty-free concessionaire in each of the Vancouver, Montreal and Toronto airports are the largest single retail tenant.
This tax pulls the carpet our from under our feet. It is affecting the business. September 11 has obviously compounded this difficulty, but this is a specific issue affecting our business directly. It started to affect our business prior to September 11.
Another misconception is that airport duty-free retailers are contributing to the incidence of smoking. Airport duty- free retailers do not contribute to the incidence of smoking and much less to youth smoking. People who start smoking start by buying a pack of cigarettes, not a carton of cigarettes. Numerous studies in the past have supported this point. People who are frequent travellers do not travel on a daily basis. We are neither supporting nor encouraging the incidence of smoking.
Furthermore, in the case of youth smoking in particular, current surveys show that, of all international and trans- border traffic, people below the age of 19 represent approximately no more than 3 per cent of our traffic. That 3 per cent is usually accompanied by an adult or guardian and, like any other customer, is subject to restrictions in terms of accessibility to the store as well as having to show proof of age and a boarding pass whenever they effect their purchases.
In 1995-96, following this government's consultation on tobacco control, in a document entitled ``Tobacco Control Blueprint to Protect the Health of Canadians,'' the duty-free retailers' industry was exempted from the restrictions limiting accessibility to cigarettes in order to curb youth smoking. Those restrictions were maintained for the domestic industry. However, the tax and duty-free industry was exempted, as the government saw then that we were not affecting the incidence of smoking. It is the same condition today.
Third, the duty-free industry is part of the legitimate Canadian economy and it contributes substantially to the funding of local airport authorities. We pay in excess of $55 million per annum in rents and have invested over $20 million in store refurbishment in airports. The substantial decrease in our business contributes to the decrease in revenues we pay to the airports, in a situation that is already difficult for them.
To conclude, let us take corrective action to eliminate or suspend this ill-advised tax on the tax and duty-free business. In the period 1992-93, there was an attempt to establish a so-called ``export tax,'' which was suspended in 1993 and again last year. It was suspended again because it was understood that our industry does not contribute to smuggling, or to the incidence of smoking.
Ms Kathy Kendall, The Nuance Group (Canada), Association of Canadian Airport Duty-free Operators: In addition to being with The Nuance Group, which is the largest retailer in Canada, having 70 per cent of the market and some 700 employees, I am also here as a representative of the airport duty-free association.
With respect to this tax, which was imposed last April, you may realize the one thing you have not heard is any explanation from any person on how duty-free retailers contribute to the smuggling problem. No one has given you that explanation. It gets thrown out there that it was necessary to impose this tax on duty-free retailers because we want to prevent smoking, as if saying it makes it true. The reason you have not heard that explanation is that duty-free retailers do not contribute to the smuggling problem of tobacco.
At airport retail duty-free, there is a one-carton limit. Customers must pay tax on more than one carton. Even supposing that someone could be very clever and smuggle a carton on their person or carry-on — access to duty-free is after the luggage check — just how many cartons do you think they can smuggle on to an aircraft? Surely they cannot smuggle enough to support any sort of smuggling industry. That argument holds very little weight.
At the World Health Organization consulting framework for tobacco control held in Ottawa last fall, no-one from the RCMP or the CCRA was able to give an explanation of precisely how duty-free retailing contributes to smuggling, and the airport retailing association did press them. At the end of the meeting, the RCMP committed to revising the language they will take back to the World Health Organization meetings in Geneva to reflect the fact that duty-free retailers are not responsible for a tobacco smuggling problem.
With respect to the consumption argument, let us again stop and think: You must buy an international plane ticket, and you must stay out of the country for 48 hours. Then, and only then, you may buy one carton of cigarettes. Can anybody tell me that they truly believe someone is going to start smoking, smoke more than they normally would, or continue to smoke when they otherwise would have stopped under those circumstances and because of that? I find it a little surprising.
To conclude, I wish to comment on a few statements made by Mr. Wilfert. He said our margins have stayed the same despite this tax. I can tell you that in Toronto alone, Nuance's gross margin on cartons of tobacco decreased 23 per cent since before the tax was imposed. Our unit sales are down 41 per cent. This is not a September 11 effect.
I have the statistics for April from the Greater Toronto Airports Authority with me. The international passenger traffic in terminal 1 is up 3 per cent, in terminal 3 it is down slightly, less than 9 per cent. Thus, being off 41 per cent in unit sales of tobacco is not accounted for by September 11. It is this tax. We are off 21 per cent in imported cigar sales, even though they are not subject to this tax. It is the perception that, in fact, products in the duty-free store are subject to tax. Add-on sales are down somewhat as well. We know that when people come in for tobacco they often purchase something else.
This tax is hurtful to our industry, with none of the benefits it is purported to have.
Mr. Remo Mancini, Executive Vice-President, Canadian Transit Company, Association of Canadian Airport Duty-free Operators: Honourable senators, like my colleagues, I have a written presentation I would like to table for the benefit of the committee.
I represent the private company that owns and manages the Ambassador Bridge. On our Windsor plaza we have the Ambassador duty-free store, serving international traffic leaving Canada destined for the United States and/or other countries via airports after they arrive in the United States.
As you can see, we in the land border duty-free industry serve, like our colleagues at the airports, a very narrow market. We serve only the international traveller exiting the country.
I want to say to you that the Canadian land border duty-free store program has been a huge success. Over the last 20 years, this duty-free land border program has probably generated anywhere from 1,600 to 2,000 new jobs, millions of dollars in corporate taxes have been paid and millions of dollars in new construction has been allowed to take place. In fact, our store in Windsor — the Ambassador store — without the cost of land, was an investment of more than $6 million. All the work and products were sourced from Canadian industry. Millions of dollars in purchasing is taking place via the land border duty-free stores. We buy services from people who live in our community and from people who provide specialized services from throughout Canada.
We believe we have had a very positive impact on the local communities where we have stores, and on the Canadian economy in general. We have been a big booster of Canada as far as supporting our tourism industry. We have achieved all of the government's objectives for the program, as set out some 20 years ago. I attend meetings on a regular basis and hear from officials from CCRA, and we are continually being lauded for achieving the government objectives.
The other thing I find surprising, having followed the government policy to a tee and achieving the government's objectives, is how we are being unfairly targeted and unfairly described as an industry contributing to the increase in smoking and smuggling. Nothing could be further from the truth. If the government wishes to place a tax, I think it is the government's call to do so. However, to place a tax on an industry, tarnish its reputation, and accuse it of doing things it not doing is not fair.
I wish to tell the honourable senators that the land border duty-free outlets represent 1.4 per cent of all tobacco sales in Canada. I hardly think we can be accused of anything. We are looking at a small catchment area, and most of our customers are international travellers. I want to remind you at this juncture that there is no reciprocal tax at the U.S. land border duty-free stores. We are disadvantaged as a nation with regard to the duty-free industry.
I want to tell honourable senators that duty-free stores play an important role at the land border. Duty free stores pay rent and fees to the bridge and tunnel operators. In the future, these stores will pay less. The bridge and tunnel operators will have to make up the shortfall. The question is how will they make up the shortfall? That is a question that the honourable senators should ponder.
I would like to briefly address the issue of smuggling because it disturbed me greatly when I was before the House of Commons Finance Committee. Certain comments were made and I would like to believe they were inadvertent.
I had the privilege of meeting a fine gentleman, Mr. Rob Cunningham, of the Canadian Cancer Society and enjoyed his presentation. I know he has a job to do, but I take a little exception to his comments regarding the Canadian duty- free land border industry contributing to smuggling. I want to say to Mr. Cunningham, so I do not misquote him, that it is important to look at the facts.
I would like to quote three paragraphs from the official Hansard transcripts, the Hansard. This is Mr. Cunningham speaking:
One very important aspect of this bill we strongly support, one we've urged in the past, is the new $10 per carton tax cigarette tax on cigarettes sold in duty-free stores. There is really no justification for allowing low-price cigarettes to continue to be sold in duty-free stores, given the health objectives and given our past experience in respect to contraband.
The presence of duty-free channels was the window, the opportunity, whereby contraband dealers could begin the distribution flow and whereby contraband would ultimately end up in the Canadian market. By addressing the duty-free channels, you will put a smuggling prevention measure in place, especially as it's combined with the strength of the export tax contained in this bill.
What the manufacturers did in the early 1990s, exporting vast quantities of cigarettes from Canada to the United States while knowing that those cigarettes would come back to Canada as contraband, cannot be repeated. Not only will this prevent smuggling, but it will also assist in getting further cigarette taxes in place in the short term as opposed to the long term.
I want to say emphatically as I can that we have not contributed to smuggling. I would like to quote Mr. Brian Willis, Senior Chief, Excise Act, Sales Tax Division, Tax Policy Branch, who appeared before your committee on June 6, 2001, and Mr. Willis was responding to a question asked by Senator Banks, and Mr. Willis replied, ``The Canadian duty-free industry has not been a source of contraband. They are tightly controlled.''
I think it is highly unfortunate that our industry has been in any way whatsoever, by any party or any person, linked with contraband and smuggling. That is unfortunate, and I am sure it was an oversight, or someone may have misspoken.
Honourable senators, in conclusion, I would like to ask you to amend Bill C-47 and strip out those sections that place taxes in the tax and duty-free stores. That is an anomaly that we cannot allow to exist. It is an attack on an industry that has been successful for Canada and has been lockstep following the government policy as enunciated by the Government of Canada.
I say in closing that this bill does not deliver its objective of reducing tobacco consumption and contraband. However, it does deliver what it should not: the undermining of a legitimate, long-standing important industry, one that has fully complied with the government's previously stated objectives.
Senator Tkachuk: Are the officials from the Department of Finance still here? Why are cigars exempt? Is there someone from the department who can answer that question for me?
Mr. Willis: The export tax and the structure of taxing products for sale into the duty-free markets was aimed at the problems that existed with respect to cigarettes and substitutes for cigarettes. We did not focus on cigars because, at the time we put the structures in place, there was not a problem of contraband in the cigar markets.
The structure is designed to allow us to impose high taxes on tobacco products sold in Canada to achieve the government's health objectives. To do that, you must be able to ensure you can control the legal market, so that, in fact, there will be only legal sales in Canada.
That is why the export tax structure, the issues you have been discussing, was put in place in April last year, to ensure that the government's health policies of high tobacco taxes to reduce consumption could be maintained, and we would not repeat the problems that existed in the early 1990s.
Senator Tkachuk: I thought the reason for the $10 tax on the duty-free shops was a health measure. Why would cigars not be included as a health measure? What does it have to do with export? They have nothing to do with smuggling.
Mr. Willis: I agree. I do not have a good answer. Your point is why not tax cigars that are sold for export from a health perspective as well as from a contraband perspective.
Senator Tkachuk: It is tobacco. What is the difference? Why are not they taxed?
Mr. Willis: The main reason is we had focused on the key issues of cigarettes, tobacco sticks, and fine cut, which are the main areas in which we have concentrated our effort in terms of tobacco taxation. Those are the key products that are sold, those are the big volumes, and that is the area in which we have concentrated our effort to date. We have not focused a great deal of attention on cigars because they have neither been an issue nor a big problem.
Senator Tkachuk: I had asked the department officials, and they said you had already discussed the question. You made a point that there have been lost sales. Has it affected the number of employees you have in your shops, and has it affected, do you believe, any other products that were sold in your shops because cigarettes were a popular item and would affect other product sales?
Mr. Bergeron: Like any other retail business — and especially in airports — we are subjected to high rent. When sales go down, there is only a certain amount of time we can continue and maintain employment for everyone.
Employment has been reduced in two ways. Some people that were leaving as part of normal turnover were not replaced, thereby reducing effective employment. With respect to the employment of part-time people, the number of hours has been reduced.
It has to do with what we call ``capture rate'' or ``penetration.'' People who travel regularly stop going into the shops as soon as they develop the perception that they same savings are not offered. As soon as they see that there is a tax, they avoid the shops. That is part of the problem. The tax has a secondary effect on other categories.
Ms Kendall: In retail, one of the key financial controls you need is to maintain your payroll dollars as a certain percentage of your sales. As your sales drop, at some point you have to cut your payroll. That has happened. Nuance currently has employees on layoff in its Toronto operations and its Vancouver operations as well.
On a seasonal basis, we do pre-order duty-free from our non-airport stores in Victoria and Whistler. This year we did not open the duty-free pre-order portion of those stores that are part regular retail. We did not employ the people we normally do on a seasonal basis. At our Banff store, as well, we have had lay-offs.
Senator Angus: Mr. Mancini has asked us to amend the bill.
Mr. Mancini: I have.
Senator Angus: Have you got specific wording for your amendment? If I understood correctly, the objection is to having any kind of tax on tobacco in the duty-free shops. There are two taxes. One was put into another piece of legislation so we cannot fix that here. Even if we amend here, we take off the $1.50 but the $10 is still there.
Mr. Bergeron: We are asking for the removal of both to render tax and duty-free tax in duty-free shop.
Senator Angus: Can we do it in this particular bill? Do you have a draft amendment available for us?
Mr. Bergeron: I will have one tomorrow.
Mr. Mancini: I would like to approach it in two ways. I like your suggestion of seeing if we could strip out the initial tax increase. Perhaps we can have two recommendations for you: one dealing with the $1.50 in this bill and a second amendment dealing with the principle of taxing duty-free goods and taxing duty-free shops, which have been legitimately been approved by the government to do just that.
Senator Angus: Maybe Mr. Willis can negotiate with you.
Mr. Mancini: If he is willing, I will stay.
Mr. Bergeron: At the height of smuggling in 1991-92, 40 per cent of the cigarettes smoked in Province of Quebec were smuggled.
Senator Angus: The smuggling thing is a red herring. The gentleman from the department has said that it is not an issue.
We should see the amendment.
Mr. Mancini: I would like to say that at the land border stores at some of the land border crossings are busy. We have not been able to quantify that more than 8 per cent of the travellers actually bother to stop at our tax and duty- free stores because they show up at the border, they want to get across, they want to get where they are going; some of them stop, but it is 8 per cent.
If we were in fact the problem that we have been described as being, 80 per cent to 100 per cent of those people would be stopping obviously, if not 100 it would be 80 per cent. We have to work hard to get people into our store, even on a tax and duty-free basis.
Senator Angus: The other element is reciprocity. You made the point about the other end of your bridge. It is either duty-free or not duty-free, right?
Mr. Mancini: It is that simple.
Senator Angus: Tomorrow morning, with the chairman's leave, you will give us your proposed amendment.
Senator Stratton: If I do it, I want to do it on the floor of the Senate, not in committee.
Senator Angus: Why can we not have it on the record?
Senator Stratton: Yes, for the record, but do it on the floor.
Senator Angus: I would like to at least have the proposed amendment he has requested in his submission.
Mr. Mancini: I suggest you do it as often as you can.
The Chairman: Whom do I talk to on your side, Senator Tkachuk or Senator Angus?
Senator Tkachuk: I had mentioned we would do the amendment tomorrow. I did not know Senator Angus wanted to move amendments, I thought it was just Senator Stratton.
Senator Angus: I want to see what they are proposing as an amendment as part of their evidence and then we will see.
The Chairman: May I suggest, since we are not interested in amendments, we will get the amendments from these people tomorrow morning. If you want to move, do so, but get them before the meeting.
Senator Angus: We will convene and it will take one minute for the gentleman to submit his proposed amendments and it will go in the record. That is all I want. He will table it and he will have it in writing and then we will have it and we can do what we want.
The Chairman: Please understand that tomorrow morning we will go to clause by clause.
Senator Tkachuk: We have no problem with that.
The Chairman: The next witness, from the Canadian Cancer Society, is Rob Cunningham. Welcome.
Mr. Rob Cunningham, Senior Policy Analyst, Canadian Cancer Society: We obviously support the tobacco tax increases contained in this bill.
From a health perspective, higher tobacco taxes reduce smoking and improve public health. I have beside me seven volumes of studies, reports and other evidence — 303 tabs — that document the impact of higher tobacco taxes, higher taxes on lower consumption. This was tabled before the Standing Committee on Finance when the House of Commons considered this bill. It was made a formal exhibit to the proceedings of that committee and it remains available for your consideration.
I have provided a tax map that indicates the retail price of a carton of cigarettes in Ontario provinces and in U.S. border states. We see that in the United States, prices are much higher than they were a number of years ago because of tobacco tax increases, but also because of very significant manufacturer price increases due to litigation settlements.
Where, in the early 1990s Canada had significantly higher prices than in the United States, that is not the case now for Ontario is Quebec, which have the lowest prices in North America. If we look in the United States we see it is approximately $80 per carton Canadian in New York State, compared with around $42 in Ontario and Quebec. These prices incorporate the tobacco tax increases in this bill.
The federal excise tax remains lower by $3.50 per carton than it was prior to the 1994 tax rollback. It is approximately $6.50 per carton lower if you factor in inflation.
Earlier this year, there were significant price increases in the Western provinces, in the territories — with Yukon coming into effect July 1 — and in Newfoundland and Labrador. We support tobacco tax increases on fine cut and tobacco sticks, acknowledging at the same time that they represent a loophole because their tax rates are lower. We would encourage consideration to the equalization of the tax rate on these categories of tobacco products.
Senator Stratton, you raised the issue with respect to the resources allocated to tobacco control. In the last number of years the Senate has demonstrated leadership on this issue, passing — with support throughout the chamber — bills that would increase resources dedicated to tobacco control.
There was a significant increase in April 2001, which we supported and praised, for higher resources for tobacco control. It was not as much as that found in bills S-15 and S-20 and there is room for improvement. However, I want to acknowledge that particular announcement.
You have heard much about duty-free. I will focus on that for a few minutes before I conclude.
The proposed increase in this bill in the price of a carton of cigarettes in duty-free stores is only $1.50. We support that. We support the existing tobacco tax. For health reasons, health organizations in Canada and around the world support an end to the tax-exempt or tax-reduced sale of tobacco products in duty-free stores. In the European Community, were you to fly between London and Paris, you cannot buy duty-free cigarettes. If you were to fly between London and Canada, you could.
There are international negotiations underway for a framework convention on tobacco control, and there is international momentum for a worldwide ban on duty-free sales. From a health and financial perspective, it makes no sense.
It is true, 1.4 per cent of tobacco products are sold in duty-free stores in Canada, but 45,000 Canadians die each year, and every 1 per cent of that is significant. One tenth of 1 per cent of 45,000 is significant.
Combined, the export tax measures and the tax on duty-free stores are critical as part of Canada's anti-contraband strategy. We heard a quotation from my statements before the House of Commons Standing Committee on Finance. The comments remain correct. I can add that it does not matter whether a particular duty-free store is law-abiding or not. I have stated that a particular store has been engaging in illegal activity.
The fact remains that illegal operators were obtaining tax-exempt products that were allegedly going to duty-free stores in Canada and the United States. They did not end up in duty-free stores; they ended up in the contraband market. We must close worldwide the opportunity for tax-exempt product to flow.
On a fully taxed basis, 1.4 per cent of tobacco products amounts to about $80 million a year. Why should the duty- free sector have in effect an $80 million subsidy at the expense of other stores? It is not fair that a particular sector of retail stores should have a de facto subsidy.
Consumers of tobacco products in duty-free stores do not pay GST and they do not pay provincial sales tax in those provinces where it ordinarily applies. True, $11.50 is paid under the federal tax, which we support. However, there is still a significant differential. In terms of the retail price, that differential has grown considerably because of provincial tobacco tax increases this year.
Senator Tkachuk: The notion that governments should take action to encourage people not to smoke is a good one. Obviously, the public policy initiative of the government is tied into the fact that it costs the government in health care costs — and perhaps other costs — as a result of smoking-related illness. They have done so for alcohol as well. They have determined, because alcohol causes problems on the roads or liver ailments, we have to tax this because it is costing a lot of money. You have jumped on the bandwagon to use it as a way to get people to quit smoking.
Should people who commit other irresponsible acts be taxed or perhaps pay for health care, as smokers and people who drink are doing?
Mr. Cunningham: The imposition of a tax on tobacco products is fairly easy because of the small number of manufacturers.
Senator Tkachuk: An abortion or a teenage pregnancy is not difficult to tax.
Mr. Cunningham: The Canadian Cancer Society is interested in reducing cancer.
Senator Tkachuk: I understand that. You want the world to adopt the initiative of taxing everywhere to prevent cigarettes from being used. It is a big deal for you. That is why you are doing it. You must believe in the concept of using cash from people who smoke and commit an irresponsible act to pay for the increased cost to society that that act has caused. That is what the governments have said they are doing.
Cigarette smoking is not the only cause of cancer; there are many reasons for it. How do we get others to pay for their irresponsible acts?
Mr. Cunningham: Tobacco products are the cause of 30 per cent of cancer.
Senator Tkachuk: Seventy per cent is not.
Mr. Cunningham: We do not know all the causes of the remaining 70 per cent. I think educational approaches are appropriate for tobacco and other areas, but to impose taxation for other areas as a means of reducing cancer is not something that has been done around the world.
Senator Tkachuk: Taxation is an instrument to achieve the public policy objective. Taxation is an instrument to deter certain actions and to pay for what society considers an extra burden that a smoker has placed on it by accessing extra health care.
Would you adopt the same policy for other causes of cancer that will arise? Why the smoker and not someone else?
Mr. Cunningham: We do not have a policy supporting higher taxes on other activities at this point. Whether it would be appropriate is a different question. It is not within the scope of this bill and it is not something we are currently looking at.
Senator Tkachuk: You want this tax everywhere. Somebody posed as the owner of a duty-free shop and bought cigarettes. It was discovered they were not. You say that is the fault of the duty-free shops, and therefore, we should have a $10 tax.
Mr. Cunningham: I am not saying it is the fault of the duty-free stores. I am saying it is a result of the availability of tax-exempt product, some of which ends up in duty-free stores.
We have to recognize that tobacco products are unique. They are highly addictive. They kill when used exactly as intended. If it were a new product, it would not be allowed on the market. It kills one out of two long-term users. That is why it is singled out for particular treatment.
Senator Tkachuk: When you appeared before the House committee, you did not qualify it by saying that it was people who were attempting to bypass the $10 tax. You simply said that they were part of the illegal traffic.
Mr. Cunningham: Senator, if additional quotations from my testimony were given to you, you would see that I did make that comment.
Senator Tkachuk: Do you mean that you said that after questioning?
Mr. Cunningham: No, I mean that I said that during my statement.
Senator Tkachuk: Was that during your statement or after questioning?
Mr. Cunningham: That was said during my statement. All of my statement was not read, just certain excerpts. It may have been in questioning that that was said, but I am certain that the statement was made. I must review whether it was in my statement.
Senator Tkachuk: I believe the statement was made after questioning. When you made your statement, you said that the duty-free shops had something to do with smuggling. That was quoted here. I do not think that was right. I think you owe them an apology, actually, because they have nothing to do with smuggling.
Mr. Cunningham: There was never an accusation of illegality.
Senator Tkachuk: It is a poor justification to say, ``There was never an accusation of illegality.''
Mr. Cunningham: The statement is certainly factually correct that in the early 1990s, the increase in cigarette exports per year rose from approximately 1.5 billion to approximately 18 billion. That was tax exempt. The manufacturers did that, but there were purchasers of this product.
Senator Tkachuk: That is not the duty-free shops.
Senator Stratton: That is the manufacturers.
Mr. Cunningham: The purchase of this product from manufacturers, whether in Canada or the United States, was intended for duty-free stores, which it never got to.
Senator Stratton: Duty-free shops had nothing to do with that.
Mr. Cunningham: There is an opening for duty-free. It has to go from manufacturers to the intermediary to the duty- free shop and it never got to the duty-free level.
Senator Tkachuk: If this is the kind of factual evidence that you use against duty-free shops, you give me less reason to believe the factual evidence that you give me on other matters. That is why this is very important to me. You have answered the questions.
The committee adjourned.