Peter MacIntosh
Harvest is a time of change in the agriculture and winery business. Crops are brought in from the field and sold or transformed into a finished product. There are many variables along the way. The same can be said of public policy that impacts the agriculture and wine world. Public policy, in the form of laws and regulations, can change based on initiatives and political direction. As witnessed by the last federal election, political direction can change quickly and so too can the issues affecting businesses.
There are numerous pieces of legislation that affect agriculture and winery businesses.
The following is a brief review of a small sample of policies that could impact the profitability of your business.
British Columbia’s new liquor laws
Addressing outdated legislation is normally a positive thing. However, when a significant source of government revenue is on the line then any change will not be a straightforward one. This brings us to the new liquor laws in BC.
It appears that one aim of the new liquor laws is to foster tourism in the province. It is great to see wineries selling at farmers' markets. In addition, having fewer restrictions on alcohol at events and the ability of wineries to sell product other than their own are positive developments. Selling directly to the consumer is vital for many smaller wineries and any means to facilitate this is a good thing.
The BC government has kept a tight control on the pricing model of liquor under the new regulations. At first glance, it would appear that allowing BC VQA wines in grocery stores is a positive development. The convenience to consumers should drive sales volumes and increase profits. However, the margins on sales through grocery stores, i.e. the difference between what wineries sell the product for over the cost to produce it, based on the governments pricing model could be small.
The wine business is about making great wine but more importantly, it is about selling wine. Selling more wine at a less than favourable profit margin often is not the best approach. The new liquor laws are a profound change to the market place and time will tell the impact.
Agriculture specific assistance
Growing Forward 2 is a five year program for Canada’s agriculture and agri-food sector running from 2013 to 2018. It is a cost-sharing program between federal, provincial and territorial governments to offer business risk management programs: AgriStability, AgriInvest, AgriInsurance and AgriRecovery. These programs are designed to help producers manage risks associated with farming due to severe market volatility and weather related disaster situations with the goal of fostering and supporting the financial stability of farmers.
These programs are now in the middle of their stated term and can be valuable in aiding cash flow of agricultural producers. I mention them because you may be aware of some but not all of the programs.
Inter-provincial trade
In 2012, the Importation of Intoxicating Liquors Acts was updated by the federal government to remove trade barriers regarding purchase and personal consumption of wine across the country. Two provinces quickly followed suit, BC and Manitoba, and updated their legislation to include the importation of wine. This was followed up with recent similar federal amendments for beer and spirits. This all sounds great. However, the movement, sale, purchase and possession of wine, beer and spirits are governed by provincial liquor laws within each individual province. The federal government is encouraging all provinces to support the measures and create laws to facilitate the federal law, which is really all they can do.
The direct sale of BC wine to consumers across Canada has great potential to increase profitability of wineries of all sizes. The provinces, other than BC and Manitoba, have been slow to move on changing their laws. It would be wonderful to see some action on this issue but, sadly, it appears that the political will at the provincial level is not there.
Trans-Pacific Partnership Agreement (“TPP”)
The TPP is a newly announced trade agreement that includes the wine producing regions of the US, Australia, Chile and New Zealand. It's intended to provide benefits to the Canadian wine industry by reducing costly tariffs on wine, providing protection for Icewine,and streamlining complex technical and administrative barriers that limit access to markets in the member countries. The TPP is an opportunity to expand markets but it is also an invitation for more competition in an already competitive market. Wineries will need to manage both the risks and opportunities available to them under this agreement because of its significant impact on the marketplace.
Corporate Income Tax
There has been a lot of discussion regarding potential tax changes as a result of our new federal government. The majority of discussion during the election revolved around personal tax rates going up at the highest income levels. In addition, there was talk of lowering the federal tax rate on corporations. We are in a wait and see period until the government announces any formal changes. It is always important to weigh tax considerations and their impact on your business. Once again, we will have to wait until the new government provides details of the direction of their tax policy in order to determine where planning opportunities may be available.
Interest rate policy
The Bank of Canada interest rate policy has kept rates at historic lows for the last several years. It appears that we are still in a time of historic low rates for at least the near term. I regularly discuss financing options with clients and mention that it is important to utilize this cheap source of capital as much as possible whether inside or outside of their corporations. I am not advocating loading up on debt but right now lenders are offering up money at very cheap rates. Interest rates will have to rise in the future but prudent financing decisions now can assist with your cash flow.
All we know is that tomorrow will be different than today. Understanding changes and how they impact your business is very important. You may not know all of the answers to the big issues facing your business but being aware of changing risks and opportunities gives you the best chance to succeed.
Peter MacIntosh, CPA, CA is a partner with White Kennedy LLP. White Kennedy has offices in West Kelowna, Penticton and Osoyoos. Peter can be reached at 250-492-9984 or pmacintosh@whitekennedy.com.