Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - Meeting of November 24, 2005
OTTAWA, Thursday, November 24, 2005
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-259, to amend the Excise Tax Act (elimination of excise tax on jewellery), met this day at 4:35 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Welcome. Bill C-259 is a private member's bill from the other place. Our first witness is Mr. John Duncan, Member of Parliament for Vancouver Island North, British Columbia, and mover of the bill. Please proceed, Mr. Duncan.
John Duncan, Member of Parliament for Vancouver Island North: I will try to be brief and cover the essential territory. I should like to thank the sponsor of the bill, Senator Di Nino. One of the questions I have been asked many times is how I came to have a special interest in the jewellery excise tax and why I was motivated to table a private member's bill when my riding has no special connection to the jewellery sector, precious metals or gems. The background is that I did sit on the House of Commons Industry, Natural Resources, Science and Technology Committee.
I became aware in 1998 or 1999 of a study done by Ernst & Young presented by the Canadian Jewellers Association as a pre-budget consultation submission to the Commons Finance Committee. I read that document, which happened to come to every member of the Natural Resources Committee, because we were studying the issue of blood diamonds at the time. I became aware for the first time of this counter-productive tax known as the excise tax on jewellery, a hidden tax that is a carry-over from 1918. It was originally imposed to pay for the First World War effort. There was a basket of so-called luxury taxes imposed at that time. All of them have since been removed, one by one, with the singular exception of this one.
The irony is that, the more I read about it, the more outraged I became that the tax continued. It looked like such a ridiculous tax. In the land of taxation, it sits clearly isolated, operates alone and could easily be gotten rid of. It should have been disposed of at the same time as the manufacturers' sales tax when the GST was instituted. It has a high cost of compliance and is very complicated to follow because of how and when it is applied. It has the perverse affect of making jewellery that is manufactured in Canada more expensive than the same product imported by the same manufacturer or retailer from elsewhere. It makes the Canadian version more expensive just by virtue of the way the tax is applied.
AS well, the tax has led to a huge black market. I attended the Jewellery World Expo 2005 in Toronto this past summer. Senator Di Nino was there one night. A number of people in the crowd, including some large interests from the U.S. with worldwide investments in the jewellery sector, said that they were just waiting for this tax to be rescinded before they made their investments in Canada. It is a great impediment to relevant businesses. It amounts to bureaucratic red tape and has a high cost for compliance. No other nation would impose a tax on itself. They might impose a tariff on someone else but they would not penalize themselves.
A number of organizations have been opposed to the tax, including the Mining Association of Canada, the Canadian Jewellers Association, the Government of Quebec, which has a thriving jewellery sector in Montreal, a thriving jewellery sector in Toronto and a newly established but thriving sector in Vancouver.
One company in Vancouver has 70 robots that work 24/7 polishing and cutting diamonds. That company cannot wait to see the end of this. That company also employs 300 people in Vietnam and has operations in other places.
The National Diamond Strategy has called for an end to this tax; the Aboriginal community wants to see an end to this tax. Not all jewellery consists of diamonds. The diamond industry that we did not have in 1997 is currently providing, by one estimate that I read, at least $500 million a year in federal tax revenues that we did not have.
In 1996, this excise tax on jewellery, at 10 per cent, raised $56 million; in 2003, it raised about $82 million. The budget of 2004 reduced this tax to 8 per cent in February of 2005 and will reduce it in 2 per cent steps. It will be 6 per cent presumably in February of 2006. At 6 per cent, this tax would raise somewhere in the order of $50 million.
The total cost of getting rid of this tax in this phase-out step would be approximately $100 million based on the six, four, two, and eventually zero scenario. The last full budget we had, there would be a loss to the federal treasury of around $100 million. It would unleash a huge part of our economy that is asking to be unleashed.
I first put this into the hopper in 2000, at which time there was a different system on the House side in terms of how names were selected. Finally, in September of 2004, my name came up, number six out of 240 eligible members of Parliament, which allowed me to get this up early in this Parliament.
We had the all important second reading debate in November, at which time members of all parties spoke in favour of the bill in the first hour of debate. In my opinion, the strong support for the bill at second reading helped motivate the government to include the excise tax phase-out in the February budget — that is the phase-out I talked about. However, in committee the bill languished from January to May. We finally passed it in May. It was a close vote and a lot of things went on that I do not want to get into.
The Conservative caucus then cooperated extensively at the House level by trading spots to ensure a final House of Commons vote prior to the June recess, so that the bill could come to the Senate. Despite strong resistance by cabinet, the bill passed by a two-to-one margin. The vote was 185 to 93 in the House of Commons. There was unanimous support from all opposition parties and the support of 27 government members.
I did not set out to become an expert in the affairs of the jewellery value-added sector, but I have discovered a very interesting industry full of good and honourable people providing jobs and benefits to Canadian society in an environmentally and socially responsible manner.
This summer I visited the Diavik mine, one of the two diamond mines in the Northwest Territories. I visited the Corona jewellery plant in Toronto and I went to the Toronto jewellery show, as I mentioned. The president of the World Jewellery Federation, Gaetano Cavalieri, was there. I think we established a very strong relationship. He speaks the same language as Senator Di Nino, and they got along famously. His point is that Canada can be a world leader in this sector because we have the minerals, the gems, the technology and the skills. We could be providing a very interesting labour-intensive value-added product to the world if we could just unshackle it by getting rid of this tax.
I will conclude with that. I probably took more time than I intended.
The Chairman: Before I allow senators to respond, I want to ask you a technical question. I have asked our researcher to get us the section.
If you look at the first reading of your bill on November 3, it says that "paragraph 5(c) of schedule 1 is repealed." There is then a change in the final bill before us that was approved, where it says that "section 5 of section 1 is replaced by the following."
I do not have before me section 5. Do you have it available for us? I do not know if any of the senators have it in their files, but I do not have it in my files. When I looked at our briefing note prepared by the Library of Parliament, it said that this bill would repeal 5(c) of schedule 1. I want to know what we are talking about here.
Mr. Duncan: I think I can explain, without going into the details. The other complication is that Bill C-43 has had the effect of changing the Excise Tax Act. The way my bill came to the Senate, the wording was usurped by Bill C-43. However, I have a legal opinion from the House that that is still workable.
The bill languished in committee because there were three clauses in the excise tax that dealt with jewellery in the preamble. The first three clauses dealt with jewellery, watches, and clocks. One interpretation was that my bill dealt with jewellery and that watches and clocks were not included. We resolved it in such a way as to make my original wording amendable without going beyond the rules. Eventually, what was referred to the Senate included jewellery, watches, and clocks not over $50. Everything else has a $3 minimum. Grandfather clocks, that kind of thing, would still have this tax applied.
I am told by all of my retailing people that are members of the Canadian Jewellers Association that they represent a very small percentage of their sales, and this is not an issue. Watches were an issue, but they are now included in my bill.
The Chairman: I still have a problem. Take a look at your bill. This is technical, and then I will allow the committee to get at it. I am just not clear on the matter I am dealing with. I now have schedule I in front of me. It is called 5(a), (b), and (c). This schedule, which I will pass around, says 5 (a), (b), and (c); this replacement just says five. I assume what you are saying is schedule 5 of schedule I is replaced by small schedule I. Is there any inconsistency between this document, the schedule, and this document, your bill?
Mr. Duncan: I do not believe so.
The Chairman: I am raising it as a question of technicality because it seems strange that we end up replacing a section 5 and still have a small five.
Mr. Duncan: That is because of the fact that there are those residual clocks.
The Chairman: I understand that. You could have just removed five and it still would have been the section. Frankly, it is just a drafting question.
Mr. Duncan: You would have to ask legislative counsel.
Senator Di Nino: You talk about jewellery. I think we should put on the record, if I am correct, that jewellery that attracts this tax is any trinket that is $3 or more. Is that correct?
Mr. Duncan: Yes. Some of the largest complainants are from Wal-Mart and Zellers, stores that are selling great volumes of low-cost costume jewellery, jewellery that can hardly be called a luxury. It is a huge part of this, and the costs of compliance are huge. The Hudson Bay Company and Zellers are very strong on this. This is a huge problem for them.
Senator Di Nino: My next question deals with some information I have received. I wonder if you can confirm for me that Canada is the only industrial country left today that still has this kind of a tax on its books.
Mr. Duncan: That is correct, to the best of my knowledge, and that is certainly what has been entered on the record.
Senator Di Nino: Perhaps you can help us out from the research you did. We know now that the diamond industry is becoming a very important industry in our country. Diavik Mines is only one example. There are mines there are being proposed as well. I understand that the industry is totally supportive of this initiative of yours, Bill C-259.
Mr. Duncan: Yes, the mining industry is quite excited. They have been calling for the removal of this tax for quite some time. I think many Canadians have not caught up to what has happened in the sector of the mining industry. We lost the Giant Mine in Yellowknife, and that community was not looking at a very rosy picture; in stepped the diamond industry. There are two mines 350 kilometres outside of Yellowknife. They are fly-in. One mine I visited is employing 750 people. They started off with a 38 per cent Aboriginal quota on hiring; they are well in excess. In other words, most of the employees are northerners. It has completely filled the vacuum in the economy in Yellowknife and is taking it to the next level.
With two operating diamond mines in the country, we are now the third-largest producer world-wide, from zero. The mining association has told me that if the other eight or so that are currently planned come on the books, we will be number two in the world.
It is clear that the world view of Canada and the branding that we have in the international community and the whole concept of Canadian diamonds is completely compatible. There is a huge demand. Now that virtually all diamonds in the western world are sourced, this is good news.
Senator Di Nino: Again, I am looking at the briefing notes prepared by the Parliamentary Information Center, so I take this to be correct. We are the only diamond-producing country in the world that has this tax. Also, the notes tell me that as a consequence of this tax, diamonds mined in Canada cost more domestically than anywhere else in the world. Do you have any information to verify that? Are you aware of that?
Mr. Duncan: I am aware of that. I have made those statements myself. In terms of why a Canadian-produced piece of jewellery is more expensive than the equivalent from another country is concerned, if the manufacturer is still scheduled to appear today, he can answer that question in great detail.
The Chairman: We are possibly expecting a witness. I am not sure if he is here or not. We intend to proceed whether we hear him or not. We will also be able to get some insight from the department officials.
Senator Di Nino: One piece of important information that came from my research is that the jewellery industry widely defined is a nascent industry in the northern parts of our country, Aboriginal and otherwise. One of the opinions expressed was that the elimination of this tax would help to create additional economic opportunities in the northern parts of our country, both in the territories and in other parts. Do you have any opinion or facts on that? Can you verify that that is something that you discovered in your research?
Mr. Duncan: On the value-added end, the economics are clearly impacted. That is the value of having the manufacturer here. The manufacturer from the Gatineau area can talk about that. His member of Parliament, a Liberal, has told me about his operation. I have also talked directly with the individual. This tax has contributed to sending Canadian jobs overseas from his company. We are not talking about a few people. We are talking about several dozens of people just in that one firm. I have talked to another company, the one I went to see in Toronto. They are either just hanging in there or they have a special advantage because of Canadian ingenuity. As long as that tax is there, it pre-empts the kind of growth we should be seeing because of this special synergy that can happen. All things Canadian in the value-added jewellery industry, if everything else is equal, people will pick Canadian. Of course, everything else is not equal now because of the pricing problem.
Senator Di Nino: Let me ask it a different way. I seem to remember a very strong endorsement from the Government of the Northwest Territories about the positive impact that the elimination of this tax would have in his communities. I did not bring it with me, and I apologize.
Mr. Duncan: I have that letter with me. I certainly had discussions with Bill Braden, who is one of the MLAs up there. That was on an ongoing basis.
This is a letter — I can enter this into the record — to Ralph Goodale, Minister of Finance, dated February 2, 2005. The letterhead is Northwest Territories and Gouvernement du Québec. The subject line is: "National Diamond Strategy Action Plan." Paragraphs two and three of that letter reads as follows:
One of the key recommendations of this Plan concerns removal of the Federal Excise Tax on luxury items as soon as possible. In the opinion of all the stakeholders consulted, this tax is obsolete, discriminatory and counter-productive. It clearly inhibits development of the jewellery industry in Canada, which translates into lost opportunities in every region of the country. Its simple removal should allow the jewellery industry to be more competitive, offer a wider range of products to Canadian consumers and international markets, and create increased employment and wealth. The increased business activity will generate increased revenues for the Federal Government through existing revenue streams such as the Goods and Services Tax and Income Taxes. The new revenue should offset the revenue lost by eliminating the Excise Tax.
On behalf of our Provincial and Territorial colleagues, we urge you to remove this tax as soon as possible.
That letter is signed by Brendan Bell, the minister responsible for resource and economic development in the Northwest Territories, and Sam Hamad, the Minister of Natural Resources for the Province of Quebec.
The Chairman: Let me understand that letter, because we have not had a chance to see it, Mr. Duncan. You have support from which territorial or provincial governments for this bill?
Mr. Duncan: Quebec and Northwest Territories.
There is one other aspect to this, which is that this tax creates a black market. The Ernst & Young report does speak to that.
The Chairman: Do we have a copy of that that we can append to our record as well?
Mr. Duncan: I will leave this with you.
The Chairman: Thank you. Do any honourable senators have any objection to us appending those documents to our records? We like to see them circulated, but we are dealing with an attenuated time.
Mr. Duncan: I can provide the French and English copies of the document.
The Chairman: Mr. Duncan, I have several other senators who wish to question you.
Senator Fitzpatrick: Welcome. It is nice to have a representative from British Columbia here before the Senate committee.
Usually you and I are talking about softwood lumber and not jewellery. It is nice to have you here as sponsor of this bill — which removes a counterproductive tax on jewellery.
I just have a couple of questions to ask you. You indicated that the future revenue from this tax would be approximately $100 million. Is that the total of the future revenue or is that a present value? If it is a present value, it would be significantly less than the $100 million, I would think.
I am also wondering if you have had any analysis done on what the pro forma creation would be of new business and how that would offset the $100 million or less that will be collected from the tax over this phase-out period of time?
Mr. Duncan: In February 2006, the rate will be 6 per cent; February 2007, 4 per cent; February 2008, 2 per cent; February 2009, zero per cent. At 6 per cent, the tax would raise about $50 million. At 4 per cent, it would raise about $30 million; and at 2 per cent, it would raise half of that. That is where I got the $100 million from.
Senator Fitzpatrick: The present value would be significantly less than that. Therefore, that number is probably a high number, higher than the real present value would be.
Mr. Duncan: I will not argue with that.
Senator Fitzpatrick: Have there been any determinations on what new productivity this would create and what that might provide to the economy in other unhidden taxes?
Mr. Duncan: I have seen examples. However, I do not think anyone has set out to quantify all of this. Other than the Ernst & Young report, there may have been three submissions done over the years; however, there is a lot of ad hoc evidence from the value-added sector that says, "We are just waiting. We will not invest until that tax is gone." There are other people saying, "We have lost jobs. We have outsourced jobs." You have manufacturers here who would prefer to manufacture here because they can do it in the quantity they want who are ordering that same product from overseas just because of this tax. The cost of compliance is incredible.
A small business cannot computerize it. You can computerize the GST but not this. You can have a locally made band and an imported stone. You have you to follow each little piece of the puzzle, and so as a consequence this is another incentive to non-compliance at all.
It drives things underground. You lose not just this tax, but you lose the GST plus the income tax. It is huge. There is a strong suggestion in the Ernst & Young report that what is avoided as is as large as what is collected, and that was at 10 per cent.
Senator Angus: Avoided or evaded.
Mr. Duncan: Evaded is the word.
Senator Angus: I know.
Senator Fitzpatrick: I am curious to know why grandfather clocks would not be included in this bill. Are the manufacturers of those products not going to react to this? Why is it not across the board?
Mr. Duncan: It was a legal technicality. I wanted to include them but because I called it jewellery at second reading, there was a legal interpretation that jewellery included watches but excluded clocks. The government at that time was trying to kill my bill. Therefore, there was no flavour to be friendly.
Senator Fitzpatrick: Will you sponsor another bill to eliminate the tax on clocks then?
Mr. Duncan: My hope would be that the effect of adopting this bill would be the only thing left. They have to largely calculate it by hand anyway, which means they only have to calculate a single-digit per cent of their current business. Then the next full budget would get rid of that as well.
The Chairman: I am puzzled by penalizing the blind in this provision. I just do not understand that.
Senator Tkachuk: I have a question on GST and the PST. The GST is charged on the excise tax as well as the price of the product?
Mr. Duncan: Yes.
Senator Tkachuk: My assumption would be that in my province the PST would be the same. In other words, you are paying a tax on the excise tax.
Mr. Duncan: You are paying a tax on a tax, just like on gasoline.
Senator Tkachuk: That is the only clarification I required, Mr. Chairman.
Mr. Duncan: That means that they are and have been collecting more GST than they would have otherwise.
Senator Goldstein: Mr. Duncan, thank you for your excellent presentation. It has been enlightening for me, as I am sure it has been for my colleagues.
I am curious about one thing you said. I wonder if you can clarify for me or whether it is the manufacturer who will appear after you who can give the clarification. I was always under the impression that this tax was levied at the level of the supplier to the retailer and not at the level of the retailer. If that is so, would jewellery, in the broadest sense of the definition, not be taxed upon importation from outside of Canada and therefore be treated the same as jewellery within Canada? If that assumption is correct, I find it hard to understand your assertion that there is a competitive advantage given to foreign jewellery to the detriment of Canadians.
Mr. Duncan: I will refer to this Ernst & Young report with regard to how the jewellery tax works. This was when it was at 10 per cent. It is a 10 per cent levy paid by manufacturers on the sale price of items manufactured in Canada and by importers on the duty paid value of imports. There can be quite a difference between the duty paid value of imports and the manufactured sale price in Canada, as I understand it, because sometimes there is a lower price on the imported ingredients than there is on what is manufactured here. We may call that dumping.
There might be a more clear way to say it. I understand the concept, but I have trouble explaining it.
Senator Tkachuk: It would be much like the manufacturer's sales tax, which was 13.5 per cent before the GST, which was charged on the manufacturer. I believe that this excise tax is charged on the manufacturer at 10 per cent.
Senator Goldstein: The importer would pay exactly the same tax. The assertion that the importer would be importing at a price that is lower than the Canadian import and hence dumping is not a correct assertion because, if there is dumping, we know how to deal with that under the Customs and Excise Act. It is perhaps too technical an issue, but I find it difficult to understand why the tax would de facto favour importers to the detriment of Canadian manufacturers. It seems to me that that would be a neutral. There are aspects of the tax that I find disturbing, but this is not one.
Mr. Duncan: I understand that I have not adequately responded to your question.
Senator Goldstein: It is a very technical question, and I am not being critical of you. You made an excellent presentation. It is quite okay that you do not have that information.
The Chairman: We do have departmental officials here who will be familiar with this.
Senator Angus: Mr. Duncan, thank you for attending here. This has been a long haul for you. Bill C-259 is not the first iteration of this proposed legislation. It had different numbers at different times.
Mr. Duncan: Not one got as far as the House, but it was on the Order Paper for a long time and I retained my commitment to seeing it through one day.
Senator Angus: When the efforts started by the jewellers, the industry in question was comfortable with a phase-out, but that was eight years ago. According to the documentation we have, their efforts started in 1996. If they had achieved a four- or five-year phase-out at that time, it would have been all over by now.
To your knowledge, why are they opposed to the phase-out now?
Mr. Duncan: First, there are jewellery manufacturers and retailers in Canada who have been fighting this for three generations. This did not start in 1996. Mr. Evenchick, from Gatineau, had his first meeting with the finance minister 48 years ago in an effort to get rid of this tax. That is one individual. Other people have written saying they are third-generation in their family to be fighting this tax.
When you have a track record like that and someone offers you one fifth of what you want, that is better than nothing, after decades. However, they all recognize how painful this is because they know how counterproductive it is. As the phase-out gets lower, who can justify a 4 per cent excise tax that has a huge cost of compliance and is still creating a black market, and who will justify 2 per cent?
The Chairman: Do you have any evidence in your various reports about the cost of compliance? Normally, the auditors do an analysis of cost of compliance on certain model businesses. Can you give us some insight on cost compliance here?
Senator Angus: There is reference in some of the briefs, and I believe we have agreed that they will all be filed as exhibits.
The Chairman: Members are approaching this issue for the first time and we have not received a lot of documentation. I wonder if there is some substance to the compliance, or can we rely on the officials from the department to tell us about this? They usually do impact studies.
Mr. Duncan: They have done such a study, and every person I have talked to in the industry says that the study of the Minister of Finance does not reflect reality. I have talked to investors who refuse to invest because they do not want to deal with compliance. That is 100 per cent cost of compliance, in a sense.
Small business people work as long as it takes to do the job, but why tie them up in non-productive activities for 30 per cent of their time? I do not think there is a way to identify that cost.
The Chairman: This committee has a bias toward productivity, so we understand your viewpoint.
Senator Angus: Over this period of time, when you have advocated the abolition of this tax, you told us that the House of Commons committee dealt with it and has concluded that it was an anachronism, and other pejorative terms like that. Were you on that committee or are you able to confirm whether that happened?
Mr. Duncan: That did happen.
Senator Angus: Was it on at least two occasions?
Mr. Duncan: Yes. I can quote you from the budget recommendations of the fifth report of the Finance Committee. I believe this is 1996, according to the date below.
Senator Angus: That is correct.
Mr. Duncan: On page 28:
The Committee is sympathetic to the jewellery industry and believes that the 10 per cent excise tax is an anachronism. If it is to tax luxuries, it should not apply to inexpensive jewellery but should apply to many other items such as yachts, estates, mink coats, caviar, and champagnes. The tax should be abolished.
That was from the Standing Committee on Finance in 1996. The Standing Committee on Finance for similar logic or similar reasons, at least according to our members on the Finance Committee, agreed to a recommendation that was tabled in the House in September of 2004, which called for a phase-out.
This became part of the struggle at committee, with the government saying we have had an all-party committee say that the phase-out was their recommendation. However, once again it was better that than nothing. They thought it would be stronger. Even though many of their hearts were with this recommendation, they agreed to this phase-out just because they thought they could make it happen with the phase-out.
No, this came before the Standing Committee of Finance. These are the same people who agreed to bump this back to zero: no phase-out; let us get rid of it.
Senator Angus: That was my first point. My second point is that it has been pointed out to me by some of the industry people that, by bringing in the phase-out program over four years, the government has in effect admitted that the tax is an anachronism and needs to be abolished, and it is just the question of the timing. One of the gentlemen from the jewellers association indicated to me that that is like the Justice people saying, "We agree that you have been falsely imprisoned, wrongly imprisoned and badly treated, but you have to stay in jail for another five years while we think about it." I do not know what your feeling on that is. Have you, in all of your work on this issue, been presented with any cogent reason by the government why not to abolish the tax now?
Mr. Duncan: The bottom line, as far as I can determine, from what the Department of Finance officials are saying, is that this is all about loss of revenue stream. It is my belief that not only is this affordable, but their revenue stream would be unimpeded. As a matter of fact, they have new sources of revenue, such as the new diamond revenues, of which 2003 federal revenues were in the order of $500 million, that they did not have before. I do not understand this rationale. It is just a polar opposite view of the world and I do not know how to deal with it.
Senator Angus: I wondered if there were any reasons. The revenue aspect is a matter of numbers. We all know the logic. If you encourage an industry to grow, it will become more productive. It will generate more income tax, PST and GST. I am not persuaded by that argument, but I wondered if there were other reasons presented to you by the Department of Finance as to why they would want to keep this tax. I have searched and I have not found anywhere on the record any cogent reason to keep it. We are the only country in industrialized world with such a punitive, anachronistic, ridiculous tax.
Mr. Duncan: I think that is their prime reason. They will disagree on the record with the conclusion that there is a very large back market as a consequence of this. They will disagree with some other arguments, but in terms of their objection, it has to do with revenue stream.
The Chairman: I think we have explored that. I am always interested in history.
Senator Moore: You mentioned that you finally got your bill before the House of Commons in 2004 when your name was drawn. When did you start working on this file?
Mr. Duncan: It was in 2000. I was on the Natural Resources Committee in 1998-99. That is when I first became aware of it and started working on it. It was a fairly simple matter to put in a bill to get rid of it. I did that. I did not spend my waking hours thinking about it, but it was always there.
Senator Moore: You commented about the tax having been brought in in 1918, as indicated in the report.
The Chairman: That was a temporary measure, like the income tax.
Senator Moore: Was this initiative to try to raise tax revenues to assist in the First World War?
Mr. Duncan: That is my understanding.
Senator Moore: I was impressed by your comments with regard to the tax revenues that are now coming into the federal treasury since 2003. You mentioned $500 million of tax revenue that was not there before the diamond industry started to prove itself. Did you mention there are possibly another eight mines that could be put into production in the near future?
Mr. Duncan: That is right, yes. They are not all north of 60. Some of them are in provincial jurisdictions.
Senator Moore: Do you think that — I guess it is obvious but I would like to get it on record — the removal of this tax and the passage of your bill would expedite the coming into production of those mines? Are any of them holding back or not putting money in as quickly because of this tax?
Mr. Duncan: No, I would not go so far as to say that. However, I will paint the picture. The Diavik mine is a $1.3-billion investment, 350 kilometres from Yellowknife with no road. There is an incredible infrastructure there that employs 750 highly paid people. They remove tens of thousands of tonnes of rock and muck in a year in order to create the equivalent of a bathtub full of diamonds, of which only a portion are high quality. We should be taking those high-quality diamonds and creating value-added within Canada. That is a precious asset. Instead, we are letting that slip away.
The Chairman: Mr. Duncan, I have one or two short questions. As you know, this committee has studied the question of productivity. We have heard from the Minister of Finance, the Minister of Industry, the Prime Minister and from various sources that one of the important elements of our new economic strategy on behalf of the country is to improve productivity. Members of the committee have promised ourselves that when we have examined all kinds of legislation, we will look at it in terms of whether it improves or inhibits our economic productivity. When we look further at Bill C-55, we will look at whether the regulatory structure would create more red tape or would enhance Canada's productivity.
I do not know whether you have any statistics for or against this: What percentage of the Canadian jewellery manufacturing business is export? We know about the imports.
Mr. Duncan: I do not know the answer to that question. However, I do know that there is an international demand for the quality that we produce in some of our manufacturing. When I was at the Corona plant, they had orders from the U.S., Australia, Europe and Asia.
The Chairman: What do they manufacture?
Mr. Duncan: They manufacture high-end rings.
The Chairman: None of your statistics could indicate the size of our export market.
Mr. Duncan: No. It is interesting that the jewellery industry is huge but we have small businesses that employ fewer than 20 people. I have only two members of the Canadian Jewellery Association in my riding, but there are many jewellers. How do you organize statistics for all of that?
The Chairman: I understand. We are talking about those that manufacture in Canada and export. Any there further questions?
Senator Angus: My point that I wanted to make is that the witness came here on extremely short notice. He was telling us off the record before the hearing began that he wanted to make a statement on the record. The Canadian Jewellers Association, who were originally to appear as an association, gave him a particular mandate to make a statement on their behalf. I should like Mr. Duncan to have that opportunity.
The Chairman: I will allow him to do that. Normally, we pay the courtesy to the senator introducing the bill. Senator Di Nino, do you have any further comments?
Senator Di Nino: We should put on the record that there are 40,000-50,000 people employed across this country by the industry and there are some 5,000 jewellers, most of them small jewellers in towns and cities. I want that on the record, provided it is correct in terms of your information and research.
Mr. Duncan: Those numbers sound correct. Certainly, they are in the ballpark. Many Canadians think of this industry as I once did as a kind of stuffy, unimportant one designed for the wealthy. However, it is anything but that. The average jewellery purchase in the country is less than the cost of taking your spouse out for dinner.
Senator Di Nino: Is it fair to say, Mr. Duncan, that this is an industry of small businesses with a few exceptions?
Mr. Duncan: Yes. In Canada, it is predominantly comprised of small businesses but it is ready to bust out and receive major new investment to become a large contributor to Canada's employment statistics and economy, if we would let it happen.
Senator Di Nino: Would the elimination of the excise tax help to that end?
Mr. Duncan: The progress would begin three years earlier than it would otherwise.
The Chairman: I will allow Senator Angus another minute or two unimpeded.
Senator Angus: I should like to ask you, Mr. Duncan, about that statement that you would like to put on the record in terms of the mandate you have received from the Canadian Jewellers Association. Perhaps in so doing, tell us a bit about the CJA, how many members and a general idea of who they are.
Mr. Duncan: I do not know just when the CJA was formed but I believe that it was about 25 years ago. Its single mission at the time of formation was to get rid of the excise tax, and that remains their mission. There are many tired and frustrated cynical individuals belonging to the Canadian Jewellery Association as a result of the wall they have run into in Ottawa. Virtually every administration and every finance minister has promised that this tax would be rescinded. For one reason or another, that has not happened. I wish that our other witness was here because he could go through that chapter in verse. Perhaps you do not need to hear all of that, but I have certainly heard it.
At 10 minutes before four o'clock today, just as I was getting ready to come here, I received a phone call from Morris Robinson, who is the chair of the excise tax committee for the Canadian Jewellers Association. He said that given the weather, the notice period and their confidence in me to further this bill, which is completely in tune with their mandate, they wanted me to deliver the message to the committee that my appearance would, in their view, be sufficient and that their appearance would not be required. I wanted to be certain I said that because I did not want the committee to think that it had not heard sufficiently from the industry.
The Chairman: Mr. Duncan, on behalf of all the members I commend you for your efforts. People often do not understand that an individual member of Parliament, either on the House side or the Senate side, can make a difference. You have been dogged in your attempts to bring this to our attention, and we are pleased that you have done so today, even under such short notice. We are waiting for other witnesses so that we will be balanced in our evidence. It has been an interesting and penetrating glimpse into the business. We thank Senator Di Nino, sponsor of the bill in the Senate.
We have a conflict that I must suggest to you. If we choose to reduce the rate, this might have a maximum effect on our own budgets when it comes to our wives and significant others. We will try to overcome that bias.
Do you have anything further to say?
Mr. Duncan: This is the first time I have appeared before a Senate committee. I have been in the House now for 12 years. This is my thirteenth year. It has been a pleasant experience. I am amazed how many of you I know one way or another and recognize.
Senator Angus: There might be a vacancy from B.C.
Mr. Duncan: Senator Grafstein, we have shared a lot of time together on the Canada-U.S. Inter-Parliamentary Group and other ventures. That has been useful and productive. I know how energetic you are.
Thank you for having me here.
The Chairman: I want to welcome our next witnesses. These are two officials from the department of finance, Mr. Otto and Mr. Daman. We tried to get you earlier. We know you were engaged in other matters. We apologize, but we have a mandate from the Senate to proceed with this expeditiously. This is not unfamiliar territory to you. You have heard the evidence of Mr. Duncan and the promoter of the bill in the Senate, Senator Di Nino.
I should like you to briefly try to deal with some of the issues you think most important and allow the senators as much leeway to answer questions as possible. There are questions that bother us about the impact of the loss of this revenue and the countervailing benefits. If you could give us some direction about that in your testimony, that would be useful. I will leave it to you to present your presentation.
Senator Tkachuk: Are they talking on behalf of the minister or just as departmental officials giving evidence?
The Chairman: I believe they are talking on behalf of the minister. Proceed with your presentation. We are familiar with this bill, but please proceed.
Jim Daman, Director, Sales Tax Division, Finance Canada: We are talking on behalf of the Department of Finance.
The Chairman: We know you are. Please proceed.
Andrew Otto, Senior Tax Policy Officer, Sales Tax Division, Finance Canada: With respect to the excise tax on jewellery, it is currently applied at a rate of 8 per cent since budget 2005 and it is levied under Part III of the Excise Tax Act. It currently applies to jewellery proper, rings and diamonds, as well as watches and clocks, and items made of semi-precious stones.
The tax is levied at the manufacturer level, on manufacturers and importers, similar to the old FST. It is indeed structured like the old federal sales tax in that manner. It is levied on producers and importers. The tax is not levied on exports in the same manner that the old federal sales tax was. It is payable at the time that a manufacturer delivers the jewellery to an unlicensed person, a retailer or a wholesaler. It is payable by importers at the moment of importation. It has been in place for some time, since roughly 1918.
With respect to the tax, the industry has been lobbying and pushing for a number of years to have the tax removed. It has been one of a number of measures put forward in terms of tax relief.
In budget 2004, the minister indicated at that time that he would ask help from the standing committee of the House of Commons to look over some of these proposals, including a proposal from the jewellery industry, assess the merits of them, and assess the relative priority that should be afforded to these various tax relief proposals coming forward. The minister sent the letter in 2004 to the committee asking them for this assessment.
In October 2004, the Finance Committee in the House of Commons put out a report in which they recommended that priority among those proposals be given to the jewellery proposal and stated specifically at that time that the committee recommended that the federal government implement one of the following options to phase out the excise tax on jewellery over five years or to increase increments over five years the thresholds on which the tax is to be paid and eventually eliminate the tax at the end of those five years.
This wording was taken into consideration leading up to the budget 2005. It was announced in budget 2005 that it would be eliminated over the space of four years, beginning with a reduction immediately in February 2005 and reducing it from 2 percentage points down from the 10 it was at that time until it is eliminated on March 1, 2009.
That is currently the situation with the tax. It is similar to the old federal sales tax and it has been announced that it is being phased out. Through budget 2005, we are now down to the 8 per cent level at this time.
That idea of fitting it into the fiscal framework has been an important one in terms of the department getting many requests for tax relief. There is an issue about prioritizing and how these are brought forward. That was the way in which this tax has been addressed as announced in budget 2005.
That is the summary of what the situation is now with the tax.
The Chairman: That allows the senators to deal with it. I will allow Senator Di Nino, who is introducing this bill in the Senate, to go first.
Senator Di Nino: There are few of us around this table that wore the scars of the GST. The GST was introduced — and, I think, sold badly by our party — to get rid of the MST and FST.
The GST came into play, and the MST and FST were eliminated in all other areas except this industry. Why was this industry singled out? In effect, I think it was unfairly done. Why was it singled out as the only industry where the battles were fought, in effect, to introduce the GST so we could eliminate this tax?
If this is a policy issue and you say you have to ask the minister, that is fair enough. This is a question I have not been able to get an answer on.
Mr. Otto: I did not mean to lead the committee to believe that the FST continues to apply only to jewellery. I am simply saying the structure and the nature of the tax is similar to the FST. The same is true for other excise taxes that are applied to tobacco and fuel. They are imposed at the manufacturer's level, so structurally they are similar to the FST, but it is not a continuation of it.
Senator Di Nino: I did not say FST. I said MST, the manufacturer's sales tax.
Mr. Otto: I believe they are one and the same.
Senator Di Nino: I am saying to you that that is what it was. The industry serves the whole economic sphere of the country. The industry serves every single person in this country, from the little kid that goes out and buys a $5 gift for his mother for Christmas and must pay this luxury tax component on it. One would have thought that, when the GST came in, which applies to this $5 trinket as it is, or $3 trinket, then the other would be eliminated.
The Chairman: You are moving from senators asking questions to presenting evidence. I do not object to that. I am a Liberal, and I have to be liberal in my approach to this, but we should ask the witnesses some questions.
Senator Di Nino: What was the budget surplus in 2005? Was it in the tens of billions of dollars? What is the total tax that this particular measure will raise in the 2005 budget year?
Mr. Otto: I believe in the budget 2005-06 fiscal year, it should raise approximately $70 million. It was raising approximately $85 million per year at the time when it was 10 per cent. It is now 8 per cent, we would estimate, in the current fiscal year, if the tax continued to the end of the fiscal year.
Senator Di Nino: It is an insignificant amount compared to the total budget surplus.
The Chairman: Could we have questions, please.
Senator Di Nino: That is a question.
The Chairman: That is a declamatory statement.
Senator Di Nino: Senator Goldstein is with me on this one.
The Chairman: To be fair to the witnesses, they are officials.
Senator Di Nino: That is why I said that, if it is inappropriate, you tell me that we should not be asking them. We should be asking somebody else.
The Chairman: You can put your question on the record if necessary, but please, let us proceed.
Senator Di Nino: Is this a significant enough figure when we are looking at such huge budget surpluses that the government needs the money?
Mr. Otto: It is more a question of fitting it within the fiscal framework. Any kind of spending or tax reduction measure needs to be fit into the fiscal framework. In the planning process leading up to budget 2005, as it is for any budget, one needs to plan priorities, and the government may well have a number of priorities on both the tax reduction and spending issues, and perhaps less than something of an absolute issue of the merits of any one proposal. It is an issue of how to make the relative priorities.
Senator Di Nino: Is it a question of choices?
Mr. Otto: Yes.
Senator Di Nino: We choose to put a 10 per cent tax on a $3 piece of jewellery but not a tax on a yacht?
Mr. Otto: Well, the tax does not apply to yachts.
Senator Goldstein: The discriminatory nature of this tax as opposed to a variety of other luxuries is disturbing to many of the people around the table, where there does not appear to be any justification for it, other than its being simply a source of tax money, which is not generalized but targets a particular industry or sector of the economy. That is perhaps understandable when one is dealing with gasoline excised taxes or other generalized excised tax. This one, however, seems to be a very specific kind of excise tax. That is one of the elements I find disturbing.
There is a second element I find disturbing. I do not know if you were here when I asked the question of Mr. Duncan. Perhaps I did not ask the question clearly enough, or perhaps it was too technical. I try not to be a lawyer, but that is how I am trained. Perhaps you can help me understand.
My question is directed specifically to the issue of competitiveness and to the issue of ensuring that our Canadian industry is and remains competitive. The chair, during these hearings, once again made reference to that issue that is very fundamental to him and to all of us, correctly so.
Is there any advantage in the structure of this tax to foreign imports? If there is a locally manufactured jewellery item that is then exported, is there a technique for rebates or refunds in respect of those components where the manufacturer has paid tax because it has obtained those items from local other manufacturers but is going to export that item in such a way as to permit the item to be exported net of this tax to keep it competitive in the world market?
The Chairman: It is restricting the tax so it can be exported efficiently.
Mr. Otto: The tax is designed to address competitive issues and ensure that the domestic manufacturing industry is on a competitive and level playing field in terms of imports. The tax is levied on both importations and on domestically manufactured jewellery at the same rates. Exports are exempt. Therefore, anything produced in Canada and sold directly by the manufacturer into the export market would be free of tax.
Having said that, to be fair to Mr. Duncan, there was a problem under the old federal sales tax and there continues to be. We have heard representations made to us that there are difficulties in terms of the comparability of the sale price which is applied to the domestically produced and in terms of the duty paid value. Representations have been made to us in the past with respect to the FST and with respect to jewellery to say they are not quite comparable, and paying on duty paid value provides some degree of advantage to foreign manufacturers over domestic manufacturers. The law is written to ensure equality, but the way it is administered and the way you calculate the two, representations have been made to us that it can give an advantage. For example, things like advertising costs that might otherwise be included in the sale price domestically may not get in the duty paid value.
There have been representations made to us that are not entirely equal. It was not so much the way the law was written. I think it was written in a way that was meant to ensure fairness. It was the same under the old FST and quite difficult.
The Chairman: These are problems that we encountered with respect to the manufacturing taxes in the past. This is not new. It is very difficult for small manufacturers to segregate the two and do their calculations. It is a costly accounting issue for them to segregate for export and domestic. There is some complication here and I believe those concerns were addressed to that. Is that what you found?
Mr. Otto: This would be in terms of comparing imported jewellery and domestically manufactured jewellery. It is the representation that perhaps the imported jewellery enjoys an advantage in that duty-paid value may not always include the elements included in sales tax. The accounting problem represents a different issue for small businesses. Everyone needs to account for GST, for example, so it is more simplistic to account for that than foreign tax or manufacturer's sales tax.
Senator Tkachuk: In principle, the Department of Finance has no argument with this bill.
Mr. Daman: That is difficult to say. In principle, the Department of Finance, or the government, has got to the position of eliminating the tax or phasing it out.
Senator Tkachuk: In principle you agree the tax should be eliminated; it is just a question of timing.
Mr. Daman: If you work back five years from now that is probably where you go.
Senator Tkachuk: It is obvious the government wants to get rid of this tax because it is phasing it out; it will be done in four or five years. In principle there is no problem with getting rid of this 10 per cent excise tax; it is just a question of how quickly and when.
Mr. Daman: It came down to the fiscal cost and balanced in the context of the 2005 budget.
Senator Tkachuk: I have heard that fiscal framework and you mentioned expenditures and you mentioned revenue as part of the fiscal framework. My assumption is that the fiscal framework of the nation would be laid out in the budget. I am asking. It is a technical question, that is what it is. The fiscal framework is laid out in the budget.
Mr. Daman: Yes, it is.
Senator Tkachuk: The $4.5 billion of the second budget, the second phase that the NDP and the Liberals had agreed to at the time, was that not part of the budget fiscal framework?
Mr. Daman: I am a bit over my head, as I tend to be more of a technical person.
Senator Tkachuk: Let us go to the expenditures. Is the announcement of the $5 billion worth of new military transport planes part of the fiscal framework?
Mr. Daman: I cannot really deal with that either.
Senator Tkachuk: I am trying to understand how you can use the argument of fiscal framework if you cannot tell me what that is.
Mr. Daman: From our point of view as technical sales tax policy people, we input our input into whatever decision the government makes to come up with its larger fiscal framework.
Senator Tkachuk: I know that. These are technical questions.
Mr. Daman: I am not in a position to answer them from my technical perspective.
Senator Tkachuk: That is fair enough. I did not mean to ask unfair questions. I am trying to get to the nub of the question, which is, as long as there is a question of principle, there is only a question of timing, there is no question of principle on this bill. The government intends to get rid of this tax and they want to get rid of it in the next four or five years but it is just a question of time.
I asked a question earlier, Mr. Duncan, on the 7 per cent GST, which is charged on the excise tax as well as on the price of the product. As technicians or economists, you believe in elasticity. My view is that if the price of the product is cheaper, more products will be sold and therefore there will be extra revenue from the GST. Is my assumption correct?
Mr. Otto: If we are looking at one item in isolation that is true, if you reduce the price more of it will sell. In terms of total GST revenues, if discretionary spending moves from one area and more money is spent on jewellery but less in another area, you may not get a net GST increase. For one particular item, yes, I agree completely with you senator but in the broader picture, if people move discretionary spending from one area to another it may not result in a net GST revenue gain.
Senator Tkachuk: My point is that we are going to lose that 10 per cent. Let us say we have a $1 expenditure. So ten cents now belongs to the consumer rather than the government. That will be spent on something rather than a consumer item or put in the bank so people can borrow the money. In other words more revenue will be created and therefore your net costs, your $70 million — my view economically — is very possible that you may not have a net cost at all or maybe half that net cost. That money will be spent somewhere and there will be taxes generated from it. I am asking.
Mr. Otto: Yes, but what is the specific question?
Senator Tkachuk: My point is if the government does not have the money, the consumer will have the money.
Mr. Otto: Since it is a manufacturer's tax, the importer and manufacturer will have it in the first instance.
Senator Tkachuk: I assume the consumer will be paying the money at 10 per cent in the end.
Mr. Otto: Yes, it forms part of the price of the product.
Senator Tkachuk: By eliminating that price that money will stay in the consumers' pockets.
Mr. Otto: Presumably, yes.
Mr. Daman: Assuming the price goes down and the manufacturer does not keep the difference, et cetera.
Senator Tkachuk: That money will be spent somewhere else and there will be other tax revenue generated.
Mr. Otto: As I was trying to point out with the GST example, it is hard to look at something in isolation and simply say it will go other places. There may be no increase in GST revenues if there is not an overall increase in spending by consumers as a whole.
The Chairman: I think what — correct me if I am wrong — Senator Tkachuk is saying is there are $70 million more left in the taxpayers' pocket as opposed to the government, therefore they will use the savings, not just to save necessarily, but also to purchase others. Perhaps instead of buying a ring worth $500 they may buy a ring for $1,000.
I think what the senator is getting at, with that in turn; the loss of $70 million has to be balanced by the triggering of additional spending based on GST. Is that your question?
Senator Tkachuk: Yes, that is my question.
The Chairman: What is the answer?
Senator Angus: "Makes sense" is your answer.
The Chairman: Mr. Duncan and Senator Di Nino have made the case that the $50 million or $70 million loss to your fiscal plan may be increased in other categories in terms of GST so the loss to fiscal plan may not be as severe as just taking the loss of the $70 million in isolation. That's really the argument that Mr. Duncan has made to us. How do you feel about that? As technicians, what is your view?
Mr. Daman: If someone has extra money and they spend it on other things and they pay tax on the other things, presumably there would be an effect, but I am not sure whether it is a totally off-setting effect or not.
Senator Angus: A Liberal senator asked me to read you an excerpt from November 3. Incorporated in it is a question to which Senator Maheu, who is also the Speaker pro tempore of the Senate, would like an answer. She said:
I find it patently contemptuous that the senior mandarins in the Department of Finance continue to shilly-shally on this issue by teasing and abusing everyone involved in the jewellery industry and Canadians in general by the nonsense of incremental reduction of this tax.
I believe this bill should go to committee as soon as possible, and, when it goes to committee, I would like to see someone ask the finance mandarins by what labyrinth or Neanderthal process they have come to the conclusion that a $3 piece of jewellery is an object of luxury.
Gentlemen, have you an answer to that?
The Chairman: Sometimes, Mr. Otto, senators are not very clear, but this is a clear question.
Mr. Otto: The tax is one of very long standing. It has been in place since 1918. It was applied to jewellery and watches at that time. Costume jewellery was probably virtually non-existent at the time. It is often difficult to draw lines in these matters. As the industry and times evolved, this was the result. The tax was created a long time ago.
Senator Angus: I assume, Mr. Daman, that you join in your colleague's answer.
Mr. Daman: I was trying to think of a Neanderthal mandarin in finance, but none comes to mind.
Senator Angus: That is a figure of speech.
Can I report back to Senator Maheu, who is busy with other matters this afternoon, that you gentlemen agree that it is time that this tax is removed from the books? I do not want to put it to you unfairly.
The Chairman: If you choose to answer, you can. There is no compulsion to answer that question.
Mr. Daman: It is being removed gradually.
Mr. Otto: One of the senior chiefs in the department was once asked about that and he made what I thought was a very good reply. He said that if we were asked today about revenue raising measures, we would be very unlikely to recommend something like the jewellery tax.
Senator Angus: Res ipsa loquitur, Mr. Chairman.
Senator Cowan: You mentioned earlier that excise tax was not in existence solely on these items but also on fuel and tobacco. What other examples of excise taxes are there in our system now?
Mr. Otto: There were quite a number of excise taxes in the past.
Senator Cowan: How many are left?
Mr. Otto: There is excise tax on tobacco, alcohol, fuel, heavy automobiles, automobile air conditioners and jewellery. I believe that is all.
Senator Cowan: There was discussion when Mr. Duncan was giving evidence about the high cost of compliance on the part of individual retailers and manufacturers. Do you have any information on that?
Mr. Otto: We did our own study in 1993. Ernst & Young did studies on behalf of the industry and we wanted to verify some of the things they were saying. The conclusion of that report was that the incremental collection costs of government were quite low for larger manufacturers and importers, but it did note that for smaller manufacturers they would represent costs that were over and above what they might incur for the GST.
Senator Cowan: The evidence we heard was that many of the taxpayers are smaller concerns. I forget the numbers that Mr. Duncan gave us, but he said that a large number of the members of the association had fewer than 20 employees.
Mr. Otto: There is exception in the Excise Tax Act for manufacturers who produce less than $50,000 in a given year. There is a floor to relieve very small manufacturers.
Senator Cowan: It relieves them from what?
Mr. Otto: It relieves them from the requirement to pay the excise tax. If you produce less than $50,000 worth of jewellery per year, you do not have to be licensed and therefore you do not have to pay the excise tax. Since jewellery is such a high-cost item, if one is dealing with precious stones, one can quickly reach that floor.
Senator Goldstein: That exemption is really for artisans and is not meant to cover manufacturers.
Mr. Otto: Today, yes.
Senator Goldstein: In 1939 or 1940 there was a sur-luxury tax imposed on jewellery. As the war in Europe was terminating, Canada abolished that tax overnight.
Is there an analogy to be drawn from the fact that the government did not go into bankruptcy because of withdrawing the luxury tax in one fell swoop as opposed to withdrawing it, as is now being done, in a phased manner?
Mr. Otto: We saw two advantages to the phase-out. First, it is easier to fit it into the fiscal framework. With these taxes at the manufacturer's level you usually have certain competitive problems with people who have large tax-paid inventories if you eliminate the tax all at once, because they still have that tax on the inventory. Phasing out reduces that potential for competitive inequity. It is not that I do not think the industry would prefer eliminating it immediately; I am just saying that there is an advantage in phasing it out in that it helps people with large inventories.
The Chairman: Did you say that the last time you did a net impact study on the cost of collection and the cost of compliance was in 1993?
Mr. Otto: That is correct.
The Chairman: We do not have a current impact study that will tell us the impact of the cost of collection to the government — this is $70 million, but not net of collection — and we have no impact study to demonstrate the cost of paying the tax. In other words, there is a cost to the taxpayer and there is a cost to the tax collector. We do not have that information.
Mr. Otto: That is correct.
The Chairman: An impact study would obviously show a reduction from that $70 million. Your number is not net of cost of collection.
Mr. Otto: I do not believe it is net of the administrative cost, no.
The Chairman: It would be a lower number. Can you tell us the cost of collection?
Mr. Otto: The 1993-estimated cost would be less than 1 per cent of the incremental cost to Revenue Canada of collecting the tax.
The Chairman: If we did a model going forward, what would you estimate it would be today, after 12 years?
Mr. Otto: In terms of a percentage, I believe it would still represent a similar percentage.
The Chairman: It would be somewhere between $700,000 and $1 million.
Mr. Otto: Yes.
The Chairman: At best, we can guess, but we do not have the other number.
I have a statement in our research brief that the department agreed — this was in your previous testimony to the committee — that the federal excise tax favours imported jewellery over domestically manufactured jewellery. My researcher advises me that is the difference between the duty paid value on imported goods and sale price. Just to reiterate, this is biasing the domestic manufacturer against the importer. Is that so?
Mr. Otto: Representations have been made to us to that effect, and yes, from the FST days, we recognize that there are certain difficulties between trying to match sale price and duty paid value.
The Chairman: Finally, we have not discussed this, but your statement in response to previous questions before one of the committees is that the department agreed that the deficiencies in the federal tax make it prone to tax avoidance and evasion. We have heard that from Mr. Duncan, and we have heard that from Senator Di Nino, but is that your evidence as well? Do you confirm that?
Mr. Otto: There are certain administrative flaws in it. In the small manufacturer's threshold, there are currently not related company rules in Excise Tax Act, so one could make a multiplicity of companies under one parent that simply all manufactured under the $50,000 level and use that structure to avoid the tax. That would not be evading the tax; that would be organizing your affairs to do that. We recognize that there are flaws in the tax that could lead to avoidance activities.
The Chairman: Have there been any prosecutions in the last year about failure to pay these taxes? I am referring to prosecutions in the sense that people sometimes avoid as opposed to evade these taxes. Do you have a list of cases that may have been taken in this category?
Mr. Otto: No, I do not.
The Chairman: You do not know what the costs would have been to the administration if in fact there were prosecutions under these provisions.
Mr. Otto: Revenue Canada and he Department of Justice would undertake the prosecutions.
The Chairman: We are trying to look at the net impact of this $70 million and see the overall cost.
Mr. Otto: I do not have that information with me.
The Chairman: I thank you very much again for coming on short notice. Your evidence has been very informative and helpful to our deliberations.
We are now delighted to welcome Mr. Abbey Evenchick. We understand that you are involved this sector. Please describe to us who you are and what your business is, and then please make your evidence as brief as possible, because senators do have a number of questions. Thank you for coming under such short notice. We have been under a short time frame, and we appreciate your cooperation.
Abbey Evenchick, as an individual: I apologize for my attire.
The Chairman: It looks like you are a working man, and we are delighted to hear from working people.
Mr. Evenchick: It is difficult to encapsulate 58 years of arguing against this tax in short order; however, that is how long I have been at it. I spoke to every finance minister in those 58 years trying to get rid of this absurd tax.
When I came in, I noticed women wearing earrings and most of you men are wearing silk ties. There is no excise tax on your tie, but there is an excise tax on a $15 pair of earrings. It is asinine that this tax has stayed on for so long.
I will let you get on with your questions. I just want to say this is a family business. It was created in 1922. We have had a very difficult time in recent years trying to cope with imports from offshore. Imports generally are given favouritism over the Canadian manufacturer.
I believe that this tax should be eliminated all at one time instead of being phased out. This past year, our customers asked, "Where is our 2 per cent reduction?" All I could tell them was a good part of it went to reprogramming our computers and other costs associated with this 2 per cent reduction.
Again, this coming year, we will go through the same situation, and we cannot pass the benefits onto our customers unless this tax is eliminated all together.
The Chairman: Can you just describe in a little more detail your business, the name of it and the number of employees.
Mr. Evenchick: It is M. Evenchick Limited and we create low-end costume jewellery. I believe the highest retail article we produce is about $100 to $125. We are located in Gatineau. At one time we were located in Ottawa. We also manufacture military insignias.
Senator Angus: Is that deemed to be jewellery?
Mr. Evenchick: Yes. Again, we have a major problem because there is an 85 per cent Canadian content rule from DPW on purchasing this; however, there are ways and meaning of getting around it. We have not had a contract for military insignia for three years because of it.
The Chairman: Can you tell us how many employees you have employed over the last few years?
Mr. Evenchick: We are down to about 27 employees. When I first left the Air Force, we had 66 employees. I attribute the decrease in employees to the tax situation. We are not competitive with the importer.
The Chairman: If this tax were eliminated, would you be seeking additional employees?
Mr. Evenchick: I would hope so. There are no guarantees. We have sales people covering all of Canada, and we sell as much as we can to independent jewellers. We sell to 700 independent jewellers across Canada. Whether it would generate more sales or not can only be seen after the fact, not before.
The Chairman: Senator Di Nino is the sponsor of the bill in the Senate and he has the opportunity to ask the first set of questions.
Senator Di Nino: I know you cannot give us a definitive answer, however, one would expect if you were to reduce your prices, you would sell more and there is a chance that there may be additional opportunities for more employees. Is that right?
Mr. Evenchick: I would hope so. The industry itself has gone from 12 major suppliers in Canada down to about four.
Senator Di Nino: Where have the rest gone?
Mr. Evenchick: They have gone out of business because they were not competitive.
Senator Angus: Are you one of the four major suppliers?
Mr. Evenchick: Yes. We are one of the few remaining in our category. I am not talking about gem quality or carat jewellery. I am talking about custom jewellery.
Senator Di Nino: This is an interesting point that the small reduction, 2 per cent a year for five years, each time this happens, you have to reprogram your computers. In effect, you have a lot of administrative work that I think you said takes up all if not most of that reduction.
Mr. Evenchick: It takes up most of it.
Senator Di Nino: Therefore, nothing can go back to the consumer.
Mr. Evenchick: Very little.
Senator Di Nino: If it came all at once, the consumer would benefit from this.
Mr. Evenchick: Correct. We mark up our product on our actual cost and part of that cost is the excise tax. If the tax were to be eliminated, we would be able to pass on a good reduction to the consumer.
Senator Di Nino: That is a point we had not heard before. Thank you for putting it on the record. The way the government has proposed, it seems to me it is going to administration costs as opposed to reducing the cost to the consumer or even to manufacturers.
Mr. Evenchick: Yes, the bulk of it and I would suggest possibly after the 4 per cent level in the excise tax, it would not pay the government to continue on in further reductions because the costs of administration to them would be far greater than the actual recovery.
Senator Di Nino: I wonder if you could confirm whether the compliance costs of this tax are higher than normal.
Mr. Evenchick: It is part of our office costs. Compliance of excise tax is part of the administrative costs of our business. We would love to get rid of it.
Senator Goldstein: I think you were here earlier, Mr. Evenchick, when I asked the question as to competitiveness of imported products. I find it difficult to understand that given the fact the tax is imposed at a comparable level that there is any significant — there may be minor variations — variation of tax impact or tax cost with respect to imported products as opposed to locally manufactured products.
Is there any element of lower production costs of foreign-made jewellery imported into Canada that would cause it to be de facto undercutting local industry competitively?
Is it a function of the tax that you find yourself insufficiently competitive? Is it a function of lower manufacturing or raw material costs elsewhere, or is it a function of both? Is it a function of both?
Mr. Evenchick: Material costs are constant. Metals are controlled by the LME, London Metal Market. Asian labour, as we know, is well below Canadian labour.
The importers pay a tax on duty paid value. They can have very few employees. We have more employees that have to pay social benefits and all the other costs of business in Canada. We must take all of that into consideration before we take our mark up, our so-called profit, if any.
The importer or jobber pays on duty-paid value and he does not have to charge social benefits at that point because he takes a markup on his landed cost of product. He does not have the same level where he begins his costing on social benefits.
Senator Goldstein: In that sense, your industry is no different versus the textile manufacturing industry, where they, too, must compete with lower cost labour abroad as a function of the aggregate cost of the imported item.
The Chairman: Mr. Evenchick, there are no further questions.
This committee has tried, as best we can, to suggest to the government and to the private sector that productivity is the key to our future. To my mind, we have heard some very disturbing evidence from our witnesses from the government that they have not looked at this question through a productivity lens because of lack of impact studies. Your evidence today was very useful to confirm some of the concerns of our members.
We want to thank you very much for coming across the river from your business on such short notice to give us a sense as to what is happening with small businesses. We are concerned about the lack of growth of small businesses and we are trying to remove as many impediments as this committee can to make your job easier and for you to hire more people and to increase your taxes to the government.
Mr. Evenchick: Hopefully, we can. Thank you very much.
The Chairman: Is it agreed that the committee proceed clause by clause for consideration of Bill C-259, An Act to amend the Excise Tax Act (elimination of excise tax on jewellery)?
Hon. Senators: Agreed.
The Chairman: I hear unanimous agreement?
Hon. Senators: Agreed.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: I hear unanimous agreement?
Hon. Senators: Agreed.
The Chairman: Shall the preamble stand postponed?
Hon. Senators: Agreed.
The Chairman: I hear unanimous agreement?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: Do I hear unanimous approval?
Hon. Senators: Agreed.
The Chairman: Shall the preamble carry?
Hon. Senators: Agreed.
The Chairman: Do I hear unanimous approval?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Do I hear unanimous approval?
Hon. Senators: Agreed.
The Chairman: Shall the bill carry?
Hon. Senators: Agreed.
The Chairman: Do I hear unanimous approval?
Hon. Senators: Agreed.
The Chairman: Does the committee wish to proceed in camera to discuss observations that can be appended to the report without amendment on the bill?
Hon. Senators: No.
The Chairman: Do I hear unanimous approval of no observations?
Hon. Senators: Yes.
The Chairman: Thank you very much.
Is it agreed that I report to the Senate without amendment and without observations?
Hon. Senators: Agreed.
The Chairman: Is that unanimous?
Hon. Senators: Agreed.
The Chairman: Thank you very much, gentlemen.
Senator Di Nino: May also an attempt to be made that this bill be dealt with tomorrow, if permission by the Senate is granted?
The Chairman: As I told members of this committee innumerable times, our duty and my duty as the chair, is to report this out as expeditiously as possible. When we had this hearing promptly, despite some static from some members, I proceeded to fulfill the wishes of the committee.
I assure you that we will get this report to the House tomorrow and then we will leave it to generosity of the House to decide what they want to do with it.
Before we adjourn, I want to circulate the letter from the ministry.
The committee adjourned.