Proceedings of the Standing Senate Committee on
Issue 6 - Evidence - October 26, 2011
OTTAWA, Wednesday, October 26, 2011
The Standing Senate Committee on National Finance is meeting this day at
6:45 p.m. to study the potential reasons for price discrepancies in respect
of certain goods between Canada and United States, given the value that the
Canadian dollar and the effect of crossborder shopping on the Canadian
Senator Joseph A. Day (Chair) in the chair.
The Chair: We continue tonight our special study on the potential
reasons for price discrepancies in respect of certain goods between Canada
and United States.
We are very pleased to welcome this evening Professor Ken Wong, who is
the Distinguished Professor of Marketing at Queen's University. We are also
pleased to welcome Professor Avi Goldfarb, Associate Professor of Marketing
with the University of Toronto's Rotman School of Management.
We will begin with a short presentation by Professor Wong and then we
will go to Professor Goldfarb. Following that we will go into a question and
answer period. We have one hour set aside for this particular session.
Ken Wong, Queen's University, as an individual: Good evening. I
was pleased to be asked to be with you tonight to talk about this issue
because it is a very complex one. I am sure we all recognize its importance,
but its complexities often lie somewhere below the surface or below the
radar of the general public.
The problem is there are a number of factors bundled in pricing decisions
on either side of the border. There is also enormous variation into the
impact of each of these factors on different products carried by the same
retailer or even on the same product carried by different retailers, all of
which makes the detection of any form of price gouging very hard to do, and
the regulation of such price gouging by an external agency nearly
There are, to be certain, three different components of price differences
between Canadian and U.S. products. The first are sourced in what I will
call legitimate additional costs. These are the things that you often hear
about. They are the tariff charges and the higher shipping and
transportation expenses incurred by Canadian retailers, relative to the U.S.
For small retailers, it is the use of wholesalers in order to make certain
they have the right goods to supply to their customers and the like.
The challenge, however, with those costs is they are not standard across
all businesses. Different businesses with different asset bases have
different cost structures, and as a result you cannot simply look at
differences in prices and assume that one is price gouging and the other is
As an example, if one firm owns a fleet of trucks that it uses to handle
all of its supply chain requirements, whereas another firm has to rent those
assets from a trucking firm, obviously the firm that is big enough to have
its own trucks has lower cost than the firm that has to rent those assets
from a third party. Those lower costs tend to be reflected then in lower
prices. That does not mean that the more expensive retailer is gouging their
customer, it simply says they have higher costs than the other firm and, as
such, their prices will reflect that cost difference.
In some categories, for example cameras, it has been reported that the
price difference between Canada and U.S. goods is as little as 7 per cent.
In other categories, like stand-up refrigerators, a price difference has
been noted somewhere in the order of 80 per cent. That leads to an obvious
conclusion by some people that there is a 73 per cent price gouge going on
in the home appliance business, but that is not the case at all. The price
for a refrigerator is dramatically different, given its size, bulk and so
on, than the price for a camera.
The second thing that makes it difficult to do straight price comparisons
between Canada and the U.S. has to do with volume or scale effects. The U.S.
market is 10 times the size of the Canadian market and, accordingly, the
average retailer in the States is much larger than the average retailer here
As a consequence, with size comes certain advantages and cost
efficiencies but also comes enormous buying power. It is like the difference
between me walking into a car dealership and asking how much for a
particular car, and then asking how much it would be if I bought six.
Clearly I would expect a better price if I was buying six. Big U.S.
retailers will get better prices than even big Canadian retailers and, as a
consequence, they will reflect those buying advantages in having lower
The third and final component, and the one I think is most difficult to
talk about, is the margin objectives of each firm because here there is no
standard base and there is no real comparison. Margins, that is to say the
amount of markup that exists between costs and price, are really determined
by a number of factors such as the inherent risk that the retailer is taking
in carrying a particular product. It is the risk of obsolete inventory; it
is the risk that comes with having to provide follow-on service to the
consumer, and so on.
There is the risk that comes with what happens if we are not operating at
full capacity and our costs are a little bit higher, and obviously margins
have to cover that as well. Margins of course have to reflect competitive
realities because competition has always been the great regulator, so to
speak, of prices. The more competitive the market, the greater the number of
competitors; typically, the smaller the margins a retailer can apply to
their costs and still remain in business. Since we have fewer retailers in
Canada, it stands to reason margins in Canada have tended to be a little bit
higher than for comparative products in the U.S.
Finally, there is the component that we can refer to most simply as
"whatever the market will bear." This is a tough one. Frankly, most
businesses work in a world of profit maximization. It is, I think, at the
heart and soul of our capitalist system. It is very difficult for us to
regulate that, because it requires that we apply some standard notion of
what is a fair and normal profit. How much should someone be allowed to
charge for their particular good? Of course, because we have trouble doing
that, it is very hard to detect exactly what it is that is going on here.
My suspicion is the public really does not think about the cost
component. The public's reaction to the price disparities probably finds its
genesis in things like the covers of books, where we look at a book and we
see one price in the U.S., one price in Canada and the customer says it is
the same book, how can it possibly be a different price? Because they are
unaware of the cost differences and the scale differences, they typically
attribute that entire difference to corporate avarice and, of course, to
currency valuation. When currency goes up, even though currency may
represent a small part of that price difference, the consumer logically
expects that it will come down.
The problem, as I suggested earlier, is that that is a very hard to thing
to do, except on a product by product and almost retailer by retailer basis.
It is a very hard claim and charge to make. I think what you have to hope
here is that the consumer starts to play a more active role and a militant
role almost in responding to these price disparities to the extent they
exist — the consumer in a spirit of competition.
That is a theoretically nice concept. Here is the problem with consumer
sovereignty and the notion of competition: Competition assumes perfect
information and competition assumes access to competing goods.
We do not always have access to competing goods. Sometimes products, if
you look at the online community, manufacturers will not ship into Canada if
they have a Canadian agent. As a consequence, the consumer has no option,
they are virtually held captive to a monopolist, and that monopolist will
logically charge whatever the market will bear. It has nothing to do with
currency valuations; it simply has to do with them trying to maximize their
The second big component is information. The information one is a huge
problem for us, because there are considerable disparities amongst
socioeconomic classes in their access to information. The consumer today
should be more empowered than ever to detect price variations tied to price
gouging simply because of their access to the Internet. Unfortunately, not
everyone has access to the Internet.
The coming revolution of mobility commerce has the potential to put the
consumer in possession of price comparisons right at the point of purchase,
holding up their smart phone, getting price comparisons from stores
virtually within walking distance of where they are seated at that moment in
time. That service will not be available to all Canadians at all economic
levels, and that creates a problem.
The only solution I can see is to come up with some way of making certain
that the information is available to the consumer and available to them at
the point of purchase. This is not an ad campaign because I may not see the
ad and frankly the ad may not resonate enough with me that I carry it with
me into the retail establishment. However, it is not inconceivable that the
government could, working with someone like the Canadian Marketing
Association, come up with a code of conduct, something that retailers could
voluntarily sign on to and, if they signed on to it, would have the ability
to post some kind of decal or some kind of certificate at every cash
Doing so does not force compliance, but what doing so does is it clearly
presents to the consumer a choice. You can support a retailer who buys into
a certain code of conduct with respect to currency valuations and the like,
or you can buy from someone who does not. If someone chooses to not care
about the presence of that decal, then frankly they get what they deserve.
The point is to try and make this a marketing issue for retailers. I can
assure you that many of the retailers that people are automatically assuming
are guilty of this are not guilty of this. If you look at the major chains,
the Walmarts, the Costcos and Indigos of this world, they operate on
razor-thin margins, they are in highly competitive businesses and they do
not want to lose their ability to position themselves as the best value for
the consumer. They are not going to be gouging to make a couple of pennies.
The stakes are simply too high. There are others, however, who do not have
that competitive situation to keep them in line, and there I think some kind
of voluntary compliance that the retailer can aggressively market or should
aggressively market would be a great way of ensuring that the public knew
who was and who was not on side.
The Chair: Professor Wong, that is very interesting. Thank you. I
am sure there will be some questions arising from that, but first we will go
to Professor Goldfarb and his introduction.
Avi Goldfarb, University of Toronto, Rotman School of Management, as
an individual: I was honoured to be invited to appear before you today
to discuss price discrepancies between Canada and the United States.
By way of introduction, I am Avi Goldfarb, Associate Professor of
Marketing at the University of Toronto. I teach courses on pricing,
marketing research and marketing using information technology. I have a
doctorate in economics from Northwestern University and my research examines
how companies use information technology to become more productive.
I would like to highlight four studies that discuss differences between
Canada and the United States in productivity and prices. The combined
message will be: Canadian business productivity is lower than U.S. business
productivity, and lower productivity can lead to higher prices. Second, one
reason for this is differences in competition. Third, trade and border
policies can help in competition, thereby reducing prices, but fourth, some
Canadian companies are likely to suffer because of this. Competition reduces
prices. Competition from American companies reduces prices in Canada. There
will be Canadian companies that will be hurt. The more effective the policy
actually is at reducing prices, the more likely that existing Canadian
retailers will be hurt.
The first study I would like to discuss is the study I conducted for
Industry Canada called ICT and Productivity, a Synthesis of Canadian,
American and European Research. This study examined differences across
firms, industries and countries in their ability to adopt and use
cutting-edge information technology.
First, among the findings of the study was that there is low Canadian
retail productivity relative to the United States. Second, low Canadian
adoption and usage of information technology — relative to the United States
— can explain that difference. Finally, even when Canadian firms adopt
cutting edge technology, they are somehow not as able to convert it into
productivity as American firms. We do relatively well compared to Europe,
but these are comparisons to the United States.
The differences between Canada and the United States were only noticeable
in less competitive industries in Canada. When there are a large number of
fiercely competing firms in Canada, we see very little difference between
Canada and the U.S. When the Canadian market is as competitive as the
American one, firms adopt and use technology effectively to increase their
productivity, much like American firms. A key explanation of the observed
difference in productivity between Canada and the United States is the level
of competition by industry.
A second study I conducted two years ago for Industry Canada was called
Understanding differences between Canadian and American Internet Use:
Geography and education. This study examined differences between
Canadian and American consumers in their online activities. It found that
Canadians are much less likely than Americans to buy online, and to browse
the Internet for information. It discussed two main reasons for this. First,
higher levels of university education in the United States explain some of
the difference. Second, opportunities for buying online in Canada are
limited relative to the United States. A notable exception is in online
banking, where Canadians continue to lead Americans. To the extent there is
a short or medium term policy solution to Canada-U.S. differences, it relies
on reducing barriers to U.S.-based Internet companies in entering the
Canadian market and using their U.S. distribution systems.
A third study I would like to discuss is a paper I published with
co-authors from Georgia Tech and NYU on competition between online offline
retailers in the United States titled Competition Between Local and
Electronic Markets: How the Benefit of Buying Online Depends on Where You
Live. Using U.S. data, we showed that Amazon, Barnes & Noble, and
Walmart compete fiercely. When Walmart opens in a town, Amazon sales in that
town suffer. The expansion of Walmart and Amazon across the United States
has reduced prices, increased variety, and increased the number of
attractive retail options U.S. consumers face. The benefit of shopping on
Amazon is particularly large for those consumers with expensive and limited
local retail options. For Canada, I believe this suggests that the benefit
of buying from a fully stocked Amazon.ca — or other online retailer with the
same selection, prices and shipping times as an Amazon.com — would be
particularly high. I would argue that enabling Amazon alone is insufficient.
Competition will increase and prices will fall to the extent that delays and
fees for many U.S.-based businesses to ship across the border can be
The fourth study I would like to discuss was conducted by a colleague at
the University of Toronto, Professor Ambarish Chandra, with UBC professors
Keith Head and Mariano Tappata, called The Economics of Cross-Border
Travel. They found that Canadian consumers are quite price sensitive.
When the Canadian dollar rises, cross-border trips increase sharply. In an
op-ed piece in The Globe and Mail based on their research, professors
Chandra and Head argue that raising the personal exemption would have a
substantial impact on competitive pressure facing Canadian retailers. They
argue that public policy should be designed to benefit all Canadians rather
than a few large retailers. They assert that while some retailers may
suffer, millions of Canadians will benefit from reduced prices — directly
through cross-border shopping and indirectly through competitive pressures —
that cross-border shopping will bring. There is still a lot that we do not
know about the current price differences. The aforementioned research gives
us a sense of some key issues. Broadly, one likely driver of the difference
is low retail and wholesale productivity. American businesses are more
productive than Canadian ones.
While scale, channel structure, input prices and the cost of doing
business are all possible causes, all of these may be largely driven by
differences in the intensity of competition. The responsibility of retailers
is to provide products at their profit-maximizing price. As long as
Canadians have few options, the profit-maximizing price in Canada will be
higher than south of the border. Increasing competition will likely lower
prices, but it will also mean some Canadian firms will lose. Some will not
be able to compete at the lower prices.
There are not many regulatory tools available for fostering competition.
The two most notable are anti-trust policy and trade and border issues. The
anti-trust case against Canadian retailers and wholesalers is not clear to
me, although perhaps there is a case that can be made in specific sectors.
Rather, opening the border to increased cross-border shopping and easier
warehousing and shipping of products — particularly for Internet retailers —
will go some way to increasing competition and lowering the effective prices
faced by Canadian consumers.
The Chair: Thank you, Mr. Goldfarb.
Could you look at your number four before we go to senators? You talk
about the op-ed piece in The Globe and Mail by Professors Chandra and
Head. Could you tell us approximately how long ago that was? Perhaps we
could access it and circulate it.
Mr. Goldfarb: I believe it was May 2011.
The Chair: It was very recent then. To clarify and help us
understand, are suggesting that the personal exemptions a Canadian has —
depending on how long they stay offshore or in the U.S. — should be raised?
That would increase competition back home?
Mr. Goldfarb: Yes. Their evidence suggests that if you can do
cross-border shopping in a day without a penalty, people would jump at that.
A lot of Canadian consumers would shop across the border. That would
increase the competitive pressure on Canadian retailers who would then be
forced to reduce their prices.
The Chair: I think most of us have the sense there is quite a bit
of that going on now, without the exemptions being changed or raised. Have
there been any studies on the impact of cross-border shopping on employment
and inflation in Canada? Has there been any study on that that either of you
can direct us to?
Mr. Goldfarb: I imagine there has been, but I am not aware of it.
Professor Chandra would know.
The Chair: We just made a note of that.
Professor Wong did you have any comment with respect to that last
Mr. Wong: No, other than to say U.S. retailers are certainly
looking to Canada. It is green pasture for them. Margins here are quite
superior to those found within the U.S. That has nothing to do with
currency. That is a simple reflection of the degree of competition. As
Professor Goldfarb points out, when we are equally competitive as suppliers,
we are equally competitive on price. Over time we would expect those things
to be somewhat mitigated.
Cross-border shopping to me is a very positive situation for us. It does
force Canadian retailers to be mindful of price comparisons to their U.S.
The Chair: In your presentation, I was intrigued by this logo that
you might have on the cash register. You talked about a code of ethics, but
we seem to be talking only about the handling of currency valuation. What
other items would the consumer know from looking at that logo? How would
that help in communicating their practices?
Mr. Wong: First of all, in this country we have never been
supporters of the concept of retail price maintenance. We have never
believed in the notion that a supplier can force a retailer to sell at a
specific price. Despite what we see on the inside cover of books, we can
often go to book stores or wholesalers like Costco and buy that book at a
considerable discount off that price.
I do not believe it would be appropriate to expect retailers to divulge
their full cost structure and profitability to their customer. That
information might be available if they are publicly held and someone wanted
to get at it. For most retailers, especially smaller ones, I do not think
they would be willing to share that element of their finances. You could
have a policy on how certain things are reflected in prices. That policy
would include currency valuations. I do not know that you can have them
claim scale effects or cost advantages tied to their ownership of supply
chains or what have you.
That would be very difficult, but you can with currency valuations, just
as you can with employment equity issues or with sustainability and
environmental issues. Retailers are very quick to promote themselves as the
green alternative. There is no reason they would not want to promote
themselves as the fair pricer. In fact, if you look at organizations like
Walmart and Best Buy who constantly comment on their rolling back of prices,
clearly, they take considerable pride in that policy.
The Chair: If the consumer considers the statement that many
retailers put out, namely, that they will give 5 cents extra — now it is
basically par between the U.S. dollar and the Canadian dollar — and if they
applied that policy, whatever it might be, to the U.S. versus the Canadian
price on the book or the magazine the consumer is buying, someone will have
to give an explanation because that will not bring those two to the same
Mr. Wong: If you are suggesting a need for some kind of monitoring
agency, certainly, that can be done. I do not think you would want to do it
on a daily basis. I think the cost of that kind of administration would be
so exorbitant that prices would have to go up in order to cover it.
Certainly, you could do things like surprise audits on a six-month basis on
a random sample of goods, just to see whether price changes have reflected
Again, you can do this on a product-by-product basis. You cannot do it on
a category-to-category basis or retailer- to-retailer basis.
The Chair: I was not suggesting a monitoring agency, but I was
wondering about this logo on the cash register and people knowing what the
policy is with respect to currency fluctuations. However, they then apply
that policy to the prices on the magazine and that does not get you there.
There is still quite a variation between the recommended Canadian price and
the U.S. price. Someone will have to explain that that is the policy with
currency fluctuation, but there are many other factors like transportation,
smaller market, bigger risks, et cetera.
Mr. Wong: First, the policy does not have to be specific to a
number. It can be directional in nature. For example, "On a quarterly
basis, we will look at currency valuations and reflect that in the pricing
of U.S.-sourced products." You could make that sort of statement. If an
individual consumer found they were afoul of that, then the consumer could
complain to the company, and the company could respond as they would to any
other service complaint.
Again, the profile of this issue is so significant that any firm that
makes a public declaration that they will adhere to a policy would not want
to be caught afoul of that policy.
The Chair: I think you are right. I think Canadians are very
sensitive to the value of the Canadian dollar versus the U.S. dollar these
days on a daily basis.
Mr. Wong: I think it fair to say we might be able to forgive them
if they price gouged us. We would not forgive them if they lied to us.
The Chair: Thank you. We will move on to other senators with that
Senator Gerstein: Thank you, witnesses, for an excellent
presentations. It was very enlightening.
The study we are embarking on was initiated by the Minister of Finance,
and, basically, the question that backed it up is the following: Why are
Canadian retail prices not coming down with the dollar increasing in value?
If you look over the past five, six or seven years, the dollar has moved
from roughly 60 cents up to par, over par at some point, and settled back
close to par.
You have given wonderful evidence to this point. The question I would
like to ask you is this: If we change the word "why" to "should," what
is your reaction? In other words, with the Canadian dollar value increasing,
should we see some effect on prices as a result? The perception is,
obviously, as it was started and he mentioned in his comments to us,
Canadians are irritated; he is irritated. Should prices be coming down as a
result of the change in the value of our dollar?
The Chair: If so, how quickly?
Mr. Goldfarb: Yes, prices should come down. However, they should
not come down in direct proportion to the amount that the dollar changes. As
Professor Wong mentioned, all sorts of things go into the price of a good.
Some of them are the import prices, effectively. For the pieces that you buy
in the United States, for that part, you should see the price coming down,
but for everything else — for the cost of the retail space, for the cost of
your employees, for shipping within Canada — there is no real reason why we
should expect to see prices come down. Prices should come down, but they
almost certainly should not come down in proportion.
Mr. Wong: I will give a definitive answer of "it depends." I say
this because if we were talking about a 40 per cent currency valuation,
obviously, that is a big enough change that we would expect it to make a
If we are talking about a couple of cents, the exercise of going through
a re-pricing of an entire store containing thousands of items could add so
much to the administrative cost of the retailer that the result could be an
increase in prices due to the cost of compliance. In other words, the cost
of compliance would be greater than the consumer benefit that would come
from the currency factor being weighed in.
I should add that in reality nothing is instantaneous. Prices do not come
down instantaneously with factor costs, nor do they go up instantaneously
with increases in factor costs. Most businesses will tell you that in the
current situation where the prices of food and of energy have risen, prices
have not necessarily risen. Margins have become compressed, and, in short,
business, for competitive reasons, has had to swallow that loss of
We do not see business coming before the Senate and saying, "We should
have a right to raise our prices automatically every time energy prices go
up." Therefore, if you want it to work down, then you must also be prepared
for it to work up. We do not regulate it working up; we cannot regulate it
Senator Gerstein: Would I be correct in assuming, determined by
the commodity and the rate of turnover it has in a retail store, that that
would directly impact the pricing in view of how quickly he is replacing the
inventory that is being sold?
Mr. Wong: Again, a definitive "it depends." Not every firm has
the same inventory practices. Some run on very lean inventory. Some run on
consignment type inventories in some store goods. Not all suppliers provide
inventory on the same basis. Some suppliers will provide inventory on a
just-in-time basis, meaning we ship more frequently but in smaller
quantities so that the retailer does not have excessive handling and
inventory costs, whereas others remain with more conventional and
traditional practices. They will ship to a retailer the bulk of its order
once or maybe twice a year, and the retailer is expected to carry that
If you look at things like musical instruments, for example, most of the
buying in that industry is done at the annual trade show. I believe that is
held in August or September of every year in Toronto. As a result, most of
that inventory is shipped within a month after the show, and those orders
are placed. You carry it for the whole year.
In other cases, there are some "rogue suppliers" within the music
industry that will only ship to you on a periodic basis, depending on how
many sales you have historically made, that kind of just-in-time basis.
Again, we cannot assume anything, even though there is a prima facie
logic that says if it is turning over more often, clearly, we should have a
chance to re-price more often.
Senator Finley: Thank you for a fascinating insight on this issue.
Mr. Wong, recently — I think in April in an article in The Globe and
Mail — you said that some retailers may also be restricted by contracts
under which manufacturers dictate what retailers can charge in Canada.
Could you explain what you mean?
Mr. Wong: The quote was a little bit misinterpreted. It had to do
more with the situation that I described a little earlier, where a company
makes its product available in Canada, but only through a licensed agent. In
effect, the U.S. company is therefore giving the Canadian agent a monopoly
position within Canada, and its refusal to ship across the border supports
In that instance, even though there is no de facto price maintenance,
there really is because whatever the cost is, that is what the agent will
eventually base their price on.
Senator Finley: How prevalent is this kind of arrangement? I am
not asking for an exact dollar figure, but is there a lot of it or is it
becoming less as the thing goes more international?
Mr. Wong: I am not an expert in international trade, but my
understanding is that is typically the first stage of international
expansion that any company, American or Canadian, undertakes. We do not set
up shop in another country as much as we try to find an agent to work
through. For example, if I was trying, as many Canadian companies are now,
to penetrate the Chinese market, we do not go in with our own sales force.
We find a local to represent us in that area.
Senator Finley: Yes, but for Americans selling into Canada, are we
regarded still as some kind of backwater here?
Mr. Wong: Not necessarily. There are some people I am sure who
would hold that view, just as there are some Canadians who would hold less
than impressive or charitable images of Americans.
To be a little more to the point, I do not know what the exact numbers
are, but I would suggest to you that in the spirit of Canadian
entrepreneurism, there are many instances where Canadians go to the U.S.,
recognize an idea as having potential and then seek out the Canadian rights
to represent that idea here.
Senator Finley: Going back to something that Senator Gerstein
mentioned, we have been asked to do this study by the Minister of Finance,
presumably with an eye to perhaps being able to enable some form of
government action later — whether that be less tariffs or lower taxation or
some kind of bill of conduct or something, I do not know.
However, most of the things that you appear to have addressed between
yourself and Mr. Goldfarb are things that governments have very little to do
with, as far as I can see. In my view, we might be making matters worse by
interfering in any way, shape or form with the wholesale structure and
systems of distribution. Short of a huge increase in population, which I do
not think the government has any business in either, the volume and scale
will not change.
Let us leave tariffs out for a second because I think we can track down
tariffs ourselves. However, from either of your perspectives, are there
areas that you see any kind of government role here in not only explaining
what the situation is but improving it?
Mr. Goldfarb: To the extent that one of the reasons for the
difference between prices in Canada and the United States is due to
competition and that we have less competition here than in the United
States, we have two policy levers. One is opening the border more than we
have, so it is tariffs but you said not to focus on that. The other tool we
have is the anti- trust policy.
Anti-trust is a tool that is explicitly for increasing competition. You
cannot apply it to the entire retail sector, obviously, but if you are
looking for another government tool, that is the one we have, in my opinion.
There may be others, but those are the two that come to mind for me in
increasing competition. To the extent the difference is due to competition,
we either open the borders or we create competition within the country
through an anti-trust policy.
Mr. Wong: I will add two other possible instruments. The first
would be Canada Post — simply the cost of the last mile of delivery. They
may not be the most popular things in the world, but you could do things
with postal rates to try to negate some of the U.S. advantage. Whether or
not that would pass the test of some of the trade organizations is not my
area of expertise.
The second, however, is something government could directly affect, which
is access to information. The consumer without information is absolutely
powerless to whatever companies want to do.
The Internet was supposed to usher in an era of greater price
transparency than ever before. You cannot go to a marketing conference or
convention and not hear about the impact of the Internet on transparency and
accountability on price and all other matters. Social networks, if you are
found to be running afoul of anything, can decimate your public image. To
the extent that government can ensure that all Canadians at all income
levels and all geographic regions have access to the Internet, have access
to mobility services and so on, that would go a long way to improving
Senator Finley: As you were speaking and you touched on books, I
tried to think of some products that should be pretty well transparent to
everything that we have talked about — distribution channels, distance,
whatever. Those would be e-books because they are distributed through the
ether, iTunes or music downloading services, and software. Are you aware of
any studies — or perhaps this is something we should look at — of any
significant factors that would show there are huge differences between
Canada and the United States, or even marginal differences, and what would
those be, other than taxes at the retail level?
Mr. Wong: I do not know of any studies. However, I do know that in
areas like e-books, for example, the right to the licence to have an
electronic version of a book available through your service may require that
you also purchase physical books. It is not clear to me exactly what the
terms of trade are there, whether or not we can say they cost less.
For iTunes, it would be a different story. In those instances, there is
no reason to believe there is any cost variation, no reason to believe there
is any volume or scale effect, so the difference would then be purely profit
motive, profit margin.
Mr. Goldfarb: To add to that, when you think about digital
purchases, it is important to distinguish between two types of things you
can buy or two channels you can buy from online. One is if it is a digital
download of software, there is nothing stopping you from going to an
American site and buying it, because they will almost always accept your
Canadian credit card. You go to the American site, buy it and you pay no
The issue comes when you have these closed systems like you have with
iTunes and with most e-books, where you do have what is like a monopoly
provider who gets to pick the prices. In those situations, we do see a
Canadian price higher than a U.S. price, but it is only when we have that
In cases where the system is open, we do not see a difference between
Canadian and U.S. prices. When we do, no one buys from the Canadian seller;
everyone just goes to the U.S. That difference between closed and open
systems is very important to an understanding of what is going on in online
Senator Eggleton: Thank you for your contributions. You have
convinced me that, yes, many factors go into these differentials and there
is much complexity.
Professor Wong you have talked lot about the retail industry. Let me talk
about a couple of products where I do not see as much influence coming from
the retail industry. One is books; the other is cars.
On books — that is, the paper books, printed books — when you go to a
bookstore, the publisher has already put the Canadian price on there. It
stands out right in front of you that there is a difference. Of course, when
the dollar is at par, it is an irritation for many people. It comes from a
publisher, presumably in the United States. Transportation costs may be a
factor, but the publisher may be closer to some Canadian cities than
American cities. Other than the exchange, the sunken costs are in the first
printing of this thing, so it is hard to understand, other than the
exchange, what the difference would be.
Second, on cars, the car prices are much lower in the United States —
even, I am told, for a car made in Canada. Of course, the industry is by and
large operated on a continental basis, operates in Canada and the United
States, and things are going back and forth across the border all the time;
it is part of the components of building the car. Here is a case where the
manufacturer does, to a great extent, dictate the price as opposed to a
retailer. I would like to understand better what justifies those
Mr. Wong: First, on the subject of books, you have to distinguish
between that printed price on the cover and the actual price being charged.
My suspicion, and I have neither done research nor seen research on this, is
that as a book buyer, I can say that if I buy a book in Canada from its
lowest source of supply, I am not paying anywhere close to that listed
price. If I were to buy that same book in the U.S. from a comparable sized
retailer in a comparable sized geographic region, therefore buying in
equivalent volumes, I would probably not find a whole lot of price
difference. The currency is simply not a huge component of that price gap.
When it comes to cars, and I am not an expert on cars by any stretch of
the imagination, I can easily understand how the simple supply chain on
cars, the distribution network for cars, could have a massive effect. Cars
are extremely bulky and expensive to ship. If I am shipping to a remote
Canadian location, a town with a population of 10,000 or 15,000 people and a
single car dealership, I may be delivering one car. That is still expensive,
but I am delivering one car. I may be able to send six, eight, ten cars to a
dealership in a large U.S. centre and therefore experience considerable
shipping and handling efficiencies relative to the Canadian situation.
Again, it really does depend an awful lot on the specifics of who is buying
and how many they are buying. It is not just tariffs and it is certainly not
just price gouging.
If you talk to anyone in the car industry, they will tell you that
margins on cars today are not what margins on cars may have been
historically. They are typically running on single-digit margins to the best
of my knowledge. Most of the money on cars is made on the servicing side and
on the servicing side there is really no currency factor that comes into
My suspicion is that there are some very good reasons. That is not to
suggest that an individual cannot find a great deal. It is to say that I do
not think, if we all turned to buying in that way, we would all find the
same deals that some people have gone on record as saying they accessed.
Mr. Goldfarb: I have two points to add. First, there is research
in the United States that shows that regulations on what dealers are allowed
to do across states have a big impact on prices. The fewer regulations you
have on what dealers can do in terms of selling in their area and selling
online, the lower the prices. If one dealer can sell anywhere in the state
through the Internet, the prices in the entire state go down.
In terms of books, there is a lot of competitive pressure in Canada and
the U.S., but in the U.S. we have seen it quite directly with the bankruptcy
of Borders. It is just a reminder that competitive pressure is nice, it
brings prices down, but if we encourage lower prices through the online
channel, it will threaten the off-line channel.
Senator Ringuette: Professor Wong, I really appreciate your
presentation because you have indicated to us that the best way to study the
issue at hand is to divide it into three components. That makes a lot of
I look at your first component, which is the legitimate additional cost,
which is all the tariffs and transportation. This is our third meeting and I
have been indicating that, just on transportation, there is 26 cents a litre
on average just on additional Canadian taxes on that gasoline. Then we look
at rental rates. Rental rates in Canada, the real estate market and the
rates are higher for retailers, and so forth. I like the way that you have
regrouped the issue.
The second component you talked about is the volume. Yes, the U.S. has 10
times the population; therefore, it has 10 times the purchasing power,
distribution through the density of that population, and so forth. For me,
this is a given.
You then look at margin objective of firms. Basically, margin objective
of firms, since we all believe in the power of the market, is a section that
we cannot change as government policy or regulations.
The second component, the size of the population between two countries,
we cannot change either. I come back to the first component, the tariffs,
the transportation cost, the real estate cost in Canada. I think that is
probably the only area that government can seriously look at having some
kind of influence on price structure. Am I wrong in my assumption?
Mr. Wong: No, other than the information campaign I articulated
earlier. I think if government can affect the cost of business, then
government will ultimately affect the price charged. Pricing is generally
done, 99 per cent of the time, on a cost plus basis. Add up our cost and add
the margin and the sum of the two is our final price.
The two challenges you have is ensuring that any cost reductions do
indeed get passed on to the consumer. That is a much tougher nut to crack
because, again, tariffs are just one small part of that overall pricing mix.
You can remove the tariff, but, let us face it, that is not the same tariff
on every product. Canada customs has manual this big of different rates. It
gets very tough to figure out whether or not that is getting passed through.
The other problem is that you start to open up a can of worms and set a
precedent. One can easily say: If you really want to reduce the cost of
transportation, then why not give us a rebate on the taxes that we pay on
fuel? With any luck, that gets passed on through the supply chain. The
public would be very skeptical about that ever finding its way back into
Senator Ringuette: The members of this committee did not open that
can of worms. It was opened by someone else.
Mr. Wong: I say this with all sincerity. I do not envy your task.
This issue is so obvious to the public. How can you not pass that on? How
can you not force them to pass that on? Yet, the reality is such a complex
task administratively, just figuring out the magnitude of the effect, let
alone how to resolve it, is nearly impossible. You will make no one happy.
The best you can hope for is to make everybody equally unhappy.
Mr. Goldfarb: I do not have anything to add to that.
Senator Runciman: This has been very interesting. Your suggestion
is to increase competition as a way to bring more balance to prices,
especially through lowering or changing the amounts that Canadian shoppers
are able to bring back to Canada. That is part of the perimeter security
conversation now. The Americans would like to see that occur and, as someone
who lives on the border, I find that idea attractive. Currently, it is on an
ad hoc basis whereby we have turned Canadian Border Services Agency
personnel into tax collectors, in some respect, rather than allowing them to
focus on their primary goal. A lot of stuff is coming back without being
I am curious about a couple of things in the area of vehicle standards.
Have we come quite a good distance? That was raised earlier. I know that
bumpers were changed a couple of years ago in an attempt to achieve
standardization in the autos produced in the United States by the Big Three,
Toyota and Honda. Has that particular issue been resolved?
Mr. Wong: Not that I am aware of. You run into that dangerous
problem of extra territoriality, I believe the technical term is, about
whether you have the jurisdiction to interfere with someone else's line of
business unless they want to ship into your country, in which case you can
force compliance with your own safety standards.
Senator Runciman: What about import taxes? How much of a factor
Mr. Goldfarb: The research that we have from the last time we had
a dramatic reduction in import taxes in 1988 suggests that they had a very
big impact on the Canadian market in both directions. They had a big impact
on the productivity of our firms, which, we expect, would lead to lower
prices — but first become more productive. It also had an impact on
short-term employment. Professor Daniel Trefler at the University of Toronto
has done a lot of research documenting this to show that lowering tariffs
increased Canadian productivity, and in the long run of five to six years,
increased the size of the Canadian workforce and wages. In the very short
run of two to three years, it hurt the Canadian workforce. The worst
performing firms who had the highest prices shut down.
Senator Runciman: The argument was made about it being a small
market, but most of the Canadian population is bunched into high density
areas. Is it a valid argument when you look at that in terms of
transportation? I know we said that fuel costs are a factor. Do you see
significant differences in pricing in outlying areas versus downtown
Mr. Goldfarb: It depends on the industry. The one I am most
familiar with is information technology. A Canadian dense urban area looks
like an American dense urban area. In fact, Canadian adoption of broadband
services until recently led American adoption of broadband services. Why?
Even though we are spread out, we are pretty densely packed into suburbs,
relative to the Americans, and so we are broadband leaders because of that.
Differences in pricing will depend on the industry, who is shipping where
and the extent to which they want to maintain equal prices across the
Mr. Wong: You also have to understand that pricing is a game of
averages. No price is precise. For example, I could not have a situation
where a customer goes to my store in Kingston, Ontario, versus downtown
Toronto and gets a better price in downtown Toronto. That would be marketing
suicide for me. Therefore, my costs tend to be averaged out. In Canada we
like to live a distance away from each other. For whatever reason, that is
our cultural heritage, and there is a cost to that. That cost means a
certain subsidy is implicit in every price. Those living in dense urban
areas will subsidize those who choose to live in rural areas, just as, to a
certain extent on other issues, those of us in rural areas subsidize those
in more densely populated regions. That is part of the price of democracy.
I also add that we have to be a little careful. Like Mr. Goldfarb, I am a
huge supporter of open competition. However, you have to make certain from a
Canadian perspective that the competition is between equals. If you were to
open up the border completely, the consequences could be devastating for
Canadian-owned retailers who would not have the opportunity, at least at the
outset, to spread their losses in Canada across an entire U.S. market. That
big U.S. retailer present in all of their states could afford to take a
little bit of a loss in Canada in order to maintain their averages across
North America. A Canadian firm, unless it could grow instantly to be North
America wide and, therefore, compete on an equal basis, could be at a
disadvantage at the start.
The Chair: Thank you, Professor Goldfarb, from the Rotman School
of Management; and Professor Wong, from Queen's University, for most
interesting presentations. We look forward to the opportunity to follow up
on some of the points you have made. In the event that we may wish to
contact you, we know where you are. Certainly, we appreciate your help on
this colossal job that we have undertaken.
Mr. Wong: Thank you.
Mr. Goldfarb: Thank you.
The Chair: We are continuing our special study on the potential
reasons for price discrepancies in respect of certain goods between Canada
and United States.
This session we welcome Mr. Brent Patten, Director of the Commercial
Border Programs Division at the Canada Border Services Agency. Mr. Patten
will be giving a formal presentation this evening. He is accompanied by Mr.
Wayne Tallack, Manager of the Port of Entry Operations Division; and Ms.
Lily Ooi, Director of the Trusted Travellers Programs Division.
Mr. Patten, would you like to begin?
Brent Patten, Director, Commercial Border Programs Division, Canada
Border Services Agency: Good evening, I would like to take a few minutes
to thank you for this opportunity to discuss the role that Canada Border
Services Agency plays and the responsibilities regarding the subject the
committee is studying.
I would like to introduce my colleagues, Wayne Tallack and Lily Ooi.
To begin, it is important to understand the mandate of the CBSA so that
it is clear about who we are and what we do as a border agency.
The CBSA has a unique mandate because it must balance two integral facets
that support Canada's prosperity. Using risk management techniques, we
ensure that legitimate trade and travel flow across the border freely. For
example, from an operational perspective, last fiscal year the CBSA
processed more than 13 million shipments and over 90 million travellers.
From a financial perspective, the CBSA collected over $23 billion in
duties and taxes.
In additional, we keep Canada safe and secure by enforcing its laws and
regulations to keep harmful goods and people out of the country.
In 2010-11, the agency made over 10,000 drug seizures valued at $550
million, seized over 4,500 illegal weapons, intercepted 46,000 prohibited
food, plant and animal products, and removed almost 15,000 people deemed
inadmissible to Canada.
The dual mandate of facilitation and security is at the heart of all
CBSA's day-to-day operations.
Mr. Chair, the committee should be aware that while the CBSA administers
and enforces more than 90 acts and regulations, our responsibility for
setting policy only relates to the Customs Act and the Immigration and
Refugee Protection Act. The policy responsibility for all other legislation
we enforce rests with other government departments. Specifically, the
committee should know that the policies and legislation that govern duties,
tariffs and taxes fall under the authority of the Department of Finance and
the Canada Revenue Agency.
For the purposes of this committee, and to keep within the scope of my
appearance, I would like to speak to the facilitation aspect of our mandate.
The CBSA has in place various processes and operational programs to
streamline the customs experience for business and travellers as we
understand how unnecessary red tape at the border can negatively impact
trade and add to increased costs.
The goal here, Mr. Chair, is to alleviate the pressures of the physical
border by simplifying processes and reducing wait times.
The principle behind this thinking is that the more we know about who and
what are coming into the country, the better we can facilitate low-risk
people and goods and focus our efforts on the high-risk areas.
These types of programs operate in two ways. First, they use the risk
management principle of advance information to know who and what is coming
before arriving in Canada. For instance, on the commercial side, trusted
trader programs such as Free and Secure Trade give members access to
streamlined border clearance processes. This reduces delivery times and
keeps down costs, providing them with a competitive advantage.
On the traveller side, programs such as NEXUS allow people to speed up
the clearance process by using designated lanes and kiosks to make their
Second, these programs make the clearance process more efficient, which
means speedier clearance and better assessment of duties and taxes.
For example, the CBSA has streamlined its courier operations, resulting
in more efficient processes for low-value shipments and has several programs
in place, such as pre-arrival review system and release on minimum
documentation to ensure commercial goods enter the country as expeditiously
After goods have entered the country, the CBSA offers trade incentive
programs that assist companies by providing relief from duties under special
The CBSA also publishes advance rulings for tariff classification of
goods, which lets importers know beforehand how goods will be classified.
This allows them to prepare the appropriate documentation more accurately
To complement the efficiency of these programs, the CBSA also regularly
conducts public information campaigns. For example, before high periods of
travel, we publicly advise travellers of their obligations and
responsibilities before they arrive at the border. On the trade side, the
CBSA conducts seminars and information sessions for importers, small
businesses, and the general public about significant topics such as how to
import a vehicle into Canada.
The agency also regularly meets with its key stakeholders to receive
feedback from the very people who use our programs.
To conclude, Mr. Chair, the CBSA plays an important role in Canada's
economy by effectively keeping the border open to secure trade and travel
and working closely with those who set the policies and laws we enforce.
I would like to thank the committee. My colleagues and I will be able to
answer your questions.
The Chair: Thank you, Mr. Patten.
Could we ask Ms. Ooi, Director of the Trusted Travellers Programs
Division, just what is involved in that particular division?
Lily Ooi, Director, Trusted Travellers Programs Division, Canada
Border Services Agency: CBSA administers a couple of trusted travellers
programs. One is a domestic program that is called CANPASS. That allows
members who are pre-risk and pre-approved facilitated access into Canada
when they fly in by air or whatever the case may be.
The other program we administer is a joint program with the U.S., and
that one is referred to as NEXUS. That allows members to enter into Canada
and the U.S. using expedited clearance. For example, they would be able to
use a kiosk where they would not have to see an officer. They would be able
to go straight through, once they answer the questions on the kiosk, get
their iris captures, which identifies them, and be able to go straight to
their luggage and then exit.
The Chair: Mr. Patten, the figures that you gave us, $23 billion
in duties and taxes, that is a lot of money. How much of that would be from
individuals who go across the border to buy some product and then bring it
back in and it is above the limit that they are entitled to bring in?
Mr. Patten: The vast majority of that $23 billion is on commercial
goods. I will get the exact figures. It is approximately $190 million from
casual importations brought in by personal means.
The Chair: What we are interested in, in part at least, in this
hearing are people who decide to go into the United States to buy rather
than to buy in Canada because they perceive a cost reduction in the U.S. and
a saving by doing so. Can you help us with that kind of scenario? Someone
comes back with a trunk load of goods. They have been down to a major store;
they have bought some groceries; they filled up with gas. What do you do at
Mr. Patten: I will start, and obviously Mr. Tallack will add into
There are large numbers of travellers heading into the U.S. for that
particular purpose. There are a different number of practices that we put
into place in terms of processing these individuals that are guided by the
tariff itself. How long you have been out of the country will determine a
specific exemption rate that can be applied that would allow goods to come
in without duties and taxes. Essentially, at a land border, for example, you
would come back through a border crossing in southern Ontario area, mostly
bridge crossings. You would make your declaration to the border services
officer at the primary inspection line. They would make a decision at that
point about the value of the goods you are declaring and determine how long
you have been away. Then, if required, they would send you for secondary
processing into the office for collection of duties and taxes.
Once you are inside the secondary area for processing of duties and
taxes, the process would involve looking at your declaration in more detail
to determine what the goods are, where they came from and applying the
tariff rates according to the tariff. At that point in time, a decision can
be made as to whether an examination is required to verify that declaration.
The Chair: Let us talk about someone who has been there less than
24 hours, so there are no exemptions. Are there any tariffs or goods and
services taxes they have to pay if they just say it is all groceries? Do
they still have to make their declaration out and spend that time in the
office? You must have quite a line-up of people.
Wayne Tallack, Manager, Port of Entry Operations Division, Canada
Border Services Agency: If they have been away from the country for less
than 24 hours, basically any duties and taxes payable on the goods they are
bringing back would be fully payable. Groceries may be a little different
because, for the most part, they are not taxed in Canada, and given they are
coming from the U.S., the same rates apply. If it was real food, there would
be no HST payable. If it was potato chips or something that is not
considered food, then duties and taxes would be assessed accordingly.
The Chair: Do you have people employed who look through the trunk
or the back seat of the car and pick out all the potato chips and peanuts
and say, "You better go in and pay tax on those"?
Mr. Tallack: I would not classify it quite like that. The person
would make their declaration, perhaps $50 or $60 worth of groceries. The
officer may ask what they bought, and they might say meat, chicken, potatoes
and that kind of thing. He may ask if there are any non-food items. They
will probably present a bill to the officer, and he would apply discretion
and determine on $50 worth of groceries with $6 or $7 worth of non-grocery
items, that is fine and they can proceed. We would hopefully not send
someone in to collect.
The Chair: Would clothing items or a flat-screen TV be treated
Mr. Tallack: Yes. Again, for the most part, they are taxed in
Canada, so the same tax rates would probably apply. Of course, it would
depend on the origin of the goods as well, and that would be determined at
the time the person makes the declaration. As Mr. Patten described, they
would assess what they had and whether further verification is needed or
simply take the oral declaration of the traveller and make the appropriate
The Chair: How many people across Canada do you have employed
doing that kind of assessment and collecting taxes like that as opposed to
those who are looking after security at the border?
Mr. Patten: I do not know if we have the exact number, and it is a
little difficult to provide one number. The function that an officer
performs in terms of collecting of duties and taxes is combined with their
overall mandate based on who they are processing at the time. We may have
dedicated officers in the secondary area collecting duties and taxes, but it
is balanced depending almost on who is next in line. An officer could
literally be dealing with a duties and tax situation one minute and dealing
with an enforcement or security issue the next. I think it would be
difficult to say how many officers we have doing only one function. It falls
in line with the scope of the activities they have to perform at the border.
The Chair: Can you give us a figure of the total number of
employees at the border working on border-type issues?
Mr. Patten: My understanding is the number of uniformed officers
we have is somewhere in the range of 8,000, obviously including land
borders, airports, marine operations, postal centres, what have you. The
total number of uniformed officers is in the 8,000 range, and we can get you
that exact number.
Senator Gerstein: Thank you, witnesses, for appearing before us.
We are all very interested in this because we all get exposed to it from
time to time during the year.
Mr. Patten, there are two roles of border officers, one is protecting our
security, the other is collecting customs, duties, et cetera. It is the same
officer approaching both. In his own mind, does one take priority over the
other, or how do you try to school someone? What is the framework when they
look at someone coming across the border?
Mr. Patten: That is a very good question. The dual mandate of the
CBSA is something we live and breathe and try to engrain within all our
employees. That dual mandate is equally as important, depending on the
situation and depending on where you are and what you are doing at a
particular time. It is something we take very seriously. That facilitation,
trade and finance is something that all officers, all employees, must
balance with their security activities. I think it is important to note. It
depends on the situation of what you have to deal with at that particular
Obviously, certain jobs that CBSA employees are in may tend to focus on
one aspect more than the other. For example, if you are an intelligence
officer or something like that, you would be more focused on enforcement
type activities versus if you worked on trade issues, wherein you would be
more focused on revenue. Equally, however, we take both mandates seriously
and apply them as required.
Senator Gerstein: It is the same individual at the border
crossing, is it not? He or she is wearing two hats?
Mr. Patten: Yes, absolutely. For the vast majority of cases for
uniformed officers, they balance that mandate and are trained on the
importance of that duality.
Senator Gerstein: Part of our study is obviously including the
whole issue of cross-border shopping. Is the majority of duty that you
collect — and I am excluding major transfers through transport and one thing
or another. With respect to individuals that cross, are they basically
day-trippers or overnighters, or are they people who have been out of the
country for a longer period of time? What is the balance among those people
who are cross-border shopping?
Ms. Ooi: I do not believe that I have the exact numbers on hand
for that, but it is a good combination of the mix; it depends where you are
In the cross-border air mode, for example, if they are flying into the
U.S., some of those individuals are likely businessmen travelling back and
forth, or they would be people or families going for a longer duration. At
the border itself, at the ports of entry, you probably have a mixture again
of people who are commuters that work in the U.S. or vice versa, that work
in Canada. For example, in the B.C. region during the summertime, it would
be many cottagers who might own property on one side or the other. Then at
other locations it might just be those daytime shoppers who go back and
Senator Gerstein: Finally, for further clarification, are the
majority of consumer goods that come in distinct from groceries, or is it
apparel or electronics? Or is it just spread all over the lot?
Mr. Patten: We have it broken down in terms of what the most
popular items that we process from passengers are, not from the commercial
side. We can provide both. I think it is what you would expect: mostly
clothing, electronics, alcohol and tobacco. We can absolutely provide the
committee with a complete breakdown of that, but it is what you would expect
that travellers would bring back from the U.S. for personal use.
Senator Gerstein: It is not primarily groceries? It is not
primarily going across to it get your tank filled up with gas?
Mr. Patten: I think they are there. I have the top five with me. I
would expect that groceries would be there as well.
Senator Finley: I have a question on the economics of cross-border
shopping. I do not think you have the data with you just now.
For example, children — and I am talking seven- and eight-year-olds — do
they get an exemption, the same exemption as adults? Here is why I am asking
the question: I think you have to be out of the country a minimum of 48
hours to get $400; is that the deal?
Ms. Ooi: Right.
Senator Finley: Let us say my wife and I decide to go cross-border
shopping and we want to buy a big-screen television or a digital camera or
something, which will save us a couple of hundred dollars. We come back
through and we say to you: All right. We bought this thing.
We have not only incurred the cost of getting down there, eating while we
are there, but probably, in order to get enough of a duty-free allowance, if
you like, we have had to stay probably two nights. If we want to go up to
$750, we may have to stay there seven nights.
In your experience, where is the pickup on this? Where is the economics
of it, in your view? Your border officials are asking people these things,
and I guess what I am asking is: Do they judge that as part of it? You have
been away for four days and you will claim this much. You have kids and a
wife in the car. Is that how it has to work to make this feasible?
Mr. Tallack: When you started off your question, it was about
bringing back a big TV, and a personal exemption cannot be split. You cannot
take a TV and say: I will take $300 and I will take $400.
In terms of that aspect of your question, that is right.
As far as someone determining the value of buying something while on a
holiday, presumably, that is a personal decision. It may be a spontaneous
kind of purchase. They may also plan that. I do not know. It is not
something we ask someone when they are returning. It may be a decision they
make while they are away. They may suddenly see an item they were thinking
of buying in Canada, and they are away for a week. Do not forget that the
first $750 of that purchase will be essentially tax free. The item may be
exactly the same value as in Canada, but they can save that tax on the first
$750. That might factor into their economic decision, rather than the
overall price of the item. I am speculating a bit.
Senator Finley: You do not do studies on this or keep statistics
of the average number of people in a car, the families, the duration of the
stay, for example?
Mr. Tallack: We do have statistics on the number of vehicles and
the number of people. I am not entirely sure whether any studies have been
done by our department on the basis of how that correlates to exemptions and
values of purchases. I am sorry; I do not have that information.
Senator Finley: In 2008-09 you processed about 91 million people
through air, highway, marine and rail. I do not know if the final numbers
are in, but in 2009-10 the anticipated number is around 85 to 86 million
people, about a 5.6 per cent drop. However, I think your own information
would indicate that the value of Canadian production protected as a result
of the Special Import Measures Act actually increased substantially from a
high year, 2008-09, to 2009-10. The people processed went down 5 or 6 per
cent, and the value of Canadian production increased by probably 5, 6, or 7
per cent, so quite a gap. To what would you attribute that?
Mr. Patten: If I could request a clarification, it would be
helpful if you could repeat the specific statistic about the revenue, or the
part that went up.
Senator Finley: The part that went up was the value of Canadian
production protected as a result of applying the Special Import Measures
Act. Perhaps this is something that I do not understand what it is.
Mr. Patten: A significant factor to take into account with what we
call SIMA, the Special Import Measures Act, is that there is more
correlation to that with commercial shipments. There is probably not a
direct correlation between the number of travellers, the volume of personal
people going across the border and the link to SIMA versus what is happening
on the commercial side. That said, we can definitely verify that correlation
with our trade experts and maybe provide other statistics that may be more
applicable for the Special Import Measures Act.
Senator Finley: That would be great, if you could.
In May of 2011, the gentlemen who were here talked about a report
published in The Globe and Mail about the economics of shopping in
the U.S. The report was written by Ambarish Chandra and Keith Head.
They suggested that the allowance per person should be extensively
increased to prevent valuable border agency resources from, in effect,
dealing with — the phrase I would use, but I dare not use it because we
might be televised, but the real sort of run-of-the-mill, everyday nothing
stuff — and allow them to focus more of their attention on the actual border
What is your reaction to that? Do you think that is something that would
be worthwhile doing?
Mr. Patten: It is a little difficult to answer from our
perspective, because the decisions around what those exemptions should be,
the purpose of those exemptions, the relation to why tariffs exist and the
purpose of tariffs, is beyond our policy responsibility.
In terms of the administration of those exemptions and balancing those
responsibilities with our enforcement mandate and the other requirements of
what we have to do at the border, that is something we live with on a daily
basis, and trying to ensure that the duties and tax responsibility we have,
which is linked to those exemption rates, is balanced with everything else
we are supposed to do. I do not think I am in a position to comment.
Senator Finley: You do not feel that you could remove some of the
burden? Your folks at the border wear two hats. One of the big issues is
security. Would it not be better to have them concentrating on security as —
I will not say the full-time thing, but it would be the real bulk of the
issue as opposed to revenue generation?
Mr. Patten: I think the rationale of why we collect duties and
taxes in any of our activities is for the Department of Finance to set the
policies, laws and tariffs around why those are a required necessity. If we
had more time to spend on security, it would help with security. At what
cost to why we collect duties and taxes, that is not for me to say.
Senator Dickson: Previous witnesses — and you were here probably —
thought we had an impossible task. If we have an impossible task, you too
have an impossible task, as I read it.
Looking at this pre- and post-2003, now you have 90 statutes and all the
regulations under them. What was the situation pre-2003? Did you have as
many statutes, as many regulations to administer?
Our driver is we are supposed to find the reasons and make some
recommendations with regard to price differentials on the same goods as
between U.S. and Canada, as you are very much aware. There must be some
uplift in the pricing as a result of the 90 statutes and all these
regulations. Pre and post, what is the difference? Is there any difference?
Mr. Patten: I think it is fair to say the CBSA, or our previous
versions of the organization pre-CBSA, has always had a large scope of
legislation and regulations on behalf of other government departments to
administer, whether it is revenue related or regulatory related for other
government departments, for food and plant and Transport Canada and what
have you. The exact number we can absolutely get, but we have always had
that element of our responsibility at our ports of entry in terms of various
other government department responsibilities, to administer their
requirements at the border. Other than a few changes here and there in terms
of new responsibilities, we have always had that.
Senator Dickson: Insofar as affecting the prices of goods, has it
more effect pre-2003 versus post-2003? I am coming down to the question we
have to address. Do you have any idea? You are saying there is no
Mr. Patten: From my perspective, I have no information in terms of
our activity at the border and its exact effect on the price of goods on
Canadian shelves. I do not know of any information that exists on a
correlation between the number of acts that we have to administer.
Senator Dickson: I guess in February 2011, the Border Commercial
Consultative Committee met, and the consensus of that meeting — and I assume
you were represented there — was that it would be better if we had a
single-window agency. Does that mean you are not a single-window agency,
that there are more agencies out there or departments administering further
regulations? You have more?
Mr. Patten: Absolutely. The other government department's
single-window initiative is an initiative underway that the CBSA is
coordinating, not to eliminate other agencies or create one single agency.
It is an initiative that is being worked on to try to facilitate the
regulatory and reporting burden that industry faces to meet all those other
government department regulations.
The goal of the project is to create a single window into the Government
of Canada for trade importers, exporters, brokers, what have you, in order
to submit their information to a variety of government departments and get
their goods into or out of the country through one window. It is to make it
more efficient and be more facilitative at the border through the CBSA. It
would not replace other agencies.
Senator Dickson: We cannot replace anyone.
The CBSA, how many other agencies or government departments do I have to
go through to import goods into Canada? Just give me a number. You probably
could report in writing what the names of the statutes are, who administers
them, et cetera. It is fascinating. It has to affect the prices.
Mr. Patten: Dependent on what the goods are and where they are
coming from, I think it is accurate to say there can be a variety, a series
of government department requirements for permits and certificates, and just
data provision for other government departments to review. Yes, it can be a
fairly long list at times.
Senator Dickson: To leave one thought in your mind in conclusion,
there was a study done before the only visit that President Obama made to
Canada to meet with our Prime Minister, et cetera, insofar as facilitating
trade, the issues between our two countries. One of the background reports
for this Queen's University study said that there was no movement overall
insofar as lessening of the regulatory burden in Canada. The bottom line was
that we move slowly, very cautiously in Canada. However, with great respect,
if we really did bore in, there would be probably a lot fewer jobs in the
civil service and we would get the same results in the end with fewer
regulations. Regulations are made to create jobs, not for the betterment of
the consumer. I will give you the quote.
The Chair: Thank you, Senator Dickson. I am glad I called on you.
This issue of single-window agency, are you able to provide us with a
list of the other agencies that these various importers and brokers were
concerned about so that we can have a sense of that?
Mr. Patten: Absolutely.
The Chair: We do not have to have it now, but if you could send it
Mr. Patten: We have that by the agencies and departments as well
as the different programs that those agencies and departments administer and
that we play a role in.
The Chair: That would be helpful. If you could send that to the
clerk, it will be circulated to all members of the committee.
Senator Peterson: Thank you for your presentation. You indicated
in your presentation that you strive to minimize delays at the border
crossings. At Windsor, the busiest crossing in the country, you have one
bridge. Do you have any idea of the monetary cost from delays there?
Mr. Patten: It is very difficult to put a monetary cost on delays.
I have not seen a report that generates, at least internally within CBSA,
the cost on delays. I do not know if anyone here has, but I have not seen or
able to produce a figure in that regard.
Senator Peterson: They are very close to having a second bridge.
In that, I am sure, a number has been developed. Someone must have it. Do
you have any idea who we could ask for that number? That would certainly
factor into the decision of building the second bridge. Someone would have
Mr. Patten: I do not have it. I think we can speculate. There may
be other departments that are more responsible for infrastructure within the
agency, but again there is also private business that makes a business
decision about providing infrastructure and bridges. From our perspective,
we do not have a say in that regard.
Senator Peterson: You say you collect the GST at the border. Do
you collect any provincial sales taxes?
Mr. Patten: Yes, we do. For those provinces where we have an
agreement to collect the provincial sales tax, we do. My understanding is we
collect provincial sales tax for every province except Prince Edward Island
and Alberta, where they do not have a sales tax.
Senator Peterson: Do you have authority at airports to collect
Mr. Patten: Yes, the authority for all of our ports of entry is
the same for tax collection.
Senator Peterson: I have never paid a provincial sales tax. I have
paid GST but never provincial tax.
Senator Runciman: No one is knocking at your door.
Senator Peterson: They have, that is what I am getting at. It came
later. I am wondering how. Do you miss some? I would think provinces would
be after you all the time to get a list, and where is our money, et cetera.
That is strange. I did not think you did that.
Senator Runciman: Senator Peterson was talking about delays at the
border, and I know you mentioned the FAST program. It is a cost of doing
business, as we know.
You must have statistics, I assume. You have brought in programs like
FAST because of concerns about the thickening of the border. Do you have
anything you could supply us, not tonight, pre-9/11, for example? There must
have been an average time across the border for commercial goods, for
examples, versus the challenges you face since 9/11. If you have statistics
in that regard, that would enable us, in talking to manufacturers, for
example, to quantify the extra cost of doing business in terms of the impact
of border delays.
Mr. Patten, you mentioned a $190 million figure. You said it was casual.
What do you mean by casual? What are you talking about?
Mr. Patten: They are non-commercial shipments, something you would
carry back from vacation or just an individual trip.
Senator Runciman: You are saying the total across Canada is $190
million in terms of cross-border shopping.
Mr. Patten: That is duties and taxes collected.
Senator Runciman: Do you have any handle on the actual volume in
items of dollar amounts? You said if they are there for less than 24 hours,
for example, and you are going through a booth on a bridge and you say you
have $90 worth of groceries or whatever, the officer does not record that,
does he or she?
Mr. Patten: No.
Senator Runciman: In essence, whatever number you have is
dramatically under-represented in terms of the actual value of goods
crossing the border. I suppose there must be an assumption that perhaps you
use or not use about smuggled goods. We have heard stories about people
buying tires and all kinds of things where it is difficult to come to a
conclusion. Do you have any numbers in that regard?
Mr. Patten: To go back a little bit, you are correct. Unless it is
processed through a duties and tax collection, the number of a verbal
declaration is not input into our system. We do have more information about
the value of the goods and other information associated with what is
collected upon. We do have more than just the duties and taxes collected. We
can give you the types of goods and the value for duty of those goods. You
are exactly right that unless it goes through that process, we would not
It is important to note that for commercial goods, which is the bulk of
the value of goods coming into the country, we do have specific statistics
on those goods that enter the country because they go through a much more
formal process of reporting and information required on it that is in our
systems that we do use for analysis and program development and what have
you. We would be glad to provide any information that the committee would
like on commercial goods.
Senator Runciman: Would that include the numbers on new cars that
are purchased in the United States and brought to Canada?
Mr. Patten: From a commercial perspective, yes, we can.
Senator Runciman: That would be helpful as well. I was not clear
on the numbers that Senator Finley was referencing earlier about the
statistics on Canadian visitors in terms of U.S. shopping and the changes
you have seen since the increase in the dollar value in terms of Canadian
shoppers. Do you have numbers on that and how the dollar has impacted the
traffic and, on the other side of the coin, how it has impacted American
traffic into Canada? If you have those kinds of statistics as well, it might
Mr. Patten: We can get that. Statistics for that are available.
Senator Runciman: What about online purchase volumes? Do you have
any data on that as well?
Mr. Patten: We would have some data, particularly in terms of what
duties and taxes are collected, depending upon the method in which it is
brought into the country, whether it is a courier or a postal shipment or if
it is commercial versus traveller goods. We do have data on that, and
similar data in terms of the duties and taxes that are collected through
postal means and through the courier stream as well. We would be more than
happy to share that.
Senator Runciman: That would be helpful. Thank you.
The Chair: How do you intercept something that is ordered on the
Internet and shipped by the post office? How do you intercept that?
Mr. Patten: We have CBSA offices at the three international mail
centres where international mail is processed through CBSA process for
purposes of duty and tax collection, and also for security purposes as well.
A similar process exists for couriers, but it is a special program. However,
the same concept prevails. Duties and taxes are collected. We have the
authority and a process for examination of goods arriving by courier as
The Chair: You see a parcel at the post office. Do you determine
the value and send a bill to the person? Do you attach it to the parcel
going out, saying, "In addition to this parcel, you should be sending us X
Mr. Patten: That is close. Absolutely. In fact, all mail shipments
pass by a border services officer who looks at the declaration. There is a
declaration affixed to postal shipments. The officer looks at the
declaration and determines the value of the goods or, if there looks to be
some type of risk that requires an examination, they are sent into a CBSA
area for processing where the duties and taxes are calculated or a secondary
examination takes place. A form is attached to it indicating what the duties
and taxes are, and then we turn that package over to Canada Post, which
delivers it and collects the duties and taxes on our behalf.
Senator Marshall: When you made your opening remarks, you spoke
about the $23 billion that you collect. Whose responsibility is it to
maximize those revenues? You spoke about this relationship with the Canadian
Revenue Agency and the Department of Finance. Would it be within your
mandate to maximize those revenues?
Mr. Patten: I think we share that responsibility. There is no
doubt the CBSA holds the responsibility for compliance with the legislation
that we enforce at the border. We have a program in place not only to assess
and collect the duties and taxes, but also to verify the compliance level of
what has been reported to us for a lot of different reasons, including to
ensure that the duties and taxes that were collected were appropriate. After
the fact, we can go into businesses and conduct audits and evaluations and
verifications on what they told us those goods were, the value of them and
where they came from, from a duties and tax perspective, but also from many
other regulatory elements that we enforce at the border. As well, at the
border, the verifications and examinations we do to ensure compliance at the
time of entry are conducted as well. That responsibility does sit with the
Senator Marshall: If there is some recommendation to change the
personal exemptions or change duties or taxes or tariffs, who has the
information that can input those new assumptions and determine the impact on
the $23 billion? Who does that?
Mr. Patten: From an exemption perspective, in terms of who has the
information and who makes the call about what an exemption should be, it is
Department of Finance. That is clearly their role and mandate to determine
whether that exemption should be increased or how it should read. In regard
to the individual tariff rates that make up how that $23 billion of duties
and taxes on commercial goods is calculated, that is Department of Finance
Senator Marshall: My next question was going to be who set the
current rate and on what basis, but that would be a question for the
Department of Finance.
Mr. Patten: That is correct.
Senator Marshall: My last question relates to any studies that may
have been done by border services. Has there been a study to determine what
revenues you may have been missing out on? We talked about the underground
economy. I am sure Canada Border Services knows not everybody claims
everything. Has there ever been a study done to determine what you are
missing or could be missing?
Mr. Patten: In terms of a study, that is something I would have to
look into, but to answer the question, we take the aspect of verifying the
compliance levels for the importation of commercial goods and the accuracy
of that seriously. Within our compliance and what we call post-release
verification program, it is their job to determine what sectors we have to
audit and what sectors we have to evaluate where we need to focus our
efforts to determine where there may be areas of non-compliance or revenue
missing, or responsibilities for health and safety concerns as well.
Within that activity and that program they have information and analysis
about where we need to focus and, within that as well, how much revenue may
be an issue. Within that area, that function that we deliver on, they would
have that type of information.
Senator Marshall: That would be with Canada Border Services
Agency, not the Department of Finance or the Canada Revenue Agency.
Mr. Patten: That is correct. That function of verifying what is
declared to us and what is in the information that we base our decisions on
to collect duties and taxes or other types of function is within our
Senator Marshall: You do have some sort of audit function.
Mr. Patten: Yes, absolutely.
Senator Nancy Ruth: This is fascinating. I am delighted you came.
This is really great. My first question is about guns and money and the next
question is about the post.
You have talked about how you use the risk management principle of
advance information to know who and what is coming before they arrive in
Canada. Has the arming of guards had any impact on the 10,000 drug seizures,
the seizure of 4,500 illegal weapons, the 46,000 seizures of prohibited
plants, food and animals, and the interception of 15,000 people? If so, how
have you measured it?
Mr. Patten: I do not have any statistics. I know that the agency
has not looked at whether guns have had an impact on enforcement actions.
Firearms were not provided to us to increase interdiction of commodities
that are regulated or controlled. We could provide statistics pre-firearms
and after firearms, but I am not of sure the correlation because, as I said,
the purpose was not to increase interdiction. It was for different purposes.
Senator Nancy Ruth: I would like to see those numbers and I would
like to know how many times guns have been pulled and used.
Mr. Patten: We can definitely get you those numbers.
Senator Nancy Ruth: About a month ago I was up in the Arctic and I
was told that almost all the drugs there were coming in through Canada Post.
Would you have any way of knowing whether they are coming from outside of
Canada via Canada Post or whether it is domestic purchases?
Mr. Patten: I cannot comment on how all the drugs get in. We make
drug seizures in all of our modes of entry. We seize drugs at all types of
locations, including the post office. Drug interdiction is a key element of
what we do at our postal centres, but it is a key element of what we do at
all ports of entry. We could also provide information about the modes of
traffic by drug seizures that we have with the agency.
Senator Nancy Ruth: Do you keep any statistics on where in Canada
the bulk of these are going? Would you know the volumes going into the North
or into the Greater Toronto Area or any other area? Is that statistic kept?
Mr. Patten: Not to my knowledge. Obviously from an intelligence
perspective we would be very interested in that in terms of developing the
tools that we have to assess risk. We would have that, but in terms of pure
statistics reporting on where drugs are destined, I do not think we would
have that. Again, we use different methods within the agency for sure.
The Chair: What percentage of an officer's time at a typical
border crossing would go to safety matters and what percentage would go to
Mr. Tallack: I am not sure that numbers are kept in that way. As
was said in response to an earlier question, when someone presents himself
or herself at the border and makes a declaration, the first thing the border
service officer will do is determine who the person is, examine their
identity documents and put them through our system before they worry about
whether they have groceries or whatever. That is the first level of triage
of what they will do. Everyone presenting himself or herself goes through
The Chair: We can think of what might happen to the Canadian
economy if we substantially increase the exemptions, but what would happen
to your agency and your agency personnel is what I would be interested in
hearing from you.
Mr. Tallack: That is difficult to say. I was thinking about that
when that question was asked earlier. Raising the exemption may encourage
more people to cross the border. It may not be an issue of dealing with
duties and taxes, but there would be more traffic for us to handle. The
secondary factor would be whether a higher exemption would mean there is
less for us to worry about in terms of the goods they are carrying, but has
the traffic increased such that we are now worried about who they are and
safety issues. There would be some consequences if that choice were made.
The Chair: Unfortunately, our time is up. This has been an
interesting discussion. I hope you will take back to your 8,000 colleagues
that we very much appreciate the good work you are doing. We are
appreciative of you being here this evening to help us understand it a