Proceedings of the Standing Senate Committee on
National Finance
Issue No. 33 - Evidence - May 16, 2017 (afternoon sitting)
OTTAWA, Tuesday, May 16, 2017
The Standing Senate Committee on National Finance met this day at 2:16 p.m., in public and in camera, to continue its consideration of the subject matter of all of Bill C-44, an Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Welcome to the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I wish to welcome all those who are with us in the room and also the viewers across the country who may be watching on television or online.
As a reminder to those watching, the committee hearings are open to the public and also available online on the Senate website at sencanada.ca.
All other business can also be found online, including past reports, bills studied and lists of witnesses.
Now I would ask honourable senators to introduce themselves, starting on my right please.
[Translation]
Senator Forest: Senator Éric Forest from the Gulf region of Quebec.
Senator Eaton: Senator Nicole Eaton from Toronto.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
[Translation]
Senator Moncion: Senator Lucie Moncion from Ontario.
Senator Pratte: Senator André Pratte from Quebec.
[English]
Senator Woo: Yuen Pau Woo, British Columbia.
[Translation]
The Chair: I would also like to introduce the clerk of the committee, Gaëtane Lemay, and our two analysts from the Library of Parliament, Sylvain Fleury and Olivier Leblanc-Laurendeau, who team up to support the work of this committee.
[English]
Today we continue, honourable senators, the public and the witnesses, our consideration of the subject matter of Bill C-44.
[Translation]
Bill C-44, an Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures, is what we call a budget implementation act.
[English]
To talk about the increase of the excise duty included in Part 3 of Bill C-44, we welcome from the World Health Organization Dr. Shekhar Saxena, Director, Department of Mental Health and Substance Abuse. And joining us from Geneva —
[Translation]
— Jeremias N. Paul, Coordinator, Tobacco Control Economics, World Health Organization, and Catherine Paradis, Senior Research and Policy Analyst, Canadian Centre on Substance Abuse.
[English]
Witnesses, welcome. We want to take this opportunity to say thank you for accepting our invitation.
I have been informed by the clerk that the presentations will be the following:
[Translation]
Dr. Shekhar Saxena, Director, Department of Mental Health and Substance Abuse, World Health Organization, followed by Jeremias N. Paul, Coordinator, Tobacco Control Economics, World Health Organization, and Catherine Paradis, Senior Research and Policy Analyst, Canadian Centre on Substance Abuse.
[English]
Following your presentations, senators will be asking questions.
Dr. Shekhar Saxena, Director, Department of Mental Health and Substance Abuse, World Health Organization: Thank you very much, Mr. Chairman and members of the committee, for giving WHO an opportunity to provide its evidence on this matter. I will be talking about alcohol and my colleague Jeremias Paul will be talking about tobacco.
Harmful use of alcohol is one of the leading health risks globally. Alcohol impacts people and societies in many ways. It is determined by the volume of the alcohol consumed, the pattern of drinking and, on rare occasions, the quality of alcohol consumed.
The inclusion of a target to strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol, under the health goal in the UN 2030 agenda for sustainable development illustrates the increased diversity of the new global development agenda and its clear recognition of harmful use of alcohol as a development issue globally.
Reducing harmful use of alcohol will require concerted actions on the levels, patterns and context of alcohol consumption and the wider social determinants of health. A variety of factors have been identified at the individual and societal levels which affect the levels and patterns of alcohol consumption and the magnitude of alcohol-related problems in populations.
Due to the magnitude of these factors, reducing harmful use of alcohol is a considerable challenge for many governments, but the health, safety and socio-economic problems attributable to alcohol can be effectively reduced. Price and availability of alcoholic beverages have been identified among the key factors that determine alcohol consumption and its related problems worldwide.
WHO aims to reduce the health burden caused by the harmful use of alcohol and thereby, to save lives, prevent injuries and diseases and improve the well-being of individuals, communities and society at large.
In 2010, the World Health Assembly approved a resolution endorsing a global strategy to reduce the harmful use of alcohol, together with Canada.
The resolution urges countries to strengthen national responses to public health problems caused by the harmful use of alcohol. Pricing policies in the strategy, including taxation, are one of the key areas recommended for governments to use.
Harmful use of alcohol is also included in the WHO Global Action Plan for the Prevention and Control of NCDs 2013-2020. Appendix 3 of the NCD action plan contains a menu of policy options and cost effective interventions for prevention and control of major non-communicable diseases, including on harmful use of alcohol. This appendix is currently being updated, but both the old and the new versions of the appendix recommend an increase in excise taxes on alcoholic beverages as one of the key cost effective interventions for governments to reduce harmful use of alcohol.
It is important also to note that the target for alcohol in the monitoring framework for the action plan on NCDs is at least a 10 per cent relative reduction in the harmful use of alcohol, as appropriate, within the national context.
The effects of changes in alcohol taxation in Canada have been extensively studied. I leave it to the national experts to elaborate on those results, but WHO regards excise taxation on alcohol as a potential triple win for countries.
First, if an increase in excise duty is reflected in the final price of the products, alcohol taxation is one of the most cost effective interventions to reduce harmful use of alcohol. Recent evidence also points to taxation as one way to prevent initiation of drinking.
Second, since excise taxation is relatively easy to administer, and due to the way consumers react to changes in the price of alcohol, it is a good way for governments to generate tax revenues.
Third, since excise duties on alcohol is a revenue generating intervention, the income can be used to reduce some of the costs occurring to society from harmful use of alcohol or directly be used to correct or prevent some of the negative effects that an increase in price may have.
When we look at prices, taxes or revenues over time, we should always look at the real values. To secure the effectiveness and efficiency of excise duties, it is important that the excise duties are adjusted over time both to inflation and increases in affordability, especially in selected target groups. Nominal values tend to increase because nearly all countries experience inflation. One should always look at the real values because they are not distorted and inflated by inflation. That is also why the global strategy on alcohol recommends that countries regularly review prices in relation to levels of inflation and income.
To end, my key points today are that harmful use of alcohol is among the key risk factors to ill health worldwide; alcohol taxation is one of the most cost effective interventions governments can use to reduce harmful use of alcohol; excise rates should be adjusted annually to keep pace with the cost of living in the future and prevent alcohol becoming more affordable; and excise taxation should be part of the comprehensive effort to reduce harmful use of alcohol in a country, ideally expressed through a national strategy on alcohol.
I thank you.
The Chair: Thank you, doctor. Now we will move to Geneva and ask Mr. Paul to make his presentation, please.
Jeremias N. Paul Jr., Coordinator, Tobacco Control Economics, World Health Organization: Thank you, Mr. Chairman and members of the committee, for giving WHO the opportunity to speak today on the important topic of excise taxation for tobacco products. I have submitted a written statement, so I will just highlight the key points.
My comments today are limited to highlighting the best practices for tobacco tax policy that WHO recommends to countries as they pursue their public health objectives. These best practices can easily be remembered by the acronym STOP.
"S'' stands for specific and simple tax structures. Evidence shows that tax structures which rely largely on specific taxes tend to lead to higher cigarette retail prices than ad valorem tax structures. A simple tax structure eases tax administration, reduces tax avoidance and evasion, and has a greater impact on tobacco use by reducing incentives to substitute among tobacco products and brands in response to tax increases.
"T'' stands for tax increase and tax share in retail prices. Experiences from around the world show that the bigger the tobacco tax increase, the larger the decline in tobacco use. Higher tobacco taxes and prices are especially effective in reducing tobacco use by the young. As to tax shares, the WHO recommends that excise taxes should account for at least 70 per cent of the retail prices of tobacco products, with continued increases above inflation and income growth after reaching this threshold.
"O'' stands for outcome. Taxes should consider the impact of inflation and income increases on the affordability of tobacco products. Specific taxes need to be raised frequently to reduce affordability as income levels improve and need to be adjusted automatically to inflation.
"P'' stands for package. Higher tobacco taxes are most effective when part of a comprehensive tobacco control program. Simultaneous adoption of other tobacco control measures and policies enhances the effectiveness of tobacco tax increases.
When you think about the best practices for tobacco taxation for health, think STOP, where "S'' stands for specific and simple tax structures; "T'' stands for tax increase and tax share in the retail price; "O'' stands for the outcome on affordability; and "P'' stands for package.
Additionally, we favour vigilant and strengthened tax administration, as well as tobacco tax revenues being reinvested in people's health and well-being, particularly on tobacco control.
In conclusion, I note that the benefits of higher tobacco taxes and of well-crafted tobacco tax structures are well documented globally. Higher tobacco taxes reduce consumption, prevent young people from starting to use tobacco and are key to saving lives in every country, a classic win-win against an epidemic that will kill millions of people unless checked with every policy tool at government's disposal.
Thank you, Mr. Chairman.
The Chair: Thank you very much, Mr. Paul.
[Translation]
Let us now ask Catherine Paradis to give her presentation.
Catherine Paradis, Senior Research and Policy Analyst, Canadian Centre on Substance Abuse: Thank you for the invitation. My organization, the Canadian Centre on Substance Abuse, was created by act of Parliament to provide national leadership to address substance use in Canada. A trusted counsel, we produce guidance for decision-makers across the country by harnessing the power of research, curating knowledge, and bringing together diverse perspectives.
The CCSA co-chairs the National Alcohol Strategy Advisory Committee, which is made up representatives from the federal and provincial governments, the university world, regulatory agencies and the alcohol industry including Beer Canada, Spirits Canada and the Canadian Vintners Association. The group meets annually and, in 2007, provided 41 recommendations for a national alcohol strategy. Of those recommendations, two specifically address the price of alcohol and, indeed, the necessity, through taxation or price increases, to raise the price that consumers pay for a standard drink. This afternoon, on behalf of the CCSA and the National Alcohol Strategy Advisory Committee, I intend to argue that the increase in the excise duty on alcohol, on which you are called to vote, is a good thing for the health and safety of Canadians and has no negative consequences for the economy and for employment.
I have three main messages for you. The first message is that, within reasonable limits, the higher the price of alcohol, the fewer public health and safety problems. In 2010, researchers constructed models of the effects of establishing a series of base prices, or "the minimum price per standard drink'', as it is called. Although the modelling is somewhat complex, it can still be reduced to two important basic principles. The higher the minimum price per drink, the lower the consumption. And the lower the consumption, the greater the reduction in alcohol-related harm as a result. In Canada, this model was tested on official alcohol sales figures in two provinces, Ontario and British Columbia. In their analysis, the authors showed that, in 2012, establishing a minimum price of $1.50 per standard drink would have reduced annual deaths by 31 and the number of hospitalizations in Ontario by 1,393. In British Columbia, the number of deaths would have dropped by 39 and the number of hospitalization cases by 1,244.
I will also tell you about Saskatchewan where, in 2010, an increase of 9.1 per cent in the sale price of a standard drink was linked to a reduction in consumption, as well as a move to the consumption of products with a lower alcohol content, and to an improvement in public safety. In that province, in fact, the police reported informally that, following the increase of the minimum price per drink, they observed a reduction in alcohol-related crime at night.
Based on studies of that kind, the National Alcohol Strategy Advisory Committee advocates a minimum price on alcohol. Moreover, brewers in my province of Quebec are asking for an increase in the minimum price of beer, and you would be well advised to help them in that respect.
Our second message is that consumers of alcohol are indeed sensitive to the price of alcoholic beverages. This is even more the case for heavy drinkers, those who are dependent on alcohol, young people, our young people, our teenagers. Do not worry at all about those drinking Château Margaux 1949, because their alcohol consumption will not be affected by an increase in the excise duty on alcohol. Young people will be affected, however, and the increase will protect them better.
One of the hats I have been wearing for a year now is as co-chair of PEP-AH, the Postsecondary Education Partnership — Alcohol Harms, which brings together 35 Canadian universities and colleges in nine provinces. In that capacity, I am constantly interacting with those in the field, campus student service directors who tell me about the great receptiveness, the great vulnerability and the sensitivity of young people to the price of alcohol. Moreover, you just have to look around at the cut-price drink promotions in bars to see how much of a determining factor the price of alcohol is. A few years ago in Canada, there was a major survey that included specific questions on the types of alcoholic beverages young people were drinking. The questions allowed us to analyze the amount of alcohol that young people from 18 to 25 years of age were consuming per occasion, broken down by the various kinds of alcoholic products sold at different prices, as we know. There is absolutely no need for me to keep you in suspense. . . It is no surprise that the data show a direct link between the usual quantity consumed per occasion and the price of the products. The young people reported that the product consumed in the greatest quantity per occasion was beer, the product sold at the lowest price per standard drink.
A recent American study, of more than 1,000 alcohol consumers between the ages of 13 and 20, compared the average prices of popular and less popular brands. The less expensive brands were linked to higher levels of consumption. Among all brands of alcohol of all types, the average price of the popular brands was $1.80, compared to $3.40 for the less popular brands.
Out of concern for the health of the most vulnerable, and of young Canadians, it is therefore desirable to establish selling prices that are just high enough to limit accessibility to alcoholic beverages. We all want our young people to reach their full potential, and, currently, far too many young people are not achieving their objectives because they are only too familiar with alcohol-related harm. Let us help them by increasing the excise duty, the result of which will be to reduce the quantity they consume.
The third message is very simple. Of course, we have to consider the economic consequences of our decisions, but, at 2 per cent, the proposed increase in excise duty is very reasonable and not in the least abusive. It will not mean a loss of jobs, either by increasing purchases from beyond our borders or by reducing domestic production. The only effects will be positive for Canadians . . . and for the federal treasury.
In conclusion, the CCSA and the National Alcohol Strategy Advisory Committee assure you of their unambiguous support for a measure that is very positive for the health of Canadians, very positive for Canada's revenues, and not at all negative for the economy. Thank you.
The Chair: Thank you very much, madam.
[English]
We will now open the question and answer session. The chair will recognize Senator Woo, the sponsor of the bill.
Senator Woo: Thank you very much, witnesses, for your testimony.
First of all, I want to ask you, Dr. Saxena, about the phrase you often used in your presentation, "the harmful use of alcohol.''
Could you define that a bit for us to help us understand what would then be non-harmful use of alcohol?
Then I have a follow-up question.
Dr. Saxena: Thank you very much. I used the phrasing "harmful use of alcohol'' because in 2010 the World Health Assembly adopted, including the membership of Canada, the global strategy to reduce the harmful use of alcohol.I recognize fully that there is no alcohol use which is completely harmless.
I would say that any and all alcohol use can result in harm but does not necessarily result in harm, so all alcohol use is potentially harmful. However, for the purpose of this strategy, the harmful use is conceptualized as use which is quite likely to give rise to harm. The harm can be to a person's health, well-being and social standing, as well as potential harm to others, including the family members, the community and the country.
Senator Woo: That's very helpful. I will follow up, because I often look up these guides to what is so-called "safe amounts'' of drinking: how much wine per week or how many pints of beer. I'm always struck by how much lower those recommendations are than I would have imagined.
Can you comment on the state of knowledge that we have about what is less likely to be harmful in terms of the amount of alcohol consumed by an average adult?
Dr. Saxena: The WHO does not have safe limits on alcohol drinking, although we are very aware that many countries and many societies, including professional associations, have some guidelines on what could be considered "safe.''
Why WHO does not have a safe limit is precisely because of what I said earlier: No alcohol use is potentially harmless. It depends on the context. It depends on who is drinking. It depends on how quickly and what kind of other risk behaviour the person is indulging in, together with the use of alcohol.
We believe that less is better.
Senator Woo: Would Ms. Paradis like to comment as well?
[Translation]
Ms. Paradis: For the CCSA, alcohol consumption without harm is defined in the low-risk alcohol drinking guidelines developed by the National Alcohol Strategy Advisory Committee. In Canada, that means three drinks per day, with a maximum of 15 per week for men and, for women, two drinks per day, with a maximum of 10 per week.
I was one of six experts who, in 2010, were given the mandate to develop these low-risk alcohol drinking guidelines. We had a number of meta-analyses at our disposal. Over the years, these analyses have accumulated data on alcohol consumption and the chronic diseases that can subsequently result. We know that approximately 200 chronic diseases are linked to alcohol consumption. To simplify the picture, we examined the risk of a person developing cancer of the esophagus, for example, if that person consumes no alcohol. Then we examined the same risk if they have one or two drinks per day, and so on.
That enabled us to establish risk curves. Taken together, those diseases make up various risk curves. For women, one of the most prevalent risks is breast cancer, where the relationship is linear. With one drink per day, the risk goes up. When we put all those curves together, we saw that Canadians need guidelines and an understanding of the situation in order to reduce their risk of developing the diseases. We came to the conclusion that, for women, the recommendation was going to be two drinks per day, with a total of 10 per week and for men, three drinks per day, or 15 per week.
We did the same exercise for accidents and injuries. We had fewer data for that exercise, but we thought it was important to provide it because, each year, every Canadian celebrates Christmas or some occasion when they would like to drink a little more. On occasions like that, we want to limit the risk of injuries and accidents. So the recommendation is three drinks for women and four for men.
[English]
Senator Eaton: It is always interesting. I guess where I have problems is that they have in the House of Commons tabled the legalization of marijuana. On one hand, we are changing cigarette packaging and raising taxes on beer and spirits to the detriment of jobs, as we heard in testimony last week, in the brewing industry and spirit industry.
Why is there never any mention of education? I know you have your data on the more expensive a beer is, the less the young will drink. Is there the same amount of education that's going out as excise taxes going up? How are you all going to deal with marijuana? If beer becomes too expensive, or spirits become too expensive, or cigarettes become too prohibitive, people will start eating marijuana cookies? Instead of the chocolate chip cookies, we will have nice marijuana biscuits and we'll start smoking bongs.
How do you reconcile what you are saying with the fact that we are about to legalize marijuana?
[Translation]
Ms. Paradis: What we know for harm reduction, especially with the young, is that no one strategy will work. We look at the whole thing as a circle and we know that, for harm reduction to succeed, the attack has to be on all fronts. There must be prevention, services must be provided, the economic and physical availability of alcohol must be regulated, and there must also be support in the communities where young people drink.
Senator Eaton: If you think of the history of cigarettes, the taxes did not change people's habits. It was because smoking was no longer fashionable, and because of cancer.
[English]
It was more of an educational campaign that people didn't want them sitting next to them, blowing smoke in their faces. Yet you don't see that with alcohol since there is no such education. It will be interesting to see what they do with marijuana.
Will it be ostracized the way we have managed to ostracize cigarettes? People used to smoke at dinner parties. People used to smoke on television. Then, all of a sudden, it disappeared. It became a non-thing to do.
[Translation]
Ms. Paradis: I will let my colleagues talk about marijuana because they are experts in the area. We could send documents on the subject to the clerk. Tobacco and alcohol are not quite the same thing. A single cigarette can be harmful. There is no safe level of cigarette consumption, while for alcohol consumption, as long as it is done within the low-risk drinking guidelines, the risks are in fact greatly reduced. Yes, we succeeded in reducing tobacco use through major prevention campaigns, but also because those campaigns were accompanied by a good number of measures regulating where it was permissible to smoke. People no longer smoke in other people's faces because they can no longer do so. You can no longer smoke in a restaurant, in a bar, or at the door of a public building.
The prevention came with a whole set of regulations. That is still what I am advocating for alcohol. Universities are doing all kinds of prevention. Young people are being educated about alcohol-related harm. Without support in the form of regulation and taxation, without support in reducing the economic and physical access, we are not going to get there. In corner stores in Quebec at the moment, a bottle of beer costs less than a bottle of water. That makes no sense, especially when we know the extent to which young people are influenced by price. So the matter has to be looked at.
I am sure that my colleagues want prevention, but they also want a very tight system of regulation.
Senator Forest: When I look at what is happening with the increase in the excise duty, which is included in the cost of the product, my concern is that you are currently establishing a precedent where it will automatically be indexed to the CPI in Canada, which does not account for regional specifics. Basically, the detrimental effect I am afraid of . . . With our locally made products, in microbreweries and microdistilleries, which more and more Canadians are seeing as the shortest route to their consumption, which is interesting in itself, I see differences between the costs of those artisanal products and other products. Since the artisanal products are much more expensive, the impact on them will be greater and people will fall back to the less expensive products from major international distilleries that can often offer a price that is 50 per cent less, or close, for the same product.
This won't end up going against the objective being pursued, which is being able to consume responsibly. However, since these products are Canadian-made, there is a risk of pushing consumers towards mass-produced products; they will fall back on less expensive products. I'm very apprehensive about this issue. I don't think the 2 per cent rate has been adjusted for a long time, but automatically setting the standard to have the rate indexed every year based on the CPI, I have a problem with that.
Ms. Paradis: I'm not an economist, I'm a health sociologist. I don't know all the economic rules, but what I do know is that in terms of alcohol in Canada right now, the price of a standard glass of alcohol hasn't increased with the CPI. There's some catch-up to do; we'll get there, but we have some catching up to do.
If I understand correctly, the other concern you have is that you have the impression that if we're talking about a microbrewery, for instance, the microbrewery will absorb the cost of the excise tax, and not necessarily pass it on to consumers, because it will want to remain competitive and retain its market share. I am here to defend the interests of Canadians with respect to public health and public safety. What alcohol sellers will decide to do when it comes to passing the tax on to consumers doesn't concern me, but I understand the problem, which is why, in my testimony, I did the right thing by encouraging you with all the means you had to ensure that the provinces set a minimum price for alcohol. That way, it will be possible to ensure that local microbrewers or alcohol sellers aren't penalized compared with large multinationals, because large multinationals can indeed afford to absorb this tax without passing it on to consumers, which is much more difficult for the smaller ones.
As part of the national alcohol strategy, we found what is sometimes referred to as the sweet spot between the interests of industry and health and regulations, and that's minimum alcohol pricing, while ensuring that it is indexed each year.
Senator Forest: In terms of strategy and marketing, in recent years we have seen very low prices for certain brands, particularly for beer, and we see that young people are turning to these products, including prices that almost constitute dumping.
Ms. Paradis: Indeed, as a mother of a teen, I can assure you that I'm very concerned about this situation. Excise tax is a good idea, and my colleagues in the WHO will tell you that; it's what they call a "best buy'', something that isn't expensive to implement and is known to have a positive impact on people's health. However, in Canada, this should be accompanied by other measures, such as the introduction of minimum pricing and annual indexation.
[English]
Senator Marshall: Thank you for being here today. I see the logic in what you are saying of higher taxes and less usage, but I would like to see more discussion of the unintended consequences.
We know that people are smoking. As the taxes go up, I'm sure there will be people looking for alternatives. I would say some people are rolling their own with tobacco plus other things in it.
I'm sure marijuana, once it is legalized, will also become an alternative. There are unintended consequences to raising the taxes. There has been very limited discussion of that. For marijuana, we don't know what the tax regime is yet, but if it's not comparable to that for tobacco, people will say, "I'll give up smoking tobacco and I'll switch to marijuana.''
I think all those issues should be taken into consideration. It's the same for alcohol. I would think that once the price of alcohol gets to a certain level, people will be looking for alternatives, or they will be brewing their own. I know we went through prohibition many years ago, and that wasn't exactly a successful experiment.
I don't know if we looked at the unintended consequences. Maybe people will resort to opioid usage. I don't know, but it seems the discussion seems to be focused on just tax it more and there will be more income for the government; tax it more and the usage will go down. There is an aspect there to the unintended consequences. I regret we don't have more information on that.
Do you have any comment on that? I would also like to hear from Mr. Paul. If you do have any information, I would be very interested in hearing it.
Ms. Paradis: Regarding the unintended consequences, one world leader, in fact a Canadian, Tim Stockwell, director of the Centre for Addictions Research of BC, has co-written a document that describes those intended consequences. I would be happy to send it to you.
When it comes to your fear that as taxes and prices go up our youth might decide to switch to opioids or other products, that's when not being an economist and sociologist becomes handy. You should not disregard the fact that drinking is a social behaviour. People do not drink just to get drunk.
In Canada, we have a culture of time out. We drink to mark the difference between weekdays and weekends, between working life and leisure, and between normal everyday life and special occasions. That's why we have alcohol at weddings, parties and so on.
There is a special component of alcohol that we need in our lives. That's why even people who don't drink very much will raise a glass and a toast on special occasions. I would not be afraid, especially not with the 2 per cent increase, that people would all of a sudden switch to other products. I would be very surprised if at a wedding everyone started popping opioids instead of drinking a glass of champagne. I would not be worried about that.
Senator Marshall: We're looking at this year's increase. Now we are going to index the taxes to CPI, and next year there will be more increases. We'll keep going and saying, "Okay, if we keep increasing taxes then the usage will continue to go down,'' but that's not what happens. It's not a direct trend line. At some point in time that trend line will break or some reason.
I'm wondering what kind of research has been done on that issue. I realize it's not just this year; it's next year, or the year after, or the year after.
Ms. Paradis: Most studies that have been done in Canada looked at the consequences of a 10 per cent minimum price increase, or five times what you are thinking about. At that level we saw that moderate drinkers were not affected by the price. The youth and those with alcoholic dependency were among those who were most vulnerable. We saw a reduction in the number of hospitalizations and alcohol-related deaths. That was observed in Saskatchewan, Ontario and British Columbia.
Tim Stockwell will tell you that the numbers I presented earlier are very conservative. When they looked at the real data in British Columbia, the results were even more positive than what the model had estimated in the beginning.
The price of alcohol has not been increasing at the same pace as the IPC. We have some catching up to do as 2 per cent is a bit higher than the normal IPC. However, this is definitely something that consumers can tackle.
The Chair: Dr. Saxena also wanted to answer and then we'll hear from Mr. Paul from Geneva, who certainly has an opinion also.
Dr. Saxena: As far as alcohol pricing is concerned, Canada is far from experiencing the unintended consequences because of the price increase at this level.
The intended positive consequences are going to be much higher with this price level increase compared to any unintended consequences. There will be fewer deaths, disease, violence and mental health diseases.
Looking at the Canadian situation, in our opinion this price increase, including an annual rise indexed to the inflation level, will be very appropriate with fewer unintended consequences.
The Chair: Mr. Paul, do you have any comments?
Mr. Paul: With respect to the unintended consequences, when you decide a tax structure for public health purposes, you need to make it simple. That means adopting comparable taxes and tax increases for all tobacco products.
For example, the most recent increase that I am aware of in the United States was an increased tax on cigarettes but not on rolling tobacco, which increased the demand for these types of products.
When you do a tax design, you should apply it not only to cigarettes but also to other similar tobacco products.
[Translation]
Senator Pratte: I would like to clarify one question, Ms. Paradis. I think you said earlier that your organization is made up of people from the industry. When you take a position as you do, are you also speaking on behalf of the people in the industry who are part of your organization?
Ms. Paradis: My colleague, Luke Harford, President of Beer Canada, who is behind me, will be able to explain it later. The CCSA co-chairs the national alcohol strategy, and the advisory committee is made up of industry representatives who agreed with all the members on the 41 recommendations of the national strategy, which proposes two recommendations on price increases, including taxation and minimum pricing to ensure a price increase of a standard drink.
Senator Pratte: Industry representatives appeared before our committee last week. The scenario they described to us was a bit apocalyptic. They talked about the tax increase and the annual indexing of the tax increase. Depending on the case, we talked about job losses or an industry that would be hurt by these increases. You just told us the exact opposite, which is why I find this strange. You even said that Quebec brewers are demanding a price increase.
Ms. Paradis: Right now, in Quebec, the minimum price for beer is the lowest in Canada. So beer is very hard to sell. Mr. Harford will be in a better position to answer this question. The price is so low right now that microbrewers can't compete with them. I understood that, even if the taxes increase, to keep their market share, they will have to continue to be the brewer who sells the cheapest product. They will not pass this tax onto the consumer. In this case, microbrewers will have a larger profit margin if they themselves have to absorb the tax. Therefore, they might tell you about these apocalyptic scenarios where jobs would be lost and so on. Should the taxation measure be accompanied by a measure requiring an increase of the minimum pricing of a standard drink? Absolutely. However, from a health perspective, it isn't up to me to tell you not to impose a tax because the brewers compete among themselves to find out who will increase their price first. I am acting in the interest of young Canadians by protecting their health and ensuring their safety, and all the data I have indicates that a price increase is a good thing.
Senator Pratte: When you talk to your industry partners about the health of Canadians, they agree with you, but not everyone is on board?
Ms. Paradis: I co-signed a document written last year as part of the national alcohol strategy about a request to introduce minimum pricing for alcoholic products. I strongly believe that, with all the problems in society, we need to find the sweet spot between health, legal and economic interests. Indeed, introducing minimum pricing for alcohol is one of the sweet spots we found. This document proposing minimum pricing was signed by researchers and public health experts, as well as by the presidents of Beer Canada, Spirits Canada and, if I'm not mistaken, the Canadian Vintners Association.
[English]
Senator Cools: I would like to thank the witnesses for presenting before us. I welcome you to the Senate.
I find your testimony, your proposals and your propositions on the whole phenomenon most interesting and, perhaps for me, a little novel. Tax, supposedly, is a very important matter in our communities. The phenomenon of taxing gives rise to all kinds of important institutions like Parliament itself: no taxation without representation.
Most human beings, most Canadians, and I think most North Americans, view taxation as a duty of contributing to the public good and the public well-being. You are now proposing a novel use of taxes. I've never heard of this one before, but I'm hearing it now. Your proposition, basically, if I can read from your presentation, Dr. Saxena, is that:
The resolution urges countries to strengthen national responses to public health problems caused by the harmful use of alcohol. Pricing policies in the strategy, including taxation, are one of the key areas recommended for governments to use.
I understand this to mean that governments can reach into their population's pockets to extract more money. We know the world of wine and beer is extremely highly taxed as it is. On the grounds of what? Is it that the government will save our lives or save the lives of the population? I've never heard this thinking expressed by a government. This is why I'm saying it's novel to me.
As Senator Eaton so rightly pointed out and as one would hope, in the business of reducing tobacco use that a sensible, appealable and justifiable strategy was evolved. Smoke in a room is unpleasant, and so on. I've never heard of your solution, which is saying: "Raise taxes. It's good for you. It's good for your health.'' It may be, but most people will stay within your guidelines of, I think you said, two drinks. I don't know if you meant two drinks of double or triple Scotch or simple red wine. Most of us will have a drink or two of red wine.
The foundation or the principles underlying it don't strike me as all that good because you just can't say to the government: "Dip into people's pockets. It's healthy for them.''
The Chair: Dr. Saxena, do you have comments on that?
Dr. Saxena: Yes, thank you. I think what the World Health Assembly, including Canada, adopted was based on empirical evidence that these are measures which are good for people's health and for decreasing disease.
It is not a conceptual discussion that the ministers of health had. It's a very empirical decision that they made, and that's what we represent. It is based on data. It's based on evidence. It's good for the health of people.
It's for you parliamentarians to decide whether or not to use this measure. We are proposing that this is an effective measure.
The Chair: Dr. Saxena, as we proceed to the next 45 minutes with other witnesses, I want to say that we will continue to look at accountability, transparency and all the procedures in the mandate we have received from the Senate of Canada.
To the witnesses, thank you again for being here.
[Translation]
We will proceed with the second part of our meeting, which will study part 3 of Bill C-44. Joining us by videoconference is Frédérick Tremblay, President of the Association des microbrasseries du Québec. Welcome.
[English]
We also have Ms. Barbara Feit, Treasurer, Alberta Small Brewers Association. I should also point out to honourable senators and viewers that Ms. Feit is the interim chief executive officer of Big Rock Brewery in Calgary.
The third person appearing today is Mr. John E. Peller, Chairman and Chief Executive Officer, Andrew Peller Limited.
To the witnesses, thank you very much for accepting our invitation to share with us as a committee of parliamentarians your opinions.
As chair, I will ask Mr. Tremblay to make his presentation, to be followed by the presentations of Ms. Feit and Mr. Peller.
[Translation]
Frédérick Tremblay, President, Association des microbrasseries du Québec: Mr. Chair, thank you for welcoming me today by the magic of the Internet. My name is Frédérick Tremblay, and I am the President of the Association des microbrasseries du Québec, as well as the President of the Charlevoix microbrewery. Thank you for inviting me to appear before you today to plead the case for removing permanent increases to the excise tax that the government imposed on beer in the 2017 budget. The March 2017 announcement left the Quebec microbreweries very worried, and I want to present our point of view on the issue.
First, know that I represent more than 80 microbreweries in Quebec, some of which are large microbreweries, and others, smaller ones. Others still have an artisanal brewer's permit. Skilled, talented and creative entrepreneurs make up our industry. In terms of location, Quebec microbreweries are in 10 of the 17 administrative regions and are rooted in a very large majority of the 78 federal constituencies in Quebec.
The members of AMBQ represent more than 90 per cent of the beer brewed by microbreweries in Quebec. In most cases, the volume produced or the spirit of artisanal production limits the possible economies of scale.
There's a process from land to beer in Quebec over the last 10 years. In addition to the microbreweries that went from 34 in 2002 to 166 in 2017, hops and barley producers, malting mills and service providers were born and developed around our industry.
To give you an understanding of the business environment in which we operate, I will give you some information and, in particular, some details on how excise tax decisions can influence our industry.
In the beer industry in Quebec, microbreweries hover around 9.5 per cent of consumption. This industry has grown tremendously in the last decade and, despite its dynamism, remains a young and relatively fragile industry. On the one hand, the cost of inputs of raw materials increases significantly year after year. Moreover, in general, the consumption of beer by Quebecers has been decreasing for several years in favour of other liquors. Imported beer is also gaining in popularity. The growth of microbreweries has also increased competitiveness on the ground. Retail price is therefore a sensitive aspect for consumers, which means that microbreweries tend to differentiate themselves to maintain their position opposite others. In order to make their products accessible to consumers for home consumption or on-site consumption, microbreweries rely on different retailers, bars or restaurants, and sometimes use the services of a distributor to cover the entire territory.
We are always amazed at the lack of understanding by economists when they suggest increasing a manufacturing tax such as the excise tax, which is upstream of the entire retail pricing process. You do not have to understand what is happening in the field to know that a 1cents increase in the excise tax will result in a 1 cent increase on the consumer's tab.
So microbreweries have two options when it comes to excise tax. The first is that, in order to maintain its positioning, the microbrewery will have the reflex to absorb this tax, which will therefore be a tax on producers and will limit its capacity to invest, develop and create jobs. This reflex will be all the stronger if the beer has a retail price that is very close to the psychological consumer purchase ceiling. The producer will absorb 100 per cent of the impact.
The second decision the microbrewery could make would be to try to recover the loss incurred by the increase by also increasing the selling price of its products. What happens in this case is that, in passing, the distributor and the retailer will round up the price to increase their own profit margin, not to mention the subsequent application of provincial and federal sales taxes.
The outcome for the microbrewery is that there is no impact on its profitability on a bottle, but it is very likely that the effect will be felt on its positioning and total sales. In any case, a tax increase upsets the economic model and the business plan either by decreasing profits or by diminishing the competitiveness of microbreweries. The government's decision to index the excise tax to the CPI will certainly have a significant impact on microbreweries' room to manoeuver and will limit their ability to invest and grow.
Although beer is often considered a luxury product, it is still part of the daily lives of a majority of Canadians, especially middle-class Canadians. It is not a product reserved for the elite. An increase in the tax will likely affect the wallets of many Canadians. When we know that the budget's title is Building a Strong Middle Class, the automatic indexing of the excise tax doesn't quite go in that direction.
We believe it is time for the government to show more originality when it is time to increase inputs instead of continually targeting beer, which is already heavily taxed. We would like to point out that it is very clear, according to several health studies, that sugar is a scourge of our time, and it is very expensive for public health. Isn't it time for all sweetened beverages to play their part from the point of view of the public purse?
In conclusion, the 2017 budget has caused real concern among microbreweries. We hope that the Standing Senate Committee on National Finance will hear our perspective and support the elimination of the automatic excise tax increase.
Thank you again for inviting me to appear before you today.
The Chair: Thank you, Mr. Tremblay.
[English]
Ms. Feit, please make your presentation, and then we will follow up.
Barbara Feit, Treasurer, Alberta Small Brewers Association: Mr. Chairman and members of the committee, I serve as a director and treasurer of the Alberta Small Brewers Association, ASBA. Thank you for the opportunity to appear before you today to voice the concerns of the association and to put forth the case for removing the automatic annual escalation of excise duties on beer.
ASBA is a trade association for Alberta-based brewers. It was established to create a unified and respected voice to represent and promote the brewing industry in our province and to foster collaboration and sharing of best practices among our member breweries.
We have seen rapid growth in our industry in Alberta in the three and a half years since our organization was established. In that time the number of breweries in our province has quadrupled, with over 50 at last count and numerous additional breweries in planning or construction.
Consultation with our member breweries and other industry stakeholders has yielded a common concern with the automatic annual escalation of excise duties on beer introduced via Bill C-44 when it was tabled earlier this year. We are concerned about the automatic nature of these increases and believe the government should put careful thought and attention into any tax increase, with consideration of the state of the economic circumstances that exist both nationally and regionally at the time of the increase. Certainly we in Alberta can attest to the fact that economic conditions can vary significantly and change very quickly across provinces.
The CPI escalator in clause 42 of Bill C-44 is too blunt an instrument to factor in these considerations and should not replace prudent government oversight and conscious decision-making in this type of levy.
ASBA's members are also concerned with the multiplicative and cumulative impact that the automatic escalator will have on beer prices to consumers. The escalator is applied as a percentage increase on the previous year's rate, and thus is cumulative itself, but as GST is levied with excise as an input cost, the GST impact also escalates. The result is a continuous upward retail price spiral for consumers.
Furthermore, the inflationary pressures underlying the CPI are typically representative of similar increases in input costs faced by our members in making their beer. In order to manage the price pressures on their consumers, our breweries may not be able to pass on all of the costs they are actually incurring. In such a scenario, the government has usurped the ability of producers to recover the increases in their input costs. Therefore, the money that they have to reinvest in growth or to return to their employees and owners is reduced.
This is particularly relevant in Alberta, which is the only completely privatized retail liquor market in Canada. This open market, combined with the rapid increase in start-up breweries mentioned earlier, creates an environment of intense competition and means that individual producers must carefully consider any price increases for fear of losing sales. This is particularly true now. High unemployment rates and lacklustre economic conditions facing Albertans means that price sensitivity of consumers is at an all-time high.
Although the retail sales of beer in Alberta are privatized and not carried out by a provincial government agency, breweries are restricted from establishing retail stores or restaurant tied houses of their own and must therefore rely on third-party retailers to sell their products to consumers. On average, the profits that retailers are making rival or exceed the profits earned by the breweries themselves. The overall tax burden is also already high. At existing rates, the various provincial and federal levies on beer also combine to a total government take that rivals or exceeds our breweries' profits.
Despite the competitive pressures, there is an air of optimism in our industry in Alberta. We are the heartland of some of the best quality brewing barley and malting plants in the world. We want to play a part in the diversification of Alberta's energy dominant economy. Based on the examples we see in the United States, we know that under the right conditions, including regulatory and tax structures, a thriving brewing industry can pay significant economic dividends. The state of Oregon, which has roughly the same population as Alberta, has 246 brewing facilities, creating an estimated $4.5 billion in direct and indirect economic impact.
Canada's excise duty on beer is levied volumetrically on every hectolitre of beer that is produced and therefore government revenues increase both from growth over the industry as well as from potential rate increases. The cumulative effect of price increases to compensate for constant escalation of the excise duty rate proposed can cause consumers to reduce their purchases, thereby actually stagnating or reducing the volume of beer produced and sold. The theoretical benefit of the rate increases can quickly be nullified by lower volumes.
We firmly believe that the best way for all key stakeholders, namely, breweries, consumers and government, to win is to create an environment where production and sales of beer can grow. The federal government then benefits not only from the volumetric impact of excise duties but also from the related GST on consumer purchases. Provincial governments benefit from the beer markups that are applied on beer sales in their jurisdiction. Furthermore, the economic activity through the creation of jobs and investment in local economies for agricultural ingredients and packaging materials also flow through to both levels of government via income taxes.
Thus, in closing, we request that the Standing Senate Committee on National Finance support us in our proposal to eliminate the automatic annual excise escalator by removing clause 42 of Bill C-44. By doing so, you will enable a future where our industry can more readily create jobs, economic activity and ultimately higher returns to government.
Thank you for your time and attention today.
The Chair: Thank you, Ms. Feit.
Mr. Peller, please go ahead.
John E. Peller, Chairman and Chief Executive Officer, Andrew Peller Limited: I am a fourth generation vintner. My family started in the wine business back in 1960 and we've become a public company. Now we have thousands of shareholders.
I think I might be one of those big multinationals someone referred to earlier. We have nine estate wineries. We have a craft distillery. We export ice wine around the world. We have a very large value wine business that we are very proud of as well. As I said, we planted our first vineyard in the Okanagan back in 1960 with the Inkaneep Indian tribe. We now farm over 10,000 hectares of grapes in Canada, including Nova Scotia.
Our industry has achieved beyond the wildest dreams of the original investors, and certainly beyond the expectations of government. I recall being here when NAFTA and GATT were signed. There was not much of a prospect for our industry, but through a lot of hard work and effort by many people we have grown into an industry of 700 wineries. We are the highest value agricultural product produced in Canada. There is a huge growing culture and hospitality industry that our industry supports. We have a very bright future. As my colleagues before me have expressed, we live in a very competitive world. We are not a supply-managed company like some agricultural products are in Canada. We compete hard for our business against very strong and capable foreign national countries and companies.
It's well known throughout the beverage and alcohol industry that the wine industry has the lowest margins. As you can read in my statements, our margins as a public company are at the 10 per cent level. Beer and spirit will be as high as 25 per cent and 40 per cent. Ours is a reflection of the agricultural production and a very capital intensive cost of producing agriculture. We make expensive inventory and we hold it on to it for a long time. The financial challenges in our industry are certainly rigorous. That's why I'm dismayed at the government's interest in raising excise tax in the first place and, second, why I'm absolutely opposed to the accelerator, as my colleagues have also suggested.
I would like to give you a simple example. If I go to Ontario, a typical wine market in Canada, almost 80 per cent to 85 per cent of all volume of wine is sold at less than $10 a bottle. If you take that $10-bottle sold in the LCBO right now, $6.60 comes off the top to go to government both provincially and federally. It's not just this excise tax but all the taxes in place provincially. There are all kinds of names and terms for these taxes, but to suggest that we have not a heavily taxed product at the outset is complete fantasy.
Since 2010, we have not raised our prices on that $10-bottle of wine because our competition internationally does not allow us to do so. Through that period, we have dealt with successive government tax increases so that our margins, which were once 40 per cent, are now down to 34 per cent. In effect it's starting to set up a bit of an arm's race among federal and provincial governments as to who will compete for our margin the fastest. That's why I don't think the 2 per cent tax in itself is fair, and the accelerator itself is quite egregious.
I would like to point to Senator Cools' comment on the constitutional validity of the accelerator, which I don't believe is valid. I was a law student under Governor General David Johnston when he was the dean at Western. I hope he's proud of me. The Catholic Teachers' Association v. Ontario (Attorney General), 1960, says that no Parliament has the right to pass taxation without a rigorous and open debate on the validity of the tax by the elected representatives of the time. Here is a tax proposal that is being inputted when people have yet to even be elected or appointed. It strikes me that the responsibility for future tax increases should lie with the people who will be sitting in Parliament at the time.
My last comment is just a passing comment on health. We all know this is a sensitive and relevant topic in our community. I agree, senator, with your comments. I don't believe high taxation will solve addiction and social problems, although we do work actively with the Canadian Centre for Addictions. We believe education is the most relevant strategy.
We pay high taxes now. We know they are important to our system, but in the current regime of taxation being proposed we all know, sitting here, that both provincial and federal governments are hard pressed to meet their budgets these days. They need money because Canadians have an insatiable desire for social service. They just don't like to pay for it. The government can raise income taxes, corporate taxes or sales taxes, but because they are afraid of doing that, they come to the same whipping post on a regular basis. I assure you our taxes have gone up considerably and are now a percentage of our margin. We will be very vocal about why they are doing it in the future and certainly about this accelerator which will increase taxes that we cannot pass on. It is totally unacceptable to us.
The Chair: Thank you very much.
Senator Woo: Thank you to all the witnesses. First of all, let me say how impressive it is that two industries from different parts of the country have been success stories in Canadian agri-food and how admired they are around the world.
I want to ask about the principle of the escalator. I heard Ms. Feit say that you accept the 2 per cent grudgingly. You don't accept the escalator because it does not respond to changing circumstances in the economy or bad times in the country or in a particular region.
Is it your position, then, that in principle you would accept an adjustment of the excise tax to maintain its real value, not adjusted for volume but its real value as inflation goes up? You just don't want it to be done on an automatic basis. Maybe there should be a review after five or ten years as opposed to an automatic increase every year.
Ms. Feit: I certainly think that would be more in keeping with our expectations. I want to reiterate the point that the inflationary side of things is more of an impact on the producer. The fact that it is a volumetric tax means the government will still win. We have a win-win if we continue to grow the industry.
Certainly what you suggest in terms of every five years or so seems more reasonable. We are proposing to say that the tax is cumulative. The revenue to the government can increase by virtue of fostering the industry.
Senator Woo: I understand the volumetric argument. It is not exactly clear. One of the problems with this bill is that the government doesn't state the clear policy objective. If it is to increase revenue, the supply measure may be the solution. If it is to increase volume through growth, revenues will increase. The other policy objective that was not articulated was the health objective wherein they are trying to reduce consumption. That's a different story altogether.
I would like to ask any of you, but particularly Mr. Peller, about competition. You are very concerned about that. The excise tax will apply to all imported products as well as domestic products. In some sense it is a level playing field. I take it you believe your competitors will absorb the increase and will not mark up their prices at the retail level.
Mr. Peller: That has certainly been the case. To your last question, if you don't mind me adding on to it, how do you think Canadian taxpayers would react if they were told their income taxes were going up with an accelerator going forward indexed to inflation? There would be armed revolt.
Senator Woo: We have tax brackets that take care of that.
Mr. Peller: I mean an automatic increase in everyone's taxes going forward relative to the CPI. If you offered that with HST, GST or corporate taxation to average taxpayers, there would be armed revolt in the country, for sure.
That's how we feel about it. To your point about competition, my $9-bottle of French Cross has not gone up in seven years. I would love to take the price up. The only ones whose margins have increased in the last seven years are the provincial and federal governments that keep raising taxes I can't pass on.
It's 85 per cent of the volume in the country. It's not a small portion of the business. As a domestic producer we have a significant share in that market. It's hurting our domestic production in manufacturing and will be a strain on us going forward.
I want to be clear for the record. We are very sensitive to the health initiatives, but we pay the highest alcohol taxes in the world right now. Our excise tax is at 63 cents a litre. France's is 7 cents a litre. Germany's is 0 and the United States' is 38 cents Canadian.
On this notion that we don't contribute measurably and there is very little accountability as to where this revenue goes, it seems apparent to most of us in the business world that we are a last resort when they don't want to hit other areas of taxation. I find it a little offensive.
[Translation]
The Chair: Mr. Tremblay, do you have a comment?
Mr. Tremblay: With regard to the previous question, our view would be that the excise tax and any manufacturing tax should be abolished. I don't think the issue is determining when we could discuss an increase.
The negative effect of an upstream tax is that just about all the intermediaries make big bucks on the way up. The government will order an increase. If the producer decides to pass it on, the producer and distributor will take a margin on the tax. Then, the retailer will take a margin on the amount that is already marginalized by the distributor, and the consumer will end up with a product where the sale price has been rounded off. Ultimately, a 1 cent increase means that the consumer will pay 10 cents to 12 cents more. The government wants to reduce taxpayers' taxes to give them more purchasing power. The government is looking for 1 cent, but it's reducing the purchasing power of the consumer by 10 cents to 12 cents. That's not the way to increase government revenues. It's really hurting the Canadian economy.
[English]
Senator Marshall: One of the issues that came up when we heard from previous witnesses was something that Mr. Peller alluded to. I mean this is not just a new tax. It is tax on tax. You gave an example of a $10-bottle of wine, which you said was around average, and indicated all the taxes.
We have asked other witnesses for breakdowns. Could Ms. Feit from Alberta and Mr. Tremblay from Quebec give us breakdowns of the numbers with regard to the taxes they are already paying and what the taxes will be once Bill C- 44 is approved? I would appreciate that. From my perspective, I don't have a good appreciation of how much tax you already pay. It will be taxes on taxes, so I would like to get a handle on exactly what you are paying in taxes already and what the increase will be once Bill C-44 goes into effect.
It sounds like it's not a very big increase, but when you look at the government's budget documents over the next five years, the government as a result of this tax increase will collect a half-billion dollars. It really is significant, and I would appreciate if we could get that information. I would like to see that.
I'd like to make another point. The budget that just came down is called "the innovation budget.'' Do you have any views on that as it relates to your own industry? You are talking about wineries and microbreweries. I'm sure there must be some innovation in those industries. If you look at it the same way as I do, it's supposed to be an innovation strategy, and now we're looking at very significant increases for spirits. I would appreciate any comment you have on that.
Those are the two issues. One is additional financial information and the other is on the innovation strategy.
Mr. Peller: Quickly, I told you on a $10-bottle of wine that $6.60 is tax, provincial and federal sales tax. When we sell a bottle of wine for $3, it will end up retailing for $10, and $6.60 of that is environmental tax, merchandizing tax, and the federal sales and excise taxes. The federal taxes get added on to the provincial one. It is a multiplier effect, so a 2-cent excise tax may be 10 cents over a period of time.
This would have been fine if this had not started 30 years ago. We are getting close to the end of the line on what is reasonable for people to bear with these products.
Senator Marshall: How comparable is it from province to province? Is every province pretty close?
Mr. Peller: There is one outlier, Alberta, which has a flat tax instead of an ad valorem tax. They tax $3.26 a litre. They collect the same amount but they overburden the lower end of the market. A $10 wine has a $3 tax and a $50 bottle of wine has a $3 tax. It has that effect.
Your second question is a very good one because Innovation Canada and Dominic Barton at McKinsey, working with the government, identified the agri-food sector as the high potential for economic growth. We are their dream industry for value-added processing in the vineyard, inside the winery, and culturally with hospitality and tourism. We think they should be looking for ways to support investment in our industry as opposed to making it harder for us to want to invest in our industry.
The Chair: If you want to send additional information, please do through the clerk.
Mr. Peller: It's guaranteed that you will get that information.
Ms. Feit: I will just add a couple of comments. On the cost side of things, it is a little complicated because most of the provinces, including Alberta, have different rates depending on size. Certainly I would say, roughly speaking, on a $12 wholesale price for a six-pack, the tax component is probably at the low end, $1.50 or $1.60, and closer to $3 once you get into the higher end.
The selling expenses on the beer that our members produce are quite high. By and large most of our members do not pasteurize their product so it has a limited shelf life. It is in our best interests to make sure that the product does not continue to sit on the shelf once it gets close or past that date. We spend a lot of time sending salespeople to ensure that the product is still fresh and removing it if it is not. The cost structure is a little different.
The markup provincially is also different between the two types of alcohol. Most provinces have a per hectolitre structure, but it's graduated usually depending on size. There are a few that are percentage based, which is more similar to the wine side of things. Certainly they cause issues in terms of growth because your tax bill also goes up the more you succeed.
Finally, in terms of innovation, the obvious relationship is that you don't have money to reinvest if you are paying more tax. We have a lot of new members in the industry. It takes a lot for them to raise the capital to create the brewing assets, to buy them and put them in place. Usually they can't package in anything but a keg, initially, because they don't have money to invest in the packaging equipment. The longer it takes for them to start to get some returns to be able to do that, it also depresses their ability to innovate and to grow.
[Translation]
Senator Forest: We know that the excise tax depends on production volumes. So how many hectolitres can an average microbrewery in Quebec or Alberta produce every year?
Mr. Tremblay: In Quebec, there are more than 160 microbreweries. They come in all sizes. The largest produce about 100,000 hectolitres a year, and the smallest, about 200 to 300 hectolitres a year. Medium microbreweries will produce between 5,000 and 20,000 hectolitres a year. So this industry has many players with relatively small production volumes, and economies of scale are therefore very difficult to obtain because of the raw materials and all the inputs.
Senator Forest: And in Alberta, what is the microbrewers' average in terms of production volumes?
[English]
Ms. Feit: In Alberta, our situation is similar to Quebec. There are a variety of sizes of organizations. We have a lot of new ones who are producing in the 2,000 to 5,000 hectolitres. We have a couple that are probably between 5,000 and 20,000. The company I work for outside of my role on the association, Big Rock, is the biggest. It has been around for 30 years. We are producing between 150,000 and 200,000 hectolitres.
Because of the interprovincial trade barriers that we face in our industry, my company has chosen to invest in assets in other provinces. "The economies of scale'' is a bit of a misnomer, a misunderstanding, in some cases. When we build a small brewery in Vancouver which is producing 4,000 hectolitres, as we have done in Etobicoke, the economies of scale when you add those together are not the same as if you had a 200,000-hectolitre stand-alone, centralized brewery.
[Translation]
Senator Forest: Tourism is a major industry in Canada. The market analysis shows tourism as an industry that, although not miraculous, has the merit of bringing people here and investing new and useful revenue streams in the country. Two big interactive trends are the wide open spaces and the whole Canadian gastronomy phenomenon, including microbreweries, local wineries and so on. One of the elements — perhaps innovative — in the budget is the inclusion of this tax, which will be constantly adjusted to the consumer price index. Given your market knowledge, what impact could that have on the tourism industry?
[English]
Mr. Peller: I can speak in the case of Niagara. I was born just outside of Hamilton, but I have been familiar with the Niagara Peninsula my whole life.
When we first arrived in the wine business, it was manufacturing of truck engines for General Motors. Once the economy broke there and they left, there was nothing going on in Niagara. Fast forward 35 years later, and cultural tourism is the number one industry in Niagara. More people go there to visit a winery than to visit Niagara Falls.
There are 150 wineries and a lot of restaurants. Our company operates two. It is an incredible industry. It is supported by international travellers and local citizens.
The average small business struggles to break even in our business, and that is being generous, because of how costly it is to be in the business. Small operators tend to do better over the long term as their property values rise. The provincial government exempts them from some taxes provincially but the federal taxes are paid. They will not be cheering any federal exercise tax increases, I can assure you.
Senator Forest: The $6.60 for taxes does not include the tax on your home or your property.
Mr. Peller: No. The excise tax would be on spirit products and beer products. It's true that the 100 per cent VQA produced wines do not have the excise tax, but other wines that are blends will have that tax.
Senator Eaton: Last week we heard from Luke Hartford who said there were 13,000 Canadians involved in the domestic breweries, which supported 163 full-time equivalent jobs across the country.
Do you have figures, Mr. Peller, for the vintners?
Mr. Peller: I know that nationally 14,000 were employed. I think we're up to 17,000 or 18,000 now. Our industry's total impact has grown from $6 billion to $9 billion in the last five or six years. It has been exponential growth.
Senator Eaton: Would you expect this escalating excise tax to have any effect on employment and jobs?
Mr. Peller: I've tried to be honest about that. I know some people think they are small amounts, but they are small amounts based on huge amounts that are already paid.
Expecting us to pass them on in the future is total fantasy. We can only pass on price increases if our import competitors do. As domestic industry in total, we only have a 33 per cent share of Canada. There are far more imported wines sold from California, France and Italy, and they do not pass on price increases. We have absorbed these increases in the past.
My position is that we pay way more than our fair share of tax. There are so many products that need to be taxed. If health is the general issue here, let's face it: obesity is the number one health issue in Canada. There are many products that should be addressed before increasing our sales taxes, which are getting up into the 110 per cent range. That is the basis for my position.
Senator Eaton: Do you have any thoughts on jobs?
Ms. Feit: I would like to say that instead of looking at what might happen to jobs if taxes go up, we have a great example in the United States of what happens when the taxes are low. Denver, Oregon, and a whole area in North Carolina now, has become an intensive hub for microbreweries and brewery tourism.
It's proven that when taxes are low, you can attract new investment and create these hubs. I probably get a call at least every other month from some county or jurisdiction in the United States trying to entice us to come and set up a brewery because it creates employment, local spending and tourism. We've certainly seen that in the winery business, but it's happening now as well on the brewery side.
Senator Eaton: It's not so much about jobs lost. It's the opportunity to create more jobs.
[Translation]
Mr. Tremblay, what do you have to say about it?
Mr. Tremblay: Quebec is a very large territory with many small municipalities. We see that the majority of today's microbreweries are in communities with fewer than 10,000 people. This has a major impact. We talk about jobs, but we also need to talk about involvement in the community. Everyone knows it around the table: wherever there's a brewery, we can solve the world's problems. . . It sparks up the spirit and reinvestment in the community.
Our concern at the moment is that, in with most of these breweries, young people have left the major centres to start up the microbreweries out of passion, and they are not yet earning decent wages.
When we talk about investments and taxes, we always think it will be passed on to consumers, but the reality is that this is the third increase in Quebec over the last five years. I can tell you that most of these taxes have been absorbed by the companies. Right now, the economy is not at its maximum; consumers can no longer pay more for their beer. So the companies absorb the increase in taxes. We are talking about investing in innovation that could inevitably help us to keep up with the rising cost of all the raw materials that we are facing now, but the reality is that all that money that should be used for innovation must be absorbed because of all these taxes that have been increased in recent years. This is becoming worrisome for small breweries in smaller centres.
The Chair: Message received, Mr. Tremblay. Pursuant to the order of reference from the Senate, members of the committee will continue to work toward predictability, accountability and transparency.
[English]
To the witnesses, thank you very much for sharing your views with us. We will continue with our objective in the Senate of Canada of looking at predictability, accountability and transparency.
On this, honourable senators, we will go in camera to look at future business.
(The committee continued in camera.)