Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 2 - Evidence - February 18, 2016
OTTAWA, Thursday, February 18, 2016
The Standing Senate Committee on Banking, Trade and Commerce met this day at
10:39 a.m. to study the present state of the domestic and international
financial system (topic: the causes and effects of the recent decline in the
Canadian Dollar exchange rate).
Senator David Tkachuk (Chair) in the chair.
The Chair: Today we continue our study on the present state of the
international and domestic financial system, and specifically the Canadian
We have before us today from the Canadian Chamber of Commerce, Hendrik Brakel,
Senior Director, Economic, Financial and Tax Policy; and from the Canadian
Federation of Independent Business, Ted Mallett, Vice-President and Chief
Mr. Mallett, please proceed with your presentation.
Ted Mallett, Vice-President and Chief Economist, Canadian Federation of
Independent Business: Good morning. It's a pleasure to be here today to
present on a topic that our members frequently talk to us about. Whether the
dollar is way high or way low, it's certainly a common point of discussion.
I've reviewed some of the earlier testimony from last week. Certainly you had
some high-profile economists talking about the causes of the decline of the
currency and some of the prospects for its future. I don't have much to add to
those kinds of discussions, as they did a very complete job of taking one
through the various points. So I thought I would take a different tack and talk
more about what the effects are, what we're hearing from our members and to what
degree something can be done about it, because you can overreact or underreact.
We'll give you perhaps a little background.
You may be aware that the CFIB is a membership association made up
exclusively of independently owned businesses. We don't have any publicly traded
businesses in our membership. These people understand the challenges and
successes of running a business first-hand. Therefore, it is an extremely
important element of being able to present to a committee such as this and get
involved in public policy because we have one-on-one discussions with members.
We don't have any publicly held businesses, so most of our members are small,
although there is no upward limit on size of enterprise. We have a number of
very large enterprises in the membership, although they're privately held. Half
of our members employ fewer than five people and only about 4 per cent employ
more than 50. You can get a sense of the shift downward. Even so, our membership
is perhaps biased on the large side when you talk about the small business
community in general. The vast majority of small business owners is
incorporated, even those providing source deductions on pension plans and so on,
and are one-person businesses or maybe two-person businesses. Even so, we are
biased toward the larger side of the small business community.
We extensively poll our members on policy issues and track business
conditions. That's what I'm going to be sharing in my talk today. Our Business
Barometer, which I provided some detailed information on, is a regular monthly
sampling of business conditions and perspectives out there. Since February 2009,
we've been doing this monthly with a survey that has not changed in terms of its
methodology. We value the importance of ensuring consistency so we have terms of
reference. When there is a change in business conditions, we are able to see it
clearly in our data.
I've provided four documents in my package for your review. I can briefly
describe them before moving to the issue of currency. The two-page national
report is a basic 12-month forward look at business conditions and expectations.
We put business expectations in an index form at chart number 1 and compare that
against GDP growth. It does a very good job of mirroring GDP growth in the
economy. There is strong correlation between the two, but our numbers are
released in the same month they're collected. We're releasing February results
next Thursday, so we come in about two months ahead of the GDP estimate. It's a
good leading indicator of how the economy is performing.
On page 2 we have things like full-time staffing intentions, general state of
business health, future pricing and wage plans. Pricing is pertinent because
that tends to show up some of the currency issues out there. We track business
indicators, like unfilled orders, accounts receivables, capital intentions,
spending intentions and limitations on growth. I direct your attention to chart
number 11, bottom right corner, to "Major cost constraints.'' In the middle of
that category is a grouping called "foreign currencies.'' It's deliberately
worded vaguely because we have to have to the same wording, whether the currency
is at one level or another. It provides an indication of the kinds of points of
These are not necessarily the highest costs that a business faces but they're
probably the least controllable by a business owner. They are the issues that
they deal with every day, such as taxes and regulations. Of course they are
going to point that out as one of the high points.
Concern about currency costs and, therefore, concern about the high cost of
buying U.S. products, is at the highest level now that we have ever seen from
our survey going back to 2009. We don't have the same kind of question about
construction going back earlier, so we can't compare with the early 2000s as a
point of reference. Hopefully, in another couple of decades we'll have
information that is more complete along those lines.
We have two other larger documents, but they are simply provincial and
sector-based comparisons using the same information. We were able to break out
this information in more detail. You can review it at your convenience. The last
one that I want to direct your attention to is information that was not
available in our regular monthly publications that I provided with a little more
detail for you to point out where the shoe is pinching in terms of currency. In
terms of major cost constraints, chart number 1 at the top shows that close to
40 per cent of our members are saying that currency is a major concern for their
business. Considering that not all businesses are directly associated with the
trade markets, that's a pretty high number. It's quadrupled since 2011-12.
If you superimpose the value of the currency, you can see a perfect inverse
relationship between the two elements. It clearly has become a major issue for
our membership. Breaking that into size-of-business and sector issues shows
It doesn't look like it's a size-of-business issue. It's hitting businesses
no matter what size they are. Amongst the micro businesses of fewer than five
employees, it's gone from an issue of 8 per cent up to about 25 per cent; so it
has tripled. For larger enterprises it's a bigger issue, and we've also seen
larger increases in concern.
It's certainly more of a sectoral issue. There is nothing surprising in these
things, but in the wholesale sector, the retail sector and even to a large
degree the manufacturing sector is where most concerns seem to be showing up.
Although I didn't put it in chart form, we were able to get down into far more
detailed sectoral analysis as well. For example, the sectors affected most
according to our membership, and I simply compare the 2011-12 perspective versus
the 2015-16 perspective that groups them into nicer chunks over time, are
wholesalers of HVAC equipment; farm, lawn and garden equipment; home
furnishings; books; periodicals; music; construction, forestry and mining
equipment; machinery; and electrical products manufacturing.
It's interesting that we are also dealing with concurrent issues around
restructuring of the economy and the need for greater productivity gains. Those
sectors are bringing products in that we hope other businesses will purchase to
increase productive capacity. On the one hand, they are facing higher costs in
bringing those particular products into Canada; while on the other hand, they
are the products are needed most urgently in the Canadian economy to leverage
and regain a more balanced economy.
It would be nice to have a longer history for this kind of information, but
we'll keep tracking it consistently. Hopefully we will be able to provide
further information on it. Small firms are price takers. There is not a whole
lot that they are expecting us to do. They are not lobbying us to push for a
higher dollar or a lower dollar from where it is. They are used to dealing with
these kinds of things. Small firms have, to some degree, the ability to hedge
perhaps some of their currencies. But the smaller the business the more
expensive hedging is on a unit basis, so it becomes more of a challenge. The
cost to business is immediate and they ride the wave whether it's a success or
not. That's really how they have to operate and really it's reflected in the
kind of comments that we get.
With that, I can wrap up my comments and I'm happy to hear questions.
Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy,
Canadian Chamber of Commerce: I will tell you a little bit about our
forecast for the Canadian dollar, our outlook going ahead, and really what it
means for Canadian business, what we've heard from our members because it has
been, as my colleague said, a huge issue for Canadian business.
Our forecast for the Canadian dollar will average 71 cents in 2016 and rise
to average about 74 cents in 2017 and then edge gradually up from there.
One of the challenges with forecasting the dollar this year is wild market
conditions. We have never seen it like this. So far in 2016, Canada has one of
the best-performing stock markets in the world. That's because the TSX has only
fallen 5 per cent. The S&P 500 fell 8 per cent, the NASDAQ is down 10 per cent,
European shares are down 17 per cent and the Shanghai Composite Index is down 22
per cent. We've never seen financial markets moving like this.
And it is just not just financial markets. Tim Cook, the CEO of Apple, one of
the world's most profitable companies, was talking about their quarterly
results. He said we are seeing "extreme conditions unlike anything we've
experienced before'' in the global economy.
So it's a strange global economy. Rich countries seem to be doing a little
better. The U.S. is expected to grow somewhere around 2.5 per cent to 3 per cent
this year. Europe is pulling out of its funk, growing somewhere around 1.5 per
cent to 1.8 per cent. What we're seeing is a really surprising slowdown in
emerging markets and really tight financial conditions. One of the phenomena
that we're hearing from our members in the banking community is these huge flows
of liquidity, which are really roiling global markets.
The quantitative easing that took place in 2009 was huge from then on. It
averted a global crisis. We should be very thankful that the U.S. federal
reserve avoided the types of cascading bank failures we saw back in the 1930s,
but it had unintended consequences in that the U.S. monetary base, the amount of
funds available to the U.S. financial system, rose from US $800 billion up to
about $4 trillion, so it almost quintupled. There was a huge amount of money in
Economists talk about the portfolio rebalancing effect where government bond
yields dropped to zero because the fed was buying up all these bonds and so
yields dropped to zero, and then investors move into corporate bonds, and then
mixed portfolio people see corporate bond yields dropping so they get into
equities, and then the equities get into emerging markets and commodities and
currencies. There is this movement along the risk profile from less risky assets
to more risky assets. And now the quantitative easing has stopped.
It stopped back in 2015, which is why we saw those big shifts in emerging
market currencies. In fact now we're seeing the inverse; things are starting to
tighten. Every time in the past when we've seen tightening of U.S. monetary
policy, we've certainly seen negative impacts on equity markets but we've also
seen impacts on currencies. This is an unprecedented tightening, because we've
gone from spectacular liquidity coming into the system to some tightening.
The big consequences for emerging markets was in 2015 investors and companies
pulled $735 billion out of emerging markets — the worst capital flight in 15
years. A lot of these emerging markets that have been accustomed to borrowing
limitless amounts of U.S. dollars really cheaply suddenly found their borrowing
costs rising and their currencies falling.
This all comes at the same time that you have this slowdown in China, which
we're not really sure about. It's a little bit unpredictable. All of this is
very bad news for commodity prices, because emerging markets are the biggest
consumers of commodities. China buys half the world's iron ore. It's responsible
for about 28 per cent of the growth in demand for oil. So a slowdown in China,
in emerging markets, really impacts commodity flows.
What does it mean for the dollar? First, with regard to oil prices, global
oil demand was usually going up at about 2.5 million to 3 million barrels per
day in additional demand each year. A lot of the forecasters back in 2014
thought $100-oil would just continue forever because, thank goodness, the oil
sands are pumping out more oil, thank goodness the Americans had this fracturing
because we're struggling to keep up with rising demand for oil. Suddenly, when
emerging markets slowed down, we saw a big decline in demand and so there is
this surplus of oil on the market.
We're looking at a surplus of 1.5 million, 1.2 million barrels per day this
year, which will probably shrink and come back to balance sometime in 2017. Our
forecast for oil should be somewhere in $35- to $40-range by the end of this
year, rising to $50 next year. So there is a consequence for that vis-à-vis the
As I'm sure the other witnesses said, the biggest factor in the Canadian
dollar is oil prices. We used to joke that oil prices and the Canadian dollar
are like an old married couple because they go everywhere together. Sometimes
one wanders off, but they always get back together in the end. Historically the
correlation is 80 per cent, such that a $10- increase in the price of barrel of
oil usually affects the loonie by about 3 cents.
The second factor is the interest rate differential between Canada and the
United States. As you know, the U.S. fed raised interest rates by 25 basis
points in December. We are anticipating three more interest rate increases in
2016, to bring the interest rates all the way up to 1 per cent. None of the
investors or the financial community thinks that interest rates are going up in
Canada. In fact, we saw speeches by the Governor of the Bank of Canada talking
about negative interest rates and quantitative easing and some of the other
tools he could use to essentially stimulate the economy if Canada went lower.
The third factor that pushed the loonie above parity was that Canada was a
safe haven. We had gone through this great financial crisis with no bailouts,
our banks the strongest in the world, and so we saw huge portfolios flows going
into Canada because we were the safe haven. Now the U.S. is doing better so
there's not the same need for a safe haven and, finally, investors are more
aware of some of Canada's vulnerabilities.
All that is to say investors see rising rates and strength in the U.S., and
lower rates and vulnerabilities in Canada. So you see the investors are moving
out of Canada into the U.S. dollar. So that's why we have the loonie at 71
What does it mean for Canada? Actually results have been mixed, but it has
been positive for exports: last year exports declined by 1 per cent. It sounds
bad, but that's actually pretty good. When you think 24 per cent of Canada's
exports are oil and gas related, and prices fell by half. The math is very easy.
That's a 12 per cent hit to exports, so how to fill that great gaping hole was
with manufactured goods and services. We saw some spectacular results last year:
auto exports up 14 per cent, aerospace exports up 29 per cent, communications
technology up 13 per cent. Services did really well; U.S. tourism visits up 8
As my colleague mentioned, there are sort of mixed results here in a lot of
the natural resources companies and a lot of the services companies where their
wages are in Canadian dollars, the bulk of their costs are in Canadian dollars
and their revenues are in U.S. dollars, so that has been helpful and we have
seen companies benefit.
I was talking to an Ottawa-based company called MDS Aero, and they do test
cells for turbine engines. They were saying that the challenge they had when the
dollar was at parity is they were always struggling to cut costs: can we run a
facility with 15 people instead of the 20 that the Americans usually use? From
2003 to 2008 the loonie rose 8 per cent per year, which is very difficult for a
business like that, but now their costs are quite competitive.
During that harsh period, when we had the loonie above parity, we saw a
decline in the number of exporting companies in Canada. But those companies that
are still there are now really competitive and they're doing quite well with the
loonie at 71 cents.
Now, that being said, we don't think a lower loonie is a panacea for Canadian
competitiveness because one of the coping mechanisms, and one of the things that
our world class companies do, is to link into global supply chains. They are
sourcing from all over the world and bringing in parts from United States, Japan
and Asia, so a decline in the loonie just raises their input costs. The other
thing is that we really want Canadian businesses to invest more in capital, to
invest overseas and to invest in the latest computer technology, so it becomes
much more expensive with a lower loonie.
All that to say it's a fairly mixed bag, but overall it has had some modest
benefits for exports.
Senator Massicotte: Thank you to both of you for being here.
Mr. Mallett, I look at your survey, and 30 to 40 per cent of your membership
base is very worried about the higher cost of the dollar. Yet, when you have 47
per cent of GDP that is trade oriented, where are your clients that benefit from
a more expensive U.S. dollar? How come we don't see that in your graphs?
Mr. Mallett: We certainly show that there is a large-scale shifting of
perspective within the membership. If you look at the general business
conditions, the optimism out there, by province we find it at record low levels
in Alberta for obvious reasons. We haven't seen the turnaround as quickly in the
other parts of the country. A year ago, we were saying that this is probably an
equal situation here, where we are going to have a decline in fortunes in one,
but we are going to see a lifting in others. We haven't seen that lifting yet,
largely because of the uncertainty associated with costs.
A large degree of exporters also rely on imported products for their
subcomponents. It is not always an automatic benefit to one particular business
because they are an exporter. A lot depends on their mix of inputs and outputs.
What is interesting, though, is that we do note stronger rebound in the Atlantic
provinces on the positive side. Tourism is a form of export, especially for U.S.
travellers. The most optimistic businesses in Canada are in Nova Scotia right
now, for a number of reasons, possibly related to the navy contracts, also
possibly related to many on the resource side. These are very connected
economies to the Northeast U.S.
We are seeing that kind of turnaround. It's just that the benefits that many
thought were perhaps automatic and that would kick in quickly in fact move much
more slowly than anybody thought.
Senator Massicotte: Just on that note, as you know, the bank
economists were here last week. They were basically saying it's sort of
kif-kif, the benefit of the cost of the dollar.
Let me ask Mr. Brakel a question. The Conference Board of Canada was here
yesterday; the economist was here. He said that we are not seeing the immediate
lift to the economy from the lower dollar because our manufacturing sector is
not as competitive as it should be, either because they lack capacity or they're
not as competitive or modern in their processes. Therefore, he was saying that
we will not to see a lift for some period of time until they re-invest, because
they cannot compete. That's a little discouraging, which means we will suffer a
delay before our economy benefits from that dollar due to the fact that our
Canadian players, particularly the manufacturing sector, are not competitive and
not adequately organized.
Mr. Brakel: That is an excellent point, and what we are hearing from
our manufacturers is they are running into those production constraints. They
can't find the skilled people that they need. They're hiring, but they just
can't find them.
The decision to invest in plant and equipment, to spend millions of dollars
expanding your facility, is a 10-, 20-year decision horizon. It is difficult to
make a decision like that based on what the loonie is doing in 2015 and 2016.
They have a long-term horizon in mind, so they've seen where the dollar has
been. The challenge has been that, over the past 12 years, the dollar has
fluctuated between 63 cents and $1.08. To try to make decisions based on where
the loonie is going is a tough proposition.
We have seen pickup in business investment, but it is not showing up in the
overall numbers because it is being overwhelmed by the sharp drop in business
investment in CapEx that is happening in the oil and gas industry. Overall,
business investment numbers are very weak in Canada. It is a negative for the
economy, but it is because the natural resources decline has been so sharp that
it is overwhelming any gains we are seeing.
Senator Massicotte: On that note if I could, I know you mentioned
hedging a little bit, but you have a large membership base, up to 500 employees.
The Canadian Chamber of Commerce has many large players. There is really no
excuse. If the dollar is so important to their profitability, they should not be
speculating on that kind of commodity. They should have hedged. It's not that
expensive and it's well organized. There is immense depth to that hedging
market. Why did your bigger members not do so? They were basically profiting at
no cost from the previous circumstance, but now they are getting burnt maybe
from bad decision making on their behalf.
Mr. Brakel: Certainly there is a huge financial industry in Canada and
any bank would be very happy and delighted to help any company hedge the
I think some of the challenges are the complexity associated with it, the
predictability of what sort of revenues you are going to get. We have heard
mixed things from our members. Some do absolutely hedge. Others deliberately
For example, in gold and oil companies, people buy those stocks because they
want those stocks to react like the oil and the gold market does. If you hedge,
then you take that away from the investor. A lot of the oil companies
deliberately don't hedge so that their stocks move the way their investors want.
Mr. Mallett: Investment decisions are made by humans, after all. It is
not just a statement to say that a certain sector is uncompetitive worldwide and
that that is an issue.
The concerns we get from our members aren't necessarily about whether the
dollar is too high or too low. What they really don't like is the uncertainty
around that. It is very difficult to make that forward decision about hedging
without knowing what the risks and costs are because they are very difficult to
The same goes for how far ahead they have to plan for, whether they have to
commit to a price list, for example, that they send their customers or how much
they have to commit to purchasing inputs from other countries. Those are all big
decisions. The more that the dollar moves around, as Hendrik said, the more
difficult that kind of decision is. They develop a risk premium for that. In a
more uncertain world, it means that they are less interested in investing. That
is part of the issue. If we could come up with an ideal way to stabilize the
movements in currency or at least give people more assurance of where it is
likely to be that could help, but that has its costs and difficulties as well.
Senator Enverga: Thank you for the presentation. It has been mentioned
many times that the low price of oil is a factor. Every time the oil price goes
down, our dollar goes down too. As you said, one does not live without the
We keep on buying oil from outside the country. What happens if we buy our
own oil? That is, keep the money within our country? Would that be a good thing
for the Canadian dollar?
Mr. Brakel: Generally, Canada is a big net exporter of oil. The reason
the international financial community is buying and selling Canadian dollars
every day is, in large part, to get our oil. We are stuck with having that
fluctuation between the Canadian dollar and oil prices.
But you are right, absolutely. Instead of importing oil from Venezuela and
other countries, if we had pipelines keeping our oil within Canada that would
absolutely be of benefit to Canada. We wouldn't have to import from other
Senator Enverga: So how much benefit is it? Do you have something like
a cost or growth estimate if were to we keep buying our own oil and don't import
anything from another country?
Mr. Brakel: One of the challenges we have in North America is that
refineries are glutted with oil. When we talk about West Texas Intermediate —
that is the $32 that it is at today — actually, for Western Canadian Select,
which is a different grade of oil, there is a discount below that. Often Western
Canadian Select is $5 cheaper because it's heavier, it has a lot of sulphur, and
they are shipping it to these refineries that are glutted with oil. What we'd
like to do is get Canadian oil out to Asia, out east and all sorts of other
places where they really need our oil so that we get a bit of a higher premium.
A few years ago the Chamber did an estimate, and they called it the $50
Million a Day that we are losing in oil revenues because we can't get our
oil out to the higher price markets, like in Asia and elsewhere. So, absolutely,
redirecting our oil within Canada and getting it out to Asia would be a huge
benefit to us.
Senator Enverga: We talk about infrastructure and putting money into
infrastructure. Do you think a pipeline would be great infrastructure to help
our economy and our dollar at the same time?
Mr. Brakel: Absolutely. The Chamber of Commerce supports it. We think
it's critical for us to get our natural resources to market. There is incredible
technology going into natural resources. Big parts of the green technology
industry are coming from the natural resources industry. It's growing. If we
make these critical investments and get our natural resources to market, yes,
absolutely, we are very bullish on natural resources.
Senator Tannas: We had a good discussion yesterday with some witnesses
around productivity. Senator Massicotte has talked a bit about it and you have
responded, but I think we heard that Canada, in general, has about a 1 per cent
productivity gap between us and the United States. Is there a difference the
smaller the business? Is that gap wider? Is it the same? Is it smaller? Do you
have any comments on why?
Mr. Mallett: Yes, I can certainly talk about that.
There is often a mixing or confusing of two concepts: one is economies of
scale and the other is productivity growth. Certainly with small firms, when you
talk about labour activity, they are more labour intensive, therefore less
capital intensive, and therefore have lower labour productivity.
The more important issue is the growth in that productivity over time. There
is mixed reaction. Looking at some points through the business cycle in the
1980s and 1990s perhaps some small firms were on the low side. Later results,
especially small manufacturers and so on, were showing higher productivity
growth than large enterprises. The difficulty is that no one has a good, solid
measure of productivity because it's a vaporous kind of measure. It's how much
output you produce for every given unit of inputs. How do you measure inputs?
You can measure people but you cannot necessarily measure how much effort
they're putting into their work. They may be showing up every day to work and
working just as hard in some measures, but are they actually doing the right
things and so on.
It's a difficult concept to measure. Many of the measures that we have tend
to break things into categories that may not make a whole lot of sense because
the business community is a series of vertically integrated steps. Small firms
are embedded in those steps so that there may be a large manufacturer making a
particular product, but they are buying hoses and parts from a medium-sized
supplier but everyone is hiring an accountant and a lawyer and payroll services
and all that, which may be a smaller enterprise.
Simply saying, "Let's group all these suppliers into a small group and then
make the large firms. Oh, gee, those small firms are less productive; therefore
they are a drag in the economy.'' No, they're embedded within the whole
production process and the reason they're there is that it's better for these
larger enterprises to subcontract that work out than doing it themselves.
There is a lot of confusion when you try to break those kinds of measures
into size categories, or even industry categories, because there is so much
interplay or interconnectedness between these kinds of businesses. It can be
quite deceiving to be able to break those things into issues. That is not to say
that productivity is not an important issue, but we have to look at it in a
holistic sense rather than a micro sense.
Senator Tannas: Maybe we're getting off topic, but small business
America or small business Canada, where are the deltas or are there any
significant deltas that you have seen in your research and your work? We hear
loud and clear from your organization and from others that small business is the
engine of our economies, and thank God for small businesses and all that. So are
there any comparators between American small business and Canadian small
Mr. Mallett: Small firms in the U.S. have an easier time growing.
You've heard all the policy arguments around tax rates and so on, but I think
there are also some major advantages around the way the geo-economic structure
of the U.S. is so much more structured around networks and hub and spoke and so
on. The upper U.S. Northeast is a densely populated area. People can move from
St. Louis to Chicago to Nashville to Columbus, and all those cities are within
an hour or two of driving. Canada isn't structured that way.
Apart from southern Ontario and southern Quebec, we have a long ribbon of
cities that requires a very different transportation infrastructure. The
wholesale sector is completely different. Canadian firms going from micro- to
small- to medium-sized have to grow almost in an unnatural way, whereas in the
U.S., if you become a solid supplier in central Ohio you can service Michigan,
Indiana, South Carolina, all within a reasonable driving distance. You can't do
that in Canada purely because of the geography.
I think that's one of the major disadvantages the Canadian economy has,
probably because of the way our geography is laid out for us.
Senator Bellemare: I am trying to make sense of the data you have
presented, especially the data from the Canadian Federation of Independent
Business. Those results are surprising. I am wondering how much they have to do
with your membership, as you say that 50 per cent of your members — and you have
109,000 of them — are from companies with five or more employees. So they are
very small businesses.
The data is provided by sector, but there is a percentage indicating the cost
constraints. I have always thought that, at the CFIB — as well as in chambers of
commerce — a lot of your members were independent workers, small companies truly
associated with independent work, in which case, as you said yourself, the work
is very intensive in terms of labour, but not in terms of capital. I have always
thought that these were companies with a significant domestic market. Given that
the dollar is low, I would have thought that foreign competitors, large
consulting firms and small Canadian companies would have had an advantage. I
understand that, if your members are only small retailers, they import a lot of
products. Therefore, they will be hurt a bit by all this, just like consumers.
Can you shed some light on the issue by telling me about your members by
sector, and telling me what sector you represent the most?
Mr. Mallett: Thank you very much for the question. Our membership is
quite reflective of the business community at large. We don't have any obvious
strength in one particular area or the other. Just fewer than 10 per cent of our
members are manufacturers. Between 20 per cent to 25 per cent of our members are
retailers; about 10 per cent are construction businesses; about 6 per cent are
in the agri-business, area farmers and related industries.
The service sector is a bit underrepresented in our membership compared to
the economy as a whole, but that is largely because just being a membership
organization where we're knocking on doors saying, "Hey, join CFIB,'' they tend
to be more hidden. They don't have signs in front of their businesses as much as
a vendor or a retailer or whatever. But it is broadly reflective of the economy
as a whole, between goods producing and the service sector.
It is an important question to ask whether there are advantages for small,
nimble businesses to be able to respond positively to the kinds of changing
forces we've got. Absolutely, I think there are tremendous opportunities and
small firms have proven to be capable of filling opportunities when they take
place, but it still takes time.
You have to have somebody with enough capital to be able to buy their
inventory, develop or hire the people they need to meet the possible demand for
their services. We are just saying that it can't take place within months of the
dollar moving from one level to the next. Also, it requires confidence that the
dollar will stay at a certain level to be able to do that.
Another interesting point relates to the previous question on technology. One
reason that small firms are more labour intensive and less capital intensive is
that labour is available in very small units. When you think about hiring
somebody to help out in a business, you can hire someone for about three hours.
The call-in requirements are such that you have to pay part-time temps for three
hours when you call them in. That is a small unit of production.
If you want to buy a small unit of technology, you probably have to buy a
machine or a truck. You could lease it; that is one element. That is why leasing
is a much more common factor now. However, technology is only available in
fairly large units, and a business has to get to a certain size. There is a
minimum size of that unit, whether it's a customer-relationship management
system, a piece of machinery, a truck, or a backhoe. You have to have the
confidence that you'll get two or three years of good use of that product to be
able to use it effectively. A piece of labour, hiring someone for a couple of
hours, is a short-term thing. That is why for small firms it is less expensive
to expand on labour than on technology.
Senator L. Smith: We've had a group of economists before us over the
last couple of weeks talking about the fluctuations in the dollar and the
causes, et cetera. We have asked questions related to assisting corporations,
whether big or small.
I know it is hard to come up with a plan because there are some different
categories of business, et cetera. In each of the presentations there was the
decision about whether to invest in building Canada based on whether you have
world- class talent. Market technology was one challenge of many manufacturers'
global supply chains, best capital equipment. Another was relative efficiency,
cost of transportation and availability of pricing information and so on.
If you had to make a three- or four-point plan that could apply generally to
Canadian business to help them weather the storm and move forward, could you
come up with your top three or four points that you think would be advantageous
to Canadian companies, whether big or small?
Mr. Brakel: Absolutely. As we talked about before, people will not
make decisions to invest millions of dollars based on where the loonie is. You
have to have the long-term revenues and the business plan.
The first priority we hear from businesses across the country is the skills
gap: "I can't find the employees.'' Any investments in training and enhanced
flexibility to bring more immigrants to Canada would be first.
Senator L. Smith: The skills gap.
Mr. Brakel: Yes.
Senator L. Smith: Lack of education or experience? What is the skills
Mr. Brakel: It is. Jobs and technologies out there today require
greater and greater skills. We have unemployed people in Canada, but their
skills don't always match with the skills required to fill the vacancies.
The success of new companies in services is all about the people and talent
the business has; so skills are always number 1.
The second point we would make is the types of infrastructure investment that
can give us big productivity gains to get our products to market more easily and
cheaply. Some investments in infrastructure, like ports, roads or even the
digital technology, can give us productivity gains in the long term. There's a
lot of private sector investment in infrastructure out there and the government
just has to sort of provide support. For example, VIA Rail would like to build a
new passenger rail system to connect Toronto, Ottawa and Montreal. We're not
talking about high-speed rail but about normal-speed rail because currently all
those trains have to travel at 50 miles per hour because freight trains share
the tracks. If we had dedicated passenger rail, we could double the speeds up to
90 or 100 miles an hour and we'd all get to Toronto in two hours and Montreal in
one. Wouldn't that be great? These are investments that the government has to
So we would say skills, infrastructure and more support for innovation and
technology. Those would be the suggestions.
Senator L. Smith: Do you guys have committees across the country that
look at these types of issues to try to prioritize and get those messages out,
besides all the analyses you do?
Mr. Brakel: Yes. We have committees on tax and innovation.
Yesterday, the Canadian Chamber of Commerce launched their Top 10 Barriers to
Canadian Competitiveness initiative, going through the biggest things that are
holding Canadian businesses back. They're issues like getting our resources to
market, getting up to scale and making the investments in capital.
One stat that always troubled me was that for every dollar that an American
company spends on capital, Canadians are at about 65 cents. We were catching up
when the dollar was at parity and it was much cheaper for Canadians to bring in
that technology, but we are worried that we will start to slow again.
Senator L. Smith: I would ask that of Mr. Mallett?
Mr. Mallett: I don't disagree at all with Mr. Brakel's statement, but
it is interesting that I have a very different list.
Senator L. Smith: What is your list?
Mr. Mallett: Let us start with the broad principles of promoting and
protecting the entrepreneurial culture within Canada. We are envied around the
world for having people who are confident enough to start their own businesses
and succeed. We have enough success in business creation around here, which
helps in the long run. It's not quite at the level we see in the U.S., largely
because of other structural advantages, but it is not something that we should
ignore or take lightly.
It will be an interesting test, because Alberta and Saskatchewan have more
self-employed people per capita than anywhere else in the country — B.C. as
well. Because those economies have been challenged, Alberta and Saskatchewan the
most, it will be interesting to see how quickly they rebound if there's a
restructuring. I have high hopes that because people have had so much exposure
to self-employment and entrepreneurship in those economies they will be able to
restructure faster than elsewhere in the country.
The flexibility to operate is the second one. Things like the small business
tax rate is critical to maintaining the ability of firms to retain equity where
they don't have the availability of scale in that they can't borrow or take on
equity markets to the same degree. Things like the small business tax credit
helps give a signal. We are not in favour of things like direct government
intervention or direct government subsidies to small businesses.
Finally, and many people have said it before, open markets nationally by
removing internal trade barriers will allow businesses to grow organically
between provinces. This is critically important as well because businesses
naturally grow to the most available market to them. If it is easier to sell to
another country than to customers in another province, it says something about
how restrictive it is in Canada. Those are my three asks.
Senator L. Smith: If we do a study on opening barriers between
provinces, would you like to give us testimony in support and participate in it?
Mr. Mallett: Wholeheartedly. I am sure the chamber would like that,
Mr. Brakel: We would love it.
Senator L. Smith: Did you talk about venture capital in terms of
changing the Canadian mentality from risk aversion to taking more risk?
Mr. Mallett: It's not that we have so much risk aversion. The venture
capital market in Canada is dealing with a much smaller pool. It is not so much
the quality of the pool; it's much smaller. The U.S. VC system has its hubs in
Massachusetts and Silicon Valley, California. It's difficult to get that kind of
scale of effort going. Venture capital is only a very thin edge of business
creation in Canada. The vast majority of business startups happen on a
shoestring, using parents' money or friends' basements, and that's as much as we
have to promote and protect.
Mr. Brakel: Just to build on Ted's comments, absolutely, venture
capital is critical. We issued a report last year on how to build up the venture
capital industry in Canada because we hear from a lot of companies in Canada,
like Shopify, which is just around the corner, that they get repeated offers to
go to the United States where it is more alluring, but what we want to do is to
build up a really strong domestic venture capital industry in Canada. There are
questions about size, but it is growing. We could do so much more.
You look at some of the solutions, like B.C.'s investment tax credit, which
is a 30 per cent refundable tax credit, but you have to have your money in for
five years. We think that has worked really well in B.C. We know that flow-
through shares work really well for mineral exploration. What is the point of
giving a company a tax credit if they are not going to have any revenues for the
next five years? So, instead, that tax credit is passed along to the investors.
That has worked really well for mineral exploration, but it can work really well
We exempt the capital gains on your TFSAs to encourage people to save more
for retirement. Why not exempt certain capital gains if you invest in a
high-risk company that's going to produce a new technology?
Venture capital, absolutely, I think is critical to growing our businesses.
Senator Greene: I'm interested in your comment about your Nova Scotia
members being the most optimistic members that you've got across the country.
I'm interested in this because I would suspect that, if you took a survey of
Nova Scotians in general, they would not be amongst even the top five provinces.
Can you explain why you believe your members are more optimistic than perhaps
the population as a whole in the province would be?
Mr. Mallett: I think it is a very good question. Let me just refer to
the Nova Scotia results, which would be the third page of the provincial
document I had. Traditionally, during the recovery from the financial crisis,
Nova Scotia firms were lagging behind the national average quite significantly
but really, starting at the end of 2014, we saw a significant hiking up of
The structure of the question that is used for that particular index is how
you expect your business to perform12 months from now. It's a forward
expectation, so t's a relative measure. I'm going to be better off than I am
now, on average.
Perhaps one can say that Nova Scotia businesses are due some optimism because
they have been lagging for such a long time. If you look at the general state of
business health, which is chart number three in that area, it has traditionally
lagged. Only 30 to 40 per cent of businesses said that their businesses were in
good health. That's low. That's nationally, but lately, in the past two years,
we are now up to roughly the 50 per cent number which is, historically, one of
the higher numbers that we tend to get across the country.
We think that a lot of this is because of the stimulating effects of the
dollar, because so much of the Nova Scotia economy has revolved around either
forestry or tourism, that they expect that there are some spinoff benefits that
happen more quickly than in, say, a manufacturing base like Ontario and Quebec,
where it takes more time for a currency change to have an effect on the forward
expectations. If they are selling their products overseas or to the U.S., they
will see other benefits.
The transmission of the benefits of a lower currency has been faster in the
Maritimes than in other provinces.
Senator Greene: Amongst your members then in the Maritimes in general,
would the tourism component be the largest?
Mr. Mallett: Tourism isn't officially a sector in the SIC sense, but
it's hospitality and transportation. There are a lot of service businesses that
are connected with tourism and so on. It is very difficult to have a direct
connection with that, but I suspect that we have an awful lot more waiting
within the tourism sector no matter what the industry sector is in that
province. It's a good question. It's worth delving into in more detail.
Senator Greene: It's very interesting because there is a lack of
connection between where I believe most Nova Scotians are about the future and
the businesses they might work for.
Mr. Mallett: It's better to have that than the other way around.
Senator Greene: Yes, I suppose it is.
Mr. Mallett: Hopefully, the optimism of employers will find its way
into the general populous, through the people working for them, and I think,
over time, you'll probably see consumer sentiment start rising in Nova Scotia as
Senator Greene: I hope so.
Senator Ringuette: Mr. Mallett, particularly — my regards to Dan Kelly
by the way — I'm looking at your graph 11, major cost constraints nationally.
Bank fees I know very well, and I have been trying to highlight that issue and
will continue to do so.
However, what is very intriguing to me is the insurance issue in your graph.
Insurance is in the private sector. We think that the competition is relatively
good in Canada so that there is flexibility with regard to cost and so forth,
but have you investigated why insurance has such a high rate and of concern to
Mr. Mallett: Insurance is one of those areas that businesses have very
little control over. There tends to be a bit of whipsawing that takes place
within the industry. When there is a major shock; 9/11 created a massive ripple
effect through the insurance sector.
Senator Ringuette: That was a decade ago.
Mr. Mallett: That's the way that it seems to move. Small business
owners may have a feeling about what their own risk profile is, but the
insurance industry has another idea of what risk profile is. So it's not a
meeting of minds of what businesses feel is an appropriate risk profile versus
what they are being charged by insurance companies. We tend to find very delayed
movements in the cost of insurance for small firms based on some of those
ripples that take place within broader insurance markets.
Again, we talked about hedging. That's a form of insurance. It's a form of
sales insurance for businesses, and there is a cost associated with that. But if
the cost of buying that insurance is out of line with what a business feels
their appropriate risk profile is then you will have concerns over that sort of
Again, it's not a direct measure of the costs themselves; it's a feeling
about how much control they have over their ability to manage those costs.
Senator Ringuette: As 45 per cent of your members said that the cost
of insurance was an issue, have you investigated why? The commodity issue,
capital, technology, occupancy, tax regulation, we understand those, but to my
surprise after banking the insurance cost is a major constraint. To me, it's an
indication that the insurance scheme needs to be looked at. Why is it creating
such a cost constraint on our business community?
Mr. Mallett: I'll have to take a look at that in greater detail, if
you want to raise that with others. But I can go back into some of our history
and see where that changes and where it is related to other elements. It is a
very good question.
Senator Massicotte: Mr. Brakel, concerning venture capital funds, you
suggested changing the tax credits program to encourage investors, especially
small ones, to invest in those funds. Our committee has debated this a lot, but
the most significant dilemma in terms of venture capital, in my opinion, has to
do with the fact that it is not profitable over a period of 10 to 15 years. The
returns are not in line with the risk taken. Should the government and the
taxpayers subsidize venture capital investments?
I am a bit puzzled. Fundamentally, those mechanisms have to stand on their
own two feet, but they are not profitable. Additions are made to the funds
through the government, the BDC, and so on, as that is very important for the
Canadian economy. However, something is not right. It is questionable to provide
funding when it is not profitable from the outset. Do you have any comments on
Mr. Brakel: You are completely right. Profitability and the rate of
return on those types of funds carry a very high risk, and the amount of time
that passes before a return is enjoyed is long. Those are long-term investments.
So we believe that the government definitely has a role to play, and the
investments made by the BDC have greatly helped the venture capital industry in
Canada. When we bring this up with Canada's Venture Capital and Private Equity
Association, they tell us that these types of investments require the private
sector to match the investment. That increases the industry's investment
So we believe that the government certainly has a role to play. As you said
so well, profitability is very often low, but when the government creates fiscal
incentives to improve the revenue on those investments, it may help attract a
lot more capital.
Around the world, in the United States as in Europe, the government plays an
important role in that kind of venture capital.
Senator Bellemare: Mr. Mallett, I was looking at the business
barometer, and all the provinces, with the exception of Alberta, are more
optimistic than the Canadian average. Among your members, is the percentage of
respondents from Alberta proportionally higher than that the province's
population in your survey?
Mr. Mallett: No, it's roughly equivalent. About ten per cent of our
members are based in Alberta. We have a lot of members in Saskatchewan as well,
maybe another 5 per cent, but because those two provinces are so far below the
national average it's weighting down significantly. We've never seen barometer
index levels down to the 20s, where Alberta is right now, and that's what is
bringing the whole average down. That's why almost everybody else is above the
Senator Bellemare: All the others are above the average, even
Saskatchewan, which is at 58.7. Alberta is the only one that is lower. That is
why I was thinking that there should be a significant proportion, but you say it
is only about 10 per cent.
Senator Enverga: It's actually on the same line of questioning.
Saskatchewan and Alberta have some similarities. What is wrong with Alberta, and
how come Saskatchewan is a lot better than Alberta? Is there any big difference
between the two?
Mr. Mallett: Alberta's economy has had a couple of generations of
adapting to the oil extraction industry. Heavy investment in oil sands, heavy
oil and so on has created a structured economy around that. Saskatchewan is far
newer at that element. It was more traditionally a farming economy, potash,
timber, uranium to some degree as well, so it only came fairly late to the
process of oil and gas extraction. Therefore, its economy was not structurally
built around that element. That's why we are seeing a different kind of
reaction, at least in terms of this element.
The same can be applied to Newfoundland and Labrador. They are facing the
same kinds of conditions for their offshore industry. Maybe their prices are not
quite so dire because we are dealing with the Brent as opposed to WTI, but the
small business sector is not integrated within oil extraction as the Alberta
economy has been.
The Chair: Thank you. Senators, I have a little note that I'm going to
read. This is our last meeting on the currency issue, and so I have a little
note to read that I think is quite appropriate. I'm just going to read it into
the record before we say goodbye to our witnesses.
The note reads: "Senators, although I am no longer on the committee, or a
senator for that matter, I would like to close the loop on a very important
issue. As members may recall, on April 9, 2014, I purchased 0.18 bitcoin in
committee, from a bitcoin ATM, for $100. Several members reminded me that I
would have to pay a capital gains tax should I cash out that bitcoin at a
profit. Well, colleagues, you can rest easy knowing that my assistant cashed out
my 0.18 bitcoin for $85, a net loss of $15 over a course of almost two years. I
actually should have received close to 89 for my bitcoin, but the machine does
not dispense change. I wish you all the best. Senator Irving Gerstein.''
Witnesses, thank you very much for a very informative session. I think we
have all enjoyed it very much. Senators, again, if you could remain for a few
minutes in a closed session after we say goodbye. I want to make sure
everybody's represented here. We were very uncomfortable yesterday because it
was only Tories, and I don't want to conduct business that way. If we could all
remain, that would be great.
(The committee continued in camera.)