Legislative Assembly of Ontario

CROSS-BORDER SHOPPING

BREWERS ASSOCIATION OF CANADA

WINE COUNCIL OF ONTARIO

CANADIAN TOBACCO MANUFACTURERS' COUNCIL

ASSOCIATION OF CANADIAN DISTILLERS

CONTENTS

Thursday 20 June 1991

Cross-Border Shopping

Brewers Association of Canada

Wine Council of Ontario

Canadian Tobacco Manufacturers' Council

Association of Canadian Distillers

Adjournment

STANDING COMMITTEE ON GENERAL GOVERNMENT

Chair: Mancini, Remo (Essex South L)

Vice-Chair: Brown, Michael A. (Algoma-Manitoulin L)

Abel, Donald (Wentworth North NDP)

Bisson, Gilles (Cochrane South NDP)

Drainville, Dennis (Victoria-Haliburton NDP)

Duignan, Noel (Halton North NDP)

Harrington, Margaret H. (Niagara Falls NDP)

Mammoliti, George (Yorkview NDP)

Murdoch, Bill (Grey PC)

O'Neill, Yvonne (Ottawa Rideau L)

Scott, Ian G. (St George-St David L)

Turnbull, David (York Mills PC)

Substitution: Sola, John (Mississauga East L) for Mr Brown

Clerk: Deller, Deborah

Clerk pro tem: Freedman, Lisa

Staff: Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1010 in room 151.

CROSS-BORDER SHOPPING

The Chair: I call the standing committee on general government to order. We are continuing our hearings with regard to cross-border shopping as approved by the committee under standing order 123, as proposed by Mrs O'Neill and the Liberal caucus.

BREWERS ASSOCIATION OF CANADA

The Chair: This morning before the committee we have the Brewers Association of Canada. Would the gentlemen at the table identify yourselves, whom you are representing and what position you hold. You have 40 minutes. Some of that 40 minutes will be used by the committee members for questions and answers at your and our convenience. I would like to turn the floor over to you. I remind the committee that we have seven hours and 17 minutes left for these hearings.

Mr Morrison: My name is Sandy Morrison. I am president of the Brewers Association of Canada, the national trade association for the brewing industry. I have with me at the other end of the table Jan Westcott, executive director of the Brewers of Ontario and Keith Lambert, senior vice-president, finance and administration, of Molson Breweries. He is here in his capacity as the chairman of our national taxation task force because of the implications of what we want to say to you today, and to bring his knowledge as an operational brewer to the committee.

We will each address you in different areas. I propose to open by describing the situation from a national standpoint.

Perhaps to give you a flavour of the association itself, membership includes, of course, Canada's two national brewing companies, four regional brewing companies and nine of Canada's leading microbrewers. Brewing facilities are located in nine of 10 provinces and the production of these 16 member companies of the BAC represents 98% of the beer produced in Canada.

The Brewers of Ontario, represented by Mr Westcott, represents brewers licensed to operate within the province of Ontario. The membership includes the 16 companies whose combined volumes account for over 98% of all beer produced within Ontario. A list of the member companies will be provided to you in a leave-behind at the end of our presentation.

Brewing has long played an important role in the Canadian economy. The brewing and marketing of beer in 1990 contributed $10.6 billion to the Canadian economy or 1.6% of the gross domestic product. More than 17,000 people are employed directly by the industry and a further 66,000 in jobs related directly to the production, distribution and sale of beer. Governments across Canada collected some $2.7 billion in commodity tax revenues from the sale of beer. Brewing in Ontario contributes 38% to this total in jobs, government revenues and economic benefit.

Despite these large numbers and the size of the companies, Canadian brewers are really relatively small in global terms. Canada is the 11th largest producer of beer in the world. On the other hand, our neighbour to the south is the largest beer market in the world, accounting for almost one quarter of all beer produced on the globe. Each of the top three US brewers sells more beer than the entire Canadian market represents.

The size of the brewing industry is a function of its evolution, which has differed greatly from that in the United States. In Canada, provincial governments, which have of course exclusive jurisdiction over the marketing and distribution of the product, have adopted significantly different sociopolitical approaches to regulating the production and sale of beer in Canada. Governments have historically employed the industry in Canada as an instrument of regional economic employment and development policy, with provinces requiring brewers to provide facilities, jobs and local purchasing in exchange for access to local markets. Governments have also imposed non-competitive taxation policies relative to the United States to raise revenue for a variety of general revenue and social policy purposes in Canada.

Beer volumes in Canada have fallen for three consecutive years. They are likely to do so again in 1991. In no other era, to our knowledge, have there been two consecutive years of negative growth in the brewing industry. However, while these statistics point to a decline in domestic beer volumes, Canadians may not in fact be drinking less. Instead, it is our view they are shifting consumption to lower priced US imports, and a record number of them are purchasing beer south of the border and bringing it back into Canada. In both cases, the motivation is price driven.

A conservative estimate places national domestic beer volume losses to cross-border traffic at 3% of domestic sales. Last year, the 3% loss represented as much as $250 million in consumer expenditures, $76 million of which was in provincial tax revenues. On-premise licensees, mostly made up of small businesses such as restaurants and taverns, lost approximately $87 million and the federal government lost $26 million in federal taxes, depending on its ability to collect duties payable at the border.

At the brewer level, 3% of the market represents about 600,000 hectolitres, which translates into about $48 million in incremental profit margins or 12% of the aggregate industry profit levels. Losses of this magnitude impact heavily on industry cash flow and consequently limit the potential for new capital spending for the industry.

Constraints on capital projects in turn have obviously negative economic consequences for other industries across the country who rely on the brewing industry and service the brewing industry, and especially in the provinces most severely hit by the industry's reduced cash flow.

Revenue Canada reports that last year 53 million single-day trips were made to the United States from across Canada and that for the past two years traffic has increased by 20% per year. A similar rate of growth in 1991 would result in as much as $100 million more in consumer expenditure on beer alone being lost to cross-border traffic. The federal government has acknowledged the growth in traffic by recently opening, on an experimental basis of course, special express lanes at busy border points. There has also been some suggestion of increased collection activity.

For a quick snapshot of the situation here in Ontario, I would like to turn now to Jan Westcott, the executive director of the Brewers of Ontario to outline the situation here.

Mr Westcott: Ontario brewers are certainly being seriously impacted by the escalation of cross-border shopping. Over the last 12 months, for example, sales of Ontario beer in provincial border communities have declined with individual stores registering drops as high as 11.5%. Moreover, the cumulative effect is significant. Since 1988, when we believe this really began to happen, sales of Ontario beer in our 18 St Catharines and Niagara Falls area beer stores have fallen by over 25%, and over 13% in our 12 Windsor stores.

This really brings into question the ongoing viability of the current network of Brewers' Retail stores across the province and our cost of distribution, certainly in border towns and communities.

As publicity about cross-border shopping builds, and there is certainly lots of it, the impact is increasingly being felt by our stores or Brewers' Retail stores further and further away from the actual border.

What began, in our view, as a somewhat localized problem immediately adjacent to the border is now reaching into communities as much as 40 to 60 kilometres away from the border. Obviously, these trends are extremely damaging and if unchecked could, we think, negatively impact our sales in Ontario by as much as 3%.

Not only would this volume reduction harm the domestic brewing industry in a very significant way, which would lose something like $35 million in revenues, it will also mean the government of Ontario will collect some $20 million less than it is now in provincial beer taxes.

Mr Morrison: Now to turn to what the consequences and perhaps some of the analyses of the causes and impacts these statistics mean to the industry, I would like to introduce Keith Lambert in his capacity as chairman of our national taxation task force. Keith is also senior vice-president of financial administration for Molson.

Mr Lambert: Canadians are shopping for beer in the US simply to save money. There is a clear reason for the recent phenomenon in increasing cross-border beer purchases and that is the tax differentials between Canada and the US; further, the enormous recent increases in provincial and federal taxation on beer.

In Canada, taxes and the provincial government markups average about 53% of the retail price of beer, so more than half is in taxation. That is the third highest in the world. Ontario's tax content is 47% and that ranks fifth highest in the world. The problem is that the US is only at 19%, so you have an enormous difference, 47% versus 19%. So the wide differential in tax rates between provinces and the US, coupled with the easy access of a large portion of the Canadian population to US border communities, has encouraged the cross-border sale of beer.

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Some recent examples of exactly what it is worth to the consumer to shop south of the border is that in New York and Michigan we have prices in the discount beer segment at $3.65, converted to Canadian dollars. That compares to $6.60 in the Ontario Brewer's Retail stores. Canadian imports south of the border would be at $4.80, so the fact is that we can still sell our product in the States more cheaply than we can in Canada because of taxation.

Another important issue that disadvantages us is the type of taxation applied, whether it is unit-based or ad valorem or percentage tax. In Canada and Ontario we adopt mainly the ad valorem or percentage tax, which creates competitive distortions on a global basis between suppliers and is inflationary. Ad valorem taxes are designed in such a way that a change at one level of taxation impacts and cascades to the other taxes and provincial markups. Application of the percentage tax to lower-priced US imports generates less revenue for the governments and this disadvantage would be eliminated and provincial revenues protected by application of a unit-based taxation rather than percentage.

To summarize, two changes would be of vital interest to the brewing industry: first, to adopt a unit-based taxation to replace the percentage and, second, to reduce the current tax levels. You will no doubt be asking what the Canadian industry is doing, what the Ontario industry is doing. The industry is in fact in the process of restructuring to improve international competitiveness. We have a briefing document for you analysing competition in the North American market and that will be made available at the end of the session. Much has already been done to reduce the competitiveness gap between Canadian and US brewers, but because of years of government regulation, more time for structural adjustment is required.

We recognize global competition is a reality and we are investing heavily to restructure to meet the challenge, but we want to compete in the meantime on a level playing field. In this regard, we would ask that governments realign tax policies, remove regulatory impediments to competitiveness and ensure Canadian brewers have a stable environment within which to prepare for competition. The dismantling of interprovincial barriers to shipment of beer and elimination of the monopoly two-price barley structure imposed by the Canadian wheat board are examples of such impediments and unlevel playing field. We estimate that this, along with some other adjustments, would save the industry between $100 million and $120 million in costs. The brewery industry has supported all of these initiatives throughout the last few years.

To conclude, cross-border shopping is a visible consequence of uncompetitive pricing of Canadian versus US beer and the cause is principally government tax and regulatory policy. In the meantime, we are out of balance on taxes relative to the US and the single most effective way to reduce the immediate and escalating problem of cross-border traffic in beer is to reduce disproportionate tax differentials between Canada and the United States.

Mr Morrison: I think we are prepared to respond to questions from members of the committee.

The Chair: We have about 20 or 25 minutes left for questions. We will start the rotation with Mrs O'Neill.

Mrs Y. O'Neill: I am sure your handout will be of interest to us. You have come with some very specific requests. I would like you to say some more, because this area, about the regulatory policies that are very difficult for your industry, is certainly new to me and likely to many of us here at Queen's Park. If you could also talk to us about the interprovincial regulatory policies as well as the intercountry or international policies, it would be helpful.

Mr Morrison: One of the documents we do not have with us in quantity but will supply to the clerk and others as available is a submission we made to the technical committee set up under the intergovernmental agreement on beer marketing practices, a federal-provincial effort, on the dismantling of interprovincial barriers to trade, specifically in beer. This was presented to that committee on 6 June and it does go through specifically what the various regulatory impediments are.

Mrs Y. O'Neill: If you could kind of bring those to layman's terms and summarize them, as well as leave the document with us. This is a standing committee you are talking about?

Mr Morrison: No, this is a federal-provincial committee struck as a result of the entering into an agreement on beer marketing practices between six of the 10 provinces and the federal government. Four of the provinces have not yet signed the agreement but they have set up a technical committee to work on the reduction in these barriers to trade.

Mrs Y. O'Neill: Would you tell us the provinces that have not signed?

Mr Morrison: Yes. The ones that have not signed are Newfoundland, Nova Scotia, New Brunswick and Manitoba. Specifically what happened over a number of years was provinces required brewers to establish a presence in the province in order to market their beer on a competitive basis within the province.

It was a long-established policy in this country, and if you look at the economic contribution of the brewing industry to gross provincial products, in fact the policy has worked admirably. It meant there were bottling plants, corrugated cardboard industries supported right across the country, jobs related directly to consumption were created in each of the individual provinces, and that worked. I mean, there were no subsidies required to maintain this manufacturing enterprise in the provinces until Canada had to meet GATT obligations and face international competition.

The Canadian brewing industry responded to the policies established by governments and created plants appropriate to provinces, be they the size of Newfoundland or Ontario or Saskatchewan, and operated within that narrow base. But south of the border you have operations such as Anheuser-Busch, Miller and Coors that produce in single facilities a sufficient amount of beer to service all of Canada. There are tremendous economies of scale when you can get plants up to that capacity, which Keith can talk to more specifically. So we are simply not competitive running as, not a cottage industry in Ontario, but certainly a very small industry in world scale in a number of provinces in Canada.

So the industry, going back, opposed participation in free trade negotiations with the United States on the basis that we did not have free trade in Canada. At that stage, back in 1984, 1985, 1986 when the negotiations were on, we said to both federal and provincial governments, "Are you in a position to say there will be free trade in Canada?" We got no assurances that that was possible and we said, "If we can't have free trade within Canada, it's impossible for us to become internationally competitive."

Subsequent to that, actions under the General Agreement on Tariffs and Trade, GATT, have in fact dictated to us as an industry and dictated to government that we must make those changes. We are now engaged in addressing those problems. But there is going to be a requirement for a long transition because of the infrastructure, the investments that are made, the need to generate capital to replace them and to really fundamentally restructure the Canadian industry. We cannot do it overnight.

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The barriers now, which the provinces are looking at -- if there is a brewery with a plant in Ontario and in Quebec, right now technically you cannot ship product between the two provinces. It would on a transitional basis, for example, allow a brewery in initial stages to say, "Okay, if you have breweries in both provinces, you can produce all of one brand in Ontario, all of another in Quebec, and swap back and forth." That would improve efficiency, give more flexibility to companies operating. But we must go a lot further.

The regulatory impediments -- what leaps to mind first of all is the malting barley monopoly. We have paid as much as 100% premium over world price for malting barley purchased from the wheat board. That is the largest single raw material ingredient for the industry. It has resulted in a cost to the industry, on average, in the neighbourhood of $20 million to $30 million. The consumer impact is significantly higher, because when you increase your input costs, then the taxes, which Keith mentioned are frequently ad valorem, increase. So your costs go up, the taxes go up, and you become less competitive.

That brings me back to one of of our fundamental reasons -- which is to say that unit-based taxation is fairer because it does not penalize domestic industries that, by nature of this country, cannot gain the economies of scale that some of our competitors south of the border can.

Keith, do you want to --

Mr Lambert: Just expand, yes. Really, there are three principal current impediments as a result of regulation. The interprovincial barriers -- and while we are happy that 80% have now signed to abolish those interprovincial barriers, it is still not in effect, so we are still not able to take our production runs of some of the smaller brands, for example, and put them all into one brewery and then ship interprovincially. We are still making small, uneconomic runs in these various breweries.

An average size of one of the major brewers in the US, of which there are about four or five, would be 10 million hectolitres, which in itself could produce for half the Canadian market. We have several breweries that range in size from 250,000 hectolitres to -- perhaps the largest one is 4 million. It has only just been built to that size, so we are a long way away from establishing those economic runs, and of course in the US there is no such restriction on where the beer can be produced and subsequently shipped. So that is absolutely vital. In a logical step, before we could enter into any sort of trade in beer between Canada and the United States, north-south trade, we logically have to have east-west trade; that has long been a position of ours. So we are happy that progress has been made, but in fact as of today we are still not able to ship effectively. So that would be the largest and major item.

Second, the malting barley premium would cost the industry some $25 million of additional taxation in agricultural support. The problem with that is that no such premium is charged on US beer sold in Canada, and certainly through the cross-border mechanism there is no such additional levy. So we are at a clear, competitive disadvantage as a result of such policies.

On further regulatory streamlining, there is really a host of items, one of which, for example, would be advertising restrictions. Whereas US brewers can feed into the Canadian market without any check, we have various levels of advertising clearance prior to use in the media, so there are a number of these items.

Mrs Y. O'Neill: Thank you very much. That has been very helpful. One question, very briefly. You said there is a loss of taxes and that you have been in a decline in sales in the last three years. Do you have any figures about what that means in taxation for the province, any round figures of the loss of revenue because you have all these regulations, impediments or unprogressive tax policies?

Mr Morrison: Yes, it is in the document. We have quantified it.

Mrs Y. O'Neill: Could you give us a figure?

Mr Lambert: Last year, a 3% loss would represent Ontario provincial revenues. We have quantified $76 million, you said. Is that the correct number?

Mr Morrison: Yes. That is national provincial revenues. About 38% would be Ontario.

Mr Lambert: Yes, 38% of $76 million would be the impact to the province here, which is about the same impact to the entire brewing industry of about 600,000 hectolitres of beer. It is worth about $48 million in incremental profits. As my colleague mentioned, that does have an impact on our ability to -- right now we should be spending that money to invest to become competitive, and we are being denied that profit in additional cash -- -

The Chair: Thank you very much. We have to move along. Sorry to interrupt.

Mr Turnbull: I am struck by the remarkable symmetry of the problems you are having compared with the whole world discussion at the moment as a result of GATT. You are struggling with tax problems and regulatory problems, and I was drawing out of what you were saying the fact that you believe you can be competitive and you want to compete on a world market. You are saying at the moment you are shackled by taxes and regulations from becoming competitive. Is that a correct assumption I am drawing?

Mr Lambert: I think it is quite accurate. We have been attending groups like this to deal with these issues. Particularly with the federal government we were successful in having a modification to the inequality of excise application, where we paid, in fact, daily excise and the US imports paid at point of sale. We are attempting to deal with these structural, regulatory matters. We think we have gone through major restructuring already in one of the brewers -- a second brewer has now embarked upon the same -- with the intention of reducing the cost gap between Canadian and US manufacturers.

Mr Morrison: I think there is a recognition, though, that head to head it is not likely that the Canadian industry will be able to become directly competitive, mainly because we have the large American breweries operating at 17 million to 20 million hectolitres. That is one brewery that would serve all of Canada. We do have some advantages, we think, in a superior product; we are close and in the market, which gives you some advantages; marketing skills we think are directly competitive; our companies, not only the large ones but smaller ones, have carved out niches in the US. We cannot take on the deep-discount cheap US beer head to head in the United States, but we do think we can develop markets in the US for what we think is a superior product.

In fact, while we are facing the tests of GATT, we have also challenged the United States, and we have a GATT panel going because, notwithstanding their constant assertion that Canada discriminates against them, there are plenty of regulatory and legislative and taxation blocks against Canadian breweries competing on the level playing field in the United States. We are saying not only do we have to move towards getting our house in order, but the United States has to face and recognize that they are going to have to face that test as well.

Mr Turnbull: Your problems are not unlike the German brewing industry at the moment, although they have much bigger problems because of the size of their production facilities, and they have managed to exclude people from their market for so long.

If one were to address the question of getting rid of the ad valorem way of taxing and go to unit value, what sort of level of taxation would you need? Could you live with the present level of taxation if it were simply converted to a unit value?

Mr Westcott: I think the best answer to that is that right now what happens on our various package sizes if you take like product and like quantity, six-pack to six-pack, or two-four to two-four, is that we are paying a significant premium, based on our higher costs. If you look at the direct comparison between, let's say, six-packs, which are a popular size, we pay a premium of 50% over the amount of net tax generated by a typical American product. I will not speculate as to whether, if the government considers unit tax, it would bring the level of taxation down. Certainly that would be our goal and that would be our hope. The fact is that if they collected exactly the same amount of tax but made it more equal among all products, there would be less of a burden on us than there is today, and that is quite significant.

Mr Morrison: It would appear from our statistics and numbers -- and I do not think we are the only industry; there are certain industries that appear to be the magnets, if you will, for the cross-border shopping -- gasoline, tobacco and alcohol are lead items. It is my personal opinion, and I will leave it at that, that while Canadians for a good number of years sustained a level of differential tax, they are signalling pretty clearly now that the substantial changes in the tax relationship that have occurred -- I mean, our taxes on beer in the last six years have gone up 222% -- they have said that is no longer a differential they are prepared to sustain; they are going to seek other options.

It is a constant battle. We would love to have 19% tax against the Americans' 19%, that is obvious, but that probably is not necessary to solve this particular problem; it is getting the balance between what people are prepared to pay, because there is a recognition of the higher level of services they get in this country, and the current level, where the signals are pretty clear from the consumer it is too high. So there has to be some kind of adjustment, and it is critical to people in your shoes to make the judgement of where that point is and arrive at it. But yes, I think it has to come down.

Mr Mammoliti: I notice on the list, Mr Chairman, that we have representatives from the Wine Council of Ontario, we have representatives from the tobacco manufacturers and the distillers as well. You will be happy to know that I am a beer drinker. I do not smoke and I do not drink wine and I do not drink anything else.

The Chair: We have significant wine producers in my constituency. They will not be happy to hear that.

Mr Mammoliti: Is that a point of order?

The Chair: No, it is just a point.

Mr Mammoliti: I believe you touched on the federal government implementing express lanes recently at some of the borders. Do you think that will help? Do you not think it will make things worse? Do you not think it is an incentive for people to actually go to the United States and buy more beer when they know they are going to get back a lot quicker, they do not have to wait in a line?

Mr Morrison: Our representation to Revenue Canada was that what this country does not need is the kind of border congestion to deter American visitors coming to this country to spend money to support our tourism industries, and if we needed express lanes, it was our view that they would be better invested in getting Americans willing to spend money in this country into the country rather than blocking Canadians or being trapped with a whole bunch of Canadians in the long queues, which has to be a deterrent to getting Americans to visit Canada.

Our view on the whole enforcement question is clearly that Canadian laws should be respected and enforced. The federal government should be doing what is necessary to collect the duties that are properly payable. At the same time, I think even the East Germans demonstrated that you cannot maintain concrete walls and machine-gun nests.

Now that we have free trade, there is an expectation that there should be a fair amount of mobility, and the volumes are such that I think it gets back to this question of balance again. Enforcement is part of it, but as long as you have this kind of tremendous tax spread on key commodities, I do not think you are going to turn it off.

Mr Mammoliti: My personal opinion is that it is an incentive.

My second question -- and we just do not have the time -- is in regard to a comment I believe Mr Westcott made, and that is the drop of 11% at stores in the border cities and whether that 11% would have anything to do with the recession and the fact that people just cannot afford to buy a case of beer any more. If so, how much of that 11%, if not all of it, has to do with the recession?

Mr Westcott: As my colleague has pointed out, we have seen in the past three years a decline in sales overall. If you compare the performance in some specific border communities -- Niagara Falls, St Catharines, Windsor -- it is running two, three or four times the decline in the rest of the province. As you track farther away from the border, the decline is much less significant, so I think it is very clear. We are not seeing pockets of decline in other parts of the province. It is in those specific communities -- Sault Ste Marie, Kingston and The Islands, those kinds of places. That is where we are seeing it and it is running in those kinds of percentages, whereas in most of the rest of the province it is 1%, 2%, 3%.

Mr Mammoliti: So if I went to my local beer store and asked if there has been a drop, would they say no?

Mr Westcott: They would say no.

Ms Harrington: I appreciate your comment that a certain differential between the prices of the US and Canadian products is or has been historically acceptable to the people of Ontario, and once that differential is skewed, that is where we run into the difficulties. What the public will tolerate is certainly something that we, as well as our federal people, have to come to realize.

I have two questions. First of all, you discussed and described how you had met with other government people to tell them of the situation and what you think is a remedy; for instance, unit-based taxation. Do you have any feeling that it is going to be successful, that your message is getting across?

Mr Lambert: It is difficult to say on the matter of unit taxation. We have been talking about that for some years and we have not been successful in making a change to that. We have been successful in dealing with the excise issue, when we had an enormous increase in the excise rate, in the order of 50% at 1 January. We were successful there and we are now starting to work on the malt spread, so those are two examples where we are moving quite rapidly.

Ms Harrington: Okay. We as politicians, of course, cannot always deal with all the details of an industry, as you probably realize, so we certainly hope that your dealings face to face with our officials are productive and reasonable, and we would hope that would proceed. If not, we need to know.

If you could, explain in a little more detail why the Canadian product that is produced right here can be sold cheaper in the United States.

Mr Lambert: It is because of the taxation.

Ms Harrington: Yes, I know that much. So when it is exported, the Canadian tax is not paid.

Mr Lambert: The Canadian taxes are withdrawn at point of export. It is simply tax exempt on shipment to the United States.

Mr Morrison: No Canadian taxes are collected on product that we export.

Mr Lambert: So then you pay US taxes --

Ms Harrington: The 19%.

Mr Lambert: -- which are at a much lower rate.

Ms Harrington: Is there any way that, when it is exported, taxes could be collected?

Mr Westcott: They can, but that then makes our products in those export markets uncompetitive, and our taxes are largely consumption-oriented, I guess, with the exception of federal excise.

Mr Morrison: Roughly 10% of the Canadian production is sold in the United States. If we priced ourselves out of the US market, that would be a further loss of Canadian production of 10% and would be crippling. What we need to do is build on our success in the United States, where there is some real potential for growth, so we would be terribly concerned at anything that eroded our competitiveness in the foreign markets.

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Mr Lambert: That would be very much counter to our objective in the current, what we call critical, transition period of international competitiveness. We are striving to build our volumes in the United States, and to apply a taxation that would not be applied to any other imported product in the beer segment would be counter to our objectives, very much so.

Ms Harrington: Okay. I thought taxes were paid before the point of sale, but it is at the point of sale.

Mr Lambert: In Canada, for domestic sales, they are levied before the point of sale.

The Chair: I would like to thank the members of the delegation for meeting with the committee this morning and for the information they have provided and for being so helpful.

WINE COUNCIL OF ONTARIO

The Chair: Next on our agenda is the Wine Council of Ontario. We are going to follow the same procedure this morning. We would ask the representatives of the wine council to please identify themselves and any positions they hold. The committee has allocated 30 minutes for your presentation, and that includes questions and answers from the committee members. I would like to turn the floor over to you.

Mr Diston: Thank you, Mr Chairman. I am David Diston, representing the Wine Council of Ontario this morning. I am also employed by Brights Wines in Niagara Falls. With me is Ramona Marlin who is an employee of the Wine Council of Ontario and has the title of project manager.

Ms Harrington: On a point of privilege, I would like to welcome David Diston, who is a very important constituent of mine. He is also president of the hospital board and a past president of the chamber of commerce. Thank you for coming.

Mr Diston: Thank you. The Wine Council of Ontario is composed of 19 wineries, representing in excess of 99% of the total licensed wine production in Ontario. The industry as a whole is responsible for annual sales of $143 million of bottled wine through the Liquor Control Board of Ontario or through the wineries' own retail operations, for a total of 33 million litres of wine.

The wineries are also significant employers. In 1989 Ontario winery operations, the wine production activity utilized 800 full-time workers, whose wages, salaries and benefits totalled $27.9 million. Additionally, Ontario winery retail operations employed 560 people, whose wages, salaries and benefits totalled $11.1 million.

Wine production contributes considerably to jobs outside the wineries, with the purchase of goods and services by the wineries directly creating a further 640 jobs among suppliers delivering the wineries' requirements. As well, another 400 jobs are created in the province because of the additional economic activity required to provide the goods and services that we purchase from the input suppliers.

Thus, the wine sector directly and indirectly supports 2,400 jobs in Ontario: 800 in the winery production, 560 in retail stores, 640 jobs in direct winery suppliers and 400 jobs indirectly.

Ontario wineries purchase over $12 million of Ontario-grown grapes each year -- that is in excess of 25,000 tons of grapes -- and support 18,000 acres of vineyards and 673 grape growers in Ontario.

In terms of cross-border shopping, Andy Brandt, the chairman of the Liquor Control Board of Ontario, which is the key retailer of our products here in Ontario, provided some interesting figures related to cross-border shopping in his presentation to the standing committee on finance and economic affairs on 25 April 1991. He indicated that while sales of beverage alcohol had been flat and/or declining in this province for a number of reasons, accelerating declines are being witnessed in border communities.

For instance, in the Niagara region sales through LCBO stores had been increasing at a 4.5% compounded rate over the last five years. However, in 1990-91 sales have declined by 5% in the liquor stores. In the Windsor-Sarnia region, while growth trends over the last five years were similar, the decline in 1990-91 has been approximately 7% in the liquor stores. Mr Brandt suggested that should this trend continue there will be continued erosion in sales in these border communities, which should be of serious concern.

The wineries of Ontario also operate their own winery retail stores in Ontario, approximately 250 in number, over 70 of which are operated as kiosks inside grocery stores. Our own preliminary statistics indicate that in this past year winery retail stores in border communities performed approximately 4% below our other winery stores, while the sales for stores within or adjacent to grocery stores, the mini-stores, declined by more than 16% in 1990-91. You will no doubt hear that the Brewers' Retail example is even more disturbing than what you have just heard. Everyone has heard and will continue to hear of the staggering statistics which further characterize the cross-border shopping situation.

According to Statistics Canada, during January and February 1991 the number of day trips by car to the USA increased by over 21% over the previous year. In February 1991, approximately 4 million Canadians crossed the border for day trips compared to 3.1 million the previous year.

The problem faced not only by our industry but by countless others is that numerous Ontario consumers are now becoming American consumers. These individuals are crossing the border to shop for certain key items: groceries, especially milk, dairy products and poultry; cigarettes; spirits, beer and wine; and gasoline, of course. All of the above continue to be less expensive in border states such as New York and Michigan.

For example, in Ontario a one-litre bottle of Ontario blended wine sells for approximately $6.75. In New York state, a comparable bottle of blended table wine averages US$3.99 or C$4.56, about two thirds of the Ontario price. In Ontario floor or non-discriminatory reference pricing does not allow wines to be sold at extremely low prices. In New York State, wine is available for sale at as low as US$2.99 for a four-litre container. We get these things delivered to our houses in Niagara Falls, Ontario, and the advertisements this week are not quite so bad. There is lots of wine at US$2.99 a bottle and four litres is US$6.99 this week, so it is not a good week to go shopping across the river for wine.

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While wine may not be the key draw for consumers who are shopping in the United States, it is no doubt being purchased incidentally, due to the low prices available. This then contributes to opportunity losses to Ontario wineries as our products are not widely available for sale in the US. Our higher input and production costs, coupled with the private and sometimes proprietary distribution system in most US states, does not allow this level playing field to materialize.

The $6.75 price for a one-litre bottle of Ontario wine at an LCBO store is made up as follows: the winery price is $2.28; the federal excise tax is 51 cents; the LCBO markup is $1.09; the LCBO flat tax is $1.50; there is a thing called a levy, which is 24 cents; there is a thing that is a so-called environmental tax of 5 cents -- I say "so-called" because it is not an environmental tax, it is just called an environmental tax and goes into general revenue -- the federal GST takes 40 cents; and provincial sales tax is 68 cents, giving a total retail price of $6.75. Based on our price, there are seven additional taxes added on. In simple terms, the price to a consumer of a bottle of Ontario wine is about three times the price received by the winery. Seven levels of taxation, in turn, provide the following: 91 cents to the federal government, $3.55 to the provincial government and $2.28 to the winery.

The Ontario wine industry is certainly aware that in many cases provincial revenues from the sales of wine, spirits and beer are used to support social, health and other assistance programs in our province, programs which the citizens have deemed to be important. However, there must be a level of understanding that as cross-border shopping continues, such revenues will decrease while the need for them, due to lost jobs, will most certainly escalate.

What can or should the provincial government do in Ontario? Suggestions as to what you as the province's government can do to address the cross-border shopping issue are probably numerous and varied, as you will hear today from many groups.

The Ontario wine industry would recommend that: (1) agreement be reached between the federal and provincial governments for the collection of provincial taxes at the border; (2) the provincial government lower the rate of taxation on wine in Ontario to make it more comparable to the border states in the United States; (3) the provincial government lower the rate of provincial sales tax on wine. As I am sure you are all aware, we pay a premium rate of sales tax on alcoholic products, so it is not the usual 7%.

The industry understands that the items just mentioned are not simple tasks and will not be immediate solutions to our problem. As such, the provincial government should look to other avenues where assistance to industries can provide some relief to the problem.

The Ontario wine industry, in a submission to the Legislature's standing committee on government agencies, outlined its concerns regarding the illegal importation, production and sale of wine in Ontario. Specifically, the Wine Council of Ontario has growing concerns over the illegal importation, production and sale of wine in Ontario. There are indications that sales of illegal wine may exceed the combined sales of our legally licensed wineries.

The sale of substantial quantities is often made through the special occasion permit option which allows for the use of so-called homemade wine in clubs, public halls and other approved premises. We have serious concerns regarding the care and attention being given these wines in the processing and storage stages. Our greatest concern from a sanitary standpoint is the method and conditions under which these wines are being offered for sale to the public. In many cases this wine is packaged in used bottles, many of which carry the label of a legitimate licensed producer.

Illegal wine sales constitute a health hazard, as no testing is done to ensure the product meets federal health standards, or Ontario's LCBO standards, and to protect the public safety. With illegal sales equal to Ontario licensed wine production, the loss of revenue would equal almost $150 million, $117 million of which would accrue to Ontario and $30 million to the federal government. You could get all that extra money and we could double our sales.

The serious nature of this problem requires the immediate action of the Ontario government and the government of Canada to ensure public safety, elimination of the loss of provincial and federal revenue and removal of unfair competition to licensed producers. This is an area, unlike cross-border shopping, fully within Ontario's jurisdiction.

The Wine Council of Ontario recommends repeal of the regulations that allow the serving of so-called homemade wine in public establishments, ensuring that existing laws and regulations governing the distribution and sale of all alcohol products are properly enforced and that the appropriate government authorities be instructed to take the necessary action to investigate and prosecute those persons found guilty of breaching the laws of the land.

We wish to stress that we have no objection to the production and use of legitimate homemade wine for personal consumption. Our concern is with illegal commercial production, importation and sale.

The Chair: Thank you. We have approximately 15 minutes for questions and we will try to divide that up evenly. Mr Turnbull was first on the list, but apparently he is not here. We will start with Mrs O'Neill.

Mrs Y. O'Neill: Could you say a little bit more about this? I did not realize how wide-scale this production for sale was. I thought it was an unusual circumstance. Is it centred in certain areas of the province or certain communities, whether they be ethnic communities or communities of people who gather for other purposes? Could you say a little bit more about the characteristics of the groups that are involved in this production which, I do agree with you, seems to be less than perfect.

Mr Diston: The large-scale production of homemade wine for regular use by families in their own houses is indeed, to a great extent, found among specific ethnic groups -- the Portuguese, the Italians and many others. The development of what I call the commercial home winemaking business -- that is, wine produced by unlicensed people and sold -- appears to have started in the southwestern part of Ontario, between Hamilton and Windsor-Sarnia, but I believe it has spread fairly widely and fairly significantly since the rules were changed to permit the use of homemade wine legally.

Homemade wine has always, to some extent, been used for weddings and other celebrations, even in halls that should not have permitted it. The change in the regulations that allowed it to be done legally expanded that dramatically and now people, we believe, purchase commercially made homemade wine in large quantities for wedding celebrations in particular, but many other celebrations.

Mrs Y. O'Neill: What year did that happen?

Mr Diston: I believe the rules were changed about five or seven years ago. I find as I get older I have to add a couple of years on to my estimates, but I believe it was five to seven years ago that it was permitted to bring in so-called homemade wine.

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Mrs Y. O'Neill: Thank you for making a strong recommendation. Could you tell us a little bit about this flat tax, and then your other tax, the premium rate tax? Could you be a little bit more specific about what those are?

Mr Diston: The liquor board markup used to be a single percentage tax that was applied equally to various categories of products, so there would be a tax markup rate for Ontario wine, one for imported wine, one for spirits and things of that nature. This was partly as a recognition that this produced extremely high taxation on premium wine products, more specifically but not exclusively imported products, the very expensive wines. The system was modified five to seven years ago to split it in two. The percentage tax was reduced and a flat tax of $1.50 per litre was applied to all products. When this was initially done, it was a wash. I do not think the Ontario liquor board made any additional money from that change, but it did put what was felt to be at that time a more reasonable level of taxation on expensive products. That is where that second tax came from, and it has been sitting there at $1.50 ever since it was introduced.

You asked me about another tax. I am sorry, I am not sure which one --

Mrs Y. O'Neill: You said that you pay a premium tax rather than the provincial tax.

Mr Diston: Yes, on the alcoholic beverages you do not pay the usual 7% provincial sales tax. We pay 10% -- no, 12%. I do not have to pay for my wine; I get it free, so I do not know the rates. It is 12% provincial sales tax on wines.

Mr Sola: Before the change in the regulations, which you said happened about five to seven years ago, how much illegal wine was sold, or if not sold, served? Right now you are saying it is almost 50-50 -- that 50% goes legally and 50% goes illegally. Before the change in the regulation, what were the percentages of legal and illegal wine sold at functions?

Mr Diston: I do not know the answer to that, but I would guess that very little illegally produced wine was used in public halls. There may have been a quantity of homemade wine being sold for home consumption. It is very hard to get a feel for that. I first became aware of complaints in this area around 1981-82 when there was an increase in unemployment and the last recession was under way. That was when we first heard reports of this. It was two or three years after that, perhaps around 1985, when the rules were changed to legalize this illegal activity.

Mr Sola: Did your sales plummet all of a sudden? Is that how you noticed it? Or did demand for wine just increase?

Mr Diston: The first reports came to us from our salespeople, who would be trying to obtain business at banquet halls. There would be various functions going on, and we found that they were not buying their wine from us or from anyone else, but bringing in wine they had made themselves. At that time it probably was genuine homemade wine they were bringing in. As soon as it became legal, we believe an industry expanded or developed to do more commercialization of the illegal wine trade.

Mr Sola: I have one more question. You stress at the end that you have no objection to the production and use of legitimate homemade wines for personal consumption, and yet earlier you stated that you have concerns regarding the sanitary aspect for illegal commercial use. Do they take shortcuts in producing for the illegal market? Why would you be unconcerned about the health standards of the homemade winery for home consumption and concerned about the homemade winery for illegal sales?

Mr Diston: Homemade wine for personal consumption in your own house is a small-scale activity. The wine is consumed by and large by the families that make it, plus a relatively small number of family and friends who may be visiting their house. I do not believe there is the same exposure of what I will call the general public with a series of home winemakers doing this activity.

When it becomes a commercial activity in larger volumes, the wine is not consumed by the people who made it, who presumably are willing to accept whatever risk their own product gives them. It is consumed by what I will call innocent third parties who may be guests of the wedding or something of that nature and who have no way of telling whether the wine they are being offered is appropriate for consumption. Commercial wine is extensively checked both by the federal authorities and, very specifically, the quality staff at the Liquor Control Board of Ontario.

We are concerned that one of these days there will be some unfortunate happening that results from this unchecked, uninspected, illegally produced wine. We are additionally concerned -- -

The Chair: Thank you for the answer. I am going to have to move along.

Ms Harrington: I want to note that Brights is certainly very generous to our community for very many community functions.

It is quite a lineup you have there of the cost of the taxes to the consumer. I had not actually seen that before, and it is an eye-opener.

I was certainly surprised to see that what you call illegal wine is so widespread. You mention the figure of 50%, and you also noted in your brief that you have made a submission to the standing committee on general government about this. When did you do that?

Ms Marlin: In January 1991.

Ms Harrington: Okay, so nothing has come from that yet.

Ms Marlin: Not that we know of, no.

Ms Harrington: It would be through the Ministry of Consumer and Commercial Relations?

Mr Diston: Yes, or the police or anyone else. If we heard of a lot of charges being laid by the police, we would assume that something was being done about it. It would not necessarily require action by the minister to enforce the law. We believe the best way to do it is to go back to the situation we had before they expanded the use of homemade wine at public functions. That would require a change in the regulations that would be spearheaded by that ministry.

Ms Harrington: What you are asking for from the standing committee is not the regulation change?

Mr Diston: We would like the regulation changed, but we would also like the laws of Ontario to be enforced.

Ms Harrington: Okay. I hope we will be able to keep in touch on that.

Mr Diston: Thank you.

The Chair: We have about a minute left if anybody has a question.

Mr Mammoliti: I just wanted to say that even though I do not drink wine, I --

Interjections.

The Chair: This is not confession, George.

How big is your export market?

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Mr Diston: Our export market is extremely small. Many of the wineries have a small export business and many of us are trying quite hard to expand it. It is difficult. We have cost pressures, we are in a high-cost environment here and it is not easy to develop an export business into the United States. When I came in, the brewers were pointing out to you some of the difficulties and the fact that Canada has had to ask for a GATT panel to look at some of these things. We are subjected to unfair taxation in the United States when we export wine into the States --

The Chair: What type of taxation is on a litre of wine when you send it over?

Mr Diston: The federal taxes in general and the customs duties are very similar in Canada and the United States. The state taxes vary massively depending which state we are talking about and which --

The Chair: Let me ask it this way: If you send a $2 bottle of wine at cost over to Michigan or New York, before it can be put on the shelf for a retail markup, what would the duty and taxation be on it?

Mr Diston: The duty and the taxation would be about 50 cents, I believe. I am guessing at that, but it would be about 50 cents. The retail price in New York state or Michigan would be about $4, compared to $6-something here.

The Chair: I want to thank you very much for appearing before our committee and for your helpful information.

CANADIAN TOBACCO MANUFACTURERS' COUNCIL

The Chair: Next on the agenda is the Canadian Tobacco Manufacturers' Council. We would like to call them forward. We are going to be following the same procedure as with our other presenters. Your organization has been allocated 30 minutes for your presentation and for questions from the committee members. For the record, I would ask you to identify yourselves and the position you hold.

Mr Kelen: Thank you, Mr Chairman and members of the committee. My name is Michael Kelen. I am the corporate secretary and the general counsel of the Canadian Tobacco Manufacturers' Council, sometimes known by its acronym, the CTMC. With me this morning is Jacques LaRivière, who is the vice-president of the CTMC.

First, if I may by introduction state that our association members constitute 99% of the manufacturing sector of the Canadian tobacco industry. The most recent estimates available indicate that Canadians spent some $8.6 billion on tobacco products in calendar year 1990. That expenditure generated some 60,000 jobs, direct and indirect, and produced $5.8 billion in tax revenue for the federal, provincial and territorial governments.

Ontario is, as many of you know, a very significant player in the Canadian tobacco industry. Not only does it represent almost 40% of the Canadian tobacco products marketplace; it is also where one finds almost half of the 60,000 jobs. One illustration of that is that there are 14,500 retailers of tobacco products in this province, with most of them being small family businesses. Also significant is the fact that Ontario produces 90% of the tobacco that is used in Canada for the manufacture of cigarettes, fine cut and other tobacco products. Last year, the government of Ontario collected more than $1 billion from consumers of tobacco products. The federal government collected a similar amount.

The purpose in providing this background information is to introduce the more detailed subject of the impact of taxation on tobacco. Of course, one of those impacts is the subject of this hearing, the cross-border shopping phenomenon, and some would say crisis.

The average retail price of a pack of 25 cigarettes in Toronto 10 years ago was $1.25. Today that same package costs the consumer about $6.25, a $5 increase. That is a 400% increase during a period when inflation grew by only 70%.

The reason? What happened? The short answer is tax increases. Over the past 10 years, the federal government has increased its taxes on cigarettes by 530%, from 37 cents to $2.35. The last federal budget, in February, increased the tax by 75 cents a pack or $6 a carton. The Ontario government has done virtually the same thing by increasing its tax load on cigarettes by more than 460%, from 30 cents 10 years ago to $2.05, including the latest increase in the budget in April this year of 48 cents per pack or $3.80 per carton.

What has happened to the cigarette marketplace during that period? From our perspective, a series of negatives, most of which I would suggest are equally negative and consequential for the government.

A quick comparison of the 1981 and 1990 numbers shows that our tobacco company member shipments of manufactured cigarettes declined by 31%. The drop in Ontario during that period was 19.5%. Of the 8,500 jobs in the manufacturing sector in 1981, 4,000 have disappeared. Five years ago there were three cigarette manufacturing plants in Ontario. Today there is only one. There were 2,700 tobacco growers in Ontario 10 years ago. Today there are 1,200. If I am not mistaken, that also means the disappearance of about 15,000 seasonal jobs.

So the downward trend in cigarette shipments has not been without its effects in Ontario and the rest of the country in terms of jobs, and contrary to what some would have you believe, it has not been offset by growth in the export market.

The 1981 and 1990 Statscan numbers show in absolute terms a tripling, from half a billion to one billion and a half cigarettes in the export category. What the numbers do not show is the fact that in 1981 there were no land-based duty-free shops on the Canadian side of the Canada-US border and that the volume of Canadian cigarettes sold in duty-free shops on the US side of the border was very low. Last year, those two outlets alone handled almost 1.2 billion cigarettes.

I submit that this volume simply represents a transfer of domestic volume to a category listed by Statscan under the export designation. The net transfer was generated by consumers in Canada in search of a product at the best possible price, which gets us to the context in which one must view the cross-border shopping phenomenon.

I submit that it is price-driven and that the price is tax-driven. The primary -- some would say exclusive -- responsibility rests with government, as does the obligation to solve the problem.

That point was made very clearly, I thought, about three weeks ago in Winnipeg by the Minister of National Revenue, Mr Jelinek, when talking about the cross-border shopping problem. It was a front-page article in the Globe and Mail on 31 May 1991 where Mr Jelinek's comments were quoted. Mr Jelinek said, when talking about the cross-border shopping problem, "It's true, taxes on tobacco" -- and he listed tobacco first -- "booze and gasoline are the major culprit on those products, and these are going to have to be dealt with by all levels of government."

Really, that is our submission. Tobacco, booze and gasoline are the main drivers. Surveys will say that people are crossing to save some money on chicken or 25 or 50 cents on a quart of milk, but the big money you can save, $20 to $30, is on a carton of cigarettes and the big money is on filling up your gas tank, $20, $25. That is what gets the people to take the trouble to cross the border. While they are there they will buy a few other things, but it is gasoline and cigarettes, and to a lesser extent booze, because the level of taxation, for example, you heard from the brewers association, is very small compared to the level of taxation on tobacco products.

The price differential is phenomenal. The pack of cigarettes that costs $6.25 in Toronto, you can buy that same Canadian brand in the United States for in the order of US$2.25. When you do it on a per-carton basis, your saving is very significant and makes your trip well worth while.

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During the past few years, there has been a massive increase in the sale in Canada of tobacco products, especially manufactured cigarettes, on which no or little Canadian taxes have been paid. What we are saying is that, while the sales in Canada have declined, that does not necessarily mean Canadians are stopping smoking, and if you make the price so high, that is tantamount to prohibition. Prohibition did not stop Americans from drinking in the 1920s, it just made a couple of Canadian entrepreneurs very wealthy -- I will not name any of them.

What we are saying is that there are a lot of cigarettes that have come into Canada that are not tax-paid, and it means the government of Ontario and the federal government and the other provincial governments are losing tax revenue.

The source of these cigarettes on which no taxes have been paid, the activities that have led to their entry into Canada, can be categorized in three different ways.

The first is that there is organized smuggling. Transborder shopping is just part of the problem. There is a bigger problem, and that is with illegal Canadian cigarettes, and illegal American cigarettes being smuggled into Canada. The first part of the problem is organized smuggling into Canada, principally from the United States, of large volumes of non-tax-paid cigarettes which find their way into consumers' hands by various undercover means. While not limited to these routes, evidence shows that certain Indian reservations are major conduits for such traffic.

A recent study done by Peat Marwick Thorne suggests that organized smuggling now involves product with a black market value of $500 million a year -- this is tobacco; cigarettes -- with a consequent loss of tax revenue to the federal and provincial governments of some $370 million.

That is the organized smuggling. That is not the Canadian in Niagara Falls who crosses the border and picks up a carton of cigarettes and fills his tank. That is the organized smuggling where the cigarettes are coming across by tractor-trailer.

The second category in which the illegal cigarettes arrive in Canada is what might be described as more amateurish or entrepreneurial smuggling whereby individuals, using a variety of means, such as a special hiding place in their car, small aircraft, boats and the like, are bringing in smaller volumes, one or two cases, 10 to 12 cartons of cigarettes, into Canada on a regular basis and retailing them directly to friends through contacts in bars, etc. Current tax differentials between Canada and the United States make this a profitable enterprise, even if the cigarettes, Canadian or American brands, are purchased in the US on a fully-taxed basis.

May I remind you at this point that the tax load on a package of cigarettes in Ontario is about $4.40 while the tax load on the same package in Michigan is less than 75 cents. It is about the same in New York state.

While it is impossible to estimate the volumes involved here, it is safe to say that this kind of activity is growing at an alarming rate and now involves millions of dollars in product and lost Canadian taxes.

Just as an aside, I think probably many of you will remember the recent series of articles in the Toronto Star where I think for six days running they had articles about cigarette smuggling. On one of those days they showed, for example, that fellow in the kayak who was crossing the Niagara River, I think it was. Something happened to his kayak and they discovered it was just full of cigarette cartons. There was another person who was speaking anonymously to the Toronto Star reporter who spoke about making a couple of thousand dollars a week just going down once or twice a week to bring back cigarettes in his car.

That is how you describe the second category of illegal cigarettes in Canada, and that is the entrepreneurs, the amateurs, who are doing the smuggling. Of course it is very small compared to the organized smuggling in the first component, where they estimate 10 to 12 million cartons are being smuggled into Canada. And again it is because of the taxes, the excessive taxes.

That brings me to the third component, and that is the transborder shopping by individual Canadians who regularly travel to the United States to purchase cigarettes and other goods for their personal or family consumption. The 20% increase in daily border crossings reported in April versus a year earlier is one indication of the growth of this activity.

While cross-border shopping involves a wide range of consumer purchases, it is generally accepted, including by Mr Jelinek, that cigarettes, along with other highly taxed items such as gasoline, beer and liquor, are the major traffic builders in providing the initial incentive to Canadian shoppers to take their consumer dollars south. Again, since a fraction of these purchases are declared for customs purposes, it is impossible to put a precise pricetag on this activity, but it is in the millions of dollars.

Neither smuggling nor cross-border shopping are new phenomena, but they have now reached a new scale, especially in respect to cigarettes. To find anything comparable, one has to go back to 1951.

This is very interesting. In 1951 there was what was considered to be a huge increase in the taxes on cigarettes at the federal level, and that was a 3-cent-a-pack increase. It caused such an increase in transborder shopping and smuggling that the government of the day rolled back the tax increase and did not touch the tax again for six years. Let's hope history repeats itself and the governments roll back the tax. I will come to what are the solutions, but I think that is the bottom line.

We and the manufacturers have participated with the RCMP and with all governments, including, as the chairman knows, the Ontario government, in developing a marking scheme. We have just tried everything we can to stem this problem, and it is without success. As long as there is this high-tax incentive to smuggle, whether it is organized smuggling, whether it is amateur smuggling or whether it is transborder shopping, it is going to continue.

On the transborder shopping issue, while it continues, consumers are going to be spending millions and millions of dollars -- in fact it is billions of dollars -- on other products while they are there, but what drives them across? Gas and smokes mostly.

There is no question that what is driving the current level of activity is taxes, pure and simple. Throughout the 1980s, federal and provincial governments have steadily increased various taxes on tobacco products, to the point where they have made Canadian cigarettes among the most expensive in the world, and even more germane to the issue, two to three times more expensive than the same product that can be purchased, even with US taxes paid, in US border communities.

For those willing to engage in such activity, the smuggling and sale of cigarettes in Canada on which no or partial taxes have been paid offers the opportunity to make enormous illicit profits. Indeed, even with substantial built-in profit margins for the smugglers and their allies, these cigarettes can and are being sold to Canadian consumers for at least $20 less a carton than the price of fully taxed Canadian brands at the retail level.

We are now talking about Canadians buying Canadian cigarettes from the US brought in illegally, but Canadians also, in times of recession, are looking for less expensive cigarettes and they can buy discount US brands for $8.50. You compare that with the average price in Ontario of $47 a carton. If somebody wants to smoke and they want inexpensive cigarettes, they can get them in New York state and Michigan for $8.50. That is not the most extreme disparity. In New Brunswick the disparity is even worse. A carton of cigarettes in New Brunswick I think is now what, $60?

Mr LaRivière: Easily.

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Mr Kelen: In fact, I think there are more Canadian brands being sold in Maine than there are in New Brunswick. This is the result of the high level of taxes. You reach a point where consumers are just going to say no, and it is tantamount to prohibition. Prohibition did not stop people from drinking, and high taxes are not going to stop Canadians smoking.

For Canadian cigarette smokers, who still number some 6 million -- so of the 18 million voters in this country, 6 million are smokers -- the economic bargain is too hard to resist, especially for those of limited economic means who simply cannot afford to buy tobacco products at their current, tax-laden prices. It is troublingly true that most of these consumers regard buying illegally marketed cigarettes as a kind of innocent or victimless activity. They seem almost happy to rob governments of their tax revenues. They appear relatively unaware of the loss of Canadian incomes and jobs that are the inevitable result.

The consequences: Rather than read the text on the consequences, I will just list some of the consequences because many of them are very serious.

The first one, of course, is that governments are losing millions and millions of dollars in tax revenues. If the Peat Marwick report on the amount of smuggled cigarettes by organized activities is correct, 10 million to 12 million cartons, we are looking at a loss of tax revenue to the provincial and federal governments of $370 million.

Second is loss of jobs: Tobacco farms are losing jobs, manufacturers are losing jobs, retailers are losing jobs, wholesalers are losing jobs, entire communities along the Canada-US border are facing loss of jobs in the retail sector. Near where we live in Cornwall, the huge shopping centres are virtually empty and people are crossing the border. What are the main drivers? I will not repeat that.

The second consequence after lost government revenue, which in times of terrible government deficits is extremely important, is lost jobs, which in a recession is also extremely important.

The third consequence is that US brands are becoming more popular among Canadians because they are cheaper. They can also smuggle US brands if Canadian brands are not available, or they can buy discounted brands. That means there is going to be structural damage; it is not going to go away.

The fourth problem is that the heavy involvement of certain Indian reservations in this activity has distorted life in those communities and has created an economic dependency on smuggling that is difficult to break or replace. Last summer with the Oka crisis we saw the violence, and the source of revenue to buy those arms was clearly identified as related to smuggling. At that point we were able to get the government to focus more on this problem of smuggled cigarettes. Up to that point we were crying in the wilderness, but when they could relate it to what the Indians were doing with the revenue -- and I am not saying generally, I am saying in certain cases -- it became a problem they had to deal with. If you buy one tractor-trailer of cigarettes worth $3 million in the States without taxes you can make $2 million. That is the profit on one truck, which can cross one of the 48 border points in our part of the world that does not have any customs points. You can just cross these country roads. When I grew up, fishing south of Montreal, we used to cross the border many times after speckled trout and not know we had crossed. There are just so many places you can cross, and when you have that kind of profit per truckload, you can expect the next problem which has emerged: organized crime is getting involved. The tobacco industry is deeply concerned that the distribution and sale of this illegal product is being linked to organized crime.

The next problem is hijackings. If you have a truck with tobacco on it worth $3 million, these trucks are getting hijacked at an alarming rate. As well, there is an increasing number of thefts, sometimes with violence, from retail outlets which sell cigarettes. People will go into the convenience store, take out 50 cartons and they have made themselves a lot of money. It is almost as profitable to deal with cigarettes as it is to deal with drugs now.

I guess the final problem is a disrespect for our country, its laws, taxes and for our system; the tax revolt that we see. When you see those lineups at the border, you are really looking at Canadians who are being driven across the border, who feel they can break Canadian laws -- because many of them are -- and do not seem to care any more. That is something we have always been proud of in Canada. When I did my income tax courses, we were told we had the highest voluntary tax compliance of any country in the world; the most respectful citizens in the world in terms of complying with Canadian tax laws. That has been changed, and part of it is the excessive taxes on our client's products and a few other selected products.

The next section deals with the response of the industry. The Canadian tobacco manufacturers, for the last 18 months to two years, have continually tried to alert governments to the scale of cigarette smuggling and transborder shopping, the inherent costs and dangers, and to emphasize the manufacturers' readiness to co-operate with enforcement officials so the laws are enforced. Frankly, while customs and tax collection officials and law enforcement officers appear to share our concern, there is little evidence that tax policymakers understand that further raising tobacco taxes simply makes a serious and dangerous situation worse. With this latest round of federal, Ontario and other provincial tax increases, the problem is virtually out of control.

While we have been stressing to governments that enough is enough, put the lid on taxes because this is what is happening, the government has failed to understand and has exacerbated the problem. Now the price difference is so high that the problem is out of control and I guess that is the reason this standing committee is considering this problem. Hopefully governments will listen to this standing committee more than they have listened to the manufacturers.

We were talking about responses by the manufacturers. During the same period of the last two years, while the manufacturers have been dubious about the real effectiveness of such measures, the manufacturers have co-operated with the government in a series of programs to identify, through special markings or indicia, Canadian manufactured stock destined for various markets. The honourable Chairman is well aware of this. He was the minister responsible in the last government in Ontario for this product and the manufacturers worked closely with him and his department in marking all Ontario cigarettes. They now have a broad yellow marking which shows the Ontario tax has been paid. So it is fairly simple to identify product that has been smuggled in, say by organized crime or organized smuggling, and is being sold in convenience stores and other stores throughout Ontario, including Toronto.

However, it does not appear that marking program is being aggressively enforced. In fact, there are not very many positive results of it being enforced at all. In a series of Toronto Star articles, the reporter just dropped into three different stores not far from downtown Toronto -- I think it was around Dundas. In all three stores, he was able to buy smuggled products for $3 a pack, something like that.

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Interjection: Four.

Mr Kelen: Four dollars a pack. Of course, that smuggled product did not have the yellow marking on it indicating the Ontario tax had been paid.

The manufacturers have spent $40 million so far on this marking program, which is a lot of money. We have developed a marking program for the Atlantic provinces and for the province of Quebec as well. As well as costing $40 million, the manufacturers have had to reorganize all their warehousing so that it is on a provincial basis as opposed to a national basis. So let's say you are making a run at your Ontario manufacturing plant of a brand you want to sell across Canada. You cannot just have the run go, you have to stop it after the Ontario product is finished, change the marking to do the Atlantic, stop it, change the marking to do the Quebec, stop it and change the marking for export, because we have a special marking for export. Economies of scale are not there.

That is basically what the manufacturers have done. We have been encouraging the government. I have been meeting with the RCMP on a regular basis to encourage them. The RCMP puts its hands up and says: "We've got the longest undefended border in the world and when you've got such a terrible tax differential and such a high incentive to smuggle, it's almost impossible for us to be at all the points. Even if we stood shoulder to shoulder along the border, little airplanes could just flip over." The profits are so great that you can easily afford to rent a plane to hop across the border with illegal cigarettes. Again, there is no solution except doing something about the high level of taxes.

That is the next heading, what can the government do.

The Chair: I want to remind the committee that our time is pretty well expired and I need unanimous consent of the committee to extend the time allotted to the presenters, and we do have another witness waiting.

Mr Mammoliti: What does that do for questions?

The Chair: We will have to allocate in our agreement a couple of minutes for questions for each party, but we need unanimous consent.

Mr Kelen: Mr Chairman, I can finish in 20 seconds, if I may.

The Chair: We still need consent for questions.

Mrs Y. O'Neill: Why do we not extend by between 5 and 10 minutes, Mr Chairman?

The Chair: Thank you, committee. Please proceed.

Mr Kelen: Thank you. The concluding part of the submission this morning is really what can governments do. The bottom line is, there is only one real solution. In our view, effective action must begin by facing up to the fundamental reality that the cause of the problem is excessive taxation. The only real solution is to reduce Canadian tobacco taxes to a level more comparable to those in the United States.

Also, please help the manufacturers help the governments understand that if they are going to insist on increasing the tax burden on these products and thus further widen the tax and price gap with the US, the problem will only continue to get worse.

In the case of tobacco products, bearing in mind that only about a third of adult Canadians smoke, hundreds of thousands have already told Ottawa the tax burden is unfair through a current process taking place. We hope Ontario, having more to lose than any other province in this regard, would set an example of fiscal realism that, I submit, might well be enlightened self-interest. Ontario consumers and taxpayers want fairness. Ontario agriculture, manufacturing and commercial workers want to keep their jobs. If we could bring the taxes in Ontario on tobacco products back down, or at least not have any further increases, this would go some way towards accomplishing those objectives. Thank you, Mr Chairman, members of the committee.

Mr Duignan: In your presentation today you never once mentioned the health factor involved in smoking. In fact, judging by the reaction of the federal minister the day before yesterday, to get more people off smoking he would continue to increase taxes on cigarettes. Have you any comment to make on that?

Mr Kelen: Clearly Mr Bouchard does not share our views that the excessive taxation is causing problems as we have discussed today. He has continued to shoot himself in the foot by increasing taxes more, because that is what governments are doing. They say they are trying to tax this industry out of existence. That is basically what they did in the United States in the 1920s with prohibition, and the result was not what the government in the United States wanted. People did not stop drinking, and the same analogy is appropriate to what is happening with cigarettes right now.

Mr Mammoliti: Cigarettes are the first drug an addict is usually introduced to. I think it is important to mention that. I do not like cigarettes. I do not like inhaling other people's cigarettes, but I am concerned about the jobs and I know that there are a lot of jobs being lost. But you relate that to the tax system. Somewhere along the way maybe we should also relate to the fact that there is not as much of a demand for cigarettes as there was, and I am not too sure it is because of the tax. I believe people are concerned about their health, and for the most part I believe that is why a lot of people are quitting. They are not buying the cigarettes.

That brings us back to the tax and my question to you. We do have a lot of tax on cigarettes, but much of it goes to pay for our health care system? If people chose to quit, do you not think we would save one hell of a lot of money on our health care system?

The Chair: That is a very good question.

Mr LaRivière: If I may, Mr Chairman, I would like to address that one simply by reminding the member that in the mid-1980s, the Ontario Ministry of Health commissioned a study carried out by Stoddart and Labelle of McMaster University where they looked at smoking and health care costs. The results of that study were published in the Journal of Health Economics, I think, in the spring of 1986 under the title "Canadian Smokers: Do They Pay Their Way Through the Health Care System?" The authors concluded that smokers do not impose a "net financial externality," which is their kind of language, on non-smokers.

A very senior official in the Ontario Ministry of Health at the time, who reviewed the paper before it was published, said the authors could have gone very much further. In our system the smokers are subsidizing the revenue and expenditure of health care costs in this province.

Mrs Y. O'Neill: Thank you very much for your perspective. I agree with you. I do not think you can tax people into morality, if this is a moral issue. I do not think taxing will change people's habits. It may change their source of procurement, but it will not change their habits.

I would like you to help me with a couple of things in your brief. You talk on page 3 about the $370 million lost revenue. Do you know how much of that is provincial?

Mr LaRivière: As I recall, it would be about an even split, but I can get you more specific numbers. I think you are familiar with the report by the forensic unit of Peat Marwick Thorne, by Mr Stamler, who is a former deputy commissioner of the RCMP. I will get you those numbers at the break.

Mrs Y. O'Neill: Thank you. Could you just refresh my memory about the rules of bringing cigarettes into the province or into Canada from the United States? What are the rules, or what kinds of rules? Is everything smuggling? I guess that is what I am trying to get at. Is it once a year? I am sorry, I just do not know what the rules are regarding bringing in cigarettes. I know how many you can bring in.

Mr LaRivière: An adult, a person over 18, is allowed one carton of cigarettes or 200 cigarettes after 48 hours of absence, or at any time if the person is prepared to pay the duty.

Mrs Y. O'Neill: It is limited to one carton.

Mr Sola: It is interesting to note your saying that demand for cigarettes has not gone down; it is just that the source of procurement has changed and that the main cause for that is excess taxation. In reflecting on the fact that a lot of our taxes go to support our social network, where would you estimate that the tax line should be drawn so that if you cannot change people's habits of smoking, at least you change their habits by getting them to buy taxed products that would go back to supporting our social service network?

We cannot go down to the level the Americans have because they do not have the same social network we have, but where would the incentive to going to the States be withdrawn, because of the differential in price for the cigarettes and the other ones you have mentioned, so we would not be losing the other revenue on the groceries?

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Mr LaRivière: With respect, in quantitative terms that is an awfully difficult line to draw. As my colleague indicated, a very useful first step would be to put a freeze, a cap, on taxation levels as they stand now. Getting back to your basic point, I think most if not all smokers would agree that given that it is a discretionary product as opposed to a basic staple, it should not be taxed in the same way as basic commodities, if you will. Having said that, I think the consumer, the ultimate taxpayer, expects fairness, but drawing that line in quantitative terms is difficult. But clearly we are over the fairness margin in the minds of consumers.

Mr Jordan: I think we have admitted to the fact that the governments, federal or provincial, are not placing the tax there really for the purpose of collecting money; they are placing it to try to protect the health of the people. What I would like to know is what research has been done by your industry to try to identify what segment or part of that product -- surely it can be identified; not the whole tobacco leaf is going to be harmful. There must be some chemical part wherever; I am not qualified to speak on it. Has there been much work done to identify that so that perhaps the rest of the tobacco leaf could be utilized?

Mr LaRivière: I am not familiar with the scientific research on the agricultural side to which you refer, but I will be glad to look into it and get you the information.

Mr Jordan: I would appreciate it, because it seems to me that there is a part of the product that could be used.

The Chair: We would like that information shared with the entire committee.

Mr LaRivière: Of course.

The Chair: Our time is over. Thank you for your presentation this morning.

The Chair: Our last presenter for the morning is the Association of Canadian Distillers. Thank you for being patient. We are running a little behind schedule. We have allocated 30 minutes.

Mr Mammoliti: Mr Chair, there should be a vote in the House very shortly.

The Chair: It is up to the committee whether we want to adjourn to go up for the vote or continue.

Mrs Y. O'Neill: It is not important to me this morning.

Mr Mammoliti: I have plans for lunch.

The Chair: The committee is going to have to continue. We have to continue our work. I would suggest that if members feel strongly about going to the House for the vote this morning, if we can maintain a quorum I would like the work to continue. We would like to have a minimum of one representative from each party, if it is possible. Do you think we will be able to meet those requirements?

Mr Jordan: I would have to check. I had made a commitment to go to the House.

Mr Mammoliti: I too have made a commitment to go to the House. I would like to ask the presenter if he would mind coming back at 1:30 or 2 o'clock, after question period.

Mrs Y. O'Neill: Mr Mammoliti, I cannot do that. I am sorry, that is impossible.

Mr Duignan: I really cannot meet in the afternoon.

Mrs Y. O'Neill: It is just impossible. These appointments have been made long before.

The Chair: Mr Duignan, Mr Abel, would you be able to stay?

Mr Abel: I think I would be able to stay.

The Chair: Mrs O'Neill, will you be able to stay?

Mrs Y. O'Neill: I will be here.

The Chair: Mr Jordan, what is your position?

Mr Jordan: If you do not mind, I will check and --

The Chair: If you can send a colleague down to sub? As you can see, Thursday is a hectic day for the members because a number of committees sit in the morning, plus the Legislature is in session and around this time there is usually a vote or possibly even two votes on private members' matters that are raised and debated.

Sir, I want to thank you for coming before our committee. You have been allocated 30 minutes. I would like to turn the floor over to you. If you could just identify yourself for our record and we would be happy to hear your brief.

ASSOCIATION OF CANADIAN DISTILLERS

Mr Rubbra: Thank you, Mr Chairman. My name is Doug Rubbra. I am the vice-president of the Association of Canadian Distillers. I bring you greetings and apologies from our president, Ken Campbell, and our chairman, Peter Wood, who unfortunately are out of the country or they would be here as well. We appreciate the opportunity to come and speak with you this morning. It is nice to see Mrs O'Neill, someone from Ottawa, and we appreciated her presence at the retail council coalition meeting on Monday. It is nice to see the interest of our elected representatives as we discuss these serious problems affecting our industry.

From the looks of who has been speaking to you this morning, you have heard a lot of bellyaching about taxes. I would be remiss if I did not continue on the same subject, and I will do it briefly, since we are the most highly taxed of the groups you have spoken to so far. We represent 10 Canadian distilling companies. It does not sound like a lot of companies, but it does represent about 95% of the Canadian distilling industry. The companies are all Canadian companies, mostly parts of megamultinationals.

If I may, during my remarks I will refer to this handout, which I gave you, on occasion. A picture is worth a few thousand words, and I think some of the graphs in there will speak for themselves as we proceed.

As you are all aware, I am sure, our industry has been subject to a lot of consolidations, a lot of mergers. Shrinking is the best term to describe it. There have been several distilleries closed down in Ontario and several jobs lost. We are not so naïve as to blame it all on taxation. However, we have to say that a significant part of the decline is due to the taxation of our products.

If I can go back, just to put things into perspective for you for a minute, the direct employment by our industry in Ontario is about 2,500 jobs. That was in 1989. Since then we have eliminated about 500 of those jobs through closures of distillers and consolidation of the industry. Those numbers are not big by some other standards, but we are a very sophisticated, mature and totally automated industry and we can endure these kinds of rationalizations without as big an impact on the workforce as that of some other industries. However, in these days a job is a job and we do not like to see any of them disappearing.

If I could refer you to page 3 in your handout, you can see that the domestic spirits market in Canada is down almost 30% in the last 10 years or so, unlike beer and wine, which are sort of holding their own at the top.

The Chair: Those wine sales at the top, is that all imported wine?

Mr Rubbra: That is domestic and imported, sir.

The Chair: There is an asterisk that says it does not include Ontario wine stores sales or Ontario winery sales.

Mr Rubbra: Those are sales through stores that are actually located at winery locations licensed for the purpose of selling their own product only. They do not share their data with us, so we are unable to include them.

The Chair: Would you know what proportion of the decline would be tilted towards the domestic market and/or the imported market?

Mr Rubbra: They are about the same in terms of the ratio between domestic and imported, which have declined. In other words, the market is down 30%. Our domestic sales are down about the same, so the imports would be about that. It does not make a distinction.

In terms of cases, we are talking about a decline from a high of 6.7 million nine-litre cases in 1981 to about 4.6 million in 1990. The reasons for the decline are straightforward for our industry in terms of what the causes are. We loosely group them into three basic categories, the first obviously being taxation. In Ontario the tax load on our products is about 81%; 81 cents out of every dollar spent on our products goes either to the federal or provincial government. We assume that accounts for maybe 50% to 60% of the decline.

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Changing lifestyles, trends away from spirits -- which I represent -- to things like wine, increased awareness of drinking and driving are changes akin to the question at the end of the last presentation about people smoking less. People are drinking less, and we figure that accounts for maybe 20-30% of our decline. The rest we attribute to the twin phenomena of cross-border shopping and organized smuggling. It is very, very difficult to get a handle on amounts and quantities. We use a figure of between 1-2 million cases a year of distilled spirits illegally entering Canada. We get that figure from Canada Customs and the RCMP, who figure out the amounts they are actually intercepting and then extrapolate very loosely that maybe we are catching 10%. The conservative estimate is 1 million and, at the other end of the scale, 2 million cases a year. On a domestic market of 15 million cases, that is a large percentage.

If you look at page 6 you will find our famous bottle chart which most of you have probably seen in the press a few times. It shows a breakdown of the price of a typical bottle of Canadian whisky in Ontario. You can see that the supplier, our industry, gets $3.70, the federal government gets about $4.48 and the province gets $11.47. That compares to prices in 1980 when our industry peaked, when distillers got $1.92, the federal government got $2.30 and the provincial share was $5.11 for a total of $9.35. It is the same story the tobacco people were telling you; prices have gone up and it is very straightforward in our industry.

I do not know how long you have been having hearings on cross-border shopping but I am sure you have heard a lot about competitiveness and the value of the dollar and increased selection in the United States and service levels and the vacation aspect of a cross-border shopping trip and marketing boards and rents and municipal taxes and labour costs. All of these obviously contribute to the phenomenon of cross-border shopping. For our industry, those factors I think are minimized relative to most other industries since our product is basically supplier's price plus regulatory impact in terms of taxation at the federal, provincial or state level.

The bottom line for us is that several factors have resulted in our shrinkage, the greatest being taxation. There is an interesting chart on page 7. If you look at the left-hand group of bar graphs you will see that the volume of domestic spirits in Ontario has been declining between 1980-89 while the LCBO's gross revenues have been increasing over the period. That speaks for itself. There can be only one answer to that: the increased tax level.

We are aware that taxation is an integral part of the pricing of our product. We have been actively lobbying at the provincial and federal levels for equalization of taxation rates between the three alcohol types. At the federal level for instance, the distilled spirits product attracts three times the rate of federal excise duty as does beer or wine. We figure a product should be taxed on its alcohol content.

We have been able to demonstrate at the federal level that the law of diminishing returns on their revenues has set in; although they increased their taxation levels for the period 1981-86 and were able to increase their revenues in spite of the volume declines, their revenues are now turning around.

That is an important lesson to learn and as a result there were no increases in Canada in federal excise duty on our products from 1986 until the GST was introduced, and that was basically an adjustment because of the GST rate, which resulted in 7% GST at the retail level instead of 19% federal sales tax which we were paying before at the manufacturer's level.

I do not have answers for you in terms of what can be done about cross-border shopping. The organized smuggling issue is probably a bigger problem for us than the cross-border shopping. We have no indication, as you heard from the tobacco people, of any links to organized crime, but we know there is an organized commercial smuggling operation from the United States into Canada, going on by truckloads, mostly at the Ontario-Quebec border.

Every case of distilled spirits that is smuggled in costs the government of Ontario $125. If we use the figures that I was using before -- 1-2 million cases a year -- the Ontario share would be about 400,000-800,000 cases per year. If you extrapolate that, the Ontario government is losing somewhere between $50 million to 100 million a year in revenue because those products have not gone through the normal LCBO channels in the province of Ontario.

We are concerned about that because the LCBO has a bottom line. If it is not satisfied with sales it is going to increase its tax rates, which obviously reduces our volumes. People criticize us at times for complaining about this problem because the same bottle of Canadian Club purchased in the United States or in Canada comes basically out of the same plant in Walkerville, quite often at a higher price to the American purchaser than to the Liquor Control Board of Ontario. But we represent the Canadian industry, we have our own bottom lines and we are concerned about the governments whose revenues are affected when products are not sold properly through appropriate channels in this country. As I said, if the liquor boards, including the Liquor Control Board of Ontario, do not realize their bottom lines, the only way they can adjust for that, other than increasing their marketing efforts, is to increase the tax rate and the markup rate as we call it provincially.

The Chair: I do not think they have a bottom line, I just think they follow the instructions of the government.

Mr Rubbra: They have targets, they have budgets; there is a new breed of management in the Liquor Control Board of Ontario these days. They have hired several senior people from major retail chains -- Sears, Loblaws, places like that -- and they are bringing a free enterprise retail-type mentality to the liquor control board, which is of course a distribution monopoly. They are getting very tough in terms of their options and the way they do business. It makes it a little more difficult sometimes for the industry to survive, but they are the largest liquor distribution entity in the world and they are our largest customer. Forty per cent of distilled spirits in Canada are sold in Ontario, so when the customer speaks, the supplier listens.

If I could refer you to page 9 in your handout, that is the crux of the matter for us. These are a few price comparisons for the types of products which we represent. Once again, it speaks for itself.

As far as cross-border shopping goes, we have commissioned a study to try to answer the question of what people actually go across the border for. The survey that is being done for us by a professional polling organization is something in the order of: Which of the following products would you make a special trip to the United States for, and which do you buy incidentally because you happen to be there? I think we all probably know the answers. They are probably gasoline and tobacco products, as you just heard. That is where the biggest saving is, and they are probably going to rate one and two.

The Chair: Is the study you are doing for internal use only or could you submit it to the committee later on when you receive it?

Mr Rubbra: I will be happy to. We have not received the results yet, but I will certainly give you the results of that study.

The Chair: I will distribute it to the entire committee. It might be nice to actually see what the consumers are saying first hand.

Mr Rubbra: As I say, our industry is in decline for several reasons, taxation being the chief reason. Cross-border shopping and smuggling, which we have to lump together because we have no way of quantifying the amounts, are a significant contributor but not the major contributor. We are very concerned about it. Anything that further erodes our domestic market is of serious concern to the industry.

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The Chair: I note on page 13 you are losing tremendous market share to beer, almost 10%. Wine's market share has gone back down to what we could refer to as its traditional 1981 level. Beer's share keeps rising. Could your loss in market share to beer be attributed in any way to the job losses that you also outline in the report?

Mr Rubbra: Certainly that would be part of it. That is primarily a pricing phenomenon. People only have so much disposable income to spend on things like spirits, beverage alcohol in general. We have found in a lot of our research that people are just throwing up their hands and saying: "We cannot afford it. We have $20 a month to spend on this kind of product. We can get more bang for that buck through beer than we can through spirits." Yes, there has been a shift in market share but I believe it has been price driven.

Mrs Y. O'Neill: Mr Rubbra, I am very sorry there are not more members here. Explanations will have been made by them; I do not know why.

Mr Rubbra: That is quite all right.

Mrs Y. O'Neill: But I feel that this is an interesting item. We are going to produce a report from this, and everything you have said is in Hansard so I hope it will be taken up by those members who are not able to stay.

I want to ask you a couple of questions. You did not say much about the export side of your industry. Is it a sizeable component?

Mr Rubbra: Yes. I apologize for not including that in the presentation. We are a very export-oriented industry. We export as much as we sell domestically.

Mrs Y. O'Neill: Is that right?

Mr Rubbra: Ninety-five per cent of our exports are Canadian whisky and 95% of that goes to the United States. Canadian whisky is the largest selling whisky in the United States. It outsells Scotch and bourbon combined.

Mrs Y. O'Neill: So this chart on page 9 would be part of your export market; this would be the tax difference which you are showing basically in these price differences?

Mr Rubbra: Yes.

Mrs Y. O'Neill: These are not duty-free?

Mr Rubbra: No. These are retail prices.

Mrs Y. O'Neill: Okay. My other question is on the job page. Of those plants, I know Corbyville has closed. Are the others closures or are they consolidations?

Mr Rubbra: No, they are closures. McGuinness closed down in 1987. They were purchased by Corby, but that plant has been closed. Is has been sold and it is being redeveloped into residential property.

Gooderham and Worts, just down the street here on Mill Street, just closed. It was not producing too much. Part of it will be saved as a heritage location, but there will be no production there.

Gilbey has two locations here in Toronto. Their main office and distillery on Kipling Avenue is being closed down. All they are maintaining is a bottling operation around the corner. They will do all their distilling now in their other plant, which is in Lethbridge, Alberta.

Corbyville is the most recent one. It will be shut down completely over this summer.

Waterloo is being phased out over a two-year period, but when all is said and done, all you will have left there is the Seagram distilled spirits museum. There will be no production there any more.

Now, they are consolidations in that those brands have been taken over and production has been taken over by other facilities of the same companies.

In the Toronto area it is a little bit distressing. All we have left now in the Toronto area is Bacardi in Brampton, in terms of an operating distillery. We have a small operation in Grimsby, Rieder Distillery.

In the rest of Ontario, we have Walkerville, of course, with Hiram Walker.

The Chair: Seagram in Amherstburg.

Mr Rubbra: Seagram in Amherstburg and Canadian Mist in Collingwood. Canadian Mist is a bit of a different product. You do not see it very much in Canada, but it is the largest-selling brand of Canadian whisky in the United States. They produce in Collingwood and export practically all their production in bulk to Louisville for bottling. They are a fully operational, 24-hour, seven-days-a-week plant.

Mrs Y. O'Neill: I think these charts will be very useful and I am sure members beyond our present attendees will be interested.

Mr Sola: Your presentation is very interesting but you did not draw the same picture that the tobacco industry did, that hard liquor sales are a magnet to draw people across the border and then while there they take in other amenities, whether it is clothes or groceries. When you look at the chart on page 9, there is about a $10 liability that you get if you purchase the same product here in Ontario as opposed to Buffalo or Detroit. Do you find that price differential to be a large drawing card to go across the border or not?

Mr Rubbra: I am not sure of the answer. As I mentioned before, we have commissioned a study to try to answer that question of what products draw you across the border, what do you go across for. I have some trouble in stating flat out that, in my opinion, people go across exclusively for distilled spirits products. I have some trouble with the position on that as well, because those two products are specifically excluded from returning exemptions until you have been out 48 hours, so if you are going to bring those back, you either have to pay the duty or you have to smuggle them. I am not sure. We have a $10 differential on a bottle. It is not as much as a $20 or $30 differential on a carton of cigarettes or on a tank of gas, so I do not really know the answer to your question. I imagine it is a combination. People say, "Let's go down and we'll get these things."

Mr Sola: I wonder if you could have your consultants try to answer this question as well, and this is the one I posed to the tobacco industries: Where do these shoppers draw the line? What is the sort of last-case scenario between the price differential here in Ontario and the price differential across the border that they are drawn? Is it $5 per bottle and $10 per carton of cigarettes? Is it 5 cents a litre, 10 cents a litre or whatever in gasoline? Because if the governments are to lower the taxes to reach that rate -- if they do not get it in percentage of tax they are applying to the product, they can get it in volume by getting the purchases made in Ontario rather than in the States -- I think that would be a very good question to be able to answer.

Mr Rubbra: I agree. That is a good question. I will see what I can do.

Mr Duignan: I have a brief question. I think you indicated earlier that 30% of the decline in sales was due to people not drinking or quitting drinking or whatever the case is and you mentioned that the rest was due to cross-border shopping or smuggling. Do you have any percentage of that? Which would be the bigger, smuggling or cross-border shopping?

Mr Rubbra: It is impossible to guess. We know smuggling is very big in the eastern part of the country, but I could not hazard a guess as to how much is which. That 30% figure is an estimate at best. We figure somewhere between 50% and 60% of the decline is due to price increases due to taxation, 25% to 30% is due to changing lifestyles and the balance is due to smuggling and cross-border shopping. It is extremely difficult to quantify.

Mrs Y. O'Neill: What is the eastern part of the country? Does that start with New Brunswick or is that including Quebec?

Mr Rubbra: Thunder Bay east, all along the water border with Ontario, and especially along the St Lawrence River.

Mrs Y. O'Neill: So the east does include Ontario?

Mr Rubbra: Yes, sorry.

Mrs Y. O'Neill: Those smuggling statistics on page 11 are overpowering.

Mr Rubbra: They figure they get the tip of the iceberg. It is just what they have caught.

Mrs Y. O'Neill: I do not think the quantity of smuggling going on is as widely known as we may think it is.

Mr Rubbra: We certainly bring it up every time we have the opportunity to talk to anybody, such as yourself or ministers, whom we see quite often.

Mrs Y. O'Neill: You are the first one who has really brought us data, statistics. I presume you are in co-operation with Customs and with the RCMP.

Mr Rubbra: Yes, we deal with them. I myself worked for Customs for 12 years.

Mrs Y. O'Neill: Oh, I see. That is why this report is different.

The Chair: Thank you very much for your presentation today. As you heard from the members, they were appreciative of the way your brief was presented. It was presented in such a way we could get the picture quickly.

Mr Rubbra: I am sorry I do not have the text for you.

The Chair: We will get it in Hansard.

Mrs Y. O'Neill: We hope you will be happy with whatever recommendations we are able to make from this committee.

Mr Rubbra: We would be grateful for any.

The committee adjourned at 1233.