LOCAL EMPLOYMENT AND TRADING SYSTEM
ASSOCIATION OF CANADIAN DISTILLERS
CANADIAN MANUFACTURERS' ASSOCIATION
CONTENTS
Thursday 25 November 1993
Underground economy
Local Employment and Trading System
Sat Khalsa, administrator
Mitchell Gold, member
François Vaillancourt
Ontario Provincial Police
Det Supt Wayne C. Frechette, director, criminal investigation branch
Det Insp Chris Lewis, OPP representative, regional task force on smuggling and criminal activity
Association of Canadian Distillers
Ronald Veilleux, president
G.A. Foss Transport Ltd
Jim Taylor, vice-president
Gord Foss, president
Canadian Manufacturers' Association
Eric Owen, director, taxation and financial issues
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/
Prince Edward-Lennox-Hastings-Sud ND)
*Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)
Caplan, Elinor (Oriole L)
*Carr, Gary (Oakville South/-Sud PC)
*Cousens, W. Donald (Markham PC)
*Haslam, Karen (Perth ND)
*Jamison, Norm (Norfolk ND)
*Kwinter, Monte (Wilson Heights L)
*Lessard, Wayne (Windsor-Walkerville ND)
Mathyssen, Irene (Middlesex ND)
*Phillips, Gerry (Scarborough-Agincourt L)
*Sutherland, Kimble (Oxford ND)
*In attendance / présents
Clerk / Greffière: Mellor, Lynn
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1005 in committee room 1.
UNDERGROUND ECONOMY
The Chair (Mr Paul R. Johnson): The standing committee on finance and economic affairs will come to order. We continue today with our deliberations in examining the underground economy in the province of Ontario.
LOCAL EMPLOYMENT AND TRADING SYSTEM
The Chair: Our first presenters today are Sat Khalsa, administrator of the Local Employment and Trading System, and Mitchell Gold. Would you gentlemen please come forward and make yourselves comfortable in front of the microphones, and whenever you're ready, please proceed. Could you also please identify yourselves for the committee members and for Hansard.
Mr Sat Khalsa: Good morning. I'm Sat, and this is Mitchell Gold. Mitchell is the chancellor and director of the International Association of Educators for World Peace. He's a member of LETS and a consultant to it. That's why I invited him to come with me this morning. Go ahead.
Mr Mitchell Gold: Good morning. I'm a recent member of LETS. I got involved with the LETS system because I saw its importance in the future of the economies of the world. As Sat mentioned, I'm with the International Association of Educators for World Peace, but that's not really germane from either an intellectual perspective or an operational perspective.
In 1975 I created the first barter bank in Canada in the field of radio programming, a radio barter bank. In the economy of Canada at that time in the radio industry, what I was doing was the leading edge in radio. We set up a barter bank. It was not understood by the industry. We were so successful in the creation of our industry -- we were in the radio programming industry, which our federal government was interested in stimulating -- that people in the industry were frightened of us and put pressure on us to shut down.
How they put pressure on us was by buying our programs instead of allowing us to barter them. That may sound strange to you, that here's someone who's coming up to us with cash for something that we would prefer to barter. The reason for that was it was one of the major systems, the Moffat group out west, and through their efforts of wanting to buy our programs, we were forced to shut down because we were doing national advertising sales, and for every market, we had to buy our way back on to our own programs in order to deliver the product to our advertisers. This was one area of misunderstanding of the industry, of barter, and the pressure came from the radio rep houses.
The other area of misunderstanding of barter came from our banks. I had about $250,000 in barter time across the country and I wanted to go to my bank and borrow money against it. They said, "That has no value." I said: "What do you mean, that has no value? I can sell this tomorrow for $100,000 easily. I don't want to." The banks, in effect, forced me to sell off a lot of my time at an extreme discount because they didn't understand barter.
Here I find myself in 1993 sitting in front of a committee that I'm quite sure doesn't really understand what the LETS system is. I've advised Sat that we ought not to address the committee because you are looking at an underground economy. We are not an underground economy; we are a parallel economy. If we are a parallel economy, we ought to be working together. In the field that I'm currently working in, which is global education, we're talking about how everything is interconnected. And according to Hazel Henderson, a leading futurist in economics -- I heard her speak recently at the World Future Society in Washington -- between 30% and 40% of the world trade is done in barter.
I want to just back off on the word "barter" a bit, because I seem to use it here rather often. We're not really barter. What we are is an alternative accounting system, because we don't really barter anything. People who participate in the system are urged to pay their taxes. I say "urged" because it's easy for them not to, and I think that's where your concern is. It's easy for someone not to disclose the taxes.
Since my association with the organization, I am participating in the -- how would you call it? -- definition of a philosophy. They have the philosophy there already, but I'm having it enunciated more clearly on why participants ought to be paying their taxes when they participate in our system. The reason why is that it's a cheaper form of tax. The overall system, the government's system, is not able to finance itself and it's taking 40% or 50% of our dollars.
You guys are running in a deflationary spiral and you're out of control and you don't know what you're doing. That's why you're trying to find out: "What's this underground thing? We want to know about it. How large is it?" We have no idea how large it is. All we can do is teach you about our system and how you, by being members of our system -- and I'm not just talking about you the government or you the committee. I'm talking about you as individuals participating in our system to see how it works for you, how it can become better for you, because if it can become better for you, you'll instantly see how it works in the larger context. If you don't see it for yourselves, you certainly won't see it for the system.
So what we're here to do is to urge you to view it on an individual basis and maybe on a committee basis, and maybe recommend a government basis to get involved with our system, see how it works, participate with us, because when you see how it works, you'll understand it.
Again, I'll make the analogy to our educational program: It's experience. It's through the experience of it that you learn. You'll read our lead sheets and you'll read the information that we put out, but it's just information, and what we're trained to do, because this is our nature, is to look at how it won't work for us. If we look at this system as to how it won't work for us, what you will find is that it won't work for you. You're going to get what you see. If you look at it to see how it will work for you, amazing as it may sound, you'll find it will work for you.
So we can't really give you anything specific about the underground economy, because we are not that. We're open to answering any specific questions you may have on how you can participate in our system so that you can learn exactly what it can do for you and for our government, for our country.
More importantly, we have a proposal that we're putting together whereby we can facilitate the dismantling of the welfare structure by using our system. We look at the part of our system that we call the welfare system, which seems to be entropic and continues to grow within itself. We see that by using the LETS system, there could be a process of empowering people who are caught in that trap to get out of that trap. This is a very exciting concept, but for this we do need government support. We need the approval --
Interjection: Ah choo.
Mr Gold: God bless, and it's nothing to sneeze at.
Mr Jim Wiseman (Durham West): This is a hard crowd to work.
Mr Gold: It is. I think that's probably the best I can say in this short time. I will be open for your questions.
The Chair: Sat, did you -- actually, I should say Mr Khalsa. It was nice to have met you earlier.
Mr Khalsa: "Sat" is okay.
The Chair: Do you have any additional comments to make before we go into questions?
Mr Khalsa: No, we can go directly into questions. I think that's the easiest thing to do.
The Chair: Okay, we have about half an hour for questions. That's about 10 minutes per caucus.
Mr Gerry Phillips (Scarborough-Agincourt): Maybe to help me understand the LETS system, you can just run us through kind of a typical example. I tried to read your material quickly here, that it would be kind of in a geographic community and people would barter goods. I would appreciate what the tax implications of that are, and just take us through that.
Mr Khalsa: Okay, sure. Let me run through some concrete examples. For example, the LETS system itself has to print its materials every month. It prints a little newsletter that it sends out to people and it has a kind of classified ads section of goods and services people want to trade. We have to print that. So we go to one of our members and we say, "How much does it cost to do the printing?" They say, "It costs $100." We say: "Whoa, we don't have that. How much green can you use?"
Mr Phillips: How much what?
Mr Khalsa: Green dollars. Think of them as barter credits. "How many barter credits will you give us?" So they say, "Okay, we'll do it for $50 cash and $50 barter." So that's good, because we have $50; otherwise we wouldn't do the trade. They wouldn't get $50 cash; they wouldn't get anything. So we give them the $50 cash, we give them the $50 green. On top of that -- this is a business here; they're a small business -- it's $100 of product that they're selling to us. We have to pay GST and PST on the full $100. So we do. So it costs us $65 cash and $50 green. They have to declare the green dollars as income and they have to pay taxes on it.
At the same time, if they go to someone else and get consulting or get a sign painted -- or, for example, we have a newspaper, the Kensington Drum, that is a member of our system. They can buy advertising in it for 75% green dollars. So when they spend those green dollars to get the ads -- and again, they would pay GST on the full amount and PST on the full amount -- that's a business expense for them.
In other words, green dollars are exactly like cash dollars in every way. The only difference is that it's considered to be income in kind. There's one exception to treating it exactly like cash, which is when the printer goes home and as a hobby or on an occasional basis he fixes the neighbour's VCR or tinkers with the neighbour's bike or gives the neighbour a loaf of bread and in exchange gets green dollars. Those green dollars are not taxable. This is the ruling of the department of taxation for the federal government. So that's the only difference between green dollars and cash dollars. In other words, spending green dollars has the potential to stimulate the economy and to increase tax revenues, and at the same time people who are short of money can increase the goods and services they have access to.
Mr Phillips: How many of these organizations are there in Ontario?
Mr Khalsa: At least 12 seminal. I don't know to what extent they've all developed. It started in Ottawa four years ago or maybe five years ago and Toronto started three years ago, and through the example of Toronto, at least 12 have started.
Mr Gary Carr (Oakville South): Thank you very much for your presentation. I didn't get a chance to read the Revenue Canada bulletin that was provided, but it talks in there about, "The department takes the view that the barter transactions are within the purview of the Income Tax Act," and so on.
In terms of -- I hate to say the word "policing" -- do you think it would make it easier to be able to collect income taxes through this system? How much more difficult or easier would it be through some of your systems as opposed to our present system?
Mr Gold: When you say how much easier would it be, I'm not really clear on what your question is.
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Mr Carr: I guess through other transactions we're hearing a lot from the construction people who are saying they'll do it without the GST and they're eliminating it. They say, "Here's the price, and if you pay cash, it's a certain amount."
Mr Gold: Those are people who are being unethical in the system. We do not promote unethical business transactions.
Mr Khalsa: In the same way as people can be unethical in the cash economy, they can be unethical in our economy. However, the fundamental idea that we're trying to get across to people is that by working together, by playing fair, there will be enough for everyone. So when someone decides to not report it, then they don't get credit in our system. If they don't get credit in our system, then they get shut out in a way. They don't build their reputation. If they don't record green dollar trades, they don't have the green dollars. They can't spend them somewhere else.
Mr Carr: In the green dollars, is it pretty easy to come to a fair price? Is there a lot of discussion or is it fairly simple to say, "This is what I believe," because you talked about the number of green dollars and so on. Is that fairly easy to do when you're involved in a transaction?
Mr Khalsa: You see, the primary implications as far as tax goes are for businesses which are GST-registered. For individuals who are not making green dollars as their main form of income, it doesn't really apply. But in the case of a business, it is very clear that our members expect those businesses not to be inflating their prices. They expect the green dollar figures and cash to be equal to their regular prices. So I think it is a simple matter to establish how much the in-kind should be.
Mr Carr: It says here, I think, that where goods or services can't be readily valued the department will normally accept the value of the latter as being the price at which the transaction took place. Can you agree with most of what's said in this Revenue Canada bulletin, or do you have any problem with it?
Mr Khalsa: We follow it. It's the law.
Mr Gold: One of the things I'd like to mention is that since I've been involved in the system, I asked a couple of friends of mine, "Are you in the system?" These are people who are more aware than most of the way the system works. They said, "Well, the system can't afford me." I said, "Well, what do you mean?" He said, "Well, I need $1,000 a day for my time." So I said: "Okay. How about if I put a transaction together and I'll pay you $500 cash for your time and $500 green for your time? Would you accept that?" He said, "Sure."
I happened to be in Chicago at the time talking to a friend of mine, and I put a $2,000 deal together to get this fellow. We're actually effecting international trade, if you want to look at it that way: He's going to get work down in Chicago. He's going to get $1,000 cash. My commission is going to be the US exchange, that I'm going to pay tax on. I'm paying him in green dollars for the trade. So I benefit, he benefits, the Canadian government benefits; everybody benefits. I don't see a loser here in this one. The Americans get the benefit of a Canadian service.
Mr Carr: Thank you very much. That was very helpful; very informative.
Mr Wiseman: I'd like to explore, perhaps if we can from an economic point of view, why it is that the LETS system is growing. You said in your last example that the system can't afford the $1,000 that he would charge for his fees. Why?
Mr Gold: Most of the people who are operating in the system right now are people who are using it in, call it, a low-range economic capacity, like $100 here, $200 there. There aren't the larger numbers. It needs someone in the system to see the way the larger numbers can work. I can see the way $1,000 can work. I haven't scanned their books, but how many $1,000 trades have you had since you've been in operation?
Mr Khalsa: About 240,000.
Mr Gold: How many $1,000 trades?
Mr Khalsa: Oh, $1,000 trades? A few.
Mr Gold: A few? One? Two? Three? Five? Ten?
Mr Khalsa: Five or 10.
Mr Gold: I've got two $1,000 trades to do in my first month. It's the people who are involved in it.
Mr Wiseman: What's lacking from them that there's a problem?
Mr Khalsa: Basically, what it is is that people join our system and they think about it exactly in terms of the current cash economy and they're very scared about big numbers. They're people who are used to living with very, very little money and they're very, very scared of debt. So they bring the same attitudes of fear and lack into our system that they have in the other system, even though the reason they join us is because it's a way of increasing their ability to get the things they need. So they're still very hesitant to trade.
Mr Gold: Plus, I think you must recognize that until the media come out and support what we're doing more from a philosophical base, and the government too, not just media, to understand how we can help each other, the larger trades are not going to happen, unless we become more a barter bank where we take inventory. Up to now, we don't take inventory. It's just a trade. Paul, you might want to make a trade through our system.
Mr Khalsa: We really don't have an intention of becoming a barter bank. There are barter banks in the city of Toronto and throughout the province.
Mr Gold: Throughout the world.
Mr Khalsa: Yes, throughout the world. They work on a certain scale, but they're designed to make money. Our intention, the reason we've started it up, is to allow communities to start taking care of themselves, because the current structures are breaking down and the government isn't in a position to be able to take care of them. People feel desperate and we want to give them a means where they can change that around, recognize that they have resources that they can put to use to take care of themselves.
Mr Wiseman: How much time do we have left?
The Chair: You have time.
Mr Wiseman: I note Mrs Haslam --
Mrs Karen Haslam (Perth): You go ahead. I only have one question.
Mr Wiseman: I have two questions.
Mrs Haslam: Could I just ask my one question and then maybe go back to Mr Wiseman, if that would be okay?
The Chair: Sure, if that's agreeable to Mr Wiseman.
Mrs Haslam: I just want to be clear on the taxation coming to government or the revenue coming to government to cover health care, the education system, municipal roads. You take advantage of all those systems.
Mr Gold: No, we don't.
Mrs Haslam: You don't travel on roads?
Mr Khalsa: We pay taxes.
Mr Gold: We use them. We don't take advantage of them.
Mrs Haslam: Okay, that's my point. You use those, and the maintenance of those systems comes from tax dollars. So could you just clarify for me how you pay tax on the green dollars? Do you pay tax on the green dollars?
Mr Gold: Yes. We went through that earlier.
Mr Khalsa: We went through that.
Mr Wiseman: Do you pay income tax?
Mr Gold: Yes. We pay tax on everything. Taxes get paid on everything.
Mr Khalsa: According to the tax rules.
Mr Gold: Both on an income level and on a GST-PST level. We are urging that the GST-PST be paid. I think your point is absolutely 100%. If we do not pay those taxes, we are taking from the common good, and if we're taking from the common good, our system is morally bankrupt. We have to contribute to the common good.
Mrs Haslam: I just wanted a clarification on that. I apologize for being late because of another meeting. My concern was that it's fine to barter, but if you use the systems of the common good, paid by the common good, then there has to be some way of you contributing to that. I appreciate your answer. Thank you.
Mr Khalsa: I want to take that point a bit further though. The thing is, from my perspective, to take the extreme case, if no taxes were being paid on green-dollar trades, nevertheless the cash economy would not be hurt by what we are doing. This is the point that small businesses have difficulty understanding when we encourage them to join. If a small business joins our group and it says, "Take 10% in green dollars and barter credits," it's scared that will mean 10% less income in cash. That's not true, because if you give people $10 extra, what will they do with it? They'll spend it. They'll probably spend it at the same place to get more.
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Mrs Haslam: To go back, I disagree with you here. My concern would be the taxation on that. To me, it's similar to saying: "Give me $50 cash. I'll give you a bill for $100 because you've given me a cheque for $100, and therefore you pay tax on only the $100." So what I want to know is you're paying tax on that $50 cash in the pocket that the person in the underground economy is saying, except the difference is between the words "cash" and "green dollars." I want to be sure that the taxes are being paid on your green dollars. I don't want to take any more of Mr Wiseman's time, but that's my point. I wanted to know that you were paying, on the green dollars, into the tax system --
Mr Khalsa: Well, we are.
Mrs Haslam: -- to provide the services the government provides for you. If that wasn't the case in a very formalized way, then it is no different than a gentleman or a lady saying in her business, "Give me $50 cash and put $100 on your credit card."
Mr Khalsa: I know I'm being politically unwise to get into this at all, but nevertheless --
Mrs Haslam: I don't want to take Mr Wiseman's time. That's the only concern.
Mr Khalsa: Nevertheless, I do want to respond. If I'm a housewife and I'm at home and the neighbours need me to babysit because they have to rush off to do something and I babysit for them and I don't pay tax on the fact that later on, as a kind of return of the favour, they do something for me like give me an extra piece of clothing they have in the house, to me, the government is not being denied its fair share of actual resources.
Mrs Haslam: I agree.
Mr Khalsa: A lot of what's happening in our system is just like that.
Mrs Haslam: But it's taking place in a formalized position, in a store where they buy goods, and they sell them, on a receipted basis, less than --
Mr Khalsa: But in the store, it's changed.
Mr Gold: The store, the dentist -- I would rather use a dentist, because one of our board members is a dentist and he works on half green and half cash. His invoice to his customer goes to the full amount in his books. Debit accounts receivable $50, debit green $50, credit revenue $100. He pays tax on $100.
Mrs Haslam: Okay.
Mr Gold: He pays GST on whatever the goods in it. Everything is exactly the same, and this is where you missed in my opening comments where I said we are not an underground economy. We are an alternate: alternate, parallel, and I don't even like the word "alternate." Parallel is what we are. Think of us as parallel. Think of how you can use us. Each individual here can use the LETS system by looking at the way they spend money. Become a member of LETS, see how it works for you, and then you'll be able to advise the economy on how it should be done. But you're not going to be able to advise the economy unless you experience it. You know, I can't explain to you what the colour green is. You have to experience it.
Mrs Haslam: I appreciate your clarification, and that's the clarification I wanted, that the taxes were being paid on the total billing sum. That's all I wanted to know. Thanks.
Mr Wiseman: I'd like to go back to this notion about money and the reason you're having to do what you're having to do. I'm not sure if I can raise this in a way that maybe you can respond to, but it seems to me the system has developed because there isn't enough hard cash in the hands of people who need it to exchange it.
Mr Gold: Our brother in the parallel system is having troubles. This is what the nature of your question is. Why is our brother in the system having trouble? Why do we go from an AA rating to an A- rating? Why is the global economy having a problem? These are large questions.
Mr Wiseman: I don't want to get that big, but I suspect that some of them are related.
Mr Gold: You may not want me to answer that, but that's the way it is. If you choose, you can blame Bob Rae for the situation of our province, but it's not Bob Rae's fault that the world is having a problem. The world is having a problem.
I travel the world. I go to Malta; I go to Panama. I hear the problems on a global level, and at the World Future Society I hear leading economists talking about the global problems. You can't come down here and think this isn't why we're having the problem here. We're having the problem here because everyone's having the problem.
Once we recognize we're having the problem, how do you stimulate your economies? My belief is that with a very simple way of looking at what we're doing, you can stimulate our economy very effectively, and it's going to benefit everybody, our parallel system and ourselves.
Mr Khalsa: I think the analysis we have in some of the papers there, which you might get a chance to look over, is very simple but at the same time very powerful. If you're dependent on money to make everything happen and yet money must leave your community, you're going to be short. When you've monetized everything, when even a mother's love becomes monetized and you've got to pay for it, then there won't be enough money to pay for all the things that have to happen. What our system does is it doesn't take that on head-on. It just creates a different mechanism whereby money won't go away.
Mr Wiseman: So how are you going to use Bill 40?
Mr Khalsa: Bill 40?
Mr Wiseman: Community economic development. You made the presentation, I think, to the community economic development committee when we were doing the hearings in the summer.
Mr Khalsa: No, I didn't.
Mr Wiseman: Somebody from this group did, because I remember it.
Mr Carr: I think they were here last year in finance.
Mr Khalsa: Yes, that's what it was. It was the same committee.
We are trying to apply to that program to get funding because we believe green dollars would increase the bang for the buck in terms of encouraging community economic development. It's already been proven in the US that a Meals on Wheels program, for example, in Miami doubled its volunteers and quintupled the amount of food it delivered with the same amount of cash: no increase in cash funding; an increase in delivery. It encouraged people who had never volunteered before to volunteer and it dropped the volunteer dropout rate from 60% to 2%, believe it or not. So that meant staff time wasn't involved in training volunteers; it meant the staff time was involved in doing other things.
That's why the governments there have funded it. They're funding it for senior citizens because it's cheaper to have a neighbour take the senior citizen shopping than to pay a day nurse. There are very direct, immediate benefits. The longer-term benefits are less clear and less easy to explain, but those immediate payoffs make it justifiable right there.
The Chair: Mr Khalsa and Mr Gold, I want to thank you very much for making a presentation before the committee this morning. I apologize for the late start. I also want to thank you for the printed document that you've supplied us with.
Mr Gold: I look forward to you all becoming members of our LETS system.
FRANÇOIS VAILLANCOURT
The Chair: Our next presenter this morning is Mr François Vaillancourt, professor of economics from the University of Montreal. Welcome to the committee. Please make yourself comfortable, and whenever you are ready, please proceed.
Dr François Vaillancourt: Ready when you are. I believe the committee clerk has distributed a very small handout of two pages. I'd like to thank you for having me this morning.
On Friday, there was a conference at the C.D. Howe Institute in Ottawa, and I had the occasion to read the proceedings of your meeting with the Treasury group, including Mr Spiro's presentation. I phoned the committee clerk on Monday and said, "Do you really want me? I think you know more about this than I do," but she convinced me that perhaps it was still useful for me to come down from Montreal. So thank you very much.
The outline you have in front of you has three dimensions.
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The Chair: Dr Vaillancourt, just before we start, we haven't received your handout, but we will forthwith.
Dr Vaillancourt: Okay. It's an above-ground distribution system.
The Chair: Okay, you can proceed.
Dr Vaillancourt: I thought, when I was asked to come, there were three issues of relative importance: What we mean by the underground economy; its importance; and, mainly, what to do about it.
You are clearly by now fairly aware of definitions of the underground economy. I would like to make perhaps one point which is not in the handout as such, where I have outlined four methods -- national accounting methods, survey methods, tax auditing and monetary aggregates -- which is the issue of the pricing of the underground economy. This is relevant for the monetary aggregates method, which you've had people explain to you before, like Mr Spiro or perhaps Mr Smith from Alberta has done or will eventually do.
When we use the monetary aggregates method, we implicitly assume that the price level for the underground economy, which we cannot measure clearly, remains the same when we say that an increase in the money circulating in the underground economy represents an increase in the quantity of underground activity. This, I think, is of some importance with respect to the introduction of the GST and its impact on the underground economy, since I would argue that before the GST was introduced, a normal process to the introduction of an underground transaction was for someone to call in a tradesperson and say, "How much is it with a bill?" "It's $1,000." "How much without the bill?" "That's $800." The reduction in the payment for the purchaser of the service was agreed to because there was some fraud going into the personal income tax with the provider of the service.
With the introduction of the GST on services, in Quebec the retail sales tax being expanded to some services, some taxation of goods in Ontario still, and perhaps eventual changes in the goods and services tax that I mentioned earlier and the Ontario retail sales tax, there is probably a 10% sales tax rate overall, provincial and federal. This means now that the price you're quoted with a bill is $1,100. If the provider of underground services still wants the same margin to manoeuvre with respect to the official pricing as opposed to the underground pricing, the amount he would ask for would be $900. So for the same amount of work done in the underground economy, the price paid for that work would have increased -- $800 to $900 -- roughly 12.5%.
We do not know anything about this. I just should warn you that this has a direct impact on the measurement using cash methods. I've asked Peter Spiro this question. He said, "We don't know." I agree, we don't know, but it may as a result lead us to slightly overestimating what's going on from a cash methods point of view. So that was one point that I think has not been made before in front of you, and I think it's an important point.
So what is the importance of the underground economy? I refer to a few studies. Your own work shows it ranges from 7% to 20%, perhaps, in 1991-92. My personal preference is to believe the low end of the range, 7.5% of gross domestic product, about $50 billion to $55 billion.
Why do I believe that? Because if you try to calculate the underground economy on a sectoral basis as opposed to an overall basis, and you have to say, "In this part of the economy there must be so much going on; in this part of the economy there must be so much going on," you find it very difficult in many sectors to assign a very high percentage of underground activities.
If we take the production of government services, for example -- health, education, municipal services, federal and provincial government -- this is a fair amount of the gross domestic product in employment, and there is no underground economy going on; it's aboveground. In some manufacturing, it's very hard to imagine -- the production of airplanes, for example, or subway cars -- there's an underground economy.
So when you do these adding-up exercises, you of course are left with the construction industry -- we all know about the construction industry being important -- and provision of services to individuals. But these are not the entire economy. You would need very high numbers, I would argue, to get a 20% underground economy overall, given the areas where there is none. I cannot demonstrate these numbers any more than anybody else, but I think one should be aware of that. One consequence of this is the issue of targeting.
Since government committees have to come up with recommendations for action as opposed to philosophical issues, what are the remedies and causes that could perhaps be considered in terms of the underground economy, defined as the economy on which taxes are not paid? That's what's important to you, I believe.
Having said that, let me start with non-tax remedies. One dimension of the overall underground economy is the issue of illegal activities. I believe the next witness is from the OPP. I was told he will talk about the dimension of illegal activities. Redefining illegality can have consequences on the tax base. If you make, if not prostitution, all activities associated with prostitution illegal, do not be surprised if prostitutes and people who live off the avails of prostitution do not report the income. Should you decide to make prostitution legal -- and actually it is legal, strictly speaking, but all the activities via soliciting are not -- then that would tend to draw some additional income into the tax net.
Clearly this is an issue which is a difficult one. It could go on to the issue, for example, of illegality of drugs. They're not provincial jurisdiction, they're Criminal Code jurisdiction, but they have consequences on a core underground economy which must remain hidden from both the tax and police activities and in a sense provide a basis, an infrastructure. Presumably a pizza parlour which is perhaps used to launder underground cash would also be quite happy not to charge the GST, and the retail sales tax in addition, for some cash transactions. So there is an issue there of what should society do in terms of what is legal and what is illegal in a society, and that's a morality issue up to a point.
The second issue is the enforcement of existing laws. You may not be aware of this, but recently French CBC, Radio-Canada, showed a video of Indians selling illegal cigarettes as police cars drove by, literally, on the same video. The issue was raised in the National Assembly to Mr Ryan, who is the Minister of Public Security, and Mr Ryan said, "No, I will do nothing." We're told right now that in the consultations of the Quebec Liberal Party leading to the, presumably, choice of Daniel Johnson as the future leader, one of the three issues that comes up in the informal consultation of the people of Quebec is the issue of the illegal sales of cigarettes and the overall respect of the law by people, and in this case by aboriginal peoples. One of the three leading issues raised on a regular basis, apparently, is what comes out.
I was asked recently, is there political will to apply the law? I don't know, but that's for you to decide, not for me. I can simply say that, as an economist, one knows in our formal model there is such a thing as the taste of individuals and that individuals learn how to behave in part by the behaviour of others. If you tell everybody else, "We're all going to cheat except you have to remain honest," it's a bit more difficult to convince people to do that.
The third comment on a non-tax remedy is to avoid price controls in all sectors. This is particularly important in Quebec in the construction industry, but in general the studies across the world show that when you try to regulate prices, if the price you set through regulation is too high or too low -- it depends if you're buying or selling, usually -- automatically people will react and try to avoid the system.
Tax issues: I think a general philosophical comment is appropriate here before coming to tax remedies. Some people have argued that what we're trying to do in Canada is to have European standards of services and American levels of taxation. I would make a different argument. I would think that what we're trying to do in Canada is to have a European or a Canadian level of government services but at the 20th-century and 19th- century levels of privacy. We're really saying: "Oh, this is all my private life. The government should not know these things, should not be aware of what's going on, should not be able to ask questions, but on the other hand it should provide all these services."
In the 19th century, governments did not provide many services. Your income transfer or production of services was perhaps a net of maybe 10% of gross domestic product, as opposed to 40% to 50% of gross domestic product now, and probably it made sense to say, "My home is my castle," as the British expression goes, and to exclude the government from it.
If we want to be logical, after a given point we must admit that if the government does more and more, individuals are less and less responsible for their own welfare. Accordingly, there should perhaps be some greater level of intrusion of government. Or, if you want to go back to governments doing less, then perhaps individuals will do more and then there will be less there.
But we have a tension going on between these two aspects of society, which is not often mentioned in the area of underground economy or tax. I think it's important to be aware of that, this issue of responsibility versus contributions to society. If we are responsible for our own welfare, we may contribute less but we expect less. If we're less responsible, we contribute more but we expect more.
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What can we do, then, in the short term? There have been studies done in New Zealand that show that the idea of having your name published as a tax fraud makes you somewhat more hesitant to be a tax fraud. I saw mention in your proceedings that it's been done in Ontario in some cases, but in general the information available on who's been defrauding the system is not widely available. It's not publicized. There's no great attempt to do that.
I don't know if it's the case in Toronto, but in Montreal in the last three years every Saturday the newspaper publishes information on municipal court proceedings on dirty restaurants and food stores and what was found and what the fines were. I think it has a direct impact. I mean, if I see a name mentioned, I will hesitate to go there, obviously, and my impression is that people are more careful because of that. It's impossible to document exactly, but clearly it is done. It is a judgement of the court and it's publicized. It's a decision made about three years ago by both the Montreal Gazette and La Presse to put that in the public domain. It was always available; it simply was not reported in the newspaper before.
I would argue -- this is the issue of privacy -- that some additional information on who is not contributing to society would be important and therefore to publish the names of tax frauds. One could imagine their pictures on stakes and all that. I don't think we want to go that far, but that would be something.
Mrs Haslam: Public lashings.
Dr Vaillancourt: No, no, no, no. Information is very different from public punishment. Some information is useful: Who is not carrying their weight?
Mr Wiseman: Let the market decide the punishment.
Dr Vaillancourt: Yes, we could do that too. But perhaps more within the realm of feasibility is the issue of auditing. I'm sure you've all read the Globe and Mail this morning, the page 1 comment that the Minister of National Revenue is considering increasing audits of the goods and services tax.
A couple of points I think are important here. First of all, one has to be very careful not to select audits only on the information available for those individuals already paying some taxes. If you do that, you tend to have what's called shadow businesses. You have three kinds of businesses or individuals: fully honest ones, those that are somewhat less than fully honest but still paying some taxes and those that are completely outside, maybe criminal or non-criminal.
If you concentrate on those where you suspect there's something going on, you may push some over the edge to trying to hide completely. The impact on your tax revenue is not certain; it would actually be negative if you do that. You need some logical audit rules but also probably some completely random auditing. An honest member of the Legislative Assembly who gets only a salary and has no other income still gets audited once in a while. That's one thing that should be considered.
Mr Wiseman: Those two over there.
Dr Vaillancourt: Well, yes, you can probably randomly pick one member of the committee if you want to. It may actually have a positive impact on your re-election to have been audited and have been found honest.
The second I mentioned is the issue of matched data. There's a story in the US tax circle of a man in Virginia who bought himself a Mercedes-Benz car and who had the registration papers delivered to him by the Virginia tax office, politely inquiring where he had gotten the money, since he had not filed an income tax return for the last three years. It was perhaps a good reason, but it's an extreme illustration of matching data of the car registration office and the income tax office, in this case. This is the issue of privacy I was mentioning before. People are very reluctant to match data.
The third issue is simply to ask for more additional information from the taxpayer. Right now, if you have a child, when the kid is less than five or six years old, not going to school full-time, somebody minds that child during the 24-hour period, unless you're a very bad parent. The information as to who minds the children for pay is collected only from those who actually claim the child care deduction at the federal income tax level. No attempt is made to collect information from all of those who have children.
Imagine the following additional one line on an income tax return, "Please indicate who is minding this child during normal hours while you are working, and is this being done with or without pay?" Every taxpayer would have to sign that one line. This would require people who right now pay and do not ask for receipts -- and I'm told by quite a few people I've asked the question to in Quebec recently that when you put an ad in the newspaper looking for a babysitter, 8 to 5 or whatever, one third of the people will phone in and say, "No receipts. I'm on welfare. I'm on workers' compensation. I'm on this. I'm on that. No receipt." This would require people to either deliberately lie or to tell the person, "I'm sorry, I will not lie on my income tax return." Right now, they're not lying. They're paying the person a given amount of money, they're not getting receipts, but they don't know officially if that person is or is not declaring income for income tax purposes. We all guess what's going on but we don't know.
This is the third kind of issue which, again, up to a point, is an intrusion in their private lives. You're being asked for additional information, but it generates additional information for the government to use.
In terms of long-term issues, and I'll close on this, Canada and North America are faced with an issue of increasing dissociation between the benefits received and the amounts paid by individuals for taxation. We're also faced with the fact that it's more and more difficult to tax capital. Capital is more and more mobile across jurisdictions.
As a result, I believe taxation will have to turn more and more towards user-type fees; for example, in the field of post-secondary education, having some Australian-type mechanism where you pay up front, you get a loan to cover that payment and you repay over 20 years. Those who go on to post-secondary education pay for it; and perhaps in the area of health care. We're going to have to be very careful in health care. A user fee does not mean that you pay $5 and go to a doctor. You may get a bill at the end of the year, for example, or you may get a co-insurance principle.
It's quite intriguing now, the idea that we would continue to pay less and less taxes and get more and more services. I think you have to strengthen the link between what you pay and what you get. I think that's one of the key reasons. There are quite a few studies in the States doing simulations of individuals -- in a simulation we're given all the rates, given the penalty rates -- which show that when individuals believe that the benefits they're receiving from taxation are higher they tend to be more willing to pay a given amount of taxes. I'm not saying they don't try to cheat somewhat -- everybody tries -- but there's probably a greater willingness if there's this feeling that there's some benefit associated with taxation.
The Chair: We have about seven minutes per caucus. We'll start with Mr Carr.
Mr Carr: Thank you very much for your presentation. I was interested in one comment where you referred to the story -- I think I heard it actually on CBC radio this morning -- about the auditors coming in and the number, the increase. I guess that means the GST is here to stay in spite of the election.
Mr Wiseman: Let's not be predeterminating about that.
Mr Carr: They're coming in and seeing the financial.
Mr Wiseman: Not fulfilling their promises too soon.
Mr Carr: What is your feeling on that particular situation? What impact will it have if, as we heard in some of the reports, and you mentioned the Globe and Mail, they increase the number of auditors by the number they do? Any idea what amount of revenue will come in and what it will do?
Dr Vaillancourt: No. It depends on how they've been targeting. I have colleagues, for example, who are into a net credit position since the opening of the GST in 1991, because they export services to international institutions in the US. They have never been asked in two and a half years, "How come you always get these refund cheques and never pay GST?" Nobody's come to ask a single time on that issue. If an auditor went and looked at that, he'd find it's quite legal, but there may be other areas where obviously they should come in.
One suspects that in the construction industry workers work in the good, white, well-paid sector when things are good and the cranes are up in downtown Toronto and construction is not stopped on the Bay-Adelaide centre, but when it doesn't go very well, they go into the underground economy. You could perhaps assign some monitors to actually do a construction industry project and track those workers and see if they actually do sell their rich car or go and get some cash, but will there be the political will to follow up on that? I don't know. It's a very difficult question. How well is it managed and how far are you willing to take the heat to go after cash that people are not paying taxes on?
Mr Carr: The other question I had was relating to what you talked about, the fee for post-secondary education and health premiums. In the federal campaign, no political party talked with regard to health premiums. I think one was going to throw herself over a railroad track and somebody else was going to do something great to protect against user fees. It was non-political; all of them said it.
One of the public's problems with even the increase in the fee for post-secondary education is that I think a lot of people wouldn't mind if they saw the taxes going down correspondingly. The big problem is the appetite of governments at all levels and political stripes as we add fees but we still have the taxes, even when we transfer it and so on, because it comes down to the fundamental problem that we're spending too much.
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When you talk about higher fees for post-secondary -- and I'll just use the example you used -- how can we as politicians say to the public that we're going to then lower your tax rate in other areas? Because they don't believe us. How do you argue that if we could just get more fees, whether it's health premiums or post-secondary, all it will mean is that government will keep spending more money?
Dr Vaillancourt: Which party are you with again?
Mr Carr: I'm with the Conservatives. I don't know if you're kidding or if you mean it.
Dr Vaillancourt: I will send a list.
It's a very difficult question. Why I suggested that to begin with is that yesterday I believe Ontario's bond rating was slightly decreased. In the US, 25% of post-secondary education is financed by fees overall. That's current statistics for 1989, I believe, or 1990. In Canada it's 10% by fees overall. Oh no, that figure is for Ontario. That means, everything else being equal, given the way we finance, the Ontario public deficit is higher and the private deficits of students going on to post-secondary education are lower because we choose to finance through taxes. That was the argument for doing that: simply putting the books right; who gets the benefits, who pays for it.
On your second point that government is spending too much, that's an issue for legislators to decide upon. I would simply like to make one comment here. One often hears the following statement: In the 1980s we overspent. The deficits were too high -- a $10-billion structural deficit in Ottawa, for example; a couple of billion perhaps in Ontario -- and therefore we should now cut spending in 1993-94 to make up for past sins.
Let's be careful here. If spending was appropriate in the 1980s and financing was inappropriate, one should not therefore cut appropriate spending in the 1990s to make up for past mistakes in financing. It would be as much of an error to do that in the 1990s as to have made the mistake in the 1980s.
I would have argued, if I was asked the question by the gentleman, that what you need is a catch-up tax for a few years on the baby boomers, people aged 35 to 55. These were those who in some sense benefited from extra spending in the 1980s. We cannot really identify and send you a specific bill saying, "You owe us $7,200," which in some sense has some specific tax measure, but for a very well-defined generation, those who did benefit from the extra spending, that would be a way of answering the issue of how to convince governments, because then you would bring in user fees for current spending and use the extra taxation to reduce the deficit. It's not going to fly politically, I know that, but that's an economist's answer.
Mrs Haslam: Excuse me. How old are you?
Dr Vaillancourt: I would pay. I'm a university professor and I've argued in the past that our salaries should be cut by 10%. My colleagues don't like me. We obviously benefit from extremely good employment conditions. We don't get fired when the recession comes in. Actually, one could easily think that the salaries of even both civil servants and their political masters should be inversely indexed to the unemployment rate: As it goes up, the salary goes down.
Mr Kimble Sutherland (Oxford): Mr Vaillancourt, we appreciate you coming forward, because we know you've written quite extensively and commented quite extensively on the underground economy.
I want to come back to the point you made that you did not feel the underground economy is as severe as some of the estimates, the high end of the estimates, the 7% to 20%. If I understood you correctly, what you're suggesting should be done, which I guess no studies have done, is to take those portions of the economy where we know studies have been done and we know they're very high, such as alcohol, tobacco -- we had a report about the jewellery industry and some others -- see what the proportion is in them and then put that into how much of the overall economy do those high-level factors, where there's a high level of underground economy, make up. Is that what you're suggesting as a way of getting a handle on this?
Dr Vaillancourt: Yes, exactly. That's one way of trying to get a handle on this. My impression is that if you look at these studies on the cash dimension of the underground economy, they're always carried out under the assumption that money in the underground economy circulates as fast as money in the aboveground economy. That's one of the two key issues. The other one is having a base year where there was no underground economy. That's always struck me as unlikely to happen. One way would be to actually go and survey people in the underground economy and ask them how long they retain cash in their hands and compare that to those in the aboveground economy. That would be one way of putting down the numbers.
The other one is to try to make some reasonable estimates. For example, one hears that in the construction industry half the work is done in the underground economy, one third to one half. Those are the numbers we hear in Quebec and Ontario. Nobody claims it's 100% but, say, one half. That gives you an upper bound for that sector. Nobody argues that municipal services are underground economy. That gives you an upper bound of zero for that sector. Just add up these various sectors. That gives you some idea as to what is going on. You'll again have margins of error.
I mentioned in the notes the survey by Mr Frechette that was done in Quebec City a few years ago. It has not been repeated, unfortunately, but he was led to find that the legal underground economy -- not the illegal one; that's a difficult issue -- was not that high. I've talked with him since I made my comments in Montreal in October and he said, "Yes, I buy your 7% or 8%." That makes sense probably, in his opinion also. But the 20% strikes us; I mean, $1 out of $5 is extremely high.
Mr Sutherland: You talked about asking for the extra information regarding who looks after your children type of thing while you're at work as one way of getting more information. Did you have any other suggestions? Because we did have some suggestions from a few other presenters that we don't ask enough information to be able to match tax files or we don't utilize what information is available either through Statscan and the federal and provincial income taxes and do the comparing.
Dr Vaillancourt: In La Presse of about two weeks ago there was an article on somebody who was being paid cash as a plumber, a typical example always. Poor plumbers. His point was, "I have so much cash I must have five bank accounts." My reaction was, "If you must have five bank accounts and you keep hiding these things, obviously there's very little information collected to try to match the bank accounts together." It's easy to do that. Does somebody report your opening a bank account?
Again, in the US they have regulations on large cash transactions. I believe it's above $10,000 in the US. I may be wrong, but it's a large cash transaction requirement. This is for crime. But clearly in the underground economy, till a few years ago, implicit interest paid on treasury bills was not reported. There was no way of finding out what was going on. There was no requirement of brokers to send the information to Revenue Canada.
I think we're very hesitant. We had a presentation on Friday by a Canadian economist of Swedish origin who works on Sweden, Åke Bloomquist from the University of Western Ontario. He argued that one reason why the underground economy in Sweden was relatively small, given how high the tax rates were there -- because what was found was it wasn't that high compared to, say, Italy, which had a lower tax rate and a much higher underground economy -- was that the Swedes were, in some sense, more law-abiding citizens. I call them Lutherans. That means they're maybe more law-abiding, I guess, than southern Catholics or something.
But it raises a touchy issue, which is that in so far as you have a fair amount of immigration in Canada, you have people who come from jurisdictions where governments were not to be trusted, and rightfully so, and come into a jurisdiction providing a lot of services. I'll take India, because the example I took on Friday was India. I know the Indian tax system a bit and I've heard of many ways of evading it. When I was in India in March everybody asked me -- it was very interesting -- about the size of the underground economy in Canada. It was very small compared to theirs. That was an interesting dimension.
People will know of various tricks. If we don't adjust our income tax system, if we assume we have the same knowledge of tax evasion that was there 20 years ago -- people have come from cultures where they have learned different technologies to evade taxes; it's not a question of wantonly being evil; it's simply that you know how to do these things and you use them to your benefit -- then your tax system is going to stay behind. It's probably an argument for employment equity and diversity in the ministry of revenue, I suspect.
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The Chair: Mr Wiseman, you have about a minute and a half.
Mr Wiseman: One quick question: You said that you would support professors taking a 10% cut in pay. Why wouldn't you take it from the other angle and support a 10% increase in the number of students and in the amount of time you teach so that revenue could come to the university?
Dr Vaillancourt: If we use an increase in fees, I suspect you'll have a small diminution in the number of students. There's some uncertainty. In theory, you could argue you're going to borrow it and it won't matter. But people are uncertain to take on long-term obligations, and if you did that, it would reduce the number of students.
We do not have many entry restrictions in Quebec right now. I don't know about Ontario, but in Quebec the number of students who show up at university, in my program anyway, all of them are admitted. That's not the issue, as far as I can tell. It's really an issue of structural costs more than the increase in revenue. There are also issues of formula funding. In Quebec universities, the last brings in 25% of the first students. It doesn't actually cover even the cost of an extra student, so you may end up reducing the quality for everybody, including those who come in.
It's a very complex issue. That's why I look at salaries and I say to myself, "Look, people are always underpaid compared to others," but in practice one has to be honest and say we're lucky in the public and quasi-public sectors, and the Quebec government is entering negotiations with unions right now to try to get some kind of -- the dreaded words -- social contract. We call them Johnson days over there.
Mr Phillips: I appreciate your thoughts. I'm trying to come to grips with the size of the issue, which is kind of our first objective. I appreciate your feeling that, "Let's try and look at this as objectively and as analytically as we can." I judgementally kind of think you're probably on the right track in that 5% to 10% range, but my question is just -- maybe you answered it earlier -- can you give us any help in terms of the sectors that you've analysed and kind of give us a little bit of a template that we might use in our report?
Dr Vaillancourt: I've looked at the overall issue of the underground economy using a monetary aggregates approach, but when I talk about the sectors -- I sat down at one point and said in my mind, what is important? You go to a list of sectors from agriculture to public administration and try to say: "Could there be cash transactions in those sectors? How important are they likely to be? What are the purchasing agreements?"
One says agriculture, for example. The answer is that of course there could be lots of farm gate transactions, but then you look around and you see what happens as a matter of fact. The wheat is sold by the Canadian Wheat Board. Pigs are often bought in vertically integrated feeding organizations. Beef is sold on the open market. Chicken is a marketing system, so are eggs, so is milk. If you take out all of these numbers, okay, what's left? Maybe apples, peaches, if you sell them in Ontario, maybe some grapes.
You can start by the overall size of the agricultural sector. Say it's x billions of dollars. Take out the part that you know is sold legally, because they also have regulations. I mean, there's no underground market in milk.
Mr Phillips: I don't mean to interrupt, but I know that. It would be useful for us if you had the notes that you used --
Dr Vaillancourt: No, I haven't done it in that detail. I'm saying how I would do it. If you're offering me a consulting contract either at above- or below-ground rates -- if the OPP is in the room, we'll negotiate an above rate.
Mrs Haslam: Mr Phillips, ask him if he'll take it in green dollars.
Mr Phillips: Yes, that's right.
Dr Vaillancourt: No, I'm sorry, I'd like to have cash that I can use all over the place. I listen to green dollars; I still don't quite understand how they work.
Mr Phillips: Listen, I agree with what your recommendation is. We may have to ask our overworked staff to kind of just try that.
Dr Vaillancourt: I would seriously say I'm sure people at treasury could go through the exercise. They're very knowledgeable about that and give you, at least in some sense, a benchmark as to what are the sectors to concentrate upon after you've done the exercise.
Mr Phillips: That's a worthwhile suggestion, I think, if we're listening -- Mr Spiro's there -- because I do think then you can start to say: "Listen, we know that in these sectors it's very small. Let's be sensible about it."
We're almost out of time. Using information from matched data, which is Mr Sutherland's point, it's odd in some respects that, as we've entered the information era, the more information we have, the more we can't seem to see things in some respects.
I follow up on the point that Mr Sutherland made. If you stretch your imagination, are there other sources of data which we should be trying to access to try to get at this? The reason I raise it is that we had one other witness who said that once something was reported to Revenue Canada, the revenue from that source went up dramatically, even though it was simply reported without an awful lot of scrutiny. Have you any other data files?
Dr Vaillancourt: No. I think matching should be done as much as possible where things are not easily mobile. One example is property tax records. You have individuals who have an address for income tax purposes, an address for property tax records, and you find out that the amount of income they earn is almost insufficient to pay the local taxes, according to their income tax files. You've really tried to match in that case something which is not easily fudged -- it is feasible, but not that easily done -- with something which is more easily fudged.
You can start asking questions: "If over three years you've actually changed houses and reduced your income and gone on to a higher-priced house, how come this happened?" This is the kind of idea I have in mind, that you should try to match information. If in the past you had some investment income -- I did my mother-in-law's income tax return and one year she forgot to give me a T5 slip for the savings bonds. I didn't catch it so I sent it in, and afterwards we amended the return. Nobody caught it. She had a drop of 50% in her investment income. You would have thought there'd be some flags in the system catching those kinds of strange variations. None. She actually turned herself in and paid the extra tax when I discovered it.
This is the kind of thing you can actually try to improve at a reasonably low cost and catch nowadays: construction workers' variations in income, for example.
The Chair: Thank you very much, Mr Vaillancourt, for coming to Queen's Park to make your presentation.
Dr Vaillancourt: Thank you very much for having me.
ONTARIO PROVINCIAL POLICE
The Chair: Our next presenters this morning are Detective Superintendent Wayne C. Frechette, director of criminal investigation branch, the Ontario Provincial Police, and Detective Inspector Chris Lewis, criminal investigation branch, the Ontario Provincial Police and OPP representative, regional task force on smuggling and criminal activity. Welcome to the standing committee on finance and economic affairs. Please come forward and make yourselves comfortable, and if you would, please identify yourselves for the committee members and for purposes of Hansard.
I'd also like to tell you that should you need to stand up and make any comments while the overhead projector is going, there's a small lapel or tie mike right there on the table that you can use so we don't miss a word.
Mr Wayne Frechette: Good morning. My name is Wayne Frechette. This is my colleague, Chris Lewis.
Mr Chris Lewis: Good morning.
Mr Frechette: I won't be standing if I can help it this morning. I'm also not squirming in discomfort at your questions, or at least I don't imagine I will be. I've got a bit of a disc problem, so if I look a little uncomfortable, it wasn't anything you said.
The Chair: Please make yourself as comfortable as possible, then.
Mr Frechette: Perhaps I'll put this overhead on right now.
The Chair: Okay. While the presentation is being made, perhaps members of the committee who can't observe the screen would like to move to another place. Please proceed.
Mr Frechette: Good morning, ladies and gentlemen. Thank you for inviting us here to this forum this morning. Before I begin, just by way of introduction, I suppose, it goes without saying that we will try to answer any questions you have as fully as we can. If that sounds like a bit of a disclaimer, it is. We have ongoing investigations that are going on as we speak, so within that context, obviously we don't wish to compromise an investigation, and perhaps even more importantly, we don't wish to put officers in any more danger than they're already in. So from time to time there may be a question or a portion of a question that we simply can't address, and I'll certainly make that plain to you.
I won't read to you from the presentation. I guess what I'll do is simply paraphrase it.
As the overhead suggests, probably the fundamental problem from a law enforcement perspective here is the jurisdictional issue. The red area on the map is the province of Ontario, the blue is the state of New York and the gold or yellow is the province of Quebec. Therein lies a large part of the problem.
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We are presently involved in a joint forces anti-smuggling initiative in the area, and one of the first jurisdictional situations we're trying to overcome right now is to get our people, the OPP officers involved, acting RCMP special constable status, because the fact of the matter is that on any given day or night, we will have an OPP officer riding in an RCMP vehicle with an RCMP officer, or vice versa. At any given time it's very difficult to say, when you're on the ground there, whether you're in Ontario or Quebec, or for that matter very often whether you're in the United States. We are going to find ourselves certainly in Quebec from time to time, and probably in a position where we're going to have to take enforcement action, so to keep this all within the bounds of legality, we're attempting to come to some sort of agreement with the federal Solicitor General or minister of public safety to get our people some sort of legal standing.
This all revolves around the Akwesasne Reserve and the nearby city of Cornwall. The Cornwall police, who are a partner in this initiative, have no actual jurisdiction in respect to Akwesasne, but a good deal of the smuggling activity and the associated violence tends to spill over into their jurisdiction. What happens here essentially is that Canadian cigarette manufacturers export large quantities of their product to the United States. I'm not a tax expert, but I understand there is little, if any, tax on those exports. The distributors, for argument's sake in Buffalo, then are in a position to sell these cigarettes to virtually anyone. Again, my understanding is that if you sell in the United States to a native person, for example, there is no tax.
What happens at that point is that the cigarettes that began here in Canada find their way back into Canada at a price that's approximately half of the going rate. I'm not a smoker and I have very little interest in becoming one, but I can certainly see that if I were, this would have certain attractions for me.
We're estimating -- and it is only that, an estimate, based on intelligence sources primarily -- that about 50,000 cartons of cigarettes cross the St Lawrence River into Canada, the bulk of them in the Cornwall area, every day. These cigarettes are sold to consumers illegally through neighbourhood corner stores, the mom-and-pop sort of corner stores, bars, restaurants and such places as university campuses, out of the backs of station wagons and hatchback Honda Civics and this kind of thing. So it's a very widespread distribution network when it gets down to the consumer level.
About 10% of the tobacco products smuggled into the country are in fact American tobacco products, American cigarettes. I guess that may be a commentary on American cigarettes; I don't know. We also are aware of a cigarette manufacturing plant on the Akwesasne Reserve on the American side, so it's a fairly big business.
There is a school of thought that if we were somehow able to rationalize the tax structure, ie, if Canadian taxes were lowered and US taxes were raised, thereby reducing the profit margin in cigarette smuggling, this problem would go away. I have some difficulty with that in that in my experience, cigarettes are basically the commodity of the day. They are smuggled because they're relatively easy to transport and there's big money in it. If the profit margin were substantially reduced, you may eliminate some of the fringe players, some of the part-timers, but my belief is that the hard-core smugglers will simply go to a commodity in which there is a profit: cocaine, weapons, alcohol. I say that because in different operations that we have conducted in the area, we have bought cocaine, we have bought weapons, we have bought alcohol. So if you have a network in place and the profit goes out of one commodity, it's not a leap in logic to believe that you will go on to the next commodity, particularly when you're already involved in it to some degree.
Probably, as I said earlier, the big attraction with cigarettes from the smugglers' perspective is that they're very easy to carry and there's a tremendous profit in them.
Liquor: Chris can probably get into this in greater detail. He is the commanding officer of the OPP component of this task force. Liquor, as you might expect, is becoming more and more of an issue, particularly with Christmas approaching. I don't know what a 60-ounce of rum is: $40 or thereabouts. In any event, from the smugglers, you're getting it for half or less. The only downside from a smuggler's perspective with liquor is it's harder to lug around. A boatload of liquor of course is a lot more labour-intensive than a boatload of cigarettes.
Mr Lewis: We have noticed a big increase in the amount of liquor seized recently. Our feeling is that Christmas is approaching and the liquor orders are going up. Traditionally in the Cornwall area, approximately 10% of all the contraband seizures have been liquor, month after month. Recently, that's changing. The figures are becoming a little more high in the liquor area.
In the last five weeks, we've seized approximately 5,000 60-ounce bottles of liquor in that Cornwall area, approximately 30,000 cartons of cigarettes and about 5,000 tins of tobacco, for a grand total of about $1.7 million in contraband. We've seized about 30,000 cartons of cigarettes in a month, a little better, and when you look at the estimates that 50,000 cartons a day are coming over the river, we haven't even got a full day's worth in five weeks, with numerous officers working around the clock. So it's a very, very big problem and we're barely touching the tip of the iceberg at this point.
Mr Frechette: One thing we should emphasize is that clearly there are residents, natives on the Akwesasne reserve, very much involved in smuggling, but it's not exclusive to them. We are aware of various components of organized crime involved in this, as well as just the average guy who has a boat and is out to make a buck. So it's certainly an issue with respect to the reserve, but they aren't the only people involved in the smuggling industry.
The Chair: Does that conclude your presentation?
Mr Frechette: That's been sort of a fast trip through the smuggling industry in Akwesasne, but if we can answer any of your questions, we'll certainly try to.
Mr Lewis: There's more information in the handout that we've provided than we've actually gone over in the short period of time.
The Chair: Okay. We have about 10 minutes per caucus for questions. We'll start with Mrs Haslam and then Mr Lessard.
Mrs Haslam: I've always raised a concern about the networks already being in place and therefore going on to other products or going on to other illegal activities, and you're saying that is the case with the networks already being set up?
Mr Frechette: That is the case now. Prior to the hostilities or whatever you should call them revolving around Oka, for about 12 months prior to that, we had been involved in an undercover operation in and around Cornwall and Akwesasne targeted on cocaine trafficking, both on the reserve and off. Obviously, we bought pretty respectable quantities of cocaine, kilo quantities. At that level, you're not dealing with street-level traffickers. These are major drug entrepreneurs.
We were also buying weapons, fairly respectable weapons such as a mini-Ruger, which is a semi-automatic rifle that we happen to be armed with, the OPP's shoulder weapon of choice. We bought an Uzi, which is an Israeli-made submachine gun, along with the AK-47, which we also purchased. Probably if you're a gun nut, those are the crème de la crème in automatic weapons. We weren't targeted on weapons. They were, for the most part, almost throw-ins to larger drug deals, but if you're posing as any criminal with a little self-respect, you will certainly buy these kinds of things, and that's what we were posing as at the time.
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Mrs Haslam: I'd like to go more into the arrest idea. When you talk about eventually these cigarettes being sold to consumers illegally at corner stores, bars, restaurants etc, and on page 5 you talk about, "To date, approximately 50 persons have been charged with related offences," what about stepping up the fines and the arrests at those local areas? For instance, in the new tobacco legislation coming in, they will be charged; they will have the opportunity of losing their licence for selling to minors. So being very proactive in being sure that we go to those areas and find out and find them.
Fifty doesn't seem like a lot. Are you only stressing and right now working at some of the larger networks, or should we be looking at a more local solution: the more local corner stores, bars, restaurants, the man down on Yonge Street with the gym bag? Should we be looking a little harder at more fines and more arrests to be sure, at the bottom level, it's being taken care of?
Mr Frechette: Perhaps Chris can deal with the 50-odd arrests that have been made down there, because they're his people who made them, and I'll get back to the second part of your question.
Mr Lewis: The 50-odd arrests aren't a province-wide thing. Those are just the arrests that have been made in the Cornwall area since this task force was formed a little over a month ago.
It's a very large enforcement problem, what you're speaking of. The Ministry of Finance has tobacco tax investigators who do that sort of investigation, try to find stores and restaurants or whatever that are illegally selling cigarettes. But with the number of enforcement officers involved at their level, at our level, and the volume of stores, bars and backs of cars that are all over this province, it's virtually a very lopsided situation.
Mrs Haslam: Could I ask just a quick question before he gets on to my second one? Do you have a Crime Stoppers in the Cornwall area?
Mr Lewis: Yes.
Mrs Haslam: What percentage does that help?
Mr Lewis: Percentagewise, I can't give you a figure. It certainly does help. We do get a lot of calls from the public directly to us and through Crime Stoppers. We talk to Crime Stoppers on almost a daily basis.
Mrs Haslam: They would be, to my thinking, on a local level: "A corner store down by me is selling cigarettes and there's no duty paid on them."
Mr Lewis: Yes, we do get those kinds of tips. We have to prioritize the tips we do get and act accordingly. We have so many officers, so much time, so we're obviously shooting for the moon in that we're looking for some of the bigger players here. If there were more than 24 hours in a day and we had more people than we do, we would slowly start working down and getting smaller and smaller. But we will lay charges in any situation we come across, regardless of the volume.
Mrs Haslam: I was thinking more along the line of my town, and I won't take up all my colleagues' time, where there are street patrols and there are beat cops and there are people who know the community. Is there no way to be sure that they are more aware of what's going on and being more proactive in getting into that corner store in one way or another and nipping it there? I understand what you're saying. If you're low on manpower, then you're going to go for the arrest that nabs a truckful, not one package of cigarettes. I understand that. I'm just wondering if there was something at a more local level that could be put into place.
Mr Lewis: It is in place. It's just that it's not very effective at this point. Police officers in general in any community have a lot of work to do for the amount of time they have. Obviously, if they're going from call to call, to domestics, to armed robberies or whatever, they may not have the time to actually go and start checking corner stores. But I would say that the majority of police officers are aware of this problem and are looking into these things.
Mr Frechette: The second part of your question had to do with the new tobacco legislation. Again, I haven't read it in great detail, but it seems to me to be more perhaps health-driven.
Mrs Haslam: Yes, it is, and young people, more along the lines of education. But there are provisions that look at the type of packaging, which again would help, because if there was more evidence of contraband or more evidence of cigarettes that come from the States with a larger warning or a larger stamp or some way -- I mean, that little yellow ribbon on the cellophane is not an effective way of noticing what cigarettes come from the States and what don't.
Mr Frechette: I guess my only observation is that the smugglers and the people who are the market for the smugglers probably won't be deterred any more by larger print. I'm not being facetious. I don't mean to be the prophet of doom, but my observation on the legislation is that, yes, it will make cigarettes somewhat less accessible in the legal market. Generally, when that happens, you drive the price up in the illegal market, where accessibility at this point really isn't a problem. So that's one of the downsides of the legislation, because if they're less accessible to me legally, I'm more inclined to deal with my fellow who gets them wherever he gets them.
Mrs Haslam: That's what brings me back to my concern about 50 arrests when we know how prolific the selling of them is at a local level. That's exactly what I'm thinking about when I'm thinking about young people and the education aspects of it and the health aspects of it.
Thank you. I won't take up any more time.
Mr Wayne Lessard (Windsor-Walkerville): You mentioned in your remarks that 10% of the cigarettes that come into Canada are American, so that means that 90% of the cigarettes that come back into Canada are Canadian cigarettes. I know the previous federal government had suggested an export tax so that it would increase the costs to bring cigarettes back into Canada, and I'm hoping the new Liberal government may reinvestigate that.
I know you're not economists, and you've indicated that if you make one substance more expensive, then smugglers are going to switch to other means of making an income. However, I don't think there's the same widespread demand for cocaine and guns as there is for cigarettes. I'm wondering whether you would think an export tax might decrease the incidence of the smuggling back into Canada of Canadian cigarettes.
Mr Frechette: The short answer to your questions is yes. I think on this whole issue there is no one initiative or no one strategy that is going to make this problem go away. It's probably going to be a combination of health initiatives, education initiatives, enforcement initiatives and some major tinkering with the whole tax structure, perhaps all of those things done in concert. In fact, I'm reasonably confident that all of those things done in concert would give us some results, but no one of them is going to do it.
Mr Lessard: Is there any more time, Mr Chair?
The Chair: We have about two minutes, Mr Lessard.
Mr Lessard: I know Mr Jamison had a question.
Mr Norm Jamison (Norfolk): Basically you touched on my question in the original sense. I know it's a sensitive area, but it's on the coordination that needs to happen considering the jurisdictions, various levels of government and so forth and police forces that are related to that particular issue. Certainly there needs to be a coordinated effort. For example, as OPP officers, you have very little ability to patrol borders in the smuggling sense without a federal mandate offered that way.
Mr Frechette: As I mentioned earlier, that's one of the reasons we want to get RCMP special constable status for our people, because then they will have enforcement powers under customs and excise. They will be able to take enforcement action in the province of Quebec. Really, at the enforcement level, the 50-odd people we have between the RCMP, OPP and Cornwall police down there are one generic police force by and large. My partner tonight, if I'm out on patrol, may well be an RCMP officer or a Cornwall officer. So I think we're on the way to doing business there. Obviously we have a problem with an international border, but we're in daily touch with the New York state police. In fact, we hope to have a common radio system with them in the next week or two such that we can talk to them.
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Mr Jamison: To me, the guns situation, the arms situation, is most frightening of all, knowing, as you've indicated, there are arms that would make it difficult, given confrontation developing there -- that we're looking at a potential of a confrontation with these types of weapons available. It's certainly disconcerting for me. My obvious question is, how capable are police forces at this point of dealing with those types of armaments?
Mr Lewis: First of all, I guess, to answer your question, we're trying to avoid a confrontation at all costs. We don't want to get into battles on the water. We don't want to get into shoot-outs. We're trying to do this more strategically.
Our officers are armed and equipped and trained. Whether we're better armed is perhaps a question. We don't know exactly what everyone out there is carrying on the other side. We know what we have. We feel we're suitably armed and equipped to do our job properly. I am very concerned about the potential for violence and seeing some of our people get injured over this.
Mr Frechette: The potential is there with every arrest, with every interaction.
Mr Jamison: Thank you.
Mr Monte Kwinter (Wilson Heights): Mr Frechette, in your statement you sort of imply that a change of taxes isn't going to solve the problem entirely. You also stated that there's about, what is it, 40,000 cartons coming in a day?
Mr Frechette: Fifty, give or take.
Mr Kwinter: Sorry: 50,000 cartons coming in a day, and you were able to get 40,000 over a five-week period. So you're getting less --
Mr Frechette: Thirty, actually.
Mr Kwinter: Thirty thousand. You're getting less than one day's smuggling capacity in that period of time. My question is, you've got all of these various components and you say no one is going to solve the total problem, but you're involved with law enforcement. What proportion of the problem do you think can be addressed by law enforcement and, if you had unlimited resources, what would be the maximum results you would get just from the law enforcement component?
What I am trying to really determine is, if more resources were applied to the problem on the enforcement side, would the results be quite dramatic as opposed to the other components that you're talking about?
Mr Frechette: Clearly, if you put a police officer every three feet --
Interjections.
Mr Frechette: I'm not being facetious, but clearly that would have a dramatic impact.
Mr Kwinter: No, I'm just saying there's got to be an optimum size.
Mr Frechette: Chris may want to jump in here at this point, but I think right now that if we had 50 more people, if we doubled the number of people, for example, or tripled it, that too brings a number of problems as to storage of exhibits and all this kind of thing. So to say what percentage of the problem can be dealt with by law enforcement, I'm really at a loss to quantify that. I would say a large component of this whole problem is a problem for law enforcement, half of it possibly, but that half has to be done in concert with other initiatives. We can't do it ourselves.
Mr Lewis: Mr Kwinter, with regard to the tax issue on the cigarettes and the fact that if taxes were raised, cigarette smuggling would go down and other things may go up, I think it would be a successful thing if taxes were raised. Cigarette smuggling would go down. It would eliminate a lot of the people who are becoming criminals who never would be otherwise, the people who are looking at hauling perhaps two cases of cigarettes a day and making a quick $1,000 to supplement their mortgage or to help finance their business or whatever.
If they couldn't do that, they probably wouldn't be involved in criminal enterprise. They'd go back to just trying to make ends meet the way everyone else is, I suppose. The traditional crime groups that are normally dealing drugs and are now moving into cigarettes would have to go back to drugs, I suppose. Smuggling would continue, but I think by eliminating the tobacco smuggling, certainly there would be a lot less people involved in this illegal trade. That's my feeling.
Mr Phillips: This is very interesting testimony. What I take from this is that this is like a $1-million-a-night after-tax profit in the Cornwall area. This is like several times bigger than General Motors. This is the biggest profit industry in Ontario and, as I say, it's all after-tax profit. It's $1 million a night, every night, just in Cornwall.
My question is this: Have we allocated the resources to try to manage this size of an industry? One of the things this committee should be looking at is trying to say, "Listen, when you're talking about trying to manage this size of a $1-million after-tax profit a night, have we got enough resources behind this issue?"
Mr Frechette: Again, a short answer would be no. In an ideal world, we would have considerably more resources applied to this than we have now. To use your term, at the moment it's like a mouse trying to manage an elephant. But I think within the parameters of our overall resources, we've put a fairly significant presence in the Cornwall area. At one time random seizures, which have been going on for some time, were looked upon by the smugglers as basically similar to a business tax, as just one of the irritations of doing business; every now and then the police will seize one of your shipments. Our intelligence information that we're getting now indicates that we're becoming considerably more than just a minor irritant.
Mr Lewis: Given the present laws, we have to have certain grounds to seize these things. We're seeing things there that we just can't act upon because the grounds don't exist, and that's just the reality of law. If we could stop every vehicle, open every trunk and if Customs could block the bridge off totally and not let anyone through until they emptied everything in their possession, we could virtually shut it down. We could turn the area into a police state, I suppose. Obviously nobody wants that, so we're trying to do our best with the authorities we have. I think if we doubled our resources, we would probably be up to 60,000 cartons rather than 30,000, and it would be just a little over a day's worth of contraband seized. Given the present laws and authorities we have, we're not doing too badly, but certainly we're only touching the tip of the iceberg.
The related violence was a big concern, the shootouts on the rivers and what not that were going on. Since our presence there, that has gone down considerably. There's not as many reports of random shooting. We've accomplished something in that regard. Getting more contraband is something we'll work on more strategically, and those figures will increase over time as well.
Mr Phillips: My judgement is that one of the challenges we face is that, in terms of public perception about buying an illegal pack of cigarettes, if you were to go to somebody on the street and say, "Hey, I've got some money I just stole from a bank," nobody would take it, but it seems to me there is -- at least I'll ask you the question. On sort of the hierarchy of socially acceptable illegal activities by the individual, is this a significant problem, that people don't view it as much of an offence at all to be buying illegal cigarettes? Have we got a problem there, that in the end the consumer doesn't feel much compunction about participating in this activity?
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Mr Frechette: I think that is evidenced right from the -- and I believe it was on The 5th Estate recently, where one of the residents of Akwesasne said words to the effect that if you're coming on to the reserve to deal with cocaine traffickers you have their full support, but don't mess with the cigarette industry. So clearly people see a difference between cocaine abuse and cigarette smoking, and I would hope they would.
To answer your question, to go to your neighbourhood watering place for a drink in the evening, people are buying smuggled cigarettes from the same fellow they buy their Nevada tickets from. It's really not seen as a heinous crime, I agree. That probably is more a function of education. At one time -- I look back a number of years -- impaired driving wasn't seen in the same light of urgency and viewed with the same distaste as it is today. It may be that with education and so on, cigarette smuggling may be seen with considerably more distaste than it presently is, hopefully.
Mr W. Donald Cousens (Markham): Three questions: The first has to do with the image I have of someone driving from Akwasesne in their four-wheeler with a couple of cars with them as they drive into Cornwall or some neighbouring community with a deposit to make following a busy night. They'd walk in and they'd have with them something in the order of $150,000 in cash or some number. It would be in small denominations; therefore, no cheques. It's a good transaction they've got, and what they've done is deposit that day after day. After a while that bank account becomes huge and becomes something that leads to other things, to me very serious things. This is more than a symptom when you have such huge amounts of cash being generated. It also leads to tremendous power that these people will have because of the way this money can then be moved around.
I'd like to ask, to what extent are you following the money at banks or registered deposit centres and is there forensic analysis being made of that? This may lead to questions you can't answer. I have to say there are other steps that go far beyond the immediate kind of task forces that you've described into some other larger areas as to tracing the money.
Mr Lewis: I guess the short answer on that is that we are looking at those things. Certainly there is a federal law in relation to proceeds of crime. Excise offences are contained within that legislation. Those are things we are looking at. Other than that, there is not a lot I can say in those regards.
Mr Cousens: I can understand that, but I can just tell you that from where I sit I see that as one way where you can start pointing. If different groups within the police forces start to assess where this money is flowing, you're going to be able to reverse the flow and see where it's coming from. It certainly could lead to something interesting.
Mr Lewis: Certainly we are looking at it. There is a problem in that we're right on the border with the United States and not all the money comes into Canadian banks, but we're working on those areas.
Mr Cousens: I won't explore that further, because I'm aware of just how much money is going into some of the banks on certain occasions. A $150,000 deposit isn't out of the way with some of these people. That just has to flag a whole set of problems.
The second one: I'm really concerned about the area in which we've got maybe five different police forces. You take the three jurisdictions -- Quebec, Ontario, US and then federal and provincial or state -- and that we have till this date still not worked out a very comprehensive arrangement plan to make sure that everybody's working together. Is there a sense of a time line when you can hope to have every level somehow in sync?
Mr Lewis: We are working together; there's no doubt. We have only four agencies that are under the roof with us. However, Quebec Provincial Police and New York State Police and all the related agencies -- US Customs, US Border Patrol, Alcohol, Tobacco and Firearms on the US side -- we are working together. We don't go out and ride around together every day, but there are certainly investigative strategies and communications that are ongoing. To say we're not in sync really wouldn't be entirely correct. We're not all under the same roof, but we're working towards a common goal, and we talk daily.
Mr Cousens: I don't want to challenge you on that. The sense I have is that there is still not total harmony in all the police forces. The question I asked earlier with regard to deposits in US banks -- if you had the FBI and other federal jurisdictions in the US involved, that doesn't become as much, say, "Hey, it's their problem or their habit." To me, I think it should be escalated to the highest levels of politics in Canada among state and federal jurisdictions to see that there isn't any sense of a boundary separator between those jurisdictions. You're saying you're working well; to me it's self-evident that it could still go better.
Mr Lewis: We're relatively new at this game. We've only been at it for just over a month, and I think we've come a long way in that time period. There are boundaries that exist in terms of law that certainly can't be dealt with at my level. Whether money sitting in a US bank solely made from crime in Canada is forfeitable is a thing that has to be looked at within the Department of Justice, by US legal people, and that's being addressed as well. We may never get satisfaction in those regards, but we're certainly working towards that.
Mr Frechette: I think you may have answered in some respects your own question there when you said it will take some sort of political initiatives to essentially erase the boundaries and so on. At the enforcement level, yes, I wish there weren't these boundaries there. There are occasions I wish there weren't certain provisions of the charter, I guess, so that we could do certain things. But the fact is these boundaries are there and ours is not to reason why. That will have to be dealt with at a higher level than us.
Mr Cousens: I have one final quick question, and it has to do with something that Noble Villeneuve, our member from Stormont, Dundas and Glengarry, has mentioned about the violence on the St Lawrence now, which is again another one of the outcomes from this openness. The underground economy is now aboveground. But when you have boats on the St Lawrence Seaway refusing to go under the bridges along through there for fear of being shot at at night, so that they're piling up at either end and then they're doing the run during the daytime, and then when you have people in boats out there saying, "Just stay off; you're taking a chance in going," to what extent is there reason for public alarm about this or to what extent is that a problem that's starting to diminish? Maybe with wintertime it'll diminish, but you have snowmobiles at that point.
Mr Frechette: It's diminished somewhat simply by our increased presence. But as far as being alarmed is concerned, as a member of the public I'm alarmed any time I hear weapons being fired. Clearly the problem is still there.
We are reluctant to become involved in essentially naval battles on the St Lawrence River. Quite frankly, I'd hate to see anyone shot over a carton of cigarettes, but --
Mr Cousens: But people have been -- that's the problem -- innocent victims.
Mr Frechette: True. Well, I'm not so sure all of them were innocent victims. They may have been players in the trade but, again, they don't deserve to be shot for that. But the strategies we are undertaking are designed to make an impact on the smuggling business and to minimize the possibility of armed confrontation. Now, you never eliminate that possibility, and from time to time I guess those are the chances we take, but given the number of people involved and the level of armament we believe they have, we certainly want to minimize it, much as we would want to minimize a confrontation with armed holdup men.
Mr Cousens: Are the boats still stopping at night along the St Lawrence? Are they having free traffic going up and down the St Lawrence?
Mr Frechette: Do you mean the lakers, commercial traders?
Mr Cousens: The lakers, yes.
Mr Frechette: I wasn't aware they were stopping.
Mr Lewis: They're continuing on. They're going back and forth all the time.
Mr Cousens: And they're travelling at night now?
Mr Lewis: Yes.
Mr Cousens: Because they weren't for a while.
Mr Lewis: I think there were a couple of incidents some months back and there was some concern, very valid concern. I think that's diminished greatly. We don't hear the gunfire 24 hours a day that we did hear, although we've had some recently. We're doing our best, but we're certainly not entirely stopping it.
The Chair: Detective Superintendent Frechette and Detective Inspector Lewis, I want to thank you both very much for making a presentation before the committee today.
Mr Lewis: You're welcome. Thank you.
Mr Phillips: Good luck.
Mr Cousens: We'll stay in Toronto.
The Chair: Just before this committee recesses, I would like to ask members of the subcommittee if we could meet here maybe 10 minutes prior to 3:30, providing that the routine proceedings in the House allow us to do that, so that we can discuss our business for the new year. Okay, this committee's recessed until 3:30.
The committee recessed from 1159 to 1547.
The Chair: The standing committee on finance and economic affairs will come to order.
Previously, it was agreed that we would have a subcommittee prior to our deliberations this afternoon, but I think maybe we'll save that till the end of this afternoon, if we have time. I would like to suggest we should take time, if not to come to some conclusion as to what we will do earlier in the new year, at least to make arrangements so that we can meet at another time.
ASSOCIATION OF CANADIAN DISTILLERS
The Chair: Our first presenter this afternoon is Ronald Veilleux, president of the Association of Canadian Distillers. Welcome to the committee. When you're comfortable and ready, please proceed with your presentation.
Mr Ronald Veilleux: I'm ready, Mr Chairman. Thank you very much, Mr Chairman and members of the Legislature. I have a very short presentation, about 15 minutes, and I hope that will leave plenty of time to clarify some of the statements I will be making this afternoon. Again, thank you very much for inviting me.
This system is not totally what I was expecting. You have a copy of the presentation in front of you. As I flip through the slides quickly, you may want to note your questions and comments and we'll come back afterwards.
First of all, I would like to give you a bit of background on our industry, its economic impact in Ontario and in Canada, and also describe the smuggling problem that we are facing, why this problem exists, and then propose a solution.
First of all, the member companies of the association: We represent all of the major distillers in this country, and the important piece here is that in Ontario we represent 9,000 people. So at stake are 9,000 highly paid, unionized jobs. That's what we are talking about today.
What is our economic impact in the province? Even with the severe decline of legal sales of spirits in this province, our industry still has a direct or total economic impact of $800 million. This does not include exports. This industry exports over half a billion dollars of Canadian whisky around the world. Of that amount, 65% is exported out of Ontario, so it's a significant economic impact. On the right side, you have all the various areas where this economic impact can be felt: agriculture, obviously very significant, raw materials, bottling, packaging and taxes. We'll be talking a bit more about taxes later on.
Just to give you a bit of an overview of the size of our industry, as far as net provincial revenue, this province collects a net revenue of $1.4 billion from beverage alcohol sales. The pie in there breaks it down between spirits, beer and wine. As you can see, spirits contribute almost 46% of the revenue of the Liquor Control Board of Ontario or revenue from the sale of beverage alcohol in this province.
What has been occurring to consumption of beverage alcohol and more specifically of spirits in the last decade? The actual decline in consumption of spirits in Ontario almost parallels Canada and the United States. All the surveys that have been done by ourselves, our members and other organizations over the last 20 years indicate that lifestyle, health concerns and aging population clearly demonstrate that this decline has gone by about a rate of 20%. So in the last decade, people consumed on average 20% less spirits.
If this is true, why is it then that the legal sales, these are the sales by your liquor board, have gone down to the extent you see on this transparency? The decline today is 46% over the same 10 years, the same period of time. So people are telling us that they're consuming 20% less, but at the same time the legal sales have gone down by 46%. Where is it going? Where is the difference? I think you know that answer and I know that answer. It's the black market. I should point out in here that during the same period of time in Europe, the consumption patterns were pretty well level and slightly going up. Asia is the same way.
What is the size of the black market in Ontario? This transparency tries to put it together. In Canada, Canadians consume 17 million cases of spirits, legal and illegal. Four million of these cases are sold illegally. That is 48 million bottles of 750 millilitres of alcohol. So 13 million cases are sold legally, four million are sold illegally. This is a tax loss of $1 billion, and this is extremely, and I would like to underline that, conservative.
The reason I am saying this is because Mr Brandt, who was here a week ago, told you that in Ontario you are losing about $800 million. In Quebec, they tell me they are losing between $300 million and $500 million. So if I only add those two, I'm away above the $1 billion. You know how easy it is to smuggle into Newfoundland. It's a big island and it's a big coast. It's impossible to stop; the same with British Columbia, the same with most provinces.
In Ontario alone, seven million cases, legal and illegal, are sold annually. As the liquor control board told you, two million cases are sold illegally and five million legally. This is an impact of half a billion dollars in taxes, but there's also an impact because there is illegal production in this province. So overall, the loss is between $750 million and $800 million. Mr Brandt quoted $800 million. If you want my honest view, it's extremely conservative; very conservative. Every liquor board in this country almost weekly is reassessing its losses, going up. It's not coming down.
Mr Sutherland: We're not surprised Mr Brandt's view was conservative.
Mrs Haslam: That's why we're laughing.
Mr Veilleux: Why is this occurring? Here's what we believe is occurring. It's unfair taxation in Canada, the significant price differential between Canada and the US, and the resulting effect is that citizens, as you know, are not willing to pay more and more taxes. If they can get away with less taxes, they'll take the easy route and pay less taxes. Therefore, it's increasing smuggling.
Here are the differential taxes between Canada and the US. In Canada in the price of one bottle of spirit on the shelf in the liquor board, 83% of it is taxes; 23% of this is federal and 60% is provincial. The industry takes 17%.
In the United States, governments take 42%, which is half of what we take in Canada, and therefore you can see why many Canadians take the opportunity to go and bring truckloads, thousands of gallons, across the border. Mind you, even more important, the people who are taking truckloads across the border do not pay taxes in the US. They do it illegally and therefore the 42% is not very representative of the differential. Just as an example, the average price of a bottle in the US is $9; in Canada, you pay $19.
To better understand my solution that I would like to propose, I would like to put on a table which describes for you the pricing structure of beverage alcohol in Ontario. This slide tells you exactly what's occurring. We produce the material. We sell it to the liquor board, on average, for about $3. From there on, taxes are added on taxes, on taxes, on taxes and the cascading effect is this result. You get 83% taxes and 13% is really our price.
The big important piece is the red line, the markup, and the markup is really a tax. The liquor board calls it a markup but it's a tax, and that tax is the piece I want to deal with, because unless we change that line and we lower that tax, I believe very sincerely that smuggling will continue to grow. Canadians and Ontarians will continue, in 95% to 97% of cases, to consume moderately, but they won't purchase it at the liquor board. They'll go and purchase it wherever they can find it and when they do that, they don't pay taxes and we all lose. So the $9.06 is the piece that I want to address. By the way, this is not unique to Ontario. It's the same across Canada.
The next one is my solution. In Ontario today, the legal system sells about 4.7 million cases. Each case has 12 bottles, and if we decide to give a break to the consumer by lowering the markup by $4, it's obvious that the province this year and next year will lose $225 million, which is the number we've got there. The argument we are making is that by lowering the tax by $4, you will bring back into the mainstream -- because we believe that Ontarians are law-abiding citizens and would prefer to purchase something from the LCBO, meeting Canadian standards instead of purchasing something illegally and not being sure what is inside the bottle, with all the health implications.
If you bring back into the system the 2 million cases that are sold illegally, you're going to gain a significant amount because you're going to gain $5 per bottle. That's an additional $120 million coming into the coffers of the government. The difference is still a loss because you have reduced the markup significantly. The loss is the difference between the two, or $105 million.
But if nothing is done, you've seen that the curve is going this way and it's going to continue to go this way. The first nine months of this year, in Ontario alone, the curve has gone down an extra 8% and it won't stop. If you take that into consideration, the projected loss for 1992-93 is an additional $45 million to $60 million. So if you do zero, if you just let it go, you lose another $45 million to $50 million.
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The difference again -- there's a mistake on the slide and I apologize for it -- is $105 million minus $45 million. You end up with a loss of $59 million to $60 million by taking this solution. You may to wish to go all the way down to $4; you may decide that, say, $3.50 is fine and it's going to keep the bottom line intact; but what is most important is not this piece. We believe that by doing this, here's what will occur: You will save an industry because, as I said, Ontarians will continue to consume in moderation. I'm sure if we took a secret poll around the table, you will all tell me that you may have one drink a week or one a day or whatever and you're not abusers and you will continue to do that.
By taking some drastic action in reducing the markup, what do we do? We reduce the incentive to smuggle so that the sales that are taking place outside the legal channel are coming back inside the legal channel. We almost achieve revenue neutrality because of this movement. The taxation playing field is levelled a bit more. As we see on these posters, they're all the same, so why is one tax twice as much as the other? It's all alcohol, and the Addiction Research Foundation will say that too. They should all be taxed the same. But most importantly, it's the bottom line there. You save an economic impact of $800 million. That's what this industry does in Ontario, and this industry will be lost, because if the curve keeps going this way, why should we produce? We're not selling. You would do the same thing. This is not a threat. It's a reality that we have to face today.
We will save 9,000 very important jobs in Ontario and we can increase this number to approximately 12,000. Why? Because if the 3,000 jobs at the liquor stores in Ontario disappear, why should these stores remain open to sell beer or wine? You've got thousands of outlets out there already selling beer and wine. Therefore, you would also lose these other jobs. You're talking a significant amount of highly paid unionized jobs. You would save $311 million in exports, and this number is growing, and you would save $663 million in net revenue to the province. This is the portion of the $1.4 billion tied to spirits.
In the end, by giving a break, you're not increasing consumption, you're keeping consumption flat -- thousands of jobs and you are keeping in this province an economic impact, if you add it all, of a couple of billions of dollars.
Mr Chair, members of the Legislature, this is my presentation and I'm available to answer some questions.
The Chair: Thank you, Mr Veilleux. We have about seven minutes per caucus. We'll start with Mr Phillips.
Mr Phillips: Thank you for the presentation. I appreciate your proposal, and we'll talk a little bit about it, but I also wouldn't mind any other advice you have for us on how we can tackle this issue, because I think you've got one solution here and my suspicion is that's it's going to require many. But just so I understand these numbers, your proposal is that we reduce the taxes by $4 a bottle. Is that right?
Mr Veilleux: That is right.
Mr Phillips: And the net impact of that, I gather, would be that the price per bottle would drop? Instead of $19, it would become $15?
Mr Veilleux: It would be less than that, because if you remove the $4 at the level of the markup, because it is a cascading effect of a tax on a tax on a tax, it lowers it a bit more. The reason we've chosen that number of $4 is because it will bring the price down to about $12, and that is competing with the price on the black market. The same bottle on the black market will sell between $10 and $12.
Mr Phillips: So the cascading, cascading, cascading might be more than $4?
Mr Veilleux: That is right.
Mr Phillips: So when we look at the loss, we should be taking more than $4?
Mr Veilleux: Yes, there will be a slightly higher loss. But what I wanted to portray here really is that if there's a sizeable loss, we can recuperate most of it to a major reduction, but if you make the reduction too small, it won't make enough of an impact to bring the illegal consumers back into the legal system.
Mr Phillips: We're always trying to get a handle on the size of the problem. Your belief is that right now in Ontario, of the seven million cases, two million cases are smuggled in from outside?
Mr Veilleux: Definitely smuggled in from the outside. As I said, I think this number of two million cases is very low. I would even guess that it's as high as three million cases because people do not smuggle it in bottles any more. They come across the border with 2,000-gallon tanker trucks, the big milk trucks, they fill them up, they unload them in a warehouse here in Toronto and they bottle them and put labels on them and put the normal seal on them, the Customs seals or whatever. All these things are done and our own experts have significant difficulty in identifying the legal versus the illegal.
Mr Phillips: Let me get this right: You're saying that somebody may be packaging Canadian Club in a Canadian Club bottle with a Canadian Club label and the Canadian Club --
Mr Veilleux: No. That's a good question. It's not Canadian goods shipped to the United States coming back; it's not like the cigarette issue. It's really US-produced spirits being illegally shipped to Canada.
Mr Phillips: So it would have a label on it that you would think it was made in the US; is that right?
Mr Veilleux: No, you've got a label on it that would make you think that it's made in Canada.
Mr Phillips: But would it be a --
Mr Veilleux: It could be a Canadian Club label but it's not Canadian Club in the bottle.
Mr Phillips: That's what I wanted. Of the 2 million cases, can you give us an indication of how many of them would be legitimate? I use Canadian Club, but whatever it is, Black Label, whatever it is.
Mr Lessard: A good example.
Mrs Haslam: He uses it often, as an example.
Mr Phillips: Actually, I'm a beer drinker, I hate to say. But what percentage is product that your manufacturers ship to the US and it's come back versus this, whatever you call this stuff?
Mr Veilleux: The percentage that we have been using up to now is about between 1% and 2%.
Mr Phillips: Between 1% and 2% of what?
Mr Veilleux: Of the total amount that is smuggled into Canada. It is material that has been shipped from Canada to the United States and is coming back.
Mr Phillips: The rest is actually product that is sold as Canadian Club, Black Label, but is not that, is repackaged.
Mr Veilleux: Yes, or they are also products that are sold like brand X, brands that you've never seen in this country. But they are sold and people purchase them because they believe they are buying something good, or it is because people believe it is all the same thing but they really don't know what they're buying. Why I can say this is what we have done is we have gone through the blue box out on the street on certain days of the week in Ontario, and when you go through the blue box, it's amazing what you find in there. You find exactly these types of bottles and you find labels you've never seen before. These labels do not exist in our liquor board, so therefore they have to be something illegal that has been brought in. Also, we find our own labels and then some of them are not very good copies. People have been cheated into believing that they are buying Canadian Club, to use the example, but they're really not purchasing Canadian Club; they are getting something else.
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Mr Phillips: The reason for pursuing this -- I've got another minute or two, have I?
The Chair: Mr Kwinter has suggested there's interest in asking a question, but you do have about four minutes left.
Mr Carr: You can take some of my time.
Mr Phillips: Okay. I may ask the question he might have asked, because he's asked it before, and that is, it would seem that this sort of activity, where somebody is buying bottles designed like Canadian Club from a bottle manufacturer and buying labels designed like -- I shouldn't be using Canadian Club at all -- whatever it is, would be traceable. I'm looking for other solutions to the problem besides the normal one of reducing taxation. One would think that a sleuth of some sort could find out very quickly where the bottle was made, go to them and say, "Excuse me," and we could begin to get at it with a little bit of that sort of activity.
Mr Veilleux: That is a part of the solution, but in our estimation it's not the solution which will resolve the problem. Extra policing will help. In this case, we had seizures in Ontario at the Windsor border. The crates clearly indicated auto parts. The crates were opened and we discovered exactly what you're talking about. The police forces went all the way back down the chain to the factory in some southern state and they discovered the press and they discovered the bottles and everything else, and obviously this operation was shut down. But there are so many of them and it's so lucrative that you shut one down and three will open across the street or wherever. That's the problem we're facing, because there is too much money to be made because of that tax differential.
Therefore, we can certainly solve part of the problem with more policing, making it criminal to illegally import liquor into Canada or to sell liquor in Canada or even to purchase liquor in Canada illegally. That will help, but it will not solve the big problem. It's too widely spread, just like cigarettes. The same channels are being used by the smugglers, and in the end it's a losing proposal. This is why we're suggesting very clearly that you have to lower taxes.
Another thing which may help the process is that a lot of people, more and more today, purchase on Sunday because like me they work six days a week and like you they have long hours. You never have time to go and shop. On Sunday, you cannot purchase your spirits for Christmas at the liquor store; therefore, a lot of people will take the opportunity to purchase them somewhere else.
People cannot purchase with credit cards in Ontario. That's another thing that could help, certainly, to bring people into the system. We have to make it easier for our Ontarians and Canadians, law-abiding citizens, to purchase through the normal system, and we are not at the present time doing that.
Mr Kwinter: Mr Veilleux, I apologize for not being here for your presentation, but I would like to ask you just a brief question. I notice that in your presentation you talk about the actual decline in consumption of spirits in Ontario between 1981 and 1992. There's a 20% decline of consumption. Do you calculate consumption based on your sales or do you have some way of determining it? Is that consumption including the underground smuggled merchandise?
Mr Veilleux: Yes.
Mr Kwinter: It is?
Mr Veilleux: Yes. These are attitude surveys done around Canada, for Canada and by province. People come to you and they will ask you, "How much are you consuming?" Most people are pretty accurate. Over a period of 20 years, you can see the trends very clearly. If people are saying, "I am consuming maybe one drink a week," or, "I don't consume at all," or, "I consume seven drinks a week," that is the trend it's going to give you. When you put all of these surveys together, you get this decline of 20%.
It's very parallel to what is occurring in the United States, and it's fairly accurate. Therefore, we're saying, if this is accurate, why is it then that the legal sales in Ontario have declined by 46%? That's where we get our four million-plus cases.
Some of us may cheat a little bit when we answer the question, but your name doesn't appear anywhere and people are pretty accurate. They'll say, "Yes, I have a beer once in a while," or "I have a bottle of wine with my family for Sunday dinner," or "I have a spirit," or a cognac or whatever, and the data is pretty good.
Mr Carr: Thank you very much for a very good presentation. It was very well done and you really laid it out very well. But I have one question as it relates to what happens to the status quo. As you know, all governments, once they get a little revenue, it's hard to get them to even freeze taxes, let alone roll them back.
One of the things that may be helpful is if you could explain, if we keep the status quo and the government says, "We realize we've taxed them too much, we can't increase any more," but if we say, "We'll keep the status quo, we won't reduce it any more," and not do what you've called for here in the solution, how much do you see it eroding some more? One of the things that would be helpful is, if governments say the status quo isn't an option because we'll just erode it further, will that happen? Or if we stay with the status quo in terms of the amount of taxes, no increases, no decreases, what do you see happening? Will we still see the decline that you've so very clearly laid out here?
Mr Veilleux: Yes. Our submission is that we'll still see the decline, but it will be an accelerated decline, for many reasons. The economy is in trouble across Canada and in Ontario. People are being overtaxed in every sector, federally and provincially and at the municipal level. Salaries are being frozen. In the end, if people have been breaking the law today, I think it's pretty fair to expect that they will continue to do so tomorrow, even if police forces are beefed up. Therefore, instead of seeing a decline of about 4% to 5% per year, as you have seen this year, as one of the slides indicated, in the first nine months the decline has been 8%. Therefore, I can see that the decline will continue to go down.
Here, if I may, I'd like to point out that we have closed in the last decade, in that period of time, 18 distilleries in Canada. Seven of them were closed in Ontario since 1990. Even with that very severe rationalization, today our members' operating capacity is at 45% of maximum. So if you are a shareholder of these companies, they're all multinational and they are looking at Ontario or Canada, you have to ask yourself a very serious question.
This is why I believe that these 9,000 jobs and this almost $2 billion in economic impact will be lost. It's all lost to the province, it's lost to Ontario, but you and I will continue to consume in moderation. Who's going to benefit from this? The underground economy or maybe the United States, because we'll import everything that we can import. Now, we can sell legally, but the underground economy will just take over.
Mr Carr: Thank you very much for a good presentation.
Mr Sutherland: You present a good presentation here, and on the surface, looking at it, it all seems to make sense and flow. I must tell you, I'm a little sceptical that all the dollars saved would come back into the legal channels.
You mentioned a couple of things. When you talked about illegal production in Ontario, I was wondering if you could highlight what percentage of the smuggled amount of alcohol is actually illegal production here versus what you were saying earlier comes in from the United States or other jurisdictions.
You did talk about the tax rates. Last week Mr Brandt, in his presentation from the LCBO, highlighted that they had done a survey, and a recent price comparison of 254 products sold both in Buffalo and at the LCBO showed that 160, or 63%, are priced lower in Ontario. That survey there would indicate that there are some price-competitiveness issues there.
I was wondering if maybe you could respond to those points.
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Mr Veilleux: Yes. On the first question, the illegal production versus the smuggled amounts, the LCBO and the LLBO, the licensing board, estimate that the total is between about $750 million and $800 million. They also believe that about $500 million is the smuggled part and $250 million to $300 million is the illegal production in the province. That's how they break it down.
On the tax break between Canada and the US, it is a fact that some products in the United States are higher in price than they are in Ontario, but that's not the competition here. The competition is between the LCBO and these lower prices in the US and those people who are importing 2,000 gallons in a big truck. They're bottling it, putting labels on it -- true or false labels -- and they are selling it on the market at $10 while it's at $17 in Canada and $20 in the US, or vice versa: $10 black market, $20 at the liquor store and $19 or $18 in the US store.
The competing forces are really the major illegal importers. That's where the problem lies. These people are pretty good at what they do. They're hard to catch. You catch them one day and they find another way to bring it in. I've been talking to many of the police forces, your own LCBO forces, and it's amazing the types of ingenious solutions they will find to bring this material into Canada.
You may have heard of this big seizure that took place in a province east of Ontario, very close to eastern Ontario, where a very legitimate American firm was exporting spirits to Africa. The way they did it -- and I would like to tell the story because it does impact Ontario -- they shipped it to Montreal for export out of Halifax. The paperwork is all done, it's all legal and they can show the paper, but the material never leaves Montreal. The material is distributed in Montreal and half of it is on its way to Toronto.
This becomes a very serious interprovincial problem. I was in Manitoba with the Minister of Finance on Monday. They are concerned too, because if these large volumes are coming into Ontario, eventually a lot of that will find its way into Manitoba and the same occurs coming from British Columbia. So it becomes a Canadian problem and this is why I did put on the board some Canadian numbers.
Mrs Haslam: How much time do I have?
The Chair: I guess we have probably about five minutes for you and Mr Lessard to pose some questions.
Mrs Haslam: Okay, that's fine. I'd like to take another tack. When you talk about being overtaxed, you said there's too much taxation on everything and everyone is overtaxed and I'd like to make a comment. Are they also being overserviced, because the taxation pays for the services that we provide as a government. When you talk about beefing up police, that is a service that is paid out of the taxation.
I think about the level of taxation when you talk about a level taxation playing field. Then do we level the playing field in services also? That means health services that are similar to those offered in the States, which is very little, or education services in Ontario matching those of the States, or the infrastructure services and in particular health, because as someone who was in the Health ministry for a while, I'm well aware of the health cost of drinking or the loss of life, when I think about MADD and all of those. The taxes ostensibly were put on to help pay for health services that are required and some of the infrastructure. That was the number one question. I'll be very quick.
Number two: I have no idea where I would buy black market liquor. I don't drink. I rarely drink. I don't drink beer, I don't drink wine, I don't drink liquor. If somebody said to me, "Can you go and get a bottle?" I wouldn't know where to go and what to do. Where would we find illegal liquor when you find it like this? Looking at the tanker truck distribution system, I don't understand how that distribution system is there.
The last thing: When we talk about dropping the taxes $4, and I share with Mr Sutherland the concern that not all the money comes back in, would it equal the cost of the illegal liquor by dropping it $4? Would that equal then the cost of the illegal liquor? Those are three quick questions.
Mr Veilleux: On the health cost, you're right; there is a health cost for the abusers. But there are more and more studies coming out -- they've been coming out for years -- where these studies clearly indicate there are benefits also to moderate consumption. I think we have to be very careful here. I won't define "moderate" for you, because what is moderate for me may be very different for all of us around this table. But there are clearly a significant number of studies indicating that moderate consumption is very beneficial.
Mrs Haslam: I don't want to cut you off; it's just that I know how limited time is in any committee and I know Mr Lessard will have a question. I'm asking about the services then, because the taxation is what supports the services out there, in particular health services, at a third of our budget.
Mr Veilleux: With my proposal I don't think you would have to cut services, because in the end what will occur here is that I believe -- and I share your concern that not all of the illegal material will come back into the system and therefore we won't recoup all of the moneys, but let's look at the alternative. The alternative of doing nothing is you will lose it all. Therefore you will have no services. That's the problem I'm trying to put on the table. You have to take a step today, because if you don't take that step, the taxes, the $l.4 billion in revenue that you get for hostel beds, for education and so on, won't be there.
We can talk about the cost, but in the end the solution is you must lower the tax level on these goods; otherwise you will lose all of that revenue. You'll never lose it all. I cannot go to that extreme. There will always be people like you and me who will go to a liquor store and buy whatever they want to buy.
Mrs Haslam: Could you go very quickly then into --
Mr Veilleux: Yes, on the number two, where do you find liquor? I would like to give you a quick example, and this is typical of what goes on. This one is very high-level, so I think it will reflect on what else can happen.
A friend of mine in Ottawa, in front of my office -- and my office is just in front of the Parliament Building centre block. My friend is asked by the Governor General to go and make a presentation on the Constitution. He shows up at Rideau Hall; he makes the presentation; an hour after he leaves and takes a cab to go to Parliament Hill centre block. This is noon on a Monday, downtown Ottawa, a very senior official, and cab drivers in Ottawa are like cab drivers in Toronto. They're pretty intelligent about who is in the cab. He's offered, on the spot, "Do you want to purchase liquor?" He's a very good friend of mine. I won't name his name, but I could give it to you privately; you can check it out.
Mrs Haslam: I don't want it.
Mr Veilleux: My friend was so surprised. "How can you do this?" He says: "It's easy. What do you want? How much do you want? I've got it all. But you have to buy a case." It was these big plastic jugs that are a gallon and a half or 160 ounces, and he's selling this thing for $20. This is a third of the price you would pay at the liquor store.
That's a typical example. It's going on in Ottawa. As a matter of fact, you know that illegal liquor was served on Parliament Hill.
Mrs Haslam: What about the bottles that were labelled? You mentioned the labelled bottles. What about those? Where would they sell those in an illegal market, the ones that you said come in with a tanker truck? I'm sorry, Mr Lessard. Would they sell those in the cab?
Mr Veilleux: Oh, yes, definitely.
Mrs Haslam: How much time is there?
The Chair: We're just about out. But Mr Brandt, in our previous presentation, did say that they'd investigated the garbage bins out behind restaurants and found many what would be considered illegal bottles of liquor, however labelled appropriately.
Mrs Haslam: Could I pass to Mr Lessard now and get the answer to my other questions --
The Chair: Sure.
Mr Lessard: Mr Veilleux, I want to thank you very much for your presentation. You know very well my interest in maintaining jobs at Hiram Walker, especially in Walkerville. Distilling is very important, and even though you refer to the spinoff jobs in agriculture and bottle manufacturing and other services provided to distillers, without distilleries none of those services would be provided and there wouldn't be any benefits. I wouldn't want to see what happened in Mr Johnson's riding with the closing of the Corby distillery happen in my riding.
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I've spoken with both the Treasurer and the Premier about your proposal and even though the Premier seemed to be very receptive, I can tell you that the Treasurer is always very reluctant to embark on proposals that he sees a cost attached to and your proposal here does indicate that there is a cost for your $4 reduction in the markup. I wonder whether you've done some work on a proposal that may indicate to the Treasurer that it's revenue neutral and that you have good research to support that.
Mr Veilleux: Yes, we have considered various options. Obviously, the $4 reduction is, we believe, the level required to bring most of the two million cases back into the system. I agree that it will never all come back, but if you make the reduction too small, you will never get the consumer back into the system. You may want to do it at a $3 reduction, and if you do a quick calculation, at the $3 reduction level you will break even, but the unknown there is whether or not you're going to get 1.5 million cases back or 1.7 million or just a million, and that I cannot answer honestly; I cannot answer that question.
There is another solution. If the bottom line is so important -- and I know it's very important. That's what I was talking about, about the level playing field. Why do we tax spirits at 83%, wine at 60% and beer at 50%? It's all alcohol and as the Addiction Research Foundation says, they're all the same. To a breathalyser, it doesn't matter if you have one beer, five ounces of wine, 12% alcohol per volume, or a glass of spirits, an ounce and a half with some mix. To a breathalyser, it's all the same thing; it's all the same amount of alcohol.
So why don't we tax all alcohol the same? We could maybe raise the tax on beer slightly. I know it's not a very good thing to do. You don't want to raise taxes. But there are alternatives there and if people are concerned about keeping the revenue neutral, that can also be achieved. Is a penny per bottle too much? Maybe it is; I don't know. But there are solutions there so that you can keep a zero sum at the end of the day.
The Chair: Mr Veilleux, thank you very much for making your presentation before the committee today. It was very interesting.
G.A. FOSS TRANSPORT LTD
The Chair: Our next presenter this afternoon is Mr Jim Taylor, vice-president of G.A. Foss Transport Ltd. If you would please come forward, sir, make yourself comfortable and whenever you are comfortable and ready, please make your presentation. Mr Taylor, I see you have someone accompanying you today. If you could identify this person for the purposes of Hansard and the committee members, it would be appreciated.
Mr Jim Taylor: This is my business partner, the president of our corporation, Gord Foss.
The Chair: Welcome to the committee.
Mr Taylor: Twenty-five years ago, when I was in high school, I had a choice of joining the debating society, the public speaking society or the chess club. Unfortunately, I joined the chess club.
Interjection.
Mr Taylor: That's what this is like, this brief that I'm going to present. I'm sorry it doesn't flow, I'm sorry we're going to have to jump all over the place, but I think in here are a lot of details that I'd like to point out.
If you'd turn to the second-last page first, addendum II I call it, it's just a summary of how big the fuel market is in Ontario. The various graph figures that I've taken come directly from Statistics Canada.
In 1991, the Ontario government increased fuel taxes for Ontario residents and Ontario companies operating in Ontario by 30%. Immediately, the total consumption of diesel fuel fell by 300 million litres in one year. At the same time, the total consumption of taxed gasolines fell by 400 million litres. The fuel tax increase was three cents a litre. You can see, on the following page, from Statistics Canada, 1991 over 1990, the total consumption in Canada of diesel fuel dropped by 300 million litres.
In every other province in Canada the consumption remained consistent. Quebec for example, going through the same recession we were, actually increased its volume of diesel fuel consumed, actually increased the volume of diesel fuel that taxes were paid on. Ontario, after going through a three-cent-a-litre tax increase, dropped 300 million litres. That's just a drop in the bucket of what's involved in the underground economy in trucking.
There are two basic reasons why there is a significant, more than significant, underground economy. First of all, there's the price as a consideration. The provincial tax and the federal tax per litre of fuel in Ontario totals 18.3 cents a litre. The price the petroleum refiner, the petroleum marketer will receive will be about 20 cents a litre; 18.3-cent-a-litre tax plus the GST if you're the end user.
The other thing that is really a detriment to the Ontario Trucking Association is the Byzantine laws that we have to operate under. If you can appreciate that, when a truck fuels up in Ontario, drives into another jurisdiction, for the distance that vehicle travels in that jurisdiction the trucking company has to remit the appropriate taxes. For example, if a truck drives from here to Detroit, fuel taxes are due to Ontario for the distance travelled in Ontario; fuel taxes are due to the state of Michigan for the distance covered in the state of Michigan.
It's not like when you hop in your car and you just drive wherever you want to go. Trucks are responsible for remitting to each jurisdiction through which they pass the appropriate amount of fuel taxes for the product their trucks consumed in that jurisdiction.
Okay, now it gets really Byzantine because the regulations are different for every jurisdiction in North America and there are 60 different jurisdictions. There are 50 states and 10 provinces, and the two territories, which are really a minimal factor. What happens in the province of Ontario -- if I can refer to addendum I, some examples -- is you're only responsible for calculating the fuel consumed in jurisdictions outside your own jurisdiction for the actual trucks that move through those jurisdictions; simple enough. You have to calculate it and remit those taxes by the 25th of every third month, the 25th day after the end of a quarter. It's virtually impossible to do that.
When a truck is travelling interjurisdictionally between here and California, it might go down to California and deliver a load, after that travel over to Dallas, from Dallas go somewhere else, and from somewhere else and from Dallas will end up in Michigan and from there it might end up out in British Columbia. It might be gone for two or three weeks before the driver gets back.
By the 25th day after the third month, all the calculations have to be remitted for the consumption of fuel that was being burned in all those jurisdictions up until that point. The truck might not even be back yet. Fuel receipts might not even be processed yet. You might not see the driver until he's had a layover at his own house. By far and away his least likely concern is going to be the remittance of his fuel tax receipts for all the jurisdictions just passed through.
You throw that kind of variable in, then you throw in a variable like the state of New York where not only is it not a flat-rate tax per litre, but it has to be remitted as it is in Ontario, but they have what they call buffer zones. For instance, if you're travelling on the New York State Thruway, it's a buffer zone. The tax that you have to remit for the distance travelled in that area is different from the tax that is done on a parallel highway. The tax for downtown New York City is different from Long Island. The tax is different if you're loaded or if you're unloaded. These are all variables.
The province of Quebec is much the same sort of thing. They have buffer zones also, and as an added variable to be considered, not only are you responsible for listing and defining all the vehicles that travelled in that jurisdiction; you also have to -- if you can appreciate this -- for every truck in your fleet, in every jurisdiction in North America, turn in receipts, total fuel consumption and total mileage, once again, by the end of the 25th day of that month. It's virtually impossible.
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If you don't do this, what happens is you face significant fines. You get the Ministry of Revenue sent in to audit you. They come in and the fines initially start off as -- I think it is right here; it's right on this page here just after addendum I -- "New penalty rates" -- gleefully it says -- "late return $300 minimum, non-payment and short payment -- up to 25% of tax due." That's the start.
There's no way it can be done, as you can appreciate, I hope, and there's no way it really does get done. That's the scenario.
As I said, a long-haul truck will load up and carry 350 imperial gallons of fuel -- 1,600 litres. That is enough fuel to drive 2,500 kilometres. It's 2,200 kilometres from here to Winnipeg. It's approximately 2,300 kilometres to Dallas, Texas. It's 2,100 kilometres to Tallahassee, Florida.
What happens is that there is a horrendous black market in fuel. Diesel fuel is identical to furnace oil. The only difference is the end use of the product. There are basically three grades of product. The first grade of diesel oil is called diesel number 1 clear or a variety of things, and it is designated that because it has the lowest pour factor of all three products. Usually about minus 40 degrees it starts to gel up and becomes unusable. Diesel number 2 is usually about minus 20, minus 25 degrees centigrade when it starts to gel and becomes unusable. Diesel number 3, which is a fuel that is used for the most part in the continental United States, is the least-expensive product and is not available in Ontario for trucking companies. It gels up at about minus 10 degrees Celsius. That product in Ontario is available only to railways and shipping companies.
The highest grade of diesel product, unlike gasoline, has the lowest number of combustion points per litre of fuel. So you're penalized because you get worse fuel economy on it, by about 10% in the lowest grade, grade number 3. That's measured in terms of British thermal units.
So you're penalized for buying fuel in Ontario because of the paperwork that's involved; you're penalized because of the product you buy, you're going to get 10% less fuel economy for it; and you're penalized because you have a price that is just way out of line with all other jurisdictions. For example, Ontario, as I said, is 18.5-cents-a-litre tax above the price that the actual refiner gets. New York, which is the highest jurisdiction in the United States, is 10.7 cents a litre, and this is after considerations of currency exchange. I used C$1.32 versus US$1 as a factor and converted the American gallons to litres. New York, which has the highest tax per litre, is 10.7. The state of Michigan is 5.23 cents a litre.
What happens, and it happens all the time, is that a trucking company that has a load to go to Winnipeg, first of all, does not drive through Canada. They drive through the United States, because all they have to do in Michigan is remit 5.23 cents a litre. It makes no difference to the company on whose behalf they're carrying the product; they just want the lowest rate possible. They do not specify, "Well, we'll give you a load but you're going to have to take it around the Lakehead." They say: "We're going to give you a load. It has to be in Winnipeg two days from now. How much do you want for that?" So the routes are all through the United States now. They're not through Canada.
Quite frankly, there's a huge black market in the States for diesel fuel and for gasoline, but more so for diesel fuel, and the reason is simple. In Ontario, we dye furnace oil a purple colour. That's authorized and supervised by the Ministry of Revenue. The purple colour signifies that there's no road tax on that product. It's a nice, handy thing to do. But it doesn't happen in the United States; only in Canada. In the United States, they don't dye their furnace oil a different colour, so in New York, it's horrific; it's basically a realm of organized crime handling diesel fuel. They order furnace oil, they do the laundering; it's the same product. They load a truck, and it takes five minutes to load a truck hauling 30,000 litres, 7,000 gallons. They buy this furnace oil, shuffle it through various companies, it comes out the other end, and they deliver it somewhere as diesel oil. No taxes are paid. It's horrific, and that is moving up into Canada.
We are a company that's involved basically in the haulage of petroleum products in Ontario. We will have hauled about 300 million litres this year. We see that happening all over. It's very easy for anyone in the trucking industry to identify an American-based truck coming up into Canada. The export licences are non-restrictive; nothing happens there. The flow-through of product is virtually a bucket with no bottom in it.
Until recently, we owned a company which was involved in the sale and leasing of specialized tanker-trailer units. One of the customers we had sold a trailer to, we turned around and found him operating basically in competition with us, which is no problem. But we couldn't quite realize how he was managing to thrive, because about three weeks or six weeks after he started, a very brief time after he started, he was back to us for his second trailer.
We've been in business since -- Gord started out in 1979, and trucking is very competitive; you cannot expand that fast. As it turns out, about three months ago he was shut down by the ministry of revenue because he had found a way of filtering out the purple dye that's in furnace oil in Ontario. He was going to refineries in Ontario under a cooperative -- a cooperative, not purchasing it directly -- buying furnace oil, taking it back to his place of business, bleaching out the dye, removing the dye, turning around and flogging that product off as diesel oil.
Now, I would sure like to have a profit margin of 18.3 cents a litre. In a truck that would hold 45,000 litres of product, we're talking, each load, $7,000 or $8,000 worth of taxes that were gone, missed. That's how much it is.
If I can give you an example, we used to service the Toronto Transit Commission for diesel fuel; it has 1,600 diesel buses. With these two trucks, these two people could have supplied enough product to run those 1,600 buses, and it could have been completely underground. That's how big it is. That's just the most recent glitch that has happened. That kind of thing is happening all the time.
An example: I had a bad day --
Mrs Haslam: Join the crowd.
Mr Taylor: It was about six weeks ago. We haul a lot of plastic resins. One of the things that's involved in plastic resins is that you have to scale the truck empty, you load the truck and scale it full, and the customer pays for the difference in price on a per-pound basis. We haul about 60 million pounds a year, 30 million tons. Is that right? Anyway, it's a lot of stuff. We're significant in the marketplace.
Mr Wiseman: I wouldn't mind having the commission on cleaning them out.
Mr Taylor: We do that ourselves. Anyway, I was over in Brampton and went into a place to make arrangements with a company that has a regular facility there for regular business, and as an adjunct to the business they have a scale for trucks to come in, and they have to scale their own trucks for their own products they use.
Right up on the board there was a sign that said, "Truck scaling, $5." I said, "That's great; that's a pretty good price." Well, it was $5 cash. If we wanted to use the facility and didn't want to pay cash, it was $10 plus applicable taxes. It was that blatant.
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I went down to a doughnut shop and I ran across an old friend of mine. Actually, he used to work for us. I was talking about that and he was just laughing because he is now doing interjurisdictional hauling for himself. He was laughing at how I thought this was rather unusual. He said he has a number of ways of getting around fuel taxes, and this is a fellow who hauls regularly. When he wants to fuel up he goes to a site in Buffalo outside the city limits, underground storage tanks there, and buys the product tax-free. You buy fuel somewhere in the States, buy fuel somewhere in Canada, you pay for the fuel you purchase, and for $5 extra you get a pad of receipts and then you just fudge wherever you went.
What happened is he was buying fuel in New York, tax-free, driving wherever he wanted to go and then when he had a load to go to Winnipeg claimed that he went through Canada and went through the States. What happens is very simple. You apply for a rebate for the distance travelled out of the jurisdiction on Canadian fuel, so the government will pay you -- am I clear on this? It's tough.
If, for example, you drive from Toronto to Winnipeg, go through Ontario, you're going to be paying a diesel tax of 18.3 cents a litre for all this distance in Canada. There is no way the government or anybody will know that you went through the United States and bought fuel in the States instead but just claimed you went the other way round. There is no control. It's that simple.
So you have a fake receipt, which are a dime a dozen, fill them out yourself, from Joe's Gas Bar in Parry Sound or from someplace in Sudbury or North Bay or wherever you want, because they're all readily available, claim you were there, claim you were running on Ontario fuel, which you pay taxes on, and claim the tax back. But you weren't there.
It's a big scam -- huge. Let me tell you how huge it is, and let me tell you that the idea of controlling this by bringing in legislation or doing more enforcement is foolish. There are 13,000 trucking companies in Ontario and 65,000 pieces of revenue-earning equipment moving up and down the roads, and that's only in Ontario. There are probably that many trucks again from other jurisdictions operating within Ontario on a given day, so we're saying somewhere around 130,000 pieces of equipment.
Statistics Canada for 1991, to give you an idea, says that interjurisdictional state shipments between Ontario and the United States of Ontario-domiciled trucking companies were 1.1 million shipments in one year. They estimate that as half the market. The American truckers coming in are another one million. Other jurisdictional trucks are probably 0.5 million on top of that. That's going south, and trucks do not go one way loaded and come back empty, so double that figure coming back. There's a total, just between Ontario and the United States, of about 4.5 million truck shipments a year crossing the border.
Throw in the scams for fuel, throw in the fact that it's virtually impossible to conform to regulations for fuel tax reporting, throw in the fact that the United States basically has no difference between furnace oil and diesel fuel, throw in the fact that furnace oil in Ontario now is being bleached and is readily available -- you may not even know that what you're buying is not a legitimate product; often you don't -- and it's horrendous.
It's amazing, quite frankly, that there are any Ontario interjurisdictional trucking companies left. It's all black market. It's easier to be black market than it is to be aboveground, because if you're aboveground, as we are, as soon as you do something wrong, they're there to audit you and you're penalized. The people working in the underground economy -- they don't even know they exist.
For example, of those 4.5 million truck shipments last year, most of those are going to be out of the Golden Horseshoe in Ontario. That's the industrialized area. There are only 11 trucking vehicle inspection stations in that Golden Horseshoe and there are 4.5 million shipments going by their doors. Those trucking inspection stations are manned by civil servants and are open from 8 o'clock in the morning till 4 o'clock in the afternoon, then they shut down. I'm sorry; our trucking company operates seven days a week, 24 hours a day. Everyone knows where the inspection stations are. We all have CBs in our trucks. If you're caught in one, it's because you're foolish enough or blind enough or you were drunk or something and just happened to cross it. It's that simple. Thank you.
The Chair: Thank you very much, Mr Taylor. We have about seven minutes per caucus, a little less than seven minutes.
Mr Carr: Thank you very much for a fine presentation. Anybody who looks at the way we've set up the fuel situation would realize it's crazy. I don't know if there's anybody to blame for it, but it is certainly a crazy system. With all the problems of jurisdictions and overlaps in provinces and states, what is your help to us to undo this?
Mr Gord Foss: What Jim didn't make that clear was that Ontario has the highest fuel taxes in all of North America, just as with alcohol. Any time there's a big disparity in taxes between jurisdictions, there's going to be bootlegging. Ontario being the highest in all of North America, we're going to be hit. Why would you buy any fuel here? If you're going to buy it illegally, you're not going to buy it here.
Mr Carr: It's the same principle -- I don't know if you were here for the people before, the Association of Canadian Distillers. They said if you lower it you'll actually get more because you'll stamp out the black market, and if you do nothing it'll get worse. How much would the government have to reduce the fuel tax -- I don't know if you want to talk cents or percentage -- and then how much additional do you see coming through? Will we lose revenue, bottom line? That's what all governments are worried about, the bottom line. By what percentage do you think we could reduce it, if in fact that's what you're suggesting, and if we do, what would that do to the bottom line? Would it increase it, decrease it? Maybe you could give us some idea.
Mr Foss: We'd be making up numbers, sitting here. But these last two increases -- a 33% increase over a period of one year is unprecedented anywhere. If you rolled that back to the old price, that would be a very good start. As far as what impact that would have, you'd have to work through the numbers yourself.
Mr Carr: You don't know how much increase that would mean if we went back and --
Mr Foss: You're going to have less money, but you're going to have more business too.
Mr Carr: Will it increase? Will more people travel through Ontario? What do you see it doing if we did what you're proposing?
Mr Taylor: As it stands right now, there is not an American trucker who will buy fuel in Canada. As I said, the American trucking companies coming up to Canada are probably responsible for somewhere around 2 million of the shipments annually that come out of Ontario. They essentially don't buy any fuel here. So that's a start.
But the other factor, and I'd like to highlight this, is that the tax consideration is of primary importance, but it's the bureaucracy. Once you get penalized for being part of the system, as we have been, then it makes no sense to be part of it. You can't fill out the fuel tax reports on time. If every time you turn around, and you're trying diligently to be part of the aboveground economy but instead of that you're getting fined $300 here, $500 there, $2,000 somewhere else, then you're going to say, "To hell with it," and go somewhere else. It's much easier to go somewhere else.
Part of the solution is technology. The government of Ontario in every jurisdiction right now is relying on the goodwill and honesty of all the truckers who come through this area and their willingness to do paperwork. Part of what you have to do is come up with a system where a truck may be monitored differently, automatically from each jurisdiction as it comes across the various jurisdictional boundaries and where the calculations and tabulations are done without any input from the driver or from the trucking company. It would amount to something like a computerized black box mounted in the truck. The tax money you're going to get back from something like that is going to be considerable.
Quite frankly, the technology is there already. Our trucks are already computerized. They're computerized for fuel economy, they're computerized for speed control, they're computerized for distance -- they're computerized for everything. New trucks have it there already.
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Mr Sutherland: Just a couple of questions, one directly related to your presentation and your concerns. I acknowledge your paperwork concerns. I've had a few truckers into my office showing me, particularly if they're going to Quebec, what they have to fill out just interprovincially, let alone going across to the States. It is quite a difficult challenge.
Two things: One, when you talked about the person driving from Toronto to Winnipeg and whether they go through Ontario or go through the States, that they can do that without anyone knowing, isn't there the ability to cross-reference the receipts being submitted between their mileage logs and the other types of formal logs that are put in there? My understanding is that there are meters on the mileage thing that you can check. I don't know how prevalent that is here, but my understanding is that it is in some of the States.
The second question I guess I want to ask you is, just being part of the trucking industry, the distillers talked about people bringing in stuff in tankers, trailers, alcohol being brought in there. Also, I think he said one was supposed to be auto parts, but when they opened it up they found it was alcohol. Do you have any information that you can share with us in a broader sense about the trucking industry and how much transportation of illegal or smuggled goods may be going on?
Mr Taylor: Let me put it this way: A truck is here today and the day after tomorrow it's in Dallas, Texas. You cannot, as an economy, think of yourself as a sovereign island with bridges that people have to leap over or gorges they have to leap over, because quite frankly things are so mobile that it doesn't work. If you want to pretend that you can stop illegal shipments, or what you call illegal shipments, at the border, at the Niagara River, you're fooling yourself. The tooth fairy doesn't exist.
Where there is an inflated tax base, there will be a black market. It is incredibly easy to get across the border with black market fuel. The rewards are obvious. In one day, a 12-hour shift, we try to earn $700 revenue on a truck, okay? That's on an investment of $90,000 for the tractor, $150,000 for a trailer, because we use specialized equipment -- virtually a quarter of a million dollars.
Anybody operating in the black market trying to haul fuel -- I'll give you another example how easy it is -- can invest in a low-budget truck and $5,000 or $6,000 for a trailer and, as I said, make a profit margin of $7,000 each trip. You can do two or three of those a day.
To give an example of how easy it is, there are no domestic petroleum refineries in the state of New York. The product is all refined either in New Jersey or here in Ontario. A major refinery here in Ontario had entered into a contract with a distributor in Buffalo. They got vast amounts of crude in via the pipeline, refined the crude into diesel fuel, furnace oil, and then it was trucked back into Buffalo for distribution.
There is nothing to stop one of those guys from taking his 30,000 litres of fuel and dropping it off anywhere on the way back down to Buffalo -- it takes him 10 minutes to drop a load of 30,000 litres -- getting back on the highway, going through Customs and saying, "Yep, here's my weigh scale; I've got 30,000 litres on board," because Customs is not going to climb up on top and take a look inside. They don't do that. In the meantime, he's just made $5,400 in Ontario above what his cost is. That's the type of situation it is.
Mr Wiseman: I've had a few calls about what happens if you drive a truck in Quebec and you don't have the proper permit.
Mr Taylor: We're licensed to go anywhere in Ontario. We're licensed to leave the province and serve other jurisdictions. We're licensed to go to Quebec and six other states. So we did. We headed out for our first trip in, came back into Ontario and we got a $300 fine because we weren't licensed by Ontario to come back in the province once we left. That's the type of bureaucracy we're having to deal with.
Mr Wiseman: I imagine this is far more complex than I'm about to try and do, but, for example, are there agreements between Ontario and the States where there's supposed to be some kind of rebate on the number of trucks that flow back and forth across the border, so that if we're giving our 18-cents-a-litre tax back to the driver of the truck, then we should be compensated at least, what, seven or eight cents a litre from the state south of the border because our truck is buying gas and spending money there?
Mr Foss: You're supposed to pay the road taxes in the jurisdiction you are in. If you buy fuel in Ontario and you drive down to New York state, you get a refund from Ontario and you pay it to New York state. You have to work out how many miles per gallon that truck works. If the truck is going through all different states, any place he buys the fuel -- it doesn't matter where you buy it; it should all work out even -- you get a refund from the jurisdiction where you purchased the fuel and you pay it to the jurisdictions that you run to.
Mr Wiseman: If you're running from Buffalo, you could buy in Buffalo, run to Montreal and run back to Buffalo without having bought any fuel.
Mr Foss: Exactly.
Mr Wiseman: So you would have nothing to rebate to the province of Ontario, or are you supposed to pay?
Mr Foss: You should. You should pay for the miles in Ontario. Whatever fuel tax you should have paid, you have to pay. If you should have burned 100 gallons or 400 litres of fuel in Ontario, you're obliged to pay that tax to Ontario.
Mr Wiseman: This is really hypothetical and it probably will reveal a whole host of problems, but, just hypothetically, what if the province of Ontario decided to drop the rebate and in dropping the rebate -- it would still have all of the tax revenues -- was then able to, because it still maintains those tax revenues, drop the price per litre?
Mr Foss: You'd be shot probably, because every state and province operates the same way: You pay for the miles that you drive in the province. You just couldn't do it. You would have such a protest. It is supposed to be a highway use tax. That's what road taxes on diesel fuel are.
Mr Wiseman: I didn't say get rid of them; I said drop them to a level that is competitive.
Mr Taylor: Oh, reduce them.
Mr Foss: Reduce them but not refund if you run out of the province. That's what we're saying. It's a highway use tax and it's not used that way in Ontario; in every other jurisdiction it is. In Ontario, it just goes into general revenue, supposedly. The idea is that it's supposed to go to maintain the infrastructure.
Mr Taylor: I'm not quite clear on your question. In the brief here I say the average shipment that goes from Ontario to somewhere in the States in distance is about 700 kilometres.
Mr Wiseman: I haven't been able to read all of it.
Mr Taylor: That doesn't matter. So if you're saying that 50 kilometres of that is in Ontario and the remaining 650 kilometres might be four different states that we're going through with this load of product, within the product there wouldn't be a clearing-house effect between the various taxes due between --
Mr Wiseman: If I understand, if you're running from Toronto to Winnipeg and you go through the States, the drivers there can claim for a rebate on the miles that they've driven in the United States because they haven't driven them in Ontario.
Mr Foss: A rebate from Ontario and then you have to pay the various states.
Mr Wiseman: So the driver would be paying the various states?
Mr Taylor: Yes.
Mr Foss: But because their tax rates are only a portion of ours, they would go that way. There's nothing illegal about doing that.
Mr Wiseman: No, it's part of the complication of the paperwork.
Mr Taylor: That's right.
Mr Foss: It's just as complicated to run through Canada, because you have to do it between the provinces, but it's much less expensive to run through the US.
Mr Wiseman: What a maze.
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Mr Phillips: It sounds like a big and relatively complicated problem that I need to sort of get my brain --
Mr Wiseman: That might just classify as the underestimation --
Mr Phillips: I always assume everybody else understands it but me, so I pretend I --
Mr Foss: We don't understand it.
Mr Wiseman: You're not alone on this one. I feel I could admit that.
Mr Phillips: One thought you gave us, among many, was that somewhere down the road technology is going to come into play on this thing as a side issue, and I think we shouldn't lose sight of that. One of the things on the toll roads is that we were going to use the toll roads for driving Ontario technology, I think, on automated tolling -- you know, chips in the cars as you roll over these things -- and that maybe as we --
Mr Taylor: That's exactly what should be put in place, that sort of scenario for conducting field tests.
Mr Phillips: I'm just saying that maybe as we try and find some good in the underground economy, there may be the use of Ontario-based technology. Because I think what you're saying is that the trucking industry in North America must be a nightmare to kind of keep the papers straight, because if you're running, as you say, all around there, you're going through 30 states, you've got to file 30 rebates, I gather. I can't imagine. I'm just saying that I think that as a side issue in our report we should -- is there any opportunity to use this as a small side issue to drive Ontario-based technology?
Mr Taylor: Make it a big issue.
Mrs Haslam: We're already on a big issue.
Mr Phillips: Yes, that's right. I think we are, but I think you've given us a good suggestion that's worth at least pursuing. I think you've identified three or four different problems.
As I understand them, one is that people are selling fuel illegally in Canada or in Ontario and that not only hurts taxes, it hurts legal people like you who normally would haul legal stuff. People are trucking in Ontario and not reporting. Ontario truckers are at a disadvantage because people aren't reporting properly.
Thirdly, I think you've said, as others have said, that in some respects the bureaucracy of all of this almost penalizes the people who are trying to be fair and honest, that you run the risk of being driven underground not only to try and save money, but to try to operate legally, and I think that's an issue we've heard from many people. It's just that over the years the system's become so complicated. That's the third thought I've taken from you, and the fourth one is just the technology one.
Mr Foss: Could I make a point? We're talking very generally. One specific thing: We have to report fuel taxes in Ontario around the 23rd of the month following the quarter; every other jurisdiction, it's the 31st. By the time we get the paperwork back, which is, say, the eighth, ninth or 10th of the month, we have about two weeks to get that in. We're a small company. We have a fellow who drops everything; he can't even take a vacation at that time. No billing is done. Nothing is done for two weeks while he scrambles to get this done, and it's almost impossible to do. We're small; it's humanly possible but almost impossible. At a smaller operator it is impossible. So they just don't do it or they just write in any old numbers and get a refund that's not based on anything.
But by making a small change and saying, "Okay, align it with all the other jurisdictions and make it the 30th or 31st of the month following," you would have an extra week and almost double the time to do it. It would be a very small thing. What you're doing is you calculate it and you're losing a bit of revenue because you haven't got that money for a week. It's significant, but I think you gain by just making it possible to comply.
Mr Phillips: That's the sort of small issue that we can at least get an answer on why it's done the way it's done. If there's not a logical reason for it, then in theory maybe we can have some impact on that.
Mr Taylor: Let me stick my foot in one more time. There's a move afoot in the southern United States. In the smaller states jurisdictions are banding together and saying, "Look, you do not give us the right to audit your domiciled trucking companies in your own state that are travelling through us." And you don't; Ontario doesn't have the right, for example, to go down to Arkansas and audit a trucking company that may be hauling a lot of freight up into Ontario. You don't have that right. So whether or not their figures are correct, you have no idea.
What is happening is, I think six states so far are banding together, harmonizing their fuel tax requirements -- not necessarily their rates, but the requirements for reporting and doing it as a block, so that when you have six states you can forget about whatever, reporting for each individual jurisdiction. This is the direction they're heading. You report for that area alone and then the states themselves are responsible for disbursing the fees among themselves. That is a significant thing to be done also.
The Chair: Mr Foss, Mr Taylor, thank you very much for making a presentation before the committee today.
CANADIAN MANUFACTURERS' ASSOCIATION
The Chair: Our next presenter this afternoon is Eric G. Owen, director, taxation and financial issues for the Canadian Manufacturers' Association. Welcome to the committee and, sir, when you have made yourself comfortable, please make your presentation.
Mr Eric Owen: Thank you, Mr Johnson. I feel I have an affiliation with you because my wife's cousin is Paul Johnson, the historian in England.
The Chair: I've read some of his books, yes.
Mr Owen: I must say, I'm not as good a writer as he is, nor do I have as much money.
It's rather interesting that he was the editor of the New Statesman. I don't have to tell certain people what the New Statesman is, but he found he was a very prolific writer and made a lot of money. He left his job at the New Statesman and he's a Conservative now.
The Chair: Heaven help me that doesn't happen to me.
Mr Owen: I was rather intrigued when I was asked to appear before the committee here. It's an issue that has been rumbled on for quite a number of years and suddenly it takes up a high profile. There's nothing really to understand why it did take a high profile, because it's perhaps an area where tax can be obtained from.
I must apologize to the House committee for the title of the issue under discussion, because as you can see on the front it's "Happiness is a Positive Cash Flow." The title is to alert the government that, by seeking solutions --
The Chair: I'm glad you re-read it. I thought that said "cash cow."
Mr Owen: Cash cow, cash flow. I had my teeth in when I said it, as well. The title is there to alert the government that by really seeking solutions to the problem, it's their duty to provide happiness to both the tax collector and, more importantly, the taxpayer.
I'm here representing the Canadian Manufacturers' Association, which was formed over 120 years ago. In my presentation it does list a few statistics, but I've got to say that if the growth and prosperity of Ontario are threatened, that in itself should be sufficient to strengthen any alliance between the private and the public sectors. We do have a great deal at stake here as well.
In viewing what the private sector is, the private sector, in my presentation, involves corporations and people. I heard the gentlemen who were here before me make the comment that it's easy to drive corporations out of Ontario -- all they do is just relocate somewhere else -- whereas people, usually their only resort is to the underground economy.
In the invitation you did list it in three ways. The magnitude was the first one and my definition of the underground economy perhaps may be a little different from one that you have seen before. I hope it is. My definition of the underground economy is that part of the economy which goes largely unmeasured by statisticians and tax officials. It includes unreported income from legal sources, such as moonlighting and bartering, as well as income from illegal sources such as trafficking in narcotics, illicit gambling and prostitution.
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The part which is illegal, when considering legal sources, is the income tax that's evaded. This is one of the things that I have to look very closely at, because I hear numbers being quoted and the magnitude of the numbers startles me. Indeed, if it is on-the-side legal sources, this may explain why people don't feel too badly about conducting their legal affairs the way they do.
Obviously, tax evasion has important implications for the various governments of Canada. To me, this indicates, however, not only a revenue loss but a difficulty in measuring the health of the economy, as unemployment may be overstated and GDP growth underestimated. That's quite important if you look at policy priorities from the point of view that if the GDP is bigger than what you think, you may be implementing certain policies which may be a little severe in light of the GDP that is there. Consequently, the unemployment may not be as great as the double digits that we look at. I'm not saying it's not. I tend to believe the unemployment is there but it's overemployed once they're unemployed. This is one of the things.
I heard a comment the other day in a meeting I was at. People were quoting downsizing and somebody says, "We don't call it `downsizing' now; we call it `rightsizing.'" This is in laying people off, and I was pretty blunt. I said, "I just call it bloody unemployment." I think it is unemployment, regardless of how you call it. Beauty is in the eye of the beholder in that case.
Trying to measure the magnitude of reported business is a problem in itself, but when you try to rationalize that proportion which would apply to unreported taxes, it becomes an even greater mystery. I've gone through a number of the surveys and I still, for the life of me, can't come to any specific figures. You can, as I say here, read in various surveys that the underground economy, as a percentage of GDP, is growing, and I suppose that's why we're here today.
Surveys in the late 1970s indicated -- and it depends on which methodology that you use, and I do know, having read the presentation from the department of Finance, that you have all of those figures -- the underground economy was thought to be around $55 billion of economic activity. Now, this is where I say it's $55 billion of economic activity, not unreported or evaded taxation.
The latest figures recently offered by economics professor François Vaillancourt suggests fiscal fraud totals as much as 16% of Canada's $700-billion economy. I took my calculator and that translates into $112 billion. That, however, as I say, is not tax leakage.
To try to measure the tax leakage, you must first decide what proportion of the $112 billion is applicable to corporations, labour, and goods and services, as different rates of tax apply in each case. This, in my opinion, exemplifies the difficulties.
I sat back there, looking at what the Ontario economy would be in terms of this, knowing full well that your officials I think indicated around $300 million or $400 million as their leakage. If you look at the $112 billion in Ontario, of that it is about 33% and that gives it about $37 billion. But if they're looking at $300 million to $400 million, I don't know what percentage of it that is, because usually the people who are evading taxes are -- and I don't say this to be derogatory to them -- the unemployed people, and they would pay little taxes to start with. As well, the rates of tax, be it the consumption tax of 7% at the federal level or 8% at the provincial level, are rather lower.
I haven't, in my paper, tried to address criminal activities, although it's interesting that we look closely at tobacco smuggling right now in the Cornwall Indian reserves. I think it was about a year ago that our biggest concern was cross-border shopping. However, that seems, like the dodo bird, to have gone. I don't know why, because it doesn't make sense to me, with the Canadian dollar being as fluid as it is. It really indicates to me that there should be people going backwards and forwards still.
The reason for the underground economy -- these are my reasons and I'm sure other people's as well -- I'd like to rationalize my understanding that if a taxpayer believes the system is relatively fair he or she is willing to comply. Even if the system is not perceived to be fair, a personal standard, sometimes referred to as a social conscience, kicks in and a person complies. Also, the fear of being caught and punished is obviously an additional deterrent.
Looking more closely at fairness, not only must it be present but it must be perceived to be present. Such a perception must be that all taxpayers are paying their appropriate share, and should the perception be that others are abusing the system, taxpayers could and often do indulge in their own tax minimization. As well, the tax system should be simple to understand and apply.
I think this is one of the major problems that we have, the simplicity of the tax system. I have been in tax for quite a long time. We underwent a real review in 1972, and we came up with a tax act which was about an inch thick. You go into my office right now, I think the tax acts are about two feet thick, and this is from 1972 to 1992, 20 years. It may be time to do the whole thing again -- give the poor accountants and lawyers some more money, I suppose.
Another problem is disrespect of the system, and this is important when assessing taxpayers' attitudes towards governments' policy goals. It's especially so when considering peoples' attitudes towards government expenditures.
I think it must be agreed the most hated tax imposition that Canadians discuss is the GST. I think we would all agree on that. I must say, by the way, that I was one of the people on the royal commission, the federal sales tax commission, that did recommend the GST for Canada. There were 18 of us -- or 17; I think we're dying off. I'm still not scared to say I was involved with it. I still think it was a good tax, although -- I don't want to debate the merits -- it was imposed at a very inappropriate time. It really was an inappropriate time, and its visibility serves as an irritant to consumers all the time.
The Canadian Manufacturers' Association pushed very hard for the visibility of the tax because the federal sales tax was invisible and we could not point fingers, it was going up in leaps and bounds. It went from 8% to 9% to 10% to 11.5% to 13.5%, and nobody knew this was happening. What we wanted was a visible tax. In retrospect that was a mistake, I do believe.
The perception of the new tax, most taxpayers thought, was an additional tax burden, even though it did replace the federal sales tax. Such a burden was felt to be regressive even though the zero rating for a number of goods and services, together with the GST credit for low-income earners, meant most low-income earners in fact did not pay it. Unfortunately, it was not seen to be that way, and to beat the GST became and still is somewhat of a Canadian pastime.
I legally beat the PST when I go to Harvey's. I've got some family and I always make sure we buy under $4. I give them all enough money and that way we don't pay the PST on our $4. If I go up and pay the whole shot, I do pay it, but that's a legal way of doing it. That is one way. They actually know me in Harvey's now and they all wait for me coming in. It's rather strange.
Value for money is also a talking point, especially when organizations like the National Citizens' Coalition quickly point out government expenditures such as, for example -- I've taken these directly from a recent publication that they had -- the Prime Minister's Office spending $840,000 to monitor newscasts and newspaper articles; $58,000 spent on an examination of what it was like to work for Dominion grocery stores -- it didn't say this in there but I have to wonder, if No Frills or Loblaw's had been conducting it, would it have been less than the $58,000? I don't know -- $500 million spent over 10 years on language training for civil service positions that did not require bilingualism; $9 million for six constitutional conferences.
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Lastly, as I say, economic conditions have resulted in double-digit unemployment. It offers no hope for future employment, and this bothers me very much, as I'll say a little later.
I'd like to review the provincial government's economic thinking based on the Ontario budget. On page 61 of the 1993 provincial budget, it stated that retail sales tax revenues were down $549 million; corporate tax revenues, $556 million; personal income tax, $337 million; employer health tax, $153 million. All of this, according to the budget, was attributed to the weak economy.
Go a little further in the budget and what did they do? They forecast tax revenues would be up 6.8% from the 1992 receipts. This makes your job much more difficult in magnitude of measurement, because this included growth in retail sales tax, corporation tax and employer health tax, and $1 billion-plus from other revenue-raising measures.
I don't know if they're actually meeting that. I did hear the Premier today say that he was only $300 million short of his deficit target. I hope it's true, I really do, although even the deficit target scares me.
Solutions to the underground economy: The solutions we suggest are directly specified at the legal side of the economy rather than the illegal side. That includes tobacco and alcohol. I know the committee has already received all the statistics showing tax content on these goods: tobacco and alcohol. If indeed there is a political decision to reduce the taxes, you're going to have a fight with the non-smokers' lobby as well as the Mothers Against Drunk Driving and this type of thing. I don't know. That's not my problem, thank you.
We suggest the major challenge to the underground economy would be improvements in the general economy. You may say to me, "Why do you say that?" I say that because it's rather strange. The underground economy or review of the underground economy has surfaced because we have a poor general economy. If we had lots and lots of money, I have to ask the question, would we be as concerned?
Looking at the improvements in the general economy, this would include growth in industry, resulting in greater profits, greater employment opportunities, higher personal earned income, greater consumption of goods, and taxes. There would be more money coming in. As I say, happiness is a positive cash flow.
The major question however is: How is this done? I don't think this is the committee. We will be meeting with the minister to discuss ideas of how the economy can be stoked to make it a little more vibrant.
However, measures to create economic growth are needed. We don't believe, by the way, that cutting government spending is sufficient. I'm sure it will come as no surprise that we recommend all government spending, federal, provincial and municipal, be reduced substantially. We hear time and time again of the spending cuts finance officials have introduced. However, the efficacy of spending must be completely reviewed. This includes a change in attitude of any elected officials, who must hold tight reins on their bureaucrats.
Regardless of the message that people sent in the recent federal election, we still perceive a lack of understanding by some politicians that a great number of taxpayers are prepared to do with less providing the value received for their tax dollars improves. It might indeed be a step in the right direction if elected officials were to treat taxpayers' money as if it were their own and spend it prudently.
As well as working for the Canadian Manufacturers' Association, I have a business on the side. Actually, we have a saying in my business. Everybody on Friday comes to me and says, "Boss, is the Hip National Bank solvent?" If it's not solvent, they don't have a payroll, or I don't have a payroll I can meet. The Hip National Bank has to be solvent. It's my money, in other words; that's what I'm saying.
I realize that today we live in a much more complex world than the time when I first studied economics, and I don't intend to tell you when that was. It was quite a long time ago. I am probably next to the -- I wouldn't like to say how old anyone here is.
However, the government would do well to review and go back to the basic principles of the need for government spending. Government is not there to respond to any call for help for just any interest group in or outside of Canada, and that includes the manufacturing sector as well.
One large step forward by provincial governments would be the harmonization of legislation between different jurisdictions. This should include the harmonization of the goods and services tax -- I'm assuming it's still going to be there -- with the provincial retail sales tax.
I find it interesting to read of people evading the current GST and the anxiety exhibited by revenue officials. It's always thought that for every dollar spent in the underground economy on goods and services, the government loses 7% of the cost of the transaction. That's not so, as the system -- this is the GST -- was structured in such a way that the tax is lost only on the last value added. This value added cycle reduces the incentive for blatant tax evasion. Anyone who purchases goods and services has to absorb the full cost of previously remitted GST if they wish to trade in the underground economy. Only GST registrants are permitted to claim GST input tax credits to remove the cost of the GST from their product or cost inputs.
It's also important to remember that the GST legislation imposes a liability for GST on the purchaser, and while you may not be aware of this, we are already seeing aggressive tax assessments being raised by Revenue Canada on erroneous input tax credit claims. We're really seeing a lot of hurt out there, and these claims are mounting to $40,000, $50,000, $60,000, $70,000, $100,000 where erroneous claims have been made, and it's true.
With the provincial sales tax being treated in the same manner as the GST instead of as a single-stage tax on the final sale, the province's cash flow would improve due to the tax being levied on all interim business stages and a larger percentage of the tax currently evaded would indeed be collected. Interprovincial trade barriers should also be removed and taxation rates harmonized if people are to shop in the province where they live.
There is a need for greater audit surveillance, and I'm watching with great anticipation to see positive results from the new initiatives announced by the Minister of Finance. While I would be the first to point a finger at additional government hiring, the return on the investment seems to be there, providing the additional personnel do not become permanent once the problem seems to be resolved.
I believe the minister indicated he was hiring 147 people and there would be a return of $70 million. That works out I think at about $470,000 an auditor, and looking at what their payroll is, I don't know, but it seems to me to be a very good return on the investment. I was asked, the fact is, could he hire five times as many and get five times as much in? But diminishing returns kicks in and perhaps that's not the pattern.
I was disappointed when reviewing the Ministry of Finance presentation to see that the tax administration viewpoint focuses only on enforcement, preventing abuse and closing loopholes. Nowhere can I see legislation changes to encourage people to get out of the underground economy because of growth incentives and less government intrusion. I realize that to some this may be a naïve approach, but a start must be made to reinforce previously held ethical values.
Finally, one of the major concerns of business at this time is that in the upcoming 1994 provincial budget, provincial retail sales tax, we are scared, will be extended to professional services. We have been told this is being considered. This will not be a tax on the profession but a tax on those who use these services, including the people you as MPPs represent. It could impose hardships on small business, senior citizens, home buyers, just to name a few, and even though it is perceived the professionals will not involve themselves in the underground economy, it begs the question as to whether cash deals will be made to evade any additional tax burdens.
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There is no doubt that the underground economy is a growing phenomenon in the world. While it will never be completely eradicated, the perception of fairness and value for money spent will go a long way towards convincing those Ontario citizens who are uneasy in dealing with the underground economy to once again pay their fair share.
As I say, don't forget -- and this is for the government as well as for business and for people -- happiness is a positive cash flow.
Mr Sutherland: I want to go back to the issue of the GST. I think you left some impression that in retrospect you felt the implementation of the GST at that time wasn't necessarily a good idea. You noted that your organization was one of the organizations that pushed and encouraged and lobbied very hard to have a goods and services tax put in to replace a manufacturers' sales tax, also one of the very visible taxes.
We've heard a lot of evidence that the visibility of the tax is a problem in terms of a constant irritant, people being reminded about how unpopular the tax is. I didn't think I quite heard you say, but the manufacturers' association, then, as an official organization, hasn't changed its position on having a goods and services tax? Could you comment on whether visibility or invisibility may make a difference, given the fact that the problem, while there, didn't seem to be as large when we had an invisible manufacturers' sales tax?
Mr Owen: First off, I'd like to correct it if I left you with the impression that I thought it was not or the CMA thought it was not a good idea. I didn't say that. Actually, what I said was that it was an inappropriate time. If you go back to when the New Zealand government introduced their goods and services tax, they introduced their goods and services tax paralleling changes and reductions in personal income and corporate taxes.
The government of Canada did that two years before it introduced the GST. Had it been at that time, it would have really been a wash. However, it wasn't a wash because it's a case of: "You've done something for me two years ago. What have you done for me lately? You've increased my taxes." That's what I meant when I said it was inappropriate.
Visibility and the CMA: Does the CMA still support the goods and services tax? Yes, we do support the goods and services tax. There are a number of benefits that we get from the goods and services tax. There were a number of problems with the old federal sales tax, not the least of which was that imports benefited from it.
We also had massive administration problems. I know you're going to say we have massive administration problems now, and I'd be the first to duck under the table, and don't throw stones at me on that, but at the same time we did have massive administration problems. Also, our exports were being penalized because we couldn't draw out of the cost of goods sold that portion of the federal sales tax which went on to inputs in the manufacturing.
This also, as a matter of fact, applies now on the retail sales tax. We cannot draw that out. If, for example, we were able to draw out the component of retail sales tax from some of our manufacturing inputs, this would make our manufacturers even more competitive.
You may say, "Well, how many dollars?" I can't say dollars from the point of view that it may be fractions of cents. But when you're looking at magnitude of market share, those fractions of cents make us more competitive in outside world markets. These are the kinds of things.
With the goods and services tax, those impediments were removed and the basic problem that we saw with the visibility -- and I certainly voted for visibility, there's no doubt at all about that, because I thought it was the right thing to do -- was that every time you go out, you see something in a shop and you go in to buy something you've always loved, "What tax did I pay on that?" This is one of the big problems that you have.
As well, some of the applications that some of the retailers adopt are most unfair. They say, "No GST, no PST." That's wrong. It's illegal to say those things; what they're actually saying is, "I am discounting the product by the value of the GST and by the value of the PST."
But the thing is, people go in and believe they are playing the old Canadian game again. We all thought hockey was the game, especially with the Leafs, although they lost last night. We all thought hockey was the game until the GST came, and boy, it's a real great game to see how you can beat the GST. I've heard so many things.
Mr Sutherland: But haven't people, by their discontent with it, really said, "I want to know what the bottom-line price is when I go to the shelf to pick up the product"?
Mr Owen: I suggest that would be the case when it first came into effect. However, it's like a payroll in that you like to know how much tax you're going to pay. You really don't know what the rate of tax is, and if you're fortunate enough to have a pay increase, you just accept the tax that's there in the payroll; it's invisible. These are the kinds of things.
People within a little while would accept the tax. This happens all over Europe. I've travelled extensively in Europe and I'm sure that a lot of the committee also has, and we don't find this is happening at all. People accept the price as shown for the product.
Mr Jamison: A comment and then a question: When I talk to the average constituent, yes, there's a feeling about the GST and its timely or untimely implementation. But what people say to me more times than not is that they're not really taxing a product. The thing that really irks them is that they're taxing basically everything, goods and services. When we talk about the manufacturer's tax, the GST, in their mind, really replaced that and placed tax on much more than that: their hydro bill, their telephone, their whatever. That's what they see.
The previous presenters indicated that possibly technology has a role to play in evaluating and discerning some of the tax evasion that's going on out there. I tend to believe that, but I also believe that in the business community technology can be used positively that way, also in garnering information through the reduction of paperwork and centralization; rather than going to two governments and a number of ministries, centralizing the paper flow. Electronically centralizing it can go a long way to identifying, whereas it's very difficult these days to identify where there can be tax discrepancies. What is your opinion on my comment and then on my question?
Mr Owen: I'm glad you asked that question. It's a very good question, especially the last part about centralization, which would help in the collection of information. This is exactly what I'm talking about when I'm talking about harmonization of a sales tax.
We don't want anything harmonized like Quebec, by the way. They've got some wild and woolly ideas of harmonization. What we're saying is that if we were to harmonize the federal and the provincial application, it may even be that Ontario does the collection and then let the feds fight for their portion -- I'm sure that would be very acceptable -- rather than the other way around.
These are the kinds of things that would be very useful; in other words, to solidify the total rather than trying to hit on everything at once. You have to realize that would be putting it up to 15%, assuming that the 8% stayed constant in Ontario.
Mr Jamison: Even if it were done separately, there would be an effect, in my mind, even if the information was more centrally based rather than spread through ministry upon ministry as far as remittance in one form or another is concerned.
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Mr Owen: I like to believe that the ministry involved in this is the ministry of revenue. I've worked with the ministry of revenue for a number of years, and you've got some fine people working up there for you. I would not say anything other than that. However, I do see leakages off into certain areas, even to the extent of bringing certain programs into the ministry of revenue which really shouldn't be there.
There was the small business development corporation concept a number of years ago. I think it's still alive and it's housed in the ministry of revenue. When it first came out, I phoned around to a number of manufacturers and said, "Would you be interested in the small business development corporation?" "Yes, we would, because it's money going out into the economy from the government of Ontario. Where do I go?" "The ministry of revenue," and it was a big laugh: "They collect; they don't give." This was the kind of thing.
I think what you're saying is right, that there could be a better rationalization. I think it would take more than this session here tonight to determine where the problems lie, though. I don't see anything wrong with that at all.
Going back to your original statement about your constituents seeing a tax now being levied on both goods and services, yes, that is quite right. However, the original federal sales tax on goods was 13.5%. Right now it's 7% on goods or services. There are a lot of those goods and services, such as health, education, this type of thing, which are what they call zero rated; there's no tax applied on them at all. As well, there is the GST credit which the federal government gives out quarterly, I believe it is, a cheque to those people who can justify, according to their income tax returns, that they do need this money; in large part, for some people, they get all the money back and even more at times than they would have normally paid out in the GST. When you consider somebody who is a low-income earner, they're not going out spending a lot of money on all kinds of fripperies and this type of thing. They're spending their hard-earned money on the necessities of life. The necessities of life are those goods usually which are zero rated.
Mr Jamison: What I'm trying to point out is that the average, midstream taxpayer is saying that the service tax portion of the GST -- they can understand the manufacturers' tax, but by dropping that they're paying directly in other areas and it seems to irk them.
Mr Owen: That I can't deny. That's the basis of a consumption tax, though.
Mr Kwinter: Thank you, Mr Owen. I wanted to make a comment first, to tell you that in my experience here there's nothing more permanent than a temporary government employee; that's to your recommendation that having additional personnel isn't a bad thing.
I'm really interested in your observations. You talk about the fact that the unemployment may be overstated and the GDP growth underestimated because of the size of the underground economy. Maybe we are not looking at the right problem. Rather than spending our efforts in trying eliminate the underground economy, maybe we should be spending our resources and our expertise trying to really determine the size and the impact it really has on our economy so that some of the solutions we're getting involved in may be better directed. Maybe the unemployment rate in Canada is 8% and maybe the GDP is growing by 5%, if we can get a real handle on what is going on. Do you have any observations on that?
Mr Owen: That was basically the point I was trying to make, Mr Kwinter, that we base our -- when I say "we" I'm talking of government in particular. They base their policy directions on the legal GDP as measured by Statscan, and this is one of those things. I just wanted to bring that observation to the committee because I certainly believe that. In some of the reading I have undertaken looking at the measurement of the underground economy, everybody has started with the normal GDP and then made an assessment of what a percentage would be other than. But I haven't in any way, shape or form been able to put my finger on any specific amount.
As I mentioned to you, even looking at the $112 billion that I extrapolated out of François Vaillancourt, 16% of $700 billion, I don't know what that would be in terms of tax avoidance. I don't know what it is because I don't know what portion of that GDP -- GDP is all the goods and services in Canada. I don't know what the labour content would be. As I said, it could well be that some of the lower-income earners would not pay income tax anyway.
So to say it's $112 billion in the underground economy, the actual tax burden on that may not be a great deal. But from the point of view of recognizing there could be another $112 billion on top of the $700 billion now, that the actual GDP is in fact $812 billion rather than $700 billion, should affect some of the thinking of the politicians across Canada.
Mr Kwinter: When we heard from the Association of Canadian Distillers, who said the consumption of spirits has gone down 20% over a period of time, I asked, does that include accounting for the illegal and underground spirits that are on the market? They said yes. It would seem they're certainly basing their calculations to take into account the impact of the underground economy.
It would seem to me that if we had the right handle on the problem, then the government policy might change. In the last election, we had two very distinct sides of the argument: a couple of parties saying the deficit was the issue and the other ones saying jobs were the issue. Obviously, the people who made the argument about the jobs won out over the people who made the argument about the deficit, where in actual fact it could be that the real problem is the reverse.
What is happening is that government policy, public policy, is being determined on figures that you imply are not necessarily accurate. I agree that unless you get a handle on the number of people who are working in the underground economy, and not just an estimate but a real determination -- and you might be able to do it. As you say, with the GST it doesn't matter whether you're in the underground economy or not; somewhere in the chain someone has had to pay the GST. You can't get it back if you're in the underground economy by the very definition of how you get it back. I think that's an area that might be worthwhile pursuing.
Mr Owen: I've got to agree, because I think the actual measurements are very important all the time. We just don't know. If we can't measure where we've been, how can we measure where we're going? I think you're quite right. Every business has its balance sheet and profit-and-loss statement. They have to know where they have been, and their budget is where they're going. So that might be one area, but I don't know whether I would recommend that you pursue that because I don't know, literally, how you could pursue it.
I talked to the clerk when I first came in and I said I'm not going to be able to give any figures on this. If you can tell me how to do it, please do. I still think everybody is swimming in deep water, because nobody is prepared to say, "I'm in the underground economy."
Mr Phillips: My memory may be failing me, but I thought either the Canadian Manufacturers' Association or the Québec Manufacturers' Association had put an estimate on this.
Mr Owen: The Québec Manufacturers' Association is a division of the Canadian Manufacturers' Association.
Mr Phillips: Have they done an estimate?
Mr Owen: I haven't seen one.
Mr Phillips: Maybe you could just take a look for us; if you could, I would appreciate that.
Mr Owen: No problem.
Mr Phillips: Your suggestion on supporting greater audit surveillance was interesting in that quite a few members of the business community think that's what this committee is all about; that is, that we're going to sick more audit police on the business community and not deal with the fundamental problems. So I was interested in the CMA's support of more audit surveillance. But my point really is, are there ways we can improve the efficiency of it? We've had other people in business saying that they end up with five or six different government auditors in on them. Do you have any suggestions for how we can do it more efficiently?
Mr Owen: There are ways, Mr Phillips. I don't know how far advanced in terms of having provincial participation in this is, but the federal government -- I've got to go there because this is where it's happening right now -- is bringing in what they call a single business registration number: one number, one firm. There will be suffixes added to the business registration number, and the suffixes will apply to personal income tax, corporate income tax, commodity tax. In Ottawa they're looking at an integration of customs, taxation and excise into one department right now, and what they're looking for is what they call one-stage audits. Now, for the bigger corporation, a one-stage audit could include two, three, 20 people.
Mr Phillips: Mr Chairman, I'm sorry. I think we may have to go for a vote now.
The Chair: Indeed we do. I'm just watching to see how many minutes we have.
Mr Phillips: I just wanted to make a comment to our staff, that is, that I suspect this will be one of the things we want to look at in recommendations.
The Chair: We have lots of time; we have 14 minutes.
Mr Phillips: I'm interested in the observations of the witness on what he understands is happening federally, because my intuition would be that if the committee simply recommends a lot more auditors as opposed to a simplification, that could be seen as another -- blah, blah, blah.
Mr Owen: In Ontario, you would be constrained to corporate and consumption tax. You don't have the problems of customs and you don't have the problems of personal income tax collection.
Mr Phillips: My point would be that we should at least consider some greater coordination perhaps. The Chair: Thank you very much, Mr Owen, for presenting before the committee this afternoon.
This committee will have the final three presenters here next Thursday morning, and then in the afternoon we'll have our research officer available to discuss how we would like her to proceed. This committee stands adjourned until 10 am, Thursday, December 2.
The committee adjourned at 1803.