Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 21 - Evidence - Morning sitting
ST. JOHN'S, Wednesday, March 5, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-70, to amend the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the Income Tax Act, the Debt Servicing and Reduction Account Act and related Acts, met this day at 9:00 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, our first witnesses today are, from the Canadian Federation of Students -- Newfoundland and Labrador, Mr. Dale Kirby and Mr. Reg Porter and, from the Council of the Students' Union of Memorial University, Mr. Robert Mendoza.
Mr. Dale Kirby, Spokesperson, Canadian Federation of Students of Newfoundland and Labrador: Our organization, collectively, encompasses all of the student organizations, all of the post-secondary students in the province. We have eight members, other unions or associations, the university, and all the colleges and technical institutes within the province. We have put together a brief to outline some of the things that we think will impact students in this province and which will increase the cost of post-secondary education.
The cost of electricity will increase. That will either be a direct cost to students, or the increase will trickle down through landlords increasing rents. This will be particularly disturbing for student parents, because this increase will impact on their children.
Memorial University will incur an extra cost of approximately $750,000 per year as a result of the harmonized sales tax. This is most disturbing because our provincial budget has not yet been released and we expect we will have to dig deeper into our pockets. This will just be tacked on. Our experience has been that any shortfall in the institute's budget results in increased tuition. I would quote from Post-secondary Indicators '95, a publication of the provincial government, the Department of Education and Training. It states:
...the present tuition costs are causing a financial burden on students in Newfoundland and Labrador that is among the highest in the country due to the low per capita income in this province.
We cannot absorb many more tuition increases and still have an accessible, affordable system in this province.
With regards to textbooks, there is confusion as to how the tax will apply. There has been some indication that there will be a point of sale rebate. We are not sure how that will happen and we have been told that the provincial government will take part in that rebate. We are uncertain whether all of the provincial governments that have adopted the HST will do that, or whether it is an option. We have a verbal agreement with the provincial government that students will get a rebate. It appears that we will be paying less for school supplies.
However, there will be an increase in the price of clothing under $100. This, along with the increased cost of electricity will impact on student parents who have to clothe their children.
We reiterate that we cannot absorb another increase to deal with the additional operating costs of our post-secondary institutes.
Mr. Robert Mendoza, Representative, Council of the Students' Union of Memorial University: To elaborate on some of the points Dale made, for the most part this tax will have the effect of decreased costs for Newfoundland students. The cost of supplies such as pencils, paper, binders and so forth will decrease. You will also see a decrease in some of the day-to-day costs students must pay.
However, there will be no change in the cost of books, although there is a lot of confusion about the point of sale rebate. One concern is that some bookstores might include the HST as a tax-inclusive basis, so they will be marked as $1.15, for example, but you will be charged as $1.07. Other book stores will have the option of not including it at all where it is the point of sale rebate and they can mark it $1.07. There is some confusion there.
The increase in the electricity rates will definitely impact on students where they are paying rent because the landlords will increase rents. Air fares and bus fares will increase. In Newfoundland, where we have such a diverse population, students who want to go home for Easter, for mid-term break, or for Christmas, will see an increase in their cost of travel.
As well, partly because of the HST and the harmonization agreements, Newfoundland is considering a 15-per-cent tax on insurance, which could very much impact on students as well. Students are moving a lot of their household belongings into apartments and bringing them into St. John's and do, for the most part, get insurance coverage on those.
The other fear is that the increased costs that the university and post-secondary institutions across the province will incur will be passed on to the students.
Memorial has provided a three-year tuition plan for students. It was provided on the understanding that there would be no drastic changes. I would say that a $.75-million increase in university expenses would be considered to be drastic by the university.
There is also talk of broadening the tax base. Though the HST is being applied at the moment directly to where the GST applies, will the tax base be broadened? Nobody has answered that question.
I question, as well, the motivation behind the introduction of the HST. It seems most of the information I have indicates that it has been targeted to businesses and to the benefit of businesses. They will be able to reduce their expenses because they will not be required to handle two taxes. The question is: Will that cost saving be passed on to consumers?
Will the HST be a reason for businesses to increase the cost of some items? For example, at the moment I am charged 19.84 per cent tax so, for every dollar I spend, I pay $1.19, $1.20 if you round it. Now, I should pay $1.15 with the harmonization of the taxes, but will this be a reason for businesses to charge, let us say $1.20, a nice round number?
It is optional whether the rate at which the HST is charged shall be printed on receipts. The purchaser must do the calculation. It is exactly the same situation as exists currently. There is no obligation to say how much tax was paid on any purchase.
There will be negligible savings to students on low cost items. It may be anywhere from 3 to 4 per cent on some items.
There will be no change to student aid levels to offset any increase that students might incur, such as travel. There is a lot of confusion for the general consumer, especially students, as to how this will affect them, especially as it will apply to books. Many students are still very confused about that.
There is an expectation -- this comes out of a federal government press release -- that businesses will adopt full tax-inclusive pricing to meet the preference of Canadian consumers. It really scares me that the federal government will expect this from businesses but not mandate it. It is a flimflam way of doing it, in my opinion, and the federal government should take a stance and mandate it.
In Newfoundland particularly, any savings that will be realized by consumers will be offset by the new provincial surcharge on recycling.
The HST will now be applied to mail order items. This was a good way for students, as well as other consumers, to save money at times. The HST will be charged on out-of-province sales.
My major fear relates to the decreased funding to the provincial government. The federal subsidy is $348 million over four years, about $87 million a year. The lost revenue is $105 million a year. That is another $18 million a year the provincial government must find. With the current cuts that the provincial government has seen to its revenue base, another $18 million a year will be hard for the provincial government to absorb.
I hate complaining without providing some feasible solutions or some ideas for solutions at least. We should adjust student aid levels to reflect any increased cost due to the HST. Though students will be paying in the long run, because it is just a loan and they will be required to pay that loan off eventually, it will at least allow students to solve cash-flow problems and, on a temporary basis, assist them.
We should provide a tax credit similar to the GST tax credit to low-income families and students to help equalize any increased costs.
I would also suggest that we ensure that some of the equalization payments directed towards the provinces are directed towards educational institutions that will be severely affected by the increases in certain costs such as electricity. Memorial has a $4-million electricity bill, and our fear is that the increase of $.75 million will be offset by student fees, even though they have already seen a 20-per-cent increase last year, they expect 5 per cent this year and another 5 per cent next year.
The Government of Canada must accept its fiscal responsibility to youth and post-secondary education. It must put in place some restrictions on the ability of post-secondary institutions to offset any increases in expenses with tuition increases, which is their standing policy.
Senator Cochrane: I am pleased you decided to come and express your concerns about the harmonized sales tax.
We all know that students are on restricted budgets, but do you suppose that you and other students could possibly cope with this additional expense as a result of the harmonized sales tax?
Mr. Mendoza: They might be able to cope, but the problem is that, at the moment, students do not know how it will be applied. There is much confusion about what it will be applied to, so students just cannot budget for it. From what I understand, it will be cost neutral, but there is still a lot of confusion and the information is just not available.
Senator Cochrane: Do your students have all the information?
Mr. Mendoza: No, not at all. There is a lot of naivete within the student population as to how this will affect them.
Mr. Kirby: You ask if students receiving student aid will be able to cope with the increases as a result of the HST. The loan amount is geared to the present level of cost. The student aid system is inadequate to meet any increase in cost. Last semester we had a tuition increase at Memorial University and student aid was increased. We must have something to offset the effects of the increase.
Senator Cochrane: By how much do you anticipate it will be necessary to adjust student air to cover any increases as a result of the harmonized sales tax?
Mr. Mendoza: We do not have any concrete figures but we had a provincial increase of $16 a week. That increase of $16 a week just barely offset the increased tuition. We are now at the maximum level of $275 a week. Students are scraping by. Any increases to cost must be met by a proportional increase in student aid. A 5-per-cent increase in tuition requires a 5-per-cent increase in student aid, or at least the allocation for tuition in student aid.
If you see an increase in general expenses by 5 or 10 per cent, you must adjust the student aid levels accordingly.I cannot give you a concrete figure because I have not calculated the allowances.
Senator Cochrane: Is $275 the figure for single students?
Mr. Mendoza: It is for every student. That is the maximum. There used to be a difference between student parents and non-parent students. We were at the maximum allowable level for student parents. We increased our non-parent students to the maximum. We can go no higher for any student. The maximum any student can receive is $275 per week. The needs assessment is taken into consideration in distinguishing between married students and non-married students.
Senator Cochrane: You told us that the electricity bill of Memorial University is presently $4 million and if this harmonized sales tax goes forward it will be increased by $.75 million each year and that you expect this increase to be borne by the students.
Mr. Mendoza: It seems to be a policy of the university that they can only recoup any additional expenses by increasing tuition. The only other alternative would be to take the funds out of endowment and scholarship funds.
I have heard it said that they would use the $12-million endowment for student scholarships to offset any other increases. It concerns me that that is an option because that is not the purpose of that fund.
Senator Cochrane: Do you think this will mean a decrease in student enrolment?
Mr. Mendoza: I think you will see a decrease in interest because of the added costs to students, yes.
Senator Losier-Cool: What you are saying is that there is a lack of information. I do not know whether it is your responsibility or the responsibility of the university to keep students informed. Yesterday we saw the Atlantic Report of APEC from which it is clear that Newfoundland will benefit most from the HST. Perhaps you will only benefit when you have completed your studies, and I understand your concern is to be able to complete your education. We know about the high level of debt some students must carry.
I am sure you know about the education tax credit which will increase by 150 per cent from 1996 to 1999. For example, if the credit is $80 per month in 1996, it will be $200 by 1999.
Mr. Kirby: Was that contained in the last federal budget just a couple of weeks ago?
Senator Losier-Cool: Yes.
There is also some provision for a supporting spouse. For students living far from home the amount is $105 a month. Students should these details. Do you take any steps to inform your members?
Mr. Kirby:We hold a general meeting twice a year where all the student leaders from across the province get together. We use list servers and the Internet to disperse information. We also try to transmit information through a regional representative at each institute.
We were recently told that the provincial government will have a student aid information Web page and students may be able to apply for loans on line, through the Internet. We will take that upon ourselves too. Although we are sort of doing the department's job we feel some responsibility. We will do our best to inform our members as to what the benefits of this will be.
Senator Losier-Cool: There is also the youth program which was introduced by Minister Pettigrew. Did he visit Newfoundland? I know he was in New Brunswick to talk to students about that program.
Mr. Kirby: I do not believe he was here, but we are familiar with the program.
Senator Losier-Cool: Someone from his ministry should visit.
Senator Hervieux-Payette: I agree with my colleague that you should certainly get some assistance in providing more detailed information to your members.
It is my understanding that computer software, Internet services, restaurant and cafeteria services will go down from 19.84 to 15 per cent which is significant. I realize, of course that the equipment required for certain disciplines, such as graphic arts and dentistry are very expensive, but a diminution of 4.8 is significant if taken in conjunction with the new youth program introduced by Mr. Pettigrew which will amount to $350 million.
Do you prefer help by way of having access to internship programs or job creation programs during the summer, or do you prefer assistance with loans and bursaries? Is it a combination of the two?
Mr. Kirby: What concerns us mainly about the whole youth job creation program is the quality of the employment students are getting. We were lobbying all this year for a work-study program which would be part of the student aid program and you would be paired with your professor instructor and get some meaningful employment, something directly related to your field of study. Then the student would get that part-time job experience or full-time during the summer at the educational institution. It would be a meaningful experience. The nature of the employment that is being attained during the summer could be any number of things. If we get a part-time job or summer job we are lucky because there are so many other people in this province particularly young people, looking for work.
Newfoundland has the highest rate of unemployment among young women in the country. Last year I believe again we had the highest rate of youth unemployment for summer programs. We are concerned about the availability of jobs as opposed to the quality, although we would like to have the quality. At this point, anything will do.
Senator Rompkey: The researchers have also reminded me that adult clothing will come down as well.
I wanted to explore a little further what you just said about the trade-off between tuition fees and work and to indicate that the co-op program is very much alive at Memorial, especially in engineering and business. As a matter of fact there are hundreds of Memorial students in Ottawa right now working for Nortel and the Department of Transport. As you know, that is a combination of on-the-job and academic studies.
Is that the sort of program you would like to see being expanded? That has been very successful for Memorial.
Mr. Mendoza: Expansion of those programs would be superb. A problem we have identified is the level of salary students in those programs are paid. Eighty per cent of it goes against your student aid. If you make $3,000 in the summer, enough to survive on, pay all your bills, pay your expenses, pay your rent, heat and light, you are expected to put $2 400 of that towards your education.
The student aid policy, which is a federal policy, allocates $600 for a student to survive on during the summer, and $2,400 is deducted from your student aid allocation in September. It serves as a disincentive for students to go out and find summer employment. Students do not go out to find summer employment to be able to pay their September tuition, they want to work for the experience it gives them.
I knew students from last year who, under the FSSEP, Federal Summer Student Experience Program, mowed lawns. They got paid to do that. How does that relate to a bachelor of science degree or to a B.A.? It does not. These jobs are not targeted to the students' fields of study. That follows Dale's comment that students are looking for quality in their employment. I am all for quality co-op programs, but not those that do not provide employment which is a learning experience.
Senator Rompkey: Did the measures in the last budget not address the point you are making?
Mr. Mendoza: It did not address it. Some of the measures were almost a catch-up rather than a real benefit. I am referring to some of the tax incentives and the increase in the education allowance and so forth. They may offset part of the increases in tuition over the past four years, or the increases in expenses over the past four years. This is the first increase we have seen in a good few years.
Senator Rompkey: That is something we might want to explore as a committee, Mr. Chairman.
The Chairman: Thank you very much, gentlemen.
Our next of witnesses are from Hospitality Newfoundland and Labrador; the St. John's Board of Trade; the Federation of Municipalities; and the Newfoundland and Labrador Crafts Development Association.
Mr. Sandy Gibbons, Senior Vice-President, St. John's Board of Trade: With me to today is Mr. Gary Reardon, the board's director of federal policy, and Ms Nancy Healy, assistant general manager of this board of trade.
The St. John's Board of Trade is the largest business organization in the province, representing over 600 companies across a variety of sectors which employ over 20,000 individuals. The St. John's Board of Trade has been lobbying both the federal and provincial governments for several years to harmonize the goods and services tax with the provincial sales tax. The board is pleased that businesses will only need to deal with a single level of government for remittance. This will result in not only reduced administrative costs for the Province of Newfoundland and Labrador, but it will also cut down on the paper burden on all businesses.
The board is also very pleased with the system of input tax credits, which will eliminate much of the sales tax which business must remit. The board is also pleased with the lower rate of taxes, and we believe this will stimulate the economy. The board shares the concern of retailers selling big ticket items that the lag time before the implementation, January 1, 1997 to March 31, 1997, may result in depressed retail sales. We hope that sales will rebound after April 1 and that businesses, many of whom have indicated that they will absorb a 5-per-cent price cut from January 1 to April 1997, will survive the transition periods.
The St. John's Board of Trade continues to support the harmonization of the GST and the PST. Harmonization is good for business, and it will create savings for business that go directly to the bottom line. However, we continue to have several concerns which I would like to bring to the committee's attention. They are tax-included pricing, the effect of HST on private contracts with municipalities, universities, schools and hospitals, the effect of HST on new home construction and renovation markets. I will deal with each of these individually.
The first concern is tax-included pricing. At a time when governments are claiming to be simplifying life for small businesses, tax-included pricing directly contradicts their stated objectives. There is no substantive business reason to go this route. We would prefer that this initiative be implemented on a voluntary basis until the HST is introduced nationwide, harmonizing all provincial sales taxes with the GST.
Business in one region should not have tax-included pricing imposed on them by government. If consumers truly want tax-included pricing under a voluntary system, they will shop in places that will have it and not shop in places which do not have tax-included pricing.
Imposing such a tax system on such a small geographical and economic area presents many challenges that would not need to be addressed if harmonization were being implemented nationally.
Tax-included pricing should be delayed as a mandatory provision until such a time as the inefficiencies and costs associated with it are removed through national implementation. The board does not believe that the consumer wants tax-included pricing if it means higher prices. If tax-included pricing were not part of the proposed HST, the cost of business would be minimal and consumers would benefit from the reduction of the lower harmonization rates. It is unnecessary for 2 million people in three of the smallest provinces in Canada to be out of sync with the rest of the country. There are no negative economic consequences to anyone by removing this proposed provision.
The implementation of this pricing policy will require a significant change to companies' accounting, pricing and point-of-sale systems. The cost of re-ticketing goods, especially those they receive from national distributors already pre-priced, together with the cost of retooling cash registers and computer inventory systems, will cost retailers more than the savings they will get from any input tax credits. Although the board realizes certain businesses will be impacted more than others, if businesses are faced with increased costs, who will bear the brunt? The consumer.
The boards suggests that the tax-included pricing initiative be introduced on a voluntary basis until such a time as the HST is implemented nationally. I encourage you to adopt this voluntary position instead of dictating to business tax-included pricing.
The second concern is the effect of HST on private contracts with municipalities, universities, schools and hospitals. The MUSH sector are extensions of provincial government activity. The changes to provincial sales taxes levied against this sector are primarily a change in how the provincial government finances public policy activities in these areas by taxing back public moneys. This sector pays GST but some receive a rebate of the tax paid.
We understand that the GST rebate will not be extended to the provincial value-added tax, PVAT, portion of this new blended tax. The current GST rebates for this sector range from 57.14 to 83 per cent, resulting in effective tax rates ranging from 3 per cent to 1.2 per cent. The extension of the PST without rebates will increase the effective tax rates to 11 per cent from 9.2 per cent. If the GST rebate structure were utilized, the effective tax rates would range from 6.4 per cent to 2.6 per cent.
The board would like the Government of Newfoundland to grant this sector an exemption from the PVAT. If this does not happen, municipality property taxes may increase in order to offset these additional taxes paid to the provincial government.
Harmonization will also have a negative impact on decisions to contract out work in the MUSH sector due to the expansion of the tax base. Existing contracts may not be renewed, adversely affecting those businesses involved with the contracts; and new contracts may not be tendered, reducing the opportunities for business in this sector.
The labour costs associated with the provision of goods and services will incur an additional 8-per-cent tax if contracted out, but not if the work is done internally. These impacts are contrary to the recent provincial government direction toward public-private partnering. Extension of the PST to the MUSH sector restructures the public financing of this sector but, consequently, adversely affects business through higher municipal taxes and lost opportunities. Consideration should be given to extending the GST rebate structure that is currently in place for this sector to the new PVAT in order to minimize the negative impacts or a granting an exemption from the PST portion of the tax.
The third concern relates to the home construction and renovation sector. Under HST, the price of a newly constructed home built by registered contractors is expected to increase by up to 5 per cent. Input tax credits claimed by the builder will not be enough to reduce the costs of a new house, as proposed by government. As well, the board of trade fears a continuation of the massive underground economy in home construction and renovations. The underground economy has thrived in this region, and the board and its members in the construction field do not believe that the availability of input tax credits would be enough to register the illegitimate builders when they can continue to evade Revenue Canada, payroll taxes, Workers' Compensation fees and other professional development expenses.
Professional contractors pay municipal, provincial, federal taxes and fees. They invest their time and money in their own skill developments and provide consumers with third-party liability coverage through the Atlantic Home Warranty Programs. The years following the implementation of the GST resulted in fewer homes being built over a five-year period, a tax-induced increase in the price of new houses, and a decrease in the percentage of professionally built homes related to owner- and underground-builder built.
If the results are the same as the results of the introduction of GST, which we have no reason to doubt, we can expect the loss of jobs within the home construction and renovation industry, and a loss of revenue to government. The board of trade is requesting HST rebate for residential construction.
If history repeats itself, the loss of revenue resulting from a decline in starts and a reduction in the ratio of contractor- owner-built homes and the increase in work being undertaken by underground renovators will cause a significant reduction in tax, while encouraging consumers to avoid dealing with legitimate contractors.
In conclusion, the St. John's Board of Trade remains firmly committed in our support of blending the provincial sales tax with the goods and services tax. We believe that a simplified, streamlined tax system, coupled with a lower tax rate and full input tax credits can ease the paper burden on businesses, free up resources and cut costs. Although we are supportive of the tax harmonization, the board would like to ensure that the implementation is handled in a manner that brings no economic harm to the province's economy and, at the same time, maximizes the economic growth and potential of the province.
Therefore, tax-included pricing should be a voluntary option. A rebate of the portion of the PST paid out to municipalities, universities and hospitals should be introduced. Finally, a rebate for new home buyers and the renovation sector should be included.
Ms Anne Manuel, Executive Director, Newfoundland and Labrador Crafts Development Association: I would begin by describing briefly to you the nature of the craft industry of Newfoundland and Labrador and the people in this province who make and sell hand-crafted products.
The craft industry of the province employs between 1,500 and 2,000 people in either a full-time or significant part-time capacity. Crafts people live and work in all parts of the province, both urban and rural; many work alone, some have a small number of employees. The materials and equipment they use are purchased from many parts of the world, but primarily come to them from central Canada. Their work is sold across the province and across the country, and some have begun to reach export markets outside Canada.
The craft industry has been highly regarded in this province and is one of 11 sectors identified as having strong potential for growth and the ability to contribute to the provincial economy. With strong support from both levels of government, the craft industry makes a substantial contribution to tourism and cultural sectors. To encourage the growth of the industry and increase employment in this sector, in 1985 the provincial government implemented a retail sales tax exemption for most hand-crafted products. The craft industry has responded well to this support. A conservative estimate of the value of the industry to the crafts people of Newfoundland and Labrador is $15 million. That is actually not an estimate, that is a value that we can count, but it is estimated that the figure is probably as high as $20 million.
The proposed new harmonized sales tax poses a severe danger to the well-being of this industry. It is difficult to bring you a clear message of the damage that the harmonized sales tax is likely to cause. Because the industry is so diverse, different parts of the industry will be affected in different ways, all of them negatively, and all of them combining to threaten what we have worked so hard to build.
Most craft businesses in this province are very small. Eighty-five per cent are below the $30,000 threshold for small traders and will not be required to charge the HST to customers. The remaining 15 per cent, who will be required to charge the tax, are the larger companies, those who have employees and those who have national and international markets. The natural inclination will be for craft buyers to purchase those products which do not carry the HST, thus giving the small trader a significant advantage in the marketplace.
We are a development association and we cannot argue with any kind of policy that will provide assistance and support to that small, growing business sector, but we must also recognize that it is the larger business that is the engine that drives the industry, that provides the employment, that pays the people who pay the income taxes, and that makes a strong contribution to the provincial economy. We are caught in a no-win situation. I cannot think of a solution to a harmonized sales tax that will both counter the bad effects of the provincial sales tax exemption that we had before, and provide any kind of a fair basis that will allow both the small trader and the larger company to continue.
In addition, the $30,000 threshold will be perceived as a top ceiling for those smaller businesses. As growth beyond this point will automatically mean a price increase of 15 per cent to the retail customer, many will see this as an encouragement to keep their businesses small.
Despite these points, small traders will also experience setbacks with the implementation of the new tax. If they choose not to register, they will be ineligible for input tax credits, meaning that their costs of manufacturing and doing business will rise by 8 per cent. This amount must be then either passed along to the customer, thus increasing prices and likely lowering sales, or absorbed by the craftsperson, which is difficult as profit margins are often very close to that 8 per cent.
We are also quite concerned about the availability of materials and equipment to crafts people in this province. Most of the materials used by our crafts people are not available within the region and must come from outside, and that is usually through suppliers in Central Canada. Already there has been one highly publicized case of a critical supplier to woodworkers in the province who has expressed the intention of no longer selling in this region. That might result in other companies following that lead. Crafts people will then have to look outside the country for supplies. This particular company supplies equipment that is not readily available anywhere else, and certainly not available within the region.
Senator Angus: Why would it not be available?
Ms Manuel: The company has said that the requirement for tax-included pricing in their catalogues is something that they are unable to cope with, nor are they able to cope with having their staff at the end of the telephone be able to quote the tax-included pricing. That is the problem.
I have left written copies of the brief, so I will not go into all the other details. The major problem the craft industry has, is that, while the federal government says that this new tax will be fair and equitable to the craft industry, it is pitting one part against the other, and I do not see how that can possibly be fair.
In conclusion, I would like to repeat our view that the proposed new harmonized sales tax is a strong disincentive to growth in the provincial craft industry. Not only does it discourage small businesses from growing, it also penalizes those who have worked hard and made the sacrifices necessary to build successful businesses. Because of the previous exemption from retail sales tax, works of craft will fall into the group of products that will suffer significant price increases when the HST is implemented. While the federal government claims that the new tax is equitable, this is certainly not the case in the craft industry. The nature of tax regulations, combined with the unique character of the craft industry, means that one segment of the industry will have a direct advantage over the other in the open marketplace. This is surely unfair treatment and a circumstance that can only damage what is now a strong and healthy industry.
I hope that you understand the difficult future which our industry faces in light of this new legislation.
Mr. Randy Simms, Vice-President, Federation of Municipalities: Ladies and gentleman, on behalf of the Federation of Municipalities, I would thank you for giving us the opportunity to make a presentation this morning. We believe that any time legislation is being considered by any level of government, including the local level, that an avenue that provides for some sober second thought or review is always welcome.
For those of you who are not familiar with our area, the Federation of Municipalities was formed in 1951, within 24 months of our becoming part of this great Canadian experiment and experience. Since that time, we have been growing continuously to the point where we now represent about 80 per cent of the population of this province in over 200 incorporated communities.
We have some concerns with the implementation of the HST but, as consumers, we welcome the concept of reduced taxes.
Basically, we are arguing the point with our provincial government, and we would argue the point with this committee, that it is inappropriate that different or various levels of government tax each other. The municipalities of the province find themselves, therefore, today paying taxes to the province and to the federal government. We have proposed to our province, and we would propose to you, that government at all levels are providing services to the people and that another level of government taxing the lower level or the junior level is simply inappropriate. Our mandate obviously as a federation is to ensure that no greater tax burden than currently being experienced by municipalities results from the implementation of the HST.
The evidence we have gathered up to this point indicates the opposite of that. Many of our larger municipalities in particular, those municipalities undertaking large capital projects for example, will find themselves negatively impacted as a result of the implementation of this tax.
The broadening base of the tax impacts on just about every professional service that many of us would employ; that being hiring engineers, lawyers, auditors and, of course, entering into any kind of public-private partnering program. Our smaller municipalities, needless to say, which do not have a tremendous number of services provided in-house and which do a lot of contracting out, will find that they are even more negatively impacted than those larger towns and cities that are more able to absorb some of the costs associated with this.
I represent, as a deputy mayor, the City of Mount Pearl. We have a population of 26,288 and four on the way by June. We are always conscious of our population because we live in the shadow of St. John's. We will see a negative impact as a result of the implementation of the HST of somewhere around $135,000 in our budget in the next year alone, and that is primarily as a result of the broadening base of the tax. However, we also purchase services, both from the private sector and from other local governments. In particular, we purchase public transit services from the City of St. John's at a cost of about a $0.5 million right now in subsidy, plus the costs that our taxpayers actually put into the till when they use the service. As result of not being a part of a transportation commission, and as a result of being a customer, we will be required to pay the new HST on this service, something that we were not required to do before.
On the question that we brought up originally, which is the one that I believe your organization can bring some influence to bear on with our province, hopefully you will agree with our recommendation at the end of day. We have small communities that have to purchase major items like fire trucks. The local volunteer firemen and the "firette" group, and the local boy scouts and others in the community will all get together and hold everything from a bake sale to a local dance to a carnival event, and they will raise all of the money necessary to purchase a fire truck, only to find, at the end, of the day that they also must cut a major cheque to pay for taxes, both to the province and to the federal government.
Under the new HST, the GST for municipalities for Newfoundland and Labrador has not changed. We are still receiving our 57.14-per-cent rebate on the GST portion of the HST. While the federal government would like to be able to say that they have replaced the situation with a fairer tax, we will find, in the majority of cases, that the tax burden on municipalities has gone up and that the GST situation, as it relates to rebate, has not been changed at all.
We share some of the concerns outlined by the St. John's Board of Trade this morning. I was delighted to see in their report that they recognized the negative impact and obstacle that this tax, as it is currently formulated, will represent for the future development of public-private partnering processes.
Back in October of 1995, the provincial government, under then Premier Clyde Wells, encouraged a major initiative in the private-public partnering field and brought forward labour, municipal government, hospital, as well as the private sector, into a two-day conference to deal primarily with new means of providing for public-private partnering programs. What came out of that was supposed to be a committee that would study it further, put recommendations to government to make it possible, and to provide for governments a transparent system that would allow us to do work outside of the Public Tendering Act itself. This tax flies in the face of any proposed initiatives along that line.
Many of our smaller communities that currently use the services of a private contractor for everything from plowing the local parking lot at the arena, to picking up their garbage once a week, now find themselves paying an additional level of tax.
In the pre-budget submission made to the provincial government last month, this organization asked the provincial Minister of Finance to recognize the basic principle that levels of government should not tax each other, and recognize that, while we are in a serious financial situation in this province, it is very important that the principle at least be enshrined somewhere as we hopefully make progress on the road to economic recovery.
We have asked that all such taxes be forgiven in some form, either through rebate or not charged at all on any capital purchases being made by municipal governments. We were not talking about, say, paper; but we were talking about, say, a printer or a fax machine. We have asked that that principle be enshrined.
We would ask this committee to consider that, and to take into account, in particular, the impact this will have on the ability of private contractors to enter into arrangements with municipal governments to provide local services. We feel that some changes must be made in those areas to continue to encourage and foster that kind of partnering relationship. Where local governments do business with each other, for example, where the City of Mount Pearl is providing an animal control service for a neighbouring community, to be required to charge, if you would, a penalty for providing that service in the form of this tax, we feel is inappropriate.
Ms Lorry Churchill, Policy and Projects Coordinator, Hospitality Newfoundland and Labrador: We appreciate this opportunity to make a presentation to this committee.
Hospitality Newfoundland and Labrador is the Tourism Industry Association, a professional association representing individuals and businesses involved both directly and indirectly in all sectors of the tourism-hospitality industry of Newfoundland and Labrador.
On behalf of the tourism-hospitality industry I present to you today the industry's views on the proposed harmonized sales tax.
The idea of a blended provincial and federal tax, or HST, was first introduced in the spring of 1996. While the notion has many benefits for the average consumer in terms of a reduction in tax paid on many goods, requirements of a blended tax are causing many problems for a number of businesses in our industry.
Administrative costs for those in the packaged tour business, for example, will be atrocious as a result of the HST. Tour packagers commonly sell packages to and from their province of business as well as to and from other countries and provinces and many combinations thereof. As well, these tours are made up of many components, such as airline travel, car rentals, accommodations, ground tours, and so on. All clients in a tour do not necessarily originate from the same location.
For example, a tour group to Newfoundland may be made up of international travellers and individuals from both HST participating and non-HST participating provinces. The tour might consist of air travel, accommodations and ground tours. HST would be charged on all components to individuals from HST participating provinces. However, GST would be charged only on the air travel component for those from non-HST participating provinces, because the origin of the flight would not be an HST participating province. However, HST would be applicable on the ground tour and accommodations because these would be consumed in an HST participating province.
The requirement to charge HST on some package tours, GST on others, HST on one component and not on another, and so on, will be an administrative nightmare for business-owners, their personnel, and for travel agents trying to book clients. How will computer reservations systems be adjusted to deal with the large number of scenarios, and who will train staff and travel agents on the administration and interpretation of the HST? Who will endure these costs?
We request that government provide assistance to tour packagers and other businesses to help them sort out complexities in the HST and provide training in interpretation of the HST rules.
As to direct effects on tour packagers and outfitters, the requirement to charge HST on packages which have been advertised, and in some cases booked, using the present tax structure will wreak havoc for tour packagers and outfitters. Many such operators already have brochures and other print materials in the marketplace reflecting the existing tax structure. As well, many bookings were made months ago based on the current tax structure.
In the past, outfitting packages, for example, were exempt from the 12-per-cent RST and pricing reflected that. Additionally, international clients were eligible to obtain a rebate on half of the 7-per-cent GST. Often the client was given this credit directly and prices were compiled with consideration made for the 3.5-per-cent credit, the remaining 3.5 per cent being remitted to Revenue Canada.
In many cases, literature for 1997 has been in the marketplace for 12 months or more. As well, bookings have been made, deposits received, and others are pending, all based on the 12-per-cent exemption. If required to submit the full 15-per-cent HST effective April 1, packagers who have booked all-inclusive packages, based on previous tax requirements, will have to absorb the discrepancy created by this new tax structure.
We recommend that, in the case of advanced bookings made prior to the introduction of the HST on April 1, 1997, the tax paid should reflect the tax structure in effect at the time of booking.
Another major issue for those in the packaged tour business is the competitive disadvantage created by the requirement for tax-inclusive pricing. Because Newfoundland and Labrador, along with Nova Scotia and New Brunswick, are required to include tax in advertised package prices, the price of a packaged tour in Newfoundland and Labrador or one of the other HST participating provinces will be perceived by the consumer to be more expensive. Although this is not the case, many consumers only look at the advertised price and do not consider taxes when comparing prices. The fact that the tax is included in one package and not another may not be instantly obvious to the comparison shopper when choosing a vacation destination.
We recommend, therefore, that the requirement of tax-inclusive pricing be either totally eliminated or implemented on a voluntary basis at least until the HST is implemented nationwide.
Tax-inclusive pricing will also cause a competitive disadvantage for the restaurant and food services industry. Despite a decrease in the overall tax paid by consumers for a meal in a restaurant, tax-inclusive pricing makes the advertised price of a restaurant meal increase by 15 per cent, while the advertised price of a similar prepared meal available in a grocery store appears to remain the same. Tax-included pricing, therefore, will make the restaurant product appear less competitive and lead to a further decrease in market share.
We again recommend that the requirement of tax-inclusive pricing be either totally eliminated or implemented on a voluntary basis.
HST ignores the importance of price points. The requirement to include the 15-per-cent HST in the advertised price will eliminate price points which are instrumental in attracting customers. This is especially true in food service business and the packaged tour businesses. The requirement for tax inclusion will prevent the use of common price points such as "$4.99" in the restaurant industry or "$1,099.00" in the tour package business which are extremely effective for competitive pricing.
Again we recommend that the requirement of tax-inclusive pricing be either totally eliminated or implemented on a voluntary basis so the effectiveness of price points is not lost.
National chains face the prospect of very expensive modifications to their marketing strategies in order to deal with the HST in participating provinces. Separate promotional campaigns will have to be developed for those provinces which have tax-inclusive pricing, resulting in extra costs for separate media ads, product packaging and in-store advertising. As well, specialty channels and national publications do not have the ability to differentiate their advertising on a regional basis. Rather than dilute their marketing investment in other regions of the country, some national chains will likely stop advertising or offering certain products or deals in the HST participating provinces.
Once again, we recommend that the requirement of tax-inclusive pricing be eliminated until the HST is implemented nationwide.
In conclusion, I would thank the committee, on behalf of the tourism-hospitality industry in this province, for the opportunity to present our views today on the harmonized sales tax. I hope this presentation has shed some light on the obstacles which will be encountered in this industry with the introduction of the proposed tax harmonization.
Senator Rompkey: I want to welcome our visitors and thank them for coming. I believe the St. John's Board of Trade is the oldest of its kind in North America. Sir Humphrey Gilbert was the first president of the Newfoundland Board of Trade. He was the half-brother of Sir Walter Raleigh, as you know, so it has a distinguished history.
Mr. Gibbons: Originally it was the Newfoundland Board of Trade, because the greatest business community was generally in the St. John's region.
Senator Rompkey: I understand that you support the HST, but that you have concerns. I would like to deal with your concerns, first of all, with the tax-included pricing. The two sides of the coin, of course, are that businesses claim this is a difficulty for them, that it will create confusion and it will be onerous for them. On the other hand, the polls show that people want tax-inclusive pricing.
As politicians, how do we strike a balance between what the people want and the difficulties that businesses may encounter. In New Brunswick, the minister dealt with that by using the word "flexibility", and I am wondering if you had some communication with government which would indicate that that might be a middle road -- using some "flexibility" in the implementation, whatever that means.
Mr. Gibbons: I am not sure of their terminology. I guess our flexibility would mean that retailers should have the opportunity to choose whether they want to include it or not. That is what we would call "flexibility". Our main problem is that most of our buyers, even our small buyers, buy from national companies that already have price tickets. As an example, clothing retailers bring in clothing which is pre-priced. They will have to re-tag their items, which is a substantial cost to business, and in the end the cost will be borne by the consumer.
Senator Rompkey: On the question of home construction and the increase in the underground economy, I would have thought that the lowering of taxes would have had a beneficial effect, or let us say a negative effect on the underground economy, rather than the other way around.
Would you comment on the APEC study with regard to construction? APEC says that construction, more than any other sector, is expected to see significant declines in its operating costs, the cost of building in Atlantic Canada is likely to be reduced, particularly non-residential building. I understand that there could be a difference between the two. This will improve the competitiveness of investments in property, plant and equipment in the three harmonizing provinces. Even a small shift, APEC says, in the investment climate, is likely to produce dividends in the form of jobs and improved productivity. Would you comment on that?
Mr. Gary Reardon, Division of Federal Policy, St. John's Board of Trade: I would certainly agree on the commercial side, where businesses have an input tax credit, that there will be a reduced cost of commercial construction. Our concern is related more to the housing or residential sector.
I am a former national president of the Canadian Home Builders' Association. I worked with government to negotiate GST and a rebate as it related to housing. The concern we had with the home sector is that home buyers are the end consumers and they pay the final tax.
Today, most of the labour, the land, overheads, mark-ups or soft costs are not subject to provincial sales tax. Under the new, harmonized tax all these components will be taxed. As a consequence, the cost of a house will go up anywhere from 2.5 to 4 per cent.
When we negotiated years ago with the federal government, both Revenue and Finance, there was a recognition that there would have been increased costs as a consequences of the implementation of the GST. We negotiated a rebate, albeit not as much as we wanted, but at least it was reasonable; it was 2.5 per cent, effectively, versus the 4-per-cent real increase in cost.
Our concern is that there is no rebate today, our provincial government does not seem interested in discussing the potential for rebate, and they do not appreciate that this will not, necessarily, be able to be passed on to the consumer. The consumer has a choice: he can buy a new home today or he can buy a resale home. The vast majority of sales in this country are resale homes. Those resale homes automatically have a competitive advantage against new homes because the new homes have this increased cost burden.
I can give you a very practical example. On the April 1, a house that I have advertised today for, say, $100,000 will go up to about $103,000. The house has not gone up in value, it has just gone up in price, and the consumer has a choice: He can buy the house just down the street for $100,000 or pay this extra $3,000. We are at a disadvantage.
Your other question concerned the underground economy. The underground economy is thriving in this province and in the Atlantic region. I do business in Nova Scotia as well and I am asked, daily, by consumers what the price is without GST or without taxes. I am a legitimate businessman. We issued 40 T4 slips last year. I cannot compete against the fellow operating a pickup who does not have to charge those taxes. He does not pay payroll taxes, he does not pay workers' compensation, he does not pay the other taxes that I have to pay, and it certainly puts us at a disadvantage.
I can only imagine what the situation will be when the consumer refuses to pay this 15 per cent. He is going to seek out the entrepreneur, the small businessman, who does not have to charge that.
Senator Rompkey: I was interested in the distinction between small business and large business in crafts. I did not know there were large businesses in crafts and I wonder who they are. Would Grenville be a large business, for example?
Ms Manuel: Yes. There are probably 20 or 30 in the province, like Grenville. There are houses in Stephenville who have a retail store and a wholesale line. There is also Broadside Weaving.
Senator Rompkey: Would Broadside Weaving be large or small?
Ms Manuel: They would be considered large. There is also Nonia, the cod-jigger downtown in St. John's.
Senator Rompkey: I see. I had not really thought of them as large business.
Ms Manuel: In our terms they are large businesses. In your terms they are probably very small.
Senator Rompkey: There is a benefit for smaller companies. That situation may resolve itself within the industry. This is an important industry for the province, there is no question about that. Are there any large businesses in Labrador?
Ms Manuel: There are a couple of retail operations that would certainly be over the $30,000 limit, yes, and we have actually started to do a lot of work in Labrador in the last few months, so I expect that there will be more.
Senator Rompkey: Do you have any suggestions?
Ms Manuel: As a representative of both groups, I cannot say we should not have the $30,000 threshold so that both the larger and the smaller will compete equally. The only possible solution is a similar exemption that craft has experienced in the last 10 years right across the whole region.
In 1985, the provincial government exempted the sale of most hand-crafted products from retail sales tax and, since that time, the size of the industry has approximately tripled. We have responded well to that encouragement. If that were done across the region and the craft industries in all three provinces were to respond in the same way, then I would think that the net return to the government would probably be a lot more in income taxes and payroll taxes.
Senator Rompkey: Might the raising of the threshold have a long-term positive effect?
Ms Manuel: I do not know. At this point, if there is a $30,000 threshold, the smaller businesses is will keep sales at $29,000 so that they do not have to charge the extra tax. They realize that, if they charge that extra tax they will have to work that much harder and spend more money to try to market their products, because they will automatically have a price disadvantage compared to those who stay under $29,000.
Senator Rompkey: I would be interested in hearing some recommendations from the craft industries, although our time today is limited.
When we were in New Brunswick, we heard positive comments from the tour operators. Indeed, the national tourism body was quite keen on the effects this would have on the tourism industry. Ms Debra Ward, the president of the Tourism Industry Association of Canada told us that the harmonized region will have a huge advantage over the non-harmonized regions in this particular area, where they will be able to give a 15-per-cent rebate to travellers who visit Nova Scotia, New Brunswick and Newfoundland and Labrador.
Will there be an advantage to you from the harmonized sales tax? I understand what you are saying about tax-inclusive pricing. This is not a new issue for us; we have heard that across the board. I understand the difficulty with tour packages and advance bookings because of the national situation. However, with regard to the region, with regard to this province and the effect of the HST on the tourism industry, which is a growth industry for us as it is for New Brunswick, will this not have an overall beneficial effect?
Ms Churchill: Yes, for the industry as a whole there will be many benefits. In this brief we have just chosen to highlight a couple of the sectors where the HST poses particularly serious and costly problems. For example, the tour packagers and the restaurant industry are concerned that there may be a perception that costs are higher in HST participating provinces. When advertising new client tour packages, the prices appear to be higher. That is our main concern.
Senator Angus: With respect to the tax-included pricing, you said, I thought very clearly, that consumers do not want it, whereas Senator Rompkey made reference to a mysterious poll which found that consumers do want it. I would like you to comment on that. As well, if you know about this poll, did they ask the right questions? Can we put matters in perspective?
Mr. Gibbons: Our comment "consumers will not like it" is based on the fact that consumers will pay a higher price for the tax-included pricing because businesses will have to charge extra costs for their accounting and all the way down the line. We are saying that, if consumers knew they would have to pay higher prices, they would not want it included.
We see no legitimate reason why it should be included, other than that it continues to be a hidden tax. Government can hide the tax and increase costs, whereas, if it is up front with the consumer, the consumer knows where the costs are coming from.
Senator Angus: Is it your view, sir, that there are benefits in having a harmonized sales tax? I think everybody, including us Conservatives, has always said that, to have a national, harmonized sales tax on a consistent basis across the board would be beneficial. We support that concept.
Would the removal of the requirement for tax-in pricing have a mitigating effect? If it could be done away it would not detract from the benefits of the HST.
Mr. Gibbons: Obviously, this is a legal question. We see no real benefit to including the pricing. There seems to be no reason whatsoever to include it. We hear about the poll which indicated that consumers want it, but we are saying that, if consumers knew there was going to be a higher price for doing that, I do not think they would want it. We have not conducted a poll with that specific question.
Senator Angus: Senator Kirby tabled this poll in the Senate the other day. From my reading of it, it is clear that they did not ask the kind of question which would include the consequences of introducing this measure.
You suggested two possible ways to deal with this, Mr. Gibbons. One was to simply remove the TIP requirement and the other was a delay in the implementation. Could you elaborate on that second suggestion?
Mr. Gibbons: The suggestion to do with a delay in implementation is because we will have two systems of taxation in this country. The Atlantic region will have this harmonization, and the rest of the country will continue with its system.
We are saying that we have no problem with a national program. However, right now, because we have a separate regional harmonization tax system, it will have a negative effect because we will have to re-tool accounting equipment and so on. Some of the witnesses for the tourism industry share those concerns.
Senator Angus: When you talk of the delay in implementation, did you have in mind something like, for example, that insofar as TIP is concerned, these provisions shall not apply until all other provinces are into the HST?
Mr. Gibbons: Yes.
Senator Angus: Would that be your preferred solution?
Mr. Gibbons: We have two suggestions. One is: Hold it until it is implemented nationally. The other is that individual retailers should have a choice of either including or not including, depending on what benefit it is to their businesses.
Senator Angus: In other words, it would be voluntary?
Mr. Gibbons: Yes.
Senator Angus: You mentioned two systems across the country. Actually, I suppose you would agree with me that there are, in fact, three. Quebec has kind of a modified version, without tax-included pricing. Are you aware of that?
Mr. Gibbons: No, I am not fully aware of the Quebec situation.
Senator Rompkey: To set the record straight, the Ekos study did ask that question, and a slight majority, 52 per cent, said that, even if it means an extra cost to business, they would want the total price displayed.
Senator Angus: Ms Manuel, am I correct that the special tools for the craft industry would not be available, because the suppliers would not want to comply with the elements that result from the tax-included pricing? Would that problem be eliminated if there were no TIP?
Ms Manuel: As far as I understand the problems of that particular company, yes, I think so.
Senator Angus: Is it only the higher costs that would drive them away?
Ms Manuel: No, the problem is not the cost so much, as it is the procedure that is required in this particular instance. This is the only company that I have heard of so far that has taken that position. Perhaps there are 5,000 other companies that will not have a problem with it.
Senator Angus: Mr. Gibbons, you suggested two areas where rebates could alleviate the problems your members might run into. Could you explain how, in your view, these rebates would work?
Mr. Gibbons: This is related to the municipalities, universities, schools and the hospital sector.
Senator Angus: Could you quantify how much that would cost, if you do know?
Mr. Gibbons: We have some numbers which indicate that, if there were a GST-type rebate, the effective tax rates would range from 6.4 per cent to 2.6 per cent. That is in our brief. There would be quite a difference if there were rebates given to the municipalities, universities, schools and the hospitals sector.
Senator Angus: Do you have some figures for the new home buyers?
Mr. Gibbons: In respect of new home buyers, we say it would be up to 5 per cent and Gary says it would be from 2.4 to 4 per cent. Home builders were saying it would be up to 5 per cent.
Senator Angus: Have you made representations to your local finance department here in the Newfoundland government on these issues?
Mr. Gibbons: Yes.
Senator Angus: Before the legislation was introduced?
Mr. Gibbons: Unfortunately, there was not a lot of consultation.
Senator Angus: It was just dropped down on you all of a sudden?
Mr. Gibbons: Yes.
Senator Angus: Did they give you any explanation for this when you went and complained?
Mr. Gibbons: I think it came on fairly quickly. Last summer negotiations were ongoing between the provincial and federal governments. However, we were not consulted. Of course, the concerns only come out as you get into the detail in any event.
Senator Comeau: It has been a few years since I have been involved in sales but, Mr. Gibbons, you might be able to help me. My understanding is that businesses over the $30,000 threshold have to collect the GST at the present time, and then they get it back when they sell the goods; is that correct? With the new 15-per-cent tax, they will now have to collect 15 per cent rather than 7 per cent. They will then have to pay 15 per cent up front, and then they will collect their inputs once the product is sold. Do I have that correct?
Mr. Gibbons: Yes.
Senator Comeau: I noted that you did not raise this as one of the concerns of your people. My understanding is that most retail business is done in the fourth quarter of the year, so that retailers have to carry huge inventories for that very special season of the year when people do make most of their purchases. My understanding is that they will now have to borrow much larger sums from the bank in order to be able to pay that 15 per cent up front, 8 per cent more up front than was formerly the case, which may then create cash flow problems for them. Is that correct?
Mr. Gibbons: One of our directors, a retailer, in a general conversation with me told me that, in fact, the opposite will probably happen. As you said, in the last quarter sales levels are at their highest. In this particular case they were able to get rid of most of their inventory and re-tool. In Newfoundland, they only bring their inventory levels up in the fourth quarter when sales are greater. They have larger inventories during that particular period of time.
Senator Comeau: It would be interesting to discuss this specifically with a retailer to find out whether it is a benefit or not. My impression was that they do have to build up an inventory and pay the extra fees up front and only recoup that once the sales are made, so that their cost of carrying inventory does in fact go up. However, we may have to deal with this with somebody who is in retailing.
Mr. Gibbons: Yes.
Senator Cochrane: Ms Manuel, as you have said, craft development has increased tremendously, three, four or five-fold over the past 10 years. I am certainly aware of that. You say most of the materials used by crafts people here are not available within our region, and therefore the purchasers have to go outside of Atlantic Canada, to purchase their supplies. If that is the case, then crafts people in the province are in a difficult situation. Do you see that some of our craft businesses may have to close down?
Ms Manuel: I certainly hope not. As far as buying materials from outside the region, this is particularly true of the larger businesses. The smaller ones that are just starting are in the transfer period between being a hobby-base and growing into full-time livelihood for the maker, which is the way a number of people grow into the industry, often do have to buy their materials retail directly within the region. However, the larger manufacturing companies would certainly go outside the region because they can get a better price, they can get a better choice and they can get materials that would make their products unique and special. Certainly, if there is not much choice between going to Ontario or going outside the country, then many people might very well go outside the country.
If purchasers of craft products outside the region have to deal with an extra amount of confusion, an extra amount of paperwork, or encounter extra difficulties in dealing with crafts people within this region, then that might encourage buyers from outside the harmonized region to purchase outside the harmonized region. Therefore, businesses here that traditionally have had markets in other provinces might find those in jeopardy. That is another concern.
Senator Cochrane: Mr. Simms, you mentioned the serious impact of the harmonized sales tax on certain classes of municipalities, especially in regards to contracting out and so on. Do you anticipate that this increase will be passed on to the consumer?
Mr. Simms: The short answer to that is yes. There is no avoiding the reality of the circumstance. The taxpayer has to accept financial responsibility. While the federal government grapples with its deficit and uses mechanisms like the new CHST, and the provincial government grapples with its deficit and uses mechanisms very similar to that in dealing with reduced municipal operating grants and things of that nature, these kinds of changes can only go one way at the end of the day. They goes to the taxpayer. A large number of communities will be negatively impacted and will have no choice but to pass it on. Larger communities may be able to, with some difficulty I might add, absorb it, but you are will see an increase in taxes.
Unfortunately, the province, senator, believes that when it did its universal poll, they argued that this would be revenue neutral from government to government to government. That has been proven to be no so. Some municipalities may benefit, but I would argue that it will be less than 20 per cent. The majority of municipalities in the province will end up paying more.
Senator Rompkey: On the issue of crafts and the fact that suppliers from central Canada may not supply in future, would that open up an opportunity for entrepreneurs in the province to become suppliers, or would there be economies of scale that would prohibit that? I heard of a company in Corner Brook this morning that has just developed a market in Saudi Arabia for a product that originated in Corner Brook. This is a firm that has gone from four to 21 people. There are entrepreneurs in the province with imagination who can fill markets. If the central Canadian market dries up, would that open up an opportunity for local people?
Ms Manuel: It could if the pricing structures were the same. There is an economy of scale. If you are in the Atlantic provinces and you are only supplying the Atlantic provinces, then the price point you are going to be able to meet is likely to be higher than a price point of a company in central Canada which is supplying the whole of Canada. A crafts person who is having to compete with crafts people in Ontario and in British Columbia for the same national marketplace will have to deal with the problem of a higher price for their raw materials.
Senator Rompkey: It seems to me, Mr. Chairman, that a vacuum will be filled somehow or other.
The Chairman: I would have thought that the tax paid on a trip would be the tax due at the time of booking the tour because it is an up-front payment. Your brief suggests I am wrong on that, and I am surprised.
Ms Churchill: Our interpretation is, even if the tour was booked prior to HST, prior to April 1, say this December past, with a departure date in May or June of this year, the requirement is that HST be charged.
The Chairman: In many cases the tour is paid for up front or, at least, a significant deposit is paid.
Ms Churchill: Not necessarily. Often a deposit is paid. That is the case with a lot of outfitting packages. They are fairly costly so a 50- or 25-per-cent deposit is paid if it is booked in the fall with a departure date after April 1. Revenue Canada and our provincial Department of Finance have both verified that the tax is applicable.
The Chairman: That is very strange.
Senator Angus: Since reference was made to this poll earlier when I was questioning Mr. Gibbons, I just wanted to simply have the record reveal that it is a public opinion survey of Atlantic consumer response to the HST proposals submitted by Ekos Research Associates Inc. on February 4, 1997, and I referred in particular to pages 10, 11 and 12. I am not sure if you have seen that, sir, but we will arrange to give you a copy.
Senator Oliver: What is the significance of pages 10, 11 and 12, if any?
Senator Angus: Those are the pages he was referring to when he said that, indeed, this poll does support the contention that consumers are against TIP. Although it is true, as Senator Rompkey says, you can give it the interpretation you wish, but you cannot discount the 70-per-cent figure. It deals with businesses rather than consumers. I would submit that this is strong evidence in support of the view that the consumers simply do not want this tax-included pricing.
Ms Churchill: Mr. Chairman, we were informed, regarding the outfitting issue we were just discussing that, as of February 1, outfitting companies were required to charge HST, even before the tax was implemented. HST was to be paid on any booking made after February 1.
The Chairman: Thank you very much for your assistance.
Our next witnesses are from the Alliance of Manufacturers and Exporters Newfoundland. May I remind you that the alliance is the organization which resulted from the merger of the Canadian Manufacturers Association and the Canadian Exporters Association. Over a year ago they formed this new organization. The spokesperson this morning will be Mr. Lorne Janes who is chairman of the organization in Newfoundland but, more importantly, he is the immediately past president, as I recall, of the CMA; am I correct on that?
Mr. Lorne Janes, Chairman, Alliance of Manufacturers and Exporters Newfoundland: That is correct.
The harmonization of the federal Goods and Services Tax and the Provincial Sales Tax remains an issue of high importance for Canadian manufacturers. Over the past several months, harmonization agreements have been completed between the federal government and the Province of New Brunswick, Nova Scotia, and, of course, Newfoundland. These governments have announced that harmonization will be implemented, effective April 1, 1997, and this brings the number of provinces which have signed harmonization agreements with the federal government to four.
The alliance believes that these agreements are an important step on the road to achieving a much better commercial environment throughout Canada. The plurality of different sales tax regimes in Canada is a competitive disadvantage to Canadian firms because of the necessity to maintain several different systems to deal with the sales tax on transactions in different parts of Canada.
The costs of administrating systems to deal with these differing sales tax regimes is high. Our members have been quite clear that this cost reduces the profitability of doing business in Canada and, simultaneously, increases the cost of goods.
GST and PST harmonization would enhance the competitiveness of the manufacturing and exporting sectors in Canada, and would improve the business climate in general.
The membership of the alliance has made it quite clear to us -- and we have divisions in every provinces of Canada -- that full input tax credits, ITCs, on retail sales tax, combined with reduced administrative burden and costs for government, and reduced compliance costs for small and large businesses alike, would have the net effect of increasing the competitiveness of Canadian business by allowing reductions to the price of goods or slow the increase in prices, in turn, positively impacting investment and job creation.
While initially full ITCs might appear to be a shift in tax burden, in actual fact, without full ITCs, the consumer would have to bear the greater burden in the form of higher prices, again negatively impacting on the domestic economy.
The importance of full ITCs is realized when it is remembered that Canadian goods must compete against goods from other nations which either are not taxed or are subject to a value-added tax which is removed on exported goods.
This competition occurs both abroad, against goods produced elsewhere, and in Canada against foreign goods which we import. To the extent that Canadian goods are not competitive in price, the cost is paid by Canada in lost jobs and lost economic opportunities. That was well illustrated recently with the figures of our import and domestic consumption of Canadian-made goods.
The end result of full ITCs would be greater sales of Canadian products. The consumer would obtain substantial benefits from the resultant economic group and from the greater number of Canadians employed producing Canadian goods. The manufacturing sector now employs approximately 2.2 million Canadian workers.
The optimal situation for Canadian business and for the Canadian economy as a whole, would result if there were one harmonized tax regime throughout Canada. This would lead to a great reduction in the expense of business in tax compliance. To obtain the full benefits of harmonization, it should be full and complete with no graduated introduction. There should be one rate of harmonized tax and one base for taxation with no exceptions throughout Canada.
Harmonization would enable Canada to expand its tax base to include the rapidly-growing service sector, which would create a simpler, more efficient tax system. A long delay in harmonization would negatively impact the Canadian ecoomy.
The alliance would be pleased to offer its assistance to the government in its initiative toward sales tax harmonization. I would be pleased to address any questions or direct them to the most appropriate person.
Senator Comeau: You are making a point that has been made over the years: that a full harmonized taxation system for Canada would be quite beneficial. I believe all of us around the table would agree with that. You suggest in your brief is that this would have been the way to go, had it been approached properly.
The approach, however, that is being taken is to implement it in three Atlantic provinces first. Do you see the move being implemented now as being positive to manufacturers, and I would restrict my question to manufacturers, not to the whole economy of Atlantic Canada?
Mr. Janes: Yes.
Senator Comeau: Given the negative sentiments directed towards harmonization, particularly the means by which it is being done, would you not agree that this will hinder the long-term implementation of a Canada-wide harmonization?
Mr. Janes: I think there are two questions there. Do I agree the negativity will hinder it? Hopefully, it will not. I think you have better judgment than that. I think that the negativity is dangerous and we should not heed it. This is a good policy; it is good legislation. We should get on with it and get it done and build our economy.
Senator Comeau: We are hearing from government members that polls are being conducted to ascertain whether consumers would prefer to see a tax-included price sticker so they will know what they must pay at the counter. Obviously any consumer would say that they would prefer to pay the price on the sticker. Armed with this poll, the government is saying that they must impose on business -- not ask business to do it voluntarily -- a tax-in pricing scheme.
This creates an impression that government is in fact conducting polls and, based on public opinion polls on a very simple question, it imposes on business its view of how business should be done.
Mr. Janes: I feel that the information from those polls is not accurate. I operate a retail business, a medium- to small-manufacturing business here in the province. I know that 10 per cent of my customers and 100 per cent of the people I deal with want one price. In fact, that is what I have done over the past years. I have displayed one price and it has worked to my advantage. We quote the price, including tax, installation and delivery. This has served me well. After that, we break the price down and tell the customer the amount for tax, delivery and installation, but the first number they hear is the total price. That is what I would want to know as a consumer.
Senator Comeau: You would not want the government to impose this on you. There is nothing stopping you as a business person telling your consumer what the price of a product is. Do you want the government to come in and say, this is how we want you to do it? This is legislation that is which specifies how business people will price their goods.
Mr. Janes: It is an awkward question.
Senator Comeau: It is a loaded question.
Mr. Janes: I agree. As a past national chair of CMA I know that our members obviously want less government involvement in our businesses. However, we do have some faith in the decisions the government makes. In a recent discussion with a retailer, he expressed the view that he wanted the pricing structure to remain as it is. That retailer had a price-sensitive business and wants to retain the "$2.99", "$3.99" or "$7.67" price structure because it is more price competitive. My response was that, in effect, he wanted the government to support a policy which misleads customers. He did not reply.
The alliance believes that the total price being shown is the best way to go. However, if there were a choice between that or nothing, we would certainly accept, as was suggested by the Board of Trade, a voluntary or some other method. It is most important to us that the harmonization and the ITCs do occur. I think the uproar that has been taking place over the unit pricing has no substance.
For 12 years prior to my manufacturing sector life, I operated a retail furniture business which is very price sensitive. We were bombarded with sales gimmicks, "two-for-ones", buy a lamp and get a sofa", "buy a sofa and get delivery", and so much discount for cash and so much for credit cards. I have far more faith in the retailer's ability to adjust to this very minor, in my view, price change.
Senator Comeau: The Atlantic Provinces Economic Council estimated that the cost of carrying its inventory -- this would be at the retail sector, I assume -- will go up by $130 million in the three harmonization provinces. In other words, they have to pay the tax increase now from 7 to 15 per cent, and carry this until such time as the products are sold, and then they will get the rebate. Have you read that APEC report?
Mr. Janes: I am familiar with it. It is not an area in which I have a great deal of expertise so I do not think it would be fair to comment.
Senator Comeau: You expressed the view that you would like to have seen a Canada-wide harmonization scheme. Have you discussed this with the officials of your province?
Mr. Janes: Yes, we have.
Senator Comeau: What was their rationale for going it alone right now?
Mr. Janes: They did not explain their rationale to me. I agreed with their position. They should go ahead. I had no problems with Eastern Canada going ahead if we all assumed that one unit pricing was correct. We all agree that it may be. I have no problem with the three little provinces stuck here on the east coast of Canada, for a refreshing change, being right, and them having to catch up with us for a change.
Senator Comeau: Perhaps the three premiers of the three Atlantic provinces have more skilled economic assessment people than all of the premiers of the other seven provinces of Canada.
Mr. Janes: Nobody is arguing with you there, sir.
Senator Comeau: I am glad you have such faith in the Atlantic provinces.
Senator Hervieux-Payette: What percentage of the gross domestic product of your province does the manufacturing sector represent?
Mr. Janes: We represent approximately $1.6 billion of the Newfoundland economy, approximately 16,000 to 20,000 workers out of a work force of about 170,000. The total GDP is less than $10 million. The manufacturing sector in Newfoundland is close to 16 per cent of the Newfoundland economy.
Senator Hervieux-Payette: Coming from Quebec, I understand the fishery, which has certainly not expanded over the last year. Do expect some expansion? That is my first question.
My second question is: Do you know your percentage of exports, both outside your provinces and outside Canada?
Mr. Janes: Nationally, I think it is around 58 per cent. Our GDP in Canada is around $400 billion. We export around $220 billion. That is 58 per nationally. Our vice-president, Mr. Ploughman, would probably have some detailed of the provincial perspective.
Mr. Burf Ploughman, Vice-President, Alliance of Manufacturers and Exporters, Newfoundland: The exports from our province would be even greater. We probably have the greatest imbalance of trade with other provinces. For example, 85 per cent of the fish is exported, and the percentage of the pulp and paper is also high.
We recently did a survey of our own membership, and there are over 500 manufacturers here in Newfoundland. We have determined that over 50 per cent of those are exporting. I think our percentage would be higher than the national average of 58 per cent.
I would like to just comment on the importance of the HST as far as manufacturing is concerned, and the importance of it to the economy of the country. The total value of shipments from manufacturing in Canada last year was a little over $400 billion. The total GDP of the country is $750 billion. We must keep that in perspective.
As was mentioned, 58 per cent of these manufacturing shipments were exported. This keeps the economy of Canada alive. The HST is extremely important for this province, and for the rest of Canada in terms of improving our competitiveness. I know there are some problems, but we must consider the significance of it as it relates to the most important industry in the country.
Senator Hervieux-Payette: Yours is a long-term vision. You say we should start and other governments will see success and follow. Of course, this is a measurable success because year after year you will be able to assess the progress of your exports.
Mr. Janes: That is correct.
Senator Hervieux-Payette: We have made extensive of the APEC document, because it appears to be a credible document. The Atlantic Provinces Economic Council produces a quarterly report on the economy of your provinces as well as a special provincial report on Newfoundland and Labrador. They also deal with various big projects such as Voisy Bay and so on. They also deal with technology development.
I was impressed by the fact that, recently, Stratos Global Corp. was listed on the Toronto Stock Exchange. Will the technology part of the manufacturing sector boost world exports?
Mr. Janes: Yes, the days of manufacturing being rows of smoke stacks is long gone. In recent years, the manufacturing sector in Newfoundland, particularly the high-tech technology part within the manufacturing sector, has done an excellent job in mitigating the problems caused by the downturn of our traditional fishing industry by replacing some of those jobs and some of that income.
Senator Hervieux-Payette: I am sure the creation of jobs in that sector is encouraging some of your young people to stay in the province rather than leaving to find employment elsewhere. You see the harmonized sales tax as being a step forward towards simplifying the process and promoting economic growth in Newfoundland?
Mr. Janes: Since you have said it far better than I could, I will leave that alone.
Senator Hervieux-Payette: Thank you for your presentation.
Senator Cochrane: Mr. Janes, you say in your brief that there should be one rate of harmonized sales tax and one base for taxation, with no exceptions, throughout Canada. Did government officials consult you and your group during the initial stages of this piece of legislation?
Mr. Janes: Yes. We have met with both the provincial and federal governments and, of course, there was major input from the national organization, now the Alliance of Manufacturers and Exporters Canada, on which most of this was based. This is the traditional standard position that CMA has taken across the country and it is fully supported by alliance members here in Newfoundland.
Senator Cochrane: You are saying that the national group would prefer to have one harmonized sales tax right across the country.
Mr. Janes: You must remember that the national group is simply the whole of the provincial groups, so the alliance of manufacturers across Canada, all ten divisions which comprise the national body, take this position. I do not want to give the impression that the alliance in Toronto dictates our position. The national alliance national expresses the view of all 10 divisions.
Senator Cochrane: During your consultations and before this legislation was introduced, did the whole alliance agree that there should be one harmonized sales tax right across the country?
Mr. Janes: Within the manufacturing sector, that is correct, yes. Of course, the most important aspect for us would be the import tax credits.
Senator Cochrane: However, now the three provinces of Atlantic Canada have decided to go with it but the other provinces have not.
Mr. Janes: As they get more knowledge and get a better grasp of the matter, I am sure they will catch up.
Mr. Ploughman: If I might be permitted to ask a question, I would like to know if Quebec, which has had, for some years, a somewhat harmonized tax, ran into the same problems as everyone is projecting we may run into here in Atlantic Canada.
Senator Hervieux-Payette: No, I do not think business or consumers ran into too many problems as far as what price is shown. I know there are regular sales promotions by national chains such as the Bay who say that no GST will be charged. We know very well that they will pay the GST. I agree that it may be unfair when some merchants do not include the GST in their ticketed price. Of course, if there were one set of rules the consumer would know he is getting the right information.
I know that you are not at the retail level, but does this affect some of your manufacturers? Have complaints from consumers led to manufacturers being required to put prices on their items? I buy goods coming from even outside of the country with prices already printed on the box, but I never pay that price. The price I pay is determined by the retailer. Do you have any views on that?
Mr. Ploughman: We must go back to the reason for the introduction of the GST. It was to replace the manufacturers' hidden tax. Of course, when you purchase gas, that tax is still hidden.
Senator Hervieux-Payette: It is a large amount.
Mr. Ploughman: Yes.
When I was over in Great Britain a couple of years ago, it was a real pleasure, when we phoned to get hotel rates, or went into a restaurant or store, to know what the price was. There is a real need for all of Canada to come on board so there can be no question of having one price. I think a properly informed consumer would be very much in favour of it.
Senator Hervieux-Payette: My understanding was that the former, hidden tax to which you referred was not uniform. It could range from 5 to 20 per cent. It was very difficult to apply. Will this uniform tax make life easier for everybody?
Mr. Janes: Yes. My understanding is that, when this is done, the full price of the goods, including taxes, will simply be on the shelf or on the product. However, the amount of any provincial, federal or harmonized tax, will be broken down for the full benefit of the consumer. It will not be hidden. The customer will know how much a product costs right up front.
Senator Cochrane: Mr. Ploughman, we have heard from students this morning, we have heard from the board of trade, we heard from Mr. Simms from the municipalities, and we have heard from the craft association. They have all told us about their concerns and it all goes down to the consumer having to pay more. Mr. Simms verified this morning that, yes, the consumer will pay more. As you know, some basic items such as heating fuel, electricity, haircuts and so on will cost an extra 8 per cent in this province. What do you say to consumers if you want to sell this?
Mr. Ploughman: My understanding is that the reason the federal government decided to subsidize the provinces over the next three years was because they would be short that much revenue. Presumably that will be to the benefit of the consumers. You are correct, there are some items like haircuts that you now must pay provincial sales tax on that you were not required to pay before.
Senator Cochrane: As well as heating fuel and gasoline.
Mr. Ploughman: That is right. I understand, however, that there have been studies done by the government which show that, on a total mix of goods where there will be a reduction in the provincial sales tax and the new items where you must pay the sales tax, overall there will be an reduction.
This is a little more complicated, but there will be a reduction in the price of goods because, right now, the manufacturers pay the provincial sales tax on supplies, on repairs and maintenance and so forth, and that must be built into the price of the product. In actual fact, the consumer is paying the tax twice.
As was said this morning, we have two economies in Canada. One is the so-called "export" economy where 58 per cent of all of our manufacturing shipments are exported. The other is related to the domestic consumption of Canadian goods. In the United States close to 80 per cent of all goods consumed in the United States are American produced. In Canada it is down to about 40 per cent. If we can help reduce the cost of goods through this tax formula, it will mean Canadian consumers will be buying more Canadian goods at a lower cost. That may be complex for the average Canadian to understand but it is vital to the economic development of this country.
Senator Cochrane: Newfoundland and Labrador this year will receive $127 million from this transitional assistance payment from Ottawa, but the province expects to lose $105 million in sales tax revenue under the HST, leaving only a net profit of $22 million from the harmonized sales tax for 1997-1998. That will as well get worse, because you know as well as I do that, in three years time, this payment will no longer exist. Where will you go from there?
Mr. Ploughman: I will speak for Newfoundland because you are referring to Newfoundland. All the economic indicators are that, within the next year, we will lead every other province in economic development due to Voisy Bay, offshore oil, growth in manufacturing, aqua-culture and whatever. There will be other sources of income. We are confident. I agree with you that, in three years when that subsidy is gone, this will be that much less. However, I think the economic activity in this province will more than make up for it.
The Deputy Chairman: Our next witness will be Mr. David Rogers from Mark's Work Warehouse.
Mr. David Rogers, Franchisee, Mark's Work Warehouse: I am the local franchisee for Mark's Work Warehouse. I am a Newfoundlander who tries to run a profitable business. I do not have the huge bank accounts of the national companies. I would stress that I am a franchisee and a local operator. I maintain my own bills and my own operating lines at the bank.
The Deputy Chairman: Do you operate here in St. John's?
Mr. Rogers: Yes. Presently, I am the only franchisee in the province for Mark's Work Warehouse.
I am a little bit nervous about this harmonized sales tax. For starters, I have had very little information and, from what I have seen here in the last hour, most people are a little bit tentative about the information they have received. I have picked it up from newspapers, television and from my area manager who is situated in Montreal. We are all a little bit in the dark.
When I first heard about this tax I though it sounded great because the tax would go down. However, since I have had a chance to get into this and discuss it with other retailers, other businessmen, I do not think that will be the case. There is a small point of discretionary income that must be raised.
This tax will be a lot broader; it will be included in, for example, phone bills, electricity bills and home fuel bills. Consumers have no choice: they must purchase those items. However, when it comes to my store, extra clothing may not be considered to be a necessity.
I believe that, in actual fact, the consumer will find that it is a tax increase rather than a decrease, because the 4.8-per-cent decrease on retail goods will be more than offset by the 8-per-cent increase on necessities.
I believe what will happen is the same thing that happened in Quebec. From what my area manager tells me, sales went down. They are still recovering from that.
This tax will benefit consumers who buy furniture, a car, a television set or a stereo, but how often does the average middle class consumer make such a major purchase? The little things will be more expensive. My wife has been telling me that we will be paying $45 to $50 more each month.
Obviously, we must wait to see what will happen, but I think, as a retailer, I will see a decrease in sales.
My main concern is this tax-in pricing. There has been little information about what, exactly, that means but, from what I can understand, there will be conversion charts and price charts that will help us. We run a very neat, tidy, well-organized store so that when our customers come in they can find exactly what they are looking for. They like it that way. If we start sticking up charts and price cards all over the place, which might work fine for a grocery store or some other companies or businesses, that will create nothing but chaos and confusion and it will only inconvenience our customers.
We have been pushed into the corner by being required to re-ticket our items. We carry thousands of different items. There is not only the start-up cost, but we are also being told that the total annual cost, not just the re-ticketing, will be in the range of $30,000 directly to the bottom line of each one of our stores. We have 14 stores in Atlantic Canada and every store will be hit with this $30,000. That is over and above the initial cost which will include the cost of, say, changing our computers. To begin with, we must re-ticket every item in our store.
The manufacturers have already told us they will not do it for us because we are too small a group in Atlantic Canada. However, if they were to do it for us, they would hit us with a fairly substantial charge. I have heard mention of a charge of 10 cents a ticket. We feel we are required to do it ourselves, and even that will be fairly costly.
I will not hire extra staff to do that. I cannot afford to do that. Retail is very competitive. We have had to fight to maintain any profitability at all, so I will use the staff that I have. This will lower my service capabilities and I will lose some of my competitive edge.
Another main cost for us is our flier and catalogue costs. As part of a national organization we will not use dual pricing on them. To insert a disclaimer requires a plate change.
It cost me $5,000 when I changed the plate for my store in August of 1995 when I opened a new store. We would be required to do that nine times a year. That is a little bit outrageous. We may be forced to drop the flier. Even advertising that comes out of a central location will all need to be changed if there is any mention of price. There is cost involved in that.
This may involve a fairly major financing cost for me. Currently, we bring in our merchandise, pay 7 per cent GST, and then we must sell that merchandise. We have three months to pay the GST which is not too bad because we have usually sold the merchandise by the time we have to pay the 7 per cent.
As I understand it, now 15 per cent will be billed to me through Mark's Work Warehouse. That 15 per cent is to be paid on a monthly basis. I will not sell that merchandise in 30 to 45 days at this time of year. Our business is done in November and December. Atlantic Canada is known for that. The rest of the country is a little different from us, but in Atlantic Canada especially, our sales are made in November and December. I will have to increase my line of credit and my operating line to carry this inventory because now I must pay the 15 per cent up front. Hopefully the bank will cooperate.
I am in business to make a profit and $30,000 could be quite damaging to my bottom line. The tax-in pricing is being pushed at us at our expense. That is bound to be passed on to the consumer. The board of trade predicts a 1 to 3-per-cent increase in costs as a result of this harmonized sales tax. That will probably result in 4 to 5 per cent being passed on to the consumer.
This harmonized sales tax should not be pushed at us in this way. We should at least wait until the rest of Canada is on board. To single out Atlantic Canada is not fair; and it will be quite costly. It does not look as if Prince Edward Island will ever jump on board. They love the competitive advantage they have. If you think anyone in Alberta will introduce a new tax, then I think you are mistaken. It will not happen. I know from knowing enough people in Alberta that it would be political suicide.
In closing I would like to reiterate that I think this will have a major impact on discretionary income. Sales will probably go down rather than up. This tax-in pricing will be quite costly and I would venture to say that some businesses will close.
You have the power to send this back from whence it came. At the very least, this tax-in pricing must be changed or eliminated.
Senator Losier-Cool: I would refer again to this report produced by the APEC which is a very credible group. Perhaps some of the details contained in this report may answer some of your concerns. This report includes the comment that Newfoundland, of all the Atlantic provinces, will derive greater benefits from the HST.
On the subject of inclusive pricing, presently is your merchandise individually priced?
Mr. Rogers: In Newfoundland everything is individually priced. If it is a $50 item, they see "$50". They know they must pay the tax when they get to the register. Most of them, within a month that the GST came in, could quite well figure that out before they reached the register. Every item is individually priced.
Senator Losier-Cool: I would refer to the east coast research association survey which found that 52 per cent of the respondents wanted tax-inclusive pricing, even if it means extra work. Do you not feel your customers should have that if they want it?
Mr. Rogers: I would agree with it if I were convinced my customers wanted it, but I am not. From what I understand of how that poll was conducted, I would have a lot of faith in it. I only found out about it yesterday.
Senator Losier-Cool: As a consumer, would you not like to know the exact price before you get to the cash register?
Mr. Rogers: I want to see what the retailer is charging me for that item. My customers, are telling me that they do not want to see the tax in. They are used to making the calculation.
Senator Oliver: I appreciate your evidence because you actually own and run a store. We were in the Province of New Brunswick for two days and we are here for a day, and what you have said is consistent with what 85 per cent of all the other witnesses have told us about this harmonized tax. It is interesting that we are starting to notice a pattern reflecting what people think about this issue. We have learned that there is strong, widespread resistance to the tax-included pricing. The reason is because there will be an additional cost to the consumer, there will be more inefficiencies, there will be no competitive advantage for someone running a retail store, and there is no substantive business reason for tax-included pricing.
You must change your accounting, your pricing system and your point-of-sale systems. You also mentioned the cost of reticketing goods. Those will all add to your overhead and you will be a lot less competitive.
Many witnesses in Newfoundland have told us that the government has done an incredibly poor job of educating the consumer about how this tax will impact them. I thank you for raising that yet again. It seems that we are being rushed into something and that no one is ready.
A number of the other presenters have suggested that we put off this tax-inclusive pricing for a while, at least until they can work out some of the inefficiencies. What is your position on that?
Mr. Rogers: I do not think we should have tax-inclusive pricing at all. If it were a total, Canadian tax, then we would not have this re-ticketing problem. It would be a one-time deal. Canada, as a nation, is big enough that the manufacturers would take care of this and we would not have the problem. As it stands, we will continue to have $30,000 expenditure I mentioned every year.
Senator Oliver: Every year?
Mr. Rogers: Yes. They will not change the tickets for us. We must have a new ticket put on every item that comes in.
Senator Oliver: In addition to the $30,000 cost that you will have every year, are there other costs that you will incur as a result of this tax?
Mr. Rogers: In the beginning we will be hit, from what I understand. However, there is some confusion.
Senator Oliver: Have you quantified what that additional cost might be to you in your store here in Newfoundland?
Mr. Rogers: It looks like it could be $2,000 to $3,000 right off the bat just for my share of the programming. The programming is shared amongst 14 stores.
Senator Oliver: From talking with other owners and operators of Mark's Work Warehouse stores in Atlantic Canada, can you say if they are worried about whether they will be able to survive as a direct result of this new government tax, if it comes into effect? If you must pay an additional $30,000 a year on your bottom line, how will this affect the survival of some of these stores?
Mr. Rogers: We will all show a direct impact and we will be a lot less profitable. There are at least two or three small stores out there that will be marginal, and I would imagine there will be some corporate ones that will also be very marginal.
Senator Oliver: Am I correct in assuming that, if some of these stores were to close as a direct result of this tax, it would mean job loss to people in Atlantic Canada?
Mr. Rogers: Yes. If other stores are having the same problems will they hire them? I know will not hire anybody else.
Senator Buchanan: You are not the only one who has this concern. I have talked to retailers all over the Halifax area who are in the same circumstance as you. They operate franchise stores of Canadian Tire, Home Hardware, Mark's Work Warehouse, and other small clothing stores and they will all be affected. One operator described it as a "quadruple whammy" that they will have to overcome. There will be the initial cost of transition, the annual costs of transition which they must absorb or pass on to their customers, and there will be an additional 8-per-cent cost on clothing under $100, and most businesses like yours only carry items that cost under $100.
You say that you will have to incur about $30,000 annually. The other stores are in the same situation. The operators say that, if no change is made, they could go out of business and jobs would be lost.
Senator Rompkey: That is not so if other stores will hire them. We are talking about the difference between franchise stores and other stores. It does not necessarily mean an overall loss of jobs.
Senator Oliver: Several witnesses mentioned this APEC report. I have also talked to the economist who drafted it about this tax-included pricing which is mentioned in the report. He admitted yesterday in New Brunswick that, as an economist, he does not see tax-included pricing as being a necessary adjunct to harmonized tax at all. In fact, they can be separated.
Would you agree that the harmonized tax would work a lot better for you in your store if you were not required to have the tax-included pricing?
Mr. Rogers: Most definitely. All we would need is a sign at the front of the store. In Newfoundland people are accustomed to the tax not being shown on the ticket.
The Chairman: Our next witnesses are from the Eastern Newfoundland Home Builders Association Ltd., Mr. Michael Lee, who is their president; and from the Newfoundland Real Estate Association, Mr. Robin Davis, who is the president.
Mr. Michael Lee, President, Eastern Newfoundland Home Builders Association Ltd.: Our industry will be adversely affected by this HST. Our industry puts back $600 into the economy of this province. In the six years following the implementation of GST, we show an overall increase in new housing starts. We have some prorated numbers available should you wish to see them. During the implementation of GST fewer houses were constructed by professional contractors.
With the introduction of the HST, we will see the obliteration of professional renovator contractors. Approximately 75 per cent of the residential construction in this province is done through renovations, and a typical job is 60 per cent labour. As you can see, when this HST comes into place, if it does, it will impact the renovator contractors even more so than the new home builders.
During the past year, our association conducted an extensive review of the impact this harmonization will have on housing, and we discovered that the actual cost of a new house will increase anywhere from 2.4 to 5 per cent with the tax harmonization. These are direct costs such as lawyers' or accountants' fees, or maintenance costs on equipment.
It has been clearly demonstrated that low interest rates alone are not enough to keep new houses affordable. Consumer confidence and the amount of associated taxes and fees as well as the tax regulatory climate that supports a healthy and viable industry are also essential.
However, we do not work in a completely competitive market. In reality, consumers have three choices after harmonization; they can pay the tax-induced costs increase and buy a new house, they can buy an existing house to which neither GST nor HST will apply or, as we see it, they can contract with the underground builders. Again, this is where it will go when you see an increase. Our market is not stable at all, so we will see more underground houses or renovations being done.
Government policy has created another unfair advantage in favour of the last two options. Legitimate contractors are creating jobs and wealth in this province through the housing they construct, and that will suffer by the implementation of this new tax policy. The problem will be further complicated in Labrador, where there is no provincial sales tax on construction materials. The price of housing there increase by more than 5 per cent.
In an underground economy, consumers adopt a Robin Hood mentality, considering themselves justified in avoiding the amount of taxation. Consumers are often placed at risk for liability if an accident occurs at job sites when they engage an underground builder. Consumers often have no recourse if the work done is substandard. The business owners are challenged daily to survive in an environment where they are often asked by customers to provide two quotes from customers, one with a receipt and one for cash. The government loses revenue from this taxation.
Supplier firms have warned us that the changeover to the harmonized sales will mean confusion and extra costs to modify computerized systems.
Most of the building supplies we use today are imported from outside the Atlantic provinces. That creates another pricing nightmare. Studies done by Greg Lambert and Mark Denis for the Canadian Home Builders Association, CHBA, revealed that, in this province, a typical house contains $13,640 in government-induced costs. This amounts to 16 per cent of a total new house price and, if the harmonized tax goes ahead, it could go anywhere from 18.4 to 21 per cent.
Each house constructed in this province creates 2.4 person years of employment. In a cost-sensitive market such as ours, the price increase will result in a decline in the housing starts and associated job losses.
We would make the following recommendations: that all levels of government recognize the importance of housing by including, in their sectors, a pledge of support in the coming years; that all levels of government take a strategic approach to taxation in residential construction, ensuring home ownership does not bear a disproportionate burden of tax restructuring at all levels; that all business be required to obtain an HST number for ease of identification and tracking the underground workers; that the federal and the provincial governments, along with the home builders' association, create a tripartite committee to combat the underground economy; that a meaningful HST rebate for renovations be implemented; that a consumer HST rebate be implemented for new homes; that a consumer HST rebate be implemented for the labour portion of all renovations; and that all government levels undertake and promote a promotional campaign to offset the public perception that it is more cost-effective for them to build than buy. If this does come about, perhaps they could use a scale-in approach.
Mr. Robin Davis, President, Newfoundland Real Estate Association: Newfoundland housing consumers can expect to pay more for newly constructed housing when the harmonization tax takes effect on April 1. Housing is by far the largest purchase and number one financial outlay for the majority of consumers.
The increase could be avoided if the provincial government would opt for an appropriate new housing rebate. The three harmonizing provinces and the federal government agreed in their technical paper last fall that housing would be treated the same under an harmonization tax as it is under the GST. This is not happening.
The GST allows a 2.5 per cent new housing rebate on the 7 per cent of the federal tax. That will continue under harmonization. The rebate was introduced with the GST in 1991 to ensure that housing affordability would not be adversely affected under the new tax.
Referring to the claim of the provincial politicians that the provincial sales tax, embedded in the price of a new home, will be removed under harmonization, and further, that builders will be eligible for input tax credits on the harmonizing tax, it is said that these factors will preserve price neutrality, but they will not.
A recent expert study conducted on behalf of realtors in the participating provinces removed all of the embedded 12-per-cent provincial sales tax. It then factored in the harmonized 15-per-cent tax, not just on building materials, as before, but on the total house price. The result was an increase of $3,800 on the typical new house costing $142,500 in Newfoundland and Labrador. Labrador may be even higher because of its transportation problems.
Additional taxes will affect the cost of new home construction plus all other real estate purchases and sales through increased taxes in professional fees such as appraisals, home inspections, commissions, surveys, legal fees, and title searching.
After April 1 additional tax is applied to monthly operating costs of the home, that is tax on fuel, tax on electricity and property insurance. I understand that we in Newfoundland and Labrador are paying the highest insurance on residential properties in all of Canada.
The remedy, according to realtor research, is a rebate of roughly 3.3 per cent on the 8 per cent of provincial tax which flows into the HST. Of the harmonizing provinces, only Nova Scotia has provided for a new housing rebate, and that is just 1.5 per cent. That is less than half of the recommended amount. New Brunswick has identified measures to assist the housing industry with the effects of harmonization, however, to date these have not been defined, unless you people heard it yesterday when you were there.
With the date of the HST implementation less than a month away, the Government of Newfoundland and Labrador has so far refused to consider a new housing rebate. We are in a period of critical uncertainty for consumers of new housing and the building industry. We, as realtors, are very nervous about the situation.
If the provincial governments of New Brunswick and Newfoundland and Labrador choose not to offer a rebate, it will mean that consumers of new housing in those provinces will be disadvantaged compared to the consumers in Nova Scotia. In all cases, unless the rebate is adequate, the HST will raise new housing costs at a time when the market is just recovering from a long period of dismal performances. We are not back where we were six years ago, even though we had a fantastic year last year. Our curve is still down there and we are trying it get back up.
The Government of Newfoundland and Labrador has breached an important principle; namely, that sales tax should not reduce the affordability of housing, even while it accepts a special federal subsidy so it can lower its tax rate of 12 to 8 per cent.
Effective April 1, the harmonization tax rebate is set at a rate of 15 per cent. Where will it be by the year 2000? How far will the tax base broaden? Why have only three provinces in all of Canada instituted the harmonization tax?
The time to nip this in the bud is now. We plead to this Senate committee that a new housing rebate be provided in all harmonizing provinces to ensure that after April 1, 1997 the cost of new housing does not increase.
The Newfoundland and Labrador Real Estate Association speaks for nearly 300 realtors in all parts of the province. I am not only speaking on behalf of the Newfoundland and Labrador Real Estate Association, I also speak for consumers.
Senator Oliver: I would like to explore with you the ramifications of a depressed market or a lack of new housing starts as a result of this tax. You have said that, in the absence of this housing rebate, people will not wish to buy the homes that they would if there were a rebate. Is that correct?
Mr. Davis: There is another stumbling block in the way. Everybody must qualify for a certain amount of a mortgage, and with the threat of additional taxes no one knows what amount they will qualify to borrow. Today they may qualify to be able to purchase a $90,000 home but, when this is over, that figure may only be $83,000. There is some uncertainty as to what this will mean.
As Mike pointed out, this will encourage the underground economy. I would estimate that there will be more money lost in the housing industry when the HST comes in than when the 7-per-cent GST was put into effect. There are many contractors today who build homes but do not hold a licence in order to collect GST. A contractor operating a legitimate business must give a construction cost that includes, say, $10,000 for labour and so on. I know I can get it done for $6,000. We all know this but these people are not being chastised the way they should be.
Senator Oliver: What should the government be doing about it, or what should this committee do to appease your fear that this new tax will drive business underground?
Mr. Davis: Everybody should have an HST number. There should be qualified contractors and only qualified contractors allowed to construct homes in any province. I am not saying that because Mr. or Mrs. Jones can drive a nail, and they should be restricted in doing that. If somebody wishes to build their own homes it is a different circumstance completely. We have just gone through the TAGS package, and there are many Newfoundlanders on that TAGS package who are quite capable building a excellent house.
Senator Oliver: A number of people have said that housing starts and housing development really drive the economy of a province or a region, and if housing starts and housing developments are retarded by this tax what, in your view, will happen to the economy in the region in general?
Ms Rosemarie Woods, Executive Officer, Eastern Newfoundland Home Builders Association Ltd.: CMHC is predicting that there will be a decline in new housing starts primarily as a result of HST, and when we did an analysis of what the impact might be, based on what the impact was when the GST was brought about, we found three interesting things. Following GST, the price of a new house rose. It was a tax-induced price increase. The number of housing starts declined, and the ratio of houses built by contractors versus owner built or underground built declined. It was once about 50-50. With the introduction of the GST, the ratio slipped to about 30-70.
We considered what would happen if that situation is duplicated with HST. What happens if there is a decline in the number of starts, we have more houses owner built or by the underground, and we do find that there is a tax induced price increase? If that were to happen, the net revenue of government could go down almost $2 million, in the first year alone. That is not even looking at renovations, which are 75 per cent of our market and where the underground is just thriving.
Senator Oliver: It will be a net loss to the province.
Ms Woods: Yes, very clearly, as well as to the consumer.
Mr. Lee: Mr. Davis mentioned rebates earlier. In New Brunswick the government publicly stated that there will be a rebate for new homes and renovations. It is only the Government of Newfoundland and Labrador that has not publicly announced a rebate.
Senator Oliver: I am sure that you understand our hands are tied. As part of the federal government we cannot do much about a province giving or not giving a rebate. It is up to you to deal with your province and your premier.
Ms Woods: They should consider a meaningful renovation rebate. Nobody every qualifies for the existing rebate which covers renovations. If you noticed, we did ask for a rebate on the labour portion. Other than that, you will probably just be encouraging the owner, which is fine, who will get the reduced amount of taxation on supplies. If we are trying to support the small business owner, we believe the approach should be to consider a rebate on the labour component of the renovation job and to make sure that we are encouraging the small business community and not the informal business community.
Mr. Davis: Senator Oliver, you stated that your hands are tied regarding rebates. I realize that. However, as senators, you are in a position, especially if there is any chance whatsoever that this tax will go across Canada, which I doubt very much, to recommend that everybody gets off on an equal footing. I have not heard what New Brunswick will offer, but I do know they have made arrangements because there is a bag of money somewhere that they will allocate to this. All provinces should start off at the same point, each offering the same rebate, not different rebates.
It costs more to construct a home in Newfoundland than it does in New Brunswick and Nova Scotia simply because of location. We live with this every day. You, as senators, are in a position to at least give us an equal footing with the other two provinces.
The Chairman: Just for your information, in the recent budget in New Brunswick -- I realize the budget has not been brought down in Newfoundland yet -- $5 million has been allocated to address the issues you raised. We were told by the minister that how that $5 million will be allocated is, at this point, unclear. In Nova Scotia there is a rebate of 1.5 per cent on the provincial portion of the HST on homes up to $150,000. You are quite right when you say that two provinces have adopted a measure and I presume one will not know what will happen in this province until the budget comes down on March 20.
Mr. Davis: We have been told by the province that the answer is no.
The Chairman: We have the Minister of Finance here this afternoon. I have no doubt that someone will ask him that question.
Senator Rompkey: I believe that these people, I must say, make a compelling case. It is something we must explore. It seems to me that the onus, as Senator Oliver has pointed out, is primarily on the province. We will need to see what the province says and what measures are provided.
What causes the fluctuation from year to year? I notice, for example, that 1993 was a very good year for housing starts. It was 846, whereas the previous year was 660. In 1996 the figure was up over 1995. In 1995 it was 547, as compared to 639 in 1996.
Ms Woods: Multiples in Newfoundland and Labrador also includes the single apartments; or a family house with an apartment in the basement. We are not looking at multiples as only being apartment complexes. It is important to understand that.
Senator Rompkey: The same is of for singles although not so much. There was a slight increase in 1996 over 1995. You said that was a good year. Why was it a good year?
Mr. Lee: 1995 was a dismal year.
Senator Rompkey: I see, it was not that 1996 was so good, it was that 1995 was so poor?
Mr. Lee: Yes.
Senator Rompkey: What causes the fluctuation from year to year? What are the factors? Is sales tax a factor?
Mr. Lee: It has a lot to do with the economy.
Senator Rompkey: If the economy were to improve in three to five years time, would sales tax be a major factor in housing starts?
Mr. Lee: It is always a factor in construction. We cannot be waiting for pie-in-the-sky improvements. I mean, we are dealing with the HST now and I think this is a reality.
Senator Rompkey: We know there is 150 million tons of nickel in the ground. That is not exactly pie in the sky.
Mr. Lee: In 1988, 3,300 houses were built in Newfoundland; and in 1995 there were 1,300. Comparatively, it went downhill very quickly. It would be nice to be able to say that 1998 will be a good year, and that is CMHC's prediction, but they are predicting that, in 1997, new home construction will decline.
Senator Rompkey: The opposite is true in Labrador. As a matter of fact people are lining up outside the town council office in Happy Valley Goose Bay to apply for the 50 new building lots that are ready to go on the market this year.
Ms Woods: They were responsible for 100 of the rural housing starts last year. That has really skewed the numbers. All of these taxes, fees and levies that are embedded in the house are mortgaged and amortized over 20 to 25 years, so the cost to the consumer is even greater than it looks initially.
Senator Rompkey: I understand the position that has been taken. The only point I was making was that the economy itself will dictate what the housing starts will be.
Mr. Lee: I had a call from a fellow in Goose Bay, Labrador yesterday who said that, although last year was a good year for building houses, a number of "fly-by-night" people, came in, built the houses but they left no money Goose Bay. They too their wages back to the island. These sort of things are happening in the underground economy.
Senator Cochrane: My question, Mr. Chairman, was to be on the loss of revenue to the province. The witness has answered the question.
Mr. Chairman: Our next witnesses are from the Newfoundland Medical Association and from the Newfoundland branch of the Canadian Bar Association. Dr. Mike Cohen is the president of the Medical Association, and Mr. Paul Burgess is the president of the Newfoundland Branch of the CBA. This committee frequently hears the evidence of lawyers, but you are the first two lawyers we heard from on this trip. The Canadian Bar Association did not make a presentation in Ottawa, so we would thank you very much for taking the time to offer us your assistance.
Dr. Mike Cohen, President, Newfoundland and Labrador Medical Association: Mr. Chairman, senators, thank you for taking the time to hear from us. The Canadian Medical Association has submitted a written brief to the standing committee and we fully support the contents and findings in that document. As such, we have not prepared a written submission, but I would like to take this opportunity to express to you some of our concerns.
Our association represents the over 1,200 physicians and medical students in this province. Our mission statement providing leadership in the promotion of good health and provision of quality health care emphasizes the value which physicians place on their role as leaders in the development of good health care policy. We appear before you today to urge that you correct existing taxation policy to be expanded under Bill C-70, which is not good health policy.
The Canadian Medical Association, representing the physicians of our country, has made many representations to national committees studying taxation policy. In each of these presentations the Canadian Medical Association has expressed a strong commitment to a system of taxation that is fair and equitable for all. However, since the GST was created in 1991, Canadian physicians have been treated unfairly.
As the CMA has expressed to you, under the GST and now the proposed HST, physicians are unable to claim input tax credits on the medical supplies they use to provide quality health care to their patients because medical services are tax exempt. Further, because the overwhelming majority of our services are paid for by provincial and territorial governments, physicians are unable to pass the increased costs of these services on in the form of higher fees. This singles out physicians and treats them in a different manner from any other self-employed Canadian.
Most self-employed Canadians and small businesses have the opportunity to claim input tax credits. Similarly, other health care providers have the ability to recoup the GST and HST costs. It is only physicians who have been forced to bear the increased costs of the GST without relief.
In the province of Newfoundland and Labrador, the unfair treatment of physicians under the GST and HST represents bad health policy. It is becoming increasingly difficult to maintain a system which delivers high-quality accessible care in the face of significant problems in recruiting and retaining physicians. Uncompetitive compensation and difficult working conditions and workloads have led many physicians to leave practice in this province. As well, those who remain are frustrated and have begun looking elsewhere. In the face of this reality, the GST and the proposed HST serve only to make this problem worse.
A recent independent study done by KPMG has shown that the proposed HST will increase the costs of practice for physicians in Newfoundland and Labrador by 1.9 per cent. This is in addition to the increased costs already imposed by the GST, which we understand the CMA has identified for you.
Let me define what that means. The average physician in this province can expect to see his or her expenses rise by approximately $1,200 under the HST. This is, for example, one month's salary of the secretary in my office. This is in addition to the additional GST costs. She has no ability to pass on that cost to the provincial government because of the constitutional exemption. He cannot recoup it through additional revenue because the budget for medical services is capped and fees have not risen in years. The physician is left to bear the increased cost and, for many, the option then becomes: exit from practice in Newfoundland and Labrador.
Physicians contemplating working in Newfoundland and Labrador will see the additional costs of practice as a disincentive to coming here. Similarly, physicians already here see the HST as further discouraging them from remaining, particularly as it is so clearly discriminatory against physicians alone. As such, the GST and HST work counter to good health policy in this province.
The Newfoundland and Labrador Medical Association urges you to support changes which address the unfair treatment of physicians under the GST and proposed HST. Such a change will ensure that provincial difficulties in recruiting and retaining physicians and providing accessible quality care are not worsened by the GST and HST.
The Canadian Medical Association has recommended an amendment to Bill C-70, which will make all medical services zero-rated. We urge you to support this amendment in the interests of fair treatment of all health providers. Good tax policy and good health policy must go hand in hand.
Mr. Paul Burgess, President, Canadian Bar Association -- Newfoundland Branch: Thank you for coming to St. John's to listen to us today.
The CBA represents over 35,000 lawyers, judges, notaries, law teachers and law students from across Canada. We have almost 400 members in this province. One of the purposes of the CBA is to promote access to justice, and the CBA is concerned that the implementation of the HST will detrimentally affect the ability of certain individuals to access justice.
It is recognized the proposed HST will generate revenue for the government of Newfoundland which will greatly assist it in carrying out the difficult task of meeting its budget objectives in these tough economic times. The branch is also aware of the benefits which the HST will have for businesses. The subject of the economic merits of the HST, however, is left for other organizations and interest groups to debate.
As I stated at the outset, the concern of the CBA is the impediment the HST will have on individuals' ability to have access to justice. Unfortunately, there are many people in our province who are financially disadvantaged. The HST will increase the cost of legal services by 8 per cent and, while this may seem an insignificant increase to some, it may prevent many from obtaining legal representation in matters which have a significant impact on their lives.
Let me share with you some of the examples which cause particular concern. The first concern relates to applying for child maintenance application against a former spouse or partner, or seeking a justified change in maintenance or enforcing payment of maintenance. The second concern arises when a landlord evicts an individual or withholds their security deposit. The third is when obtaining a divorce or an appropriate and binding custody, access, property, debt or support resolution in a divorce. The fourth concern relates to defending oneself against unjust allegations. The fifth is obtaining a fair settlement with a former employer when downsized or otherwise unjustly dismissed. The final concern relates to what may happen when someone is applying for benefits under social welfare legislation such as EI or social assistance.
There are instances when a person is earning a low income yet does not qualify for legal aid. Take, for example, a single mother of two who must pursue a maintenance application through the courts. Her legal fees to pursue the matter could reasonably be expected to be approximately $3,000 to $5,000. Now, the tax increase as a result of the HST will mean an additional $240 or $400 to her. As a society I believe we want to encourage the proper support for children of broken relationships and eliminate the consequences of poverty and need. Increasing the amount of tax to pursue that which is lawfully due to children of separated parents will make it impossible for some and harder for others to be properly represented.
Each year in this province, many people are found not guilty of criminal charges or have those charges dismissed or withdrawn. Someone falsely accused of a crime because of misidentification, false memory, malicious complaint or other reason, could, for serious crimes, easily face legal costs of well over $10,000. For less serious crimes, they would likely have to spend at least $1,000.
Additionally, financial criterion is not the only basis for determining whether individuals qualify for legal aid, for if individuals do not face the likelihood of jail, they are unlikely in this province to qualify for legal aid. The additional tax of at least $80 and in some instances perhaps $800 or more would have to be borne by those who pay for the legal services. Those who cannot afford to pay may try to defend themselves and may more likely be found guilty because important questions are never raised. Some may even plead guilty because they do not see an option.
An individual who has been laid-off may be entitled to reinstatement or compensation. Too many are fearful of the cost of service when they have no income to pursue their options. For legal services of, for example, $1,200, a terminated employee might reach a settlement which could bridge the gap to another job replacing EI or welfare benefits.
The Newfoundland branch of the CBA is greatly concerned that the HST on all legal services will impede access to justice for Newfoundlanders and result in many cases of injustice and increased costs elsewhere within the system. These are just a few of the examples which illustrate the inequities which may result.
At the National Mid-Winter Meeting recently held in Quebec in February of this year, the Council of the National CBA passed a resolution, a copy of which I have provided to all senators of this committee, wherein it was resolved that the CBA urges the governments of Newfoundland, New Brunswick and Nova Scotia, as well as the governments of any other province and territory in which a harmonized sales tax has been or will be implemented, to exempt from such tax any legal services, and we reiterate some of the particular legal services to which we refer.
The CBA does not propose that all legal services be exempted, and it is also concerned that any mechanism which does not exempt legal services would impede access to justice, for if a rebate or other type of mechanism is implemented, there are individuals who would not have the financial resources to retain legal counsel at the outset and await reimbursement at a later date.
We strongly urge this committee to consider the concerns which we have raised. We thank you for coming and listening to these concerns, and thank you for giving us the opportunity to address this issue. I would be pleased to address any questions, if you have any.
Senator Buchanan: Dr. Cohen, we have received briefs from Dr. Judy Kazimirski, the president of the CMA, who is from Windsor, Nova Scotia.
Dr. Cohen: I am well aware of where she is from, senator.
Senator Buchanan: John Cabot landed in Cape Breton before Newfoundland. We have also heard from Dr. Pugh and others of the New Brunswick Medical Association, and now from you today for Newfoundland Labrador. Tomorrow we will be hearing from the Nova Scotia Medical Association.
The figures that Dr. Kazimirski gave us and has now confirmed in a letter indicate that, in the three Atlantic provinces, the incremental cost of the HST to doctors, not including the cost you had already with the GST, the costs over and above that, will be about $4.7 million, and the amount attributed to Newfoundland is approximately $1 million dollars; Nova Scotia about $2.1 million, and New Brunswick about $1.6. They all have expressed the same concern that physicians, being in that unique situation under the Canada Health Act, must absorb all those costs. They cannot pass it on to their patients at all.
Dr. Cohen: That is correct.
Senator Buchanan: Are those the figures that you are aware of, and is that the situation here in Newfoundland?
Dr. Cohen: Yes, they are. The survey we have conducted takes into account everything the increase in the rent to the decrease in the gas price.
Senator Buchanan: I was going to mention that also. In addition to the 4.7 per cent, you will have additional costs that you can, of course, write off as expenses.
One of the arguments that was put up by someone in Ottawa was that doctors can write those additional expenses off as deductions to income tax. To me that is a bit ridiculous because I consider doctors and lawyers to be operating small businesses.
Dr. Cohen: Exactly.
Senator Buchanan: I could not understand why someone would want to single out doctors. You are in a unique situation. You cannot get the tax-input credits, you cannot get rebates, and you cannot charge your patients.
Dr. Cohen: It is the fundamental unfairness of the whole issue that concerns us, senator.
Senator Buchanan: We were told by one of our witnesses in New Brunswick that this could be the straw that breaks the camel's back for some doctors who may be in a situation today where they are contemplating moving.
Dr. Cohen: All physicians live under cap budgets pretty well now right across the country. There has been no significant increase in any physician's income for the past five, six, or maybe more, years. So every time one of these physicians takes a hit, the physician says, at the end of the year his take-home income is different. He sees the fundamental unfairness of this tax because other professionals such as dentists and lawyers can pass it on.
Senator Angus: I had an opportunity to discuss this particular issue with a highly placed member of the Newfoundland legislature in the early hours of this morning, and I have been extremely concerned about your issue which will show in the record of my questioning in other hearings. This individual disclosed to me that it is really not an issue at all, and that they had heard the representations so eloquently made by the CMA and your good self. The issue is that doctors, because they are paid by the state under the Medicare system, are just like bureaucrats, civil servants who should not receive special treatment. That is why they have not been zero-rated or exempted from this. Could you comment on that, please?
Dr. Cohen: I must make the point that it is an unfair treatment, not a special treatment. Bureaucrats do not run a private business. Physicians run a private business. We do not control our expenses. Our expenses go up as the cost of living increases -- salary increases to our secretaries, increase in rent and gas, and this type of thing. We cannot recoup that. That is the fundamental unfairness of the GST, and it will be made somewhat worse by the HST.
Senator Hervieux-Payette: I worked for the Quebec Department of Health for over four years. I would like to know the basic data respecting your own practice. What is the split between the income you receive in your private practice and the income you receive from working in a hospital?
Dr. Cohen: You are talking about an expense?
Senator Hervieux-Payette: No. I assume your income sources are from both your private clinic and from work at the hospital.
Dr. Cohen: That depends on specialists and general practitioners. General practitioners primarily work out of their offices unless they are an associated and on salary in a hospital. Specialists earn some of their income from an office setting and other parts of it from a hospital setting, but that would depend on whether the physician is a surgeon or an internist. It is difficult for me to give you those figures.
Senator Hervieux-Payette: Is the service provided by a general practitioner provided in a government clinic?
Dr. Cohen: No.
Senator Hervieux-Payette: In instances where that services is provided, the physicians are on salary, and furniture and equipment is supplied by the government.
Dr. Cohen: Our study was based on fee-for-service physicians. It was not based on salaried physicians.
Senator Hervieux-Payette: Under the GST regime, you could not claim that reimbursement.
Dr. Cohen: That is correct.
Senator Hervieux-Payette: What was the argument of those who implemented the GST for not giving any special attention to that?
Dr. Cohen: We do not know. We have been arguing from day one that we should have been exempt.
Senator Hervieux-Payette: It is not a new situation.
Senator Angus: We were thrown out of office on October 23.
Could you provide us with the statistics you mentioned?
Dr. Cohen: Yes.
Senator Hervieux-Payette: We are, of course, looking at new ways of delivering medical services. I hope that those addressing the health issue will consider this tax issue. It is probably easier to change a sector than to change a complete tax structure that it is to make exceptions.
My next question is to the legal profession. With harmonization in Quebec, additional provincial sales tax is included on our bills. At what level of income would one qualify for legal aid?
Mr. Burgess: Within this province we do not have a strict financial level below which you qualify. It is a somewhat complicated test that takes into account the financial position as well as other factors. In this province we cannot simply say that, if you make, for example, under $12,500 a year you will qualify.
Our concern does not relate as much to people who qualify for legal aid, but to those whom we often term as "the working poor".
Senator Hervieux-Payette: You also have small claim court where the amount claimed is not substantial. For instance, in a dispute between a tenant and a landlord where the amount is not large, you can go to small claims court.
Mr. Burgess: In essence you are right. Small claims court has a limit in this jurisdiction of $3,000. If it is a landlord dispute, however, there is a residential tenancies board which deals with that. You must initiate your action in the Newfoundland Supreme Court Trial Division, and then it is referred to the residential tenancies board.
Senator Hervieux-Payette: This new tax will only affect people whose claims are over $3,000 or people who cannot benefit from legal aid.
Mr. Burgess: That is correct.
Senator Hervieux-Payette: I have seen that in my province. As I understand it, people are using less legal aid services in Quebec than they did before we implemented the two taxes.
Mr. Burgess: It is a situation where you have to rely on personal testimony.
Senator Hervieux-Payette: You are speaking on behalf of the consumer because, as lawyers, you pass on the tax to your clients.
Mr. Burgess: That is correct.
Senator Hervieux-Payette: As you are aware, under the new, child maintenance legislation, there will be some mechanism for the recovery of the maintenance. This will be a national system, financed in large measure by the federal government. Do you think the costs of recovery will be reduced? Formerly, even if a plaintiff had a judgment, he or she had to sue to have the judgment executed. Do you not feel that there will be a net benefit to your clients in this case? It is certainly convenient to consult a lawyer because, although you may pay a fee, at least a judgment will be able to be implemented in a much easier fashion.
Mr. Burgess: We are not before this committee as a self-interest promotion. Our concern is that individuals should obtain legal advice and legal representation up front prior to any type of judgment, because if they cannot retain representation in the beginning, they cannot be represented, obviously. Any mechanism that assists individuals in recovery is a benefit. We have listed the concerns in all areas of legal representation.
Senator Oliver: My question is for Mr. Paul Burgess, and it follows the resolution you have shown us today. When you look at the items that John Hoyles, the executive director has included in this resolution -- employment law, landlord and tenant law, criminal law, family law -- they are all designed to help people who are either on a fixed income or do not have very much income.
In your deliberations did look at a more universal way of trying to protect these people who are, perhaps, having similar problems with other provisions? Did you look at the tax system at all and a system of tax credits as a way of dealing with the evil that you saw?
Mr. Burgess: We are simply suggesting that these are certain areas of concern. This resolution was passed unanimously by council in Quebec. This was not meant to be an exhaustive list but an indicator of the type of legal services that we thought should be considered.
Senator Oliver: I do not think you understood my question at all.
Mr. Burgess: As to the question of a tax credit type of system, the problem is that people need the money up front for legal representation. If a person has to wait for a rebate on his or her income tax return, that is a little bit late in the game. They need it when they apply for the legal services because they do not have the money to pay up front.
Senator Angus: As a member of the CBA I would thank you for coming here today and for your very articulate presentation on behalf of the CBA. I am sure my colleagues who are also members will agree with me. We seem to be getting excellent value from the association. Some of the other presentations we have had at this committee in the past 12 months from the CBA have been outstanding.
There is one question on this HST. Is it your interpretation that, if you were asked, as a St. John's attorney by a Vancouver insurance company, to give a legal opinion on a coverage matter for an insured here but an underwriter in Vancouver, you would have to deduct the tax? Would you have to add the tax on?
Mr. Burgess: As I heard earlier in the room this morning while we were waiting, there is a lot of uncertainty and that includes uncertainty in the legal profession. The short answer is: I am not sure. However, I am sure you are not focusing on the issues we have brought before the committee today. Legal services from a Vancouver firm to a St. John's firm in relation to insurance is not an area where we are concerned with an exemption. There is, however, the concern that, if you provide legal services within the four walls of the office in Saint John's, you have an obligation to collect the HST.
Senator Angus: If it is unclear, then I presume you would follow the motto: When in doubt, leave it out; right?
Mr. Burgess: You are a lawyer, senator; I will leave that for you.
The Chairman: I would thank the four witnesses for appearing, and I say on behalf of the three of us on this committee who have had close associations with Dalhousie -- Senator Oliver, Senator Buchanan, and myself -- we were delighted to hear from you. I am not sure where Dr. Cohen went to school, but I know where Mr. Burgess went to school because I believe my daughter was in your class.
Senators, our last witness before lunch is Mr. Robert Delaney, a member of the Stephenville Chamber of Commerce. We will certainly ask Senator Cochrane to be the first questioner given the fact that Stephenville is her hometown and the town in which she still lives. Thank you, Mr. Delaney, for taking the time to come in. Our format is that you make a brief opening statement and then we will ask you some questions.
Mr. Robert Delaney, Member, Stephenville Chamber of Commerce and Manager, J.M. Delaney Lumber Company: I would like to thank you for allowing me to appear here today. I would like to say a special hello to my senator, Mrs. Cochrane. Although I represent the Chamber of Commerce, my primary my focus today will be on how the HST will affect my business and what is entailed in the HST tax.
J. M. Delaney Lumber Company is a family-owned business. We have been in business 40 years in Stephenville. We employ approximately 15 to 20 people, depending on the time of year. Basically, what I want to look at is look at how the HST will affect business like mine?
I am against HST included pricing. We have a computer system at our store. We have approximately 14,000 items in our inventory at three separate price levels. If I have to go to tax-included pricing, I have to make 42,000 entries into our computer. That is before we start to re-ticket our store items, which you can appreciate requires quite a bit of work.
When the GST came into effect, it took my staff approximately a month and a half to two months to re-ticket our merchandise. It was done when they were not serving customers.
If it were a one-time tax it would not be so detrimental. However, in my conversations with the Deputy Finance Minister, the closest figure I could get was that there would be somewhere between a $100 and a $150 million shortfall on the HST.
I have been receiving a subsidy for three years from the federal government. I am afraid of is what might happen three years down the road. The Newfoundland government is going to be short at least $100 million, and they have very limited sources of funds. Taxation is one source that they must consider, in which case the rate of the HST will change.
Any change in the HST will automatically involve me going through the same scenario again. That involves a lot of work. My emphasis is to try to increase sales rather than performing a make-work job for the government and re-ticketing my store.
I have no problem with a national sales tax, but I do have a problem when that entails me doing a lot of work. If the tax is put at the bottom of the invoice, it takes ten minutes for me to reprogram our computer. Instead of spending two months, I could do it in ten minutes. Why do it the hardest way when the simplest way can achieve the same amount of funds for the government and can alleviate a lot of work for business?
I run only one small business. However, if you multiply this across the whole Atlantic provinces and you will be talking about a lot of work just for the government to implement a tax. To me, that does not make any sense. Make it easier; make it simple; put the tax right at the bottom of the bill. In future if you want to change the tax rate, then it will only involve a little work. It will involve repricing the whole store. If the tax rate increase is only one or two points, I will absorb that because it will cost me that much to change my pricing.
I compete against Canadian Tire and other national chains who have an exemption from tax-included pricing in their catalogues, and that puts us at a disadvantage. I realize that they have to put disclaimers in their catalogues saying that the GST or HST will not be included in their pricing, but it has been my experience that consumers do not read fine print. They see the other price of $10.99, and my price of $12.99, or whatever the tax rate difference would be.
You have emphasized here this morning, that this is what the consumer wants. I never heard, this morning, what business wants from your side of the table. Business is your partner who will collect the tax and administer the tax for you. You should talk to your partners in business to see what they would prefer before you come tell us what the consumer wants. There are always two sides to the coin.
In conclusion, I would like to see a tax included at the bottom of the invoice and not HST included pricing. It is asking small businesses to do to much work to change to reflect the additional cost. These changes do not come without costs.
There is also the pricing consideration. We use special pricing such as "$9.99" on items. That will change to show a price of, say, "$10.32" or "$12.66", which means you lose what you are trying to do to promote your business. That will be detrimental of all small businesses.
Senator Cochrane: Thank you, Bob, for coming in and expressing the concerns not just of your own business but of the Bay St. George's region, the Stephenville Chamber of Commerce area.
We heard a representative of Mark's Work Warehouse this morning who told us about a $30,000 start-up cost. Will you incur that cost?
Mr. Delaney: I do not know if my cost will be that high. I do know I would peg my cost at between $15,000 and $20,000 because of the extra work we will have to do. Our work will involve changing pricing. If my salesmen were not doing that, they would be out trying to drum up sales for my business.
Senator Cochrane: Did you say you have 14,000 items to change?
Mr. Delaney: That is correct.
Senator Cochrane: Will employees be doing this?
Mr. Delaney: Yes.
Senator Cochrane: In your business, the lumber business, you have a lot of little nuts and bolts and things of that nature to price. Are you concerned about pricing every single little item?
Mr. Delaney: The problem I have is that, in our business, all of our merchandise is not bar coded, whereas the larger stores just change their computers. Not every item, like a two by four, for instance, is bar coded. Every price ticket on an item in our store must have a SKU number and a price on it. I cannot leave those SKUs and the old price on the item, because then the customer who comes to my counter will say, "Well, it is a $1 here and you are charging me a $1.15." I have to physically change the ticket on every product in our store.
Senator Cochrane: How much do you anticipate it will cost to change over? When you mentioned $20,000, is that the bottom line?
Mr. Delaney: That is the bottom line for this year, but as I said, my concern is that I know this rate will not be a lifetime rate, and I do not think anybody here believes that. Tax rates change.
Another scenario that has never been considered here, and I have never heard mention of, is that another government may come in and want to scrap the HST. Then I would have to take the HST included price off. That means more work. You must consider all aspects before you go into it.
Senator Cochrane: You mentioned that you do business in other parts of the country apart from the Atlantic region. Tell us about some of the problems you might see in that regard.
Mr. Delaney: Our hardware suppliers send us in pre-priced items. They are geared to Ontario markets, not geared the Atlantic provinces. I will have to change those prices and then include the HST.
We will have to find out from our suppliers whether they will do it in their computer for us or not, but I know we will incur a cost if they have to do duplicate pricing. Presently, they have a standard zone pricing for Canada. If they are going to change zone pricing for Newfoundland or the Atlantic provinces, then I know they will charge us an extra charge because, instead of putting one price in their computer they will have to put two price levels in their computer.
I have suppliers who deal with businesses in other parts of the country and the problem is that we do not have a national sales tax, we have an Atlantic Canada tax, and you have a two-tiered tax system in Canada. If you create a nightmare in this part of Canada, nobody else in Canada will touch it. This is a nightmare. I cannot see any advantages to my business whatsoever or to any business. The only advantage I can see is that some consumers perceive that the tax-included pricing is better.
Everywhere you buy something, even the United States, you pay a tax after the purchasse. Everywhere I go, the tax is extra. You know what the tax rate is, and most people know what their tax is going to be. When we do estimates, the tax-included pricing is the bottom line.
At one time you were rarely asked for a quote. Now I am doing quotes for $200 and $500. Everyone who who comes in wants one. We give them a price, and then the tax is put at the bottom. They have a tax-included price, but it is at the bottom of the bill. It is much easier to do it that way.
Senator Rompkey: You are arguing against tax-included pricing, are you?
Mr. Delaney: Yes, I am. Very much, yes.
Senator Rompkey: We have had testimony on both sides. We heard from Mr. Janes this morning, for example, who said that he thought that tax-included pricing was a good thing. Mr. Janes had also been in the retail business. We also heard similar testimony from the Francophone Small Business Association in New Brunswick. There has been testimony on both sides of the argument, although we may argue about percentages on each side.
As to what will happen in three years, the point has already been made this morning that there are signs that the economy in this province will improve in three or four years time, and that Voisy Bay will produce royalties and taxes as will Hibernia, and then, after Hibernia, Terra Nova and White Rose.
As a matter of fact, on the plane last night we had a man from Texas who was coming down here to look at the natural gas deposits off the Labrador coast. There are expectations. We do not know what will happen with the fishery. I think in three or four years time there will be an improvement in the economy in the province. I believe that partly answers your question as to what will happen in three years' time.
You are not part of a national chain, are you?
Mr. Delaney: No, I am not.
Senator Rompkey: Representatives of the national chains have told us that the people who work for them would be at a disadvantage. Can you clarify that? Who would be at a disadvantage?
Mr. Delaney: The disadvantage is that they have to have a two-tiered pricing system. The advantage they have is that they can advertise tax-excluded pricing, not tax-included. This is the major advantage they have. They can send out a catalogue across Canada, and because they are a national company, the government is giving them a break that they do not have to make a separate catalogue for the Atlantic Provinces. Their advertised price will be tax-excluded. When I put out a flyer or anything of that nature I have to use tax-included pricing.
Senator Rompkey: You can also show the tax separately, can you not?
Mr. Delaney: It has to be clarified. I know we had a gentleman in from Revenue Canada and his first statement to the Chamber of Commerce was, "You will have to excuse me if I cannot answer all your questions".
Senator Rompkey: I asked the question and it was clear to me that you can have tax-included price and you can show the tax separately.
Mr. Delaney: Normally the consumer would look at the large print in your flyer. That is the eye-catcher, and my eye-catcher has to be tax-included.
The Chairman: Mr. Delaney, thank you very much for taking the time to come and be with us. We appreciate it.
The committee adjourned.