Finance Committee on Oct. 29th, 2012

[The Vice-Chair, Liberal, Scott Brison]

Thank you, Mr. Murphy.

Mr. Myers.

[Jayson Myers, President and Chief Executive Officer, National Office, Canadian Manufacturers and Exporters]

Thank you, Mr. Chair.

I am very pleased to be here today to make a few observations about Canada's economic recovery.

As you know, the Canadian economy is slowly recovering from the impacts of the steepest collapse that global asset markets have experienced since the Great Depression. Canada's manufacturers and exporters were particularly hard hit, but since 2009, Canada's manufacturing and exporting sectors have been on the rebound.

Government tax policies have played an important role in supporting Canada's economic recovery, because the profitability of Canadian businesses determines the employment prospects of Canadians. Every percentage point increase in after-tax profits as a per cent of GDP leads to a 0.8% decline in Canada's unemployment rate. Corporate tax rate reductions have made businesses more profitable, and that's a good thing. If tax rates had not been reduced, Canada's unemployment rate today would be higher than that of the United States, and about 200,000 fewer Canadians would be employed.

Now, with consumers and governments needing to borrow less and growth in international markets slowing down, business investment has become the critical factor in sustaining and strengthening economic growth in Canada. When companies invest in productive assets, new value-adding production technologies, new product development, and workforce training, they boost their productivity and become more competitive in domestic and export markets. They grow their businesses and employ more Canadians in high-paying jobs.

Fiscal policy is a decisive factor in influencing business investment decisions and our economic future. Deficit reduction and responsible financial management are essential to maintaining investor confidence. Our lower business taxes have made Canada a more competitive location for investment, but countries around the world, most notably the United States, are taking aggressive steps that will further reduce effective tax rates on business investment.

We need to stay in the game, and in order to do that, Canada's fiscal policy must ensure that our tax treatment of business investment remains internationally competitive. We must encourage businesses in Canada to invest more in new and improved products, processes, technologies, and skills training, and we need to reward the companies that are taking the risks to make these investments.

Business investment is highly dependent on operating cashflow performance. Since the recession, all businesses, and manufacturers in particular, have had to rely more heavily on cashflow in order to finance investments in new facilities and in machinery and equipment. While the cash balances of manufacturers and many other businesses have increased, so too have their investments in value-adding capital assets.

Cash is not “dead money”. It is what businesses use to pay off short-term liabilities and invest in—or finance their investments in—new facilities, machinery, and equipment.

The accelerated capital cost allowance for investments in manufacturing and processing machinery and equipment that was introduced in 2007 has been instrumental in assisting Canadian manufacturers to make investments in the new technologies they've needed to survive the recession and to grow. The ACCA encouraged investment and capital turnover by raising the after-tax rate of return on eligible investments by 10.4% during the first three years of use.

Since 2007, the ACCA has contributed about $2 billion in additional cashflow to manufacturers, and it has generated an estimated total of $3.1 billion in additional investment. The annual level of manufacturing investment in machinery and equipment has increased by $5 billion since 2010.

It's important to note that other countries, most notably—again—the United States, have also implemented rapid writeoffs for their manufacturing sectors. Short of providing an investment tax credit, accelerated appreciation is the most important tax measure the government has to encourage direct investment in new technologies.

CME recommends that the ACCA for manufacturing and processing machinery and equipment now be made a permanent part of Canada's tax system. Our recommendation is supported by 50 other industry associations that are members of the Canadian Manufacturing Coalition, by other business groups, and by labour leaders.

We also need to take steps to strengthen business investment in innovation. Recently, the government introduced legislation that will change Canada's scientific research and experimental development—SR and ED—tax credit system. It will, among other things, reduce the tax credit rate from 20% to 15% and eliminate eligibility for capital expenditures.

These changes will significantly increase the taxes paid by Canada's top R and D performers, especially for more capital-intensive manufacturers, and it will erode the international competitiveness of Canada's tax system for business investment. For companies using SR and ED, the cost of investing in R and D will increase by 5.9%, dropping Canada from 13th to 17th position among 30 OECD nations in terms of international tax competitiveness for R and D investments.

We're working closely with Finance officials to develop alternative mechanisms that will encourage businesses to invest in research, development, and commercialization, and to do that in Canada. To that end, we recommend that CRA simplify the SR and ED tax credit program. An accelerated writeoff should be provided for investments in capital equipment used in R and D. The SR and ED tax credit should be made partially refundable.

As well, direct funding should be made available for supporting strategic manufacturing and technology investments, and a voucher program should be established to allow businesses—

[The Vice-Chair, Liberal, Scott Brison]

Thank you, Mr. Myers.

[Jayson Myers]

It would allow businesses to direct funding to college, university, and R and D support services that best meet their needs.

Thanks.

[The Vice-Chair, Liberal, Scott Brison]

Thank you very much Mr. Myers.

Mr. Audla.

[Terry Audla, President, Inuit Tapiriit Kanatami]

Unukut.

Thank you very much for the invitation to appear today. I will take a few moments to summarize the major themes of our written submission, and then I would be more than happy to take your questions.

As many of you know, Nunavut, the Inuit homeland in Canada, makes up approximately one-third of Canada's land mass and half its shoreline. This area, governed by a set of five modern, constitutionally protected treaties, contains much of Canada's non-renewable and other natural resource potential. The Government of Canada is relying heavily on resource development projects to propel economic growth in Canada, including increased wealth, expansion of employment, and improved levels of productivity. In the Arctic, such projects must strike an appropriate balance between economic development, social development, cultural continuity, and environmental protection, and they must actively engage Inuit.

This is starting to happen, particularly in Nunavut, where I'm from. But the federal government has the power to enhance Inuit contributions to Canada's economic performance. The key is education and training. Parliament and the federal government have the authority and capacity to take far-reaching and imaginative measures to bring about greatly improved Inuit education and training outcomes. This authority and capacity is drawn from a variety of constitutionally anchored sources, including Parliament's power to make laws in relation to Inuit under section 91.24 of the Constitution Act, 1867; special federal powers in the territories over such things as marine areas, fisheries, and cross-boundary matters; and Parliament's unqualified spending powers. A radical improvement in Inuit education and training will not be achieved without the use of targeted federal funding. The scope of what is needed is large.

In 2006, a federally appointed conciliator reported during the process of updating the implementation of the Nunavut Land Claims Agreement that even a five-year effort aimed at making modest headway in Inuit participation in the Nunavut workforce would require $100 million in federal funds. That projected undertaking was just in relation to Nunavut. Other regions of Canada have similar needs, and existing funding is simply not enough to meet these needs.

The Inuit population in Canada is much younger than the general Canadian population. While fertility rates are gradually declining, the number of Inuit in the prime employment cohort aged 20 to 60 will show steady growth in coming decades. This presents both a challenge and an opportunity. It is a challenge in that public sector policies and private sector initiatives need to be fashioned so as to generate adequate employment and other economic opportunities for Inuit, particularly young Inuit joining the workforce for the first time. It is an opportunity in that successfully attracting and sustaining optimal Inuit participation in employment and other economic opportunities can contribute in tangible and important ways to both Inuit economic self-reliance and Canada's overall economic performance.

There is one other aspect of Arctic demographics that needs emphasis. This aspect is effectively summarized in the text of the Circumpolar Inuit Declaration on Resource Development Principles in Inuit Nunaat, released in May 2011, which says:

Inuit are committed to safe-guarding Inuit culture against excess adverse pressures and impacts that could be brought on by an overly ambitious, ill timed, or poorly planned and implemented staging of major resource development projects, particularly insofar as such a scenario precipitated a major influx of non-Inuit while failing to impart the technologies, skills and training, and business opportunities needed by Inuit.

Inuit are among Canada's youngest citizens, with a median age of 22, about half the Canadian median age of 40. The bulk of this population is now moving through the education system, yet too few are graduating. The stark reality of Inuit education today is that roughly three-quarters of the children are not completing high school, and many who do graduate find that their skills don't compare with those of non-aboriginal graduates.

Low educational outcomes are associated with adverse social implications, including greater unemployment, greater numbers of youth entering the criminal justice system, and greater incidences of illness and poverty. Existing socio-economic conditions will worsen unless more Inuit children graduate from high school with equivalent skills and the same opportunities to succeed in post-secondary education as their non-Inuit peers.

There's a long, graphic, and unhappy list of economic and social development indicators revealing the pronounced and enduring gaps in basic well-being between Inuit and other aboriginal peoples on the one hand and the general Canadian population on the other.

To conclude, the growing international interest in the rights, interests, and conditions of indigenous peoples should give Parliament and the Government of Canada added incentives to improve economic circumstances for any aboriginal peoples, a core reference point in determining and measuring the economic circumstances of Canada.

I'll leave it at that.

[The Vice-Chair, Liberal, Scott Brison]

Thank you, Mr. Audla.

Now going to members' questions, we'll begin with Mr. Marston.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you.

I was just wondering, Mr. Turk, if we should tell people how long we've known each other. Is it 30 or 40 years?

[James L. Turk]

It's on the lower end of that, I hope.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I noted from your answers to the written questions under “Other Challenges”...you wrote about youth unemployment. That's something that has rippled through almost all the presentations we've had here. The last presentation was great, speaking very directly to the youth of the north.

Committee members will tell you that I go on and on about the $128 billion infrastructure deficit we have, and how we believe there's a place for the federal government to take a leadership role in that. Coming from a labour background, I talk about craftspeople. If they're working on these jobs and they have apprentices with them, they can give them on-the-job skills training you can't get elsewhere.

Countries like Germany—we had a previous speaker, Ms. Robinson, talking about how it shows, at least I believe, a right mix of public investment with market solutions in a green economy.

What measures do you feel the federal government should take to move Canada more in that direction—the greening of our economy?

[James L. Turk]

You began by observing the need for training our young people to deal with that issue. The federal government has a very important role. As several of us mentioned, part of it is in better education and training funding for aboriginal students in this country. In the Prairies, they are the largest demographic.

English as a second language training: the federal government has been moving more toward a voucher system, which has privileged the private, for-profit trainers who often have less qualified teachers, a high turnover rate among their teachers, and uneven programs, at the expense of public colleges that have built up a wealth of experience and credibility and high-quality educators over a period of time. The federal government is investing public dollars, and we think one of the ways you can get more bang for your buck is to see that they go to public institutions.

You also made reference to apprenticeship. Measures have been taken to assist those in the Red Seal trades—the apprenticeship incentive grant that gives a $1,000 each year for the first two years, and a completion grant for when they complete their apprenticeship training. More needs to be done in that regard. There are a number of important trades in Canada that are not under the Red Seal that need to be recognized, whether it be X-ray technicians or whatever.

In addition to reaching beyond the non-Red Seal trades, I think the federal government also has to provide more of an inducement for employers to take on apprentices. As a country we've lagged in apprenticeship for as long as you and I have known each other. One of the reasons is that it was always cheaper for industry to bring in a skilled tradesperson as an immigrant than to train a young person. I think there have to be more incentives for business to take on apprentices so that we grow our own and provide opportunities to our young people to acquire these trades.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you.

Mr. Davidson, we've also heard concerns about low productivity in Canada. In your presentation, you talked about the lack of R and D investment in Canada. Would you say that has a negative impact on our productivity?

[Paul Davidson]

One of the things AUCC has worked quite closely with has been...we contributed to the recommendations of the Jenkins report last year, which focused on how we increase private sector investment in R and D. The record shows that government investment in research has been quite sustained and quite large, but it's really attracting additional research investment from the private sector that's most important in terms of getting Canada up to international levels. In that connection, the recommendation of the Jenkins report provides some path forward. In the discussions we've had this afternoon, there's some debate as to which are the most effective.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Mr. Audla, I appreciate your presentation about the needs of your community; it was very clear and very concise. We've had speakers, just here today, talking about the fact that across our country we have a built-in pool of people from first nations communities and from Inuit communities who need jobs. The loaded question would be: how receptive is it on the ground? I mean, you have to go out and access these dollars for sure—and there's a responsibility on all of us to provide—but on the ground, what buy-in do you think you have?

[Terry Audla]

When it comes to education and employment opportunities?

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Yes, you talked about the dropout rate.

[The Vice-Chair, Liberal, Scott Brison]

That's it for your time, Mr. Marston.

Very briefly, Mr. Audla.

[Terry Audla]

Well, there is buy-in, and we have submitted a report on the “First Canadians, Canadians First” national strategy on Inuit education. Based on the number of projects that are happening up north, there is buy-in among the locals to try to get themselves positioned to take on the jobs that are being made available.

[The Vice-Chair, Liberal, Scott Brison]

Thank you, Mr. Marston.

Thank you, Mr. Audla.

Now we'll hear from Ms. McLeod.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I would like to start with Mr. Davidson. You made a brief comment about internships. Could you tell me what you were thinking in your opening comments?

[Paul Davidson]

Our recommendation, in recommending increases in research spending and innovation spending, is that there be more opportunities for university students, both undergraduate and graduate, to work in the private sector as part of their program. There are programs like the Mitacs initiative that have been very effective at linking small and medium-sized enterprises with graduate students doing real work in real time that is creating value in the local economy and providing the students with important research opportunities.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I'll just use my daughter as an example. She did a co-op program through university, and it linked her for a number of different terms. The federal government played no role there, and it seemed to be very effective. Are you saying that we should be jumping in and interjecting in something that seems to be working pretty well between the universities and the private sector?

[Paul Davidson]

One of the important recommendations of the Jenkins report is to look at finding ways of engaging the private sector more thoroughly and earlier on in issues of research development and innovation. It's interesting that, in the American experience, there's far greater flow between graduate students and the private sector. The private sector understands and values those graduates even more highly, and we don't lose graduate students to other jurisdictions.

On the question of internships, one of the things I'm really pleased and proud about is that over half of all Canadian university students now have a co-op service learning, or internship, experience as part of their undergraduate program. It was not that long ago when it was the preserve of one or two institutions, but now it is an integral part of many students' undergraduate formation.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

My next question is to both Mr. Myers and yourself. It sounds like you would be in a debate in terms of the changes made to the SR and ED credit, because obviously those were recommendations out of the Jenkins report. Could you both give me a sentence or two in terms of supporting the changes versus concerns about the changes?

[Paul Davidson]

In the consultation process we recommended that there be a shift from tax measures to direct spending measures, to targeted initiatives that would enhance these sorts of outcomes. We are pleased to see the recommendations in Jenkins. We recognize it's a difficult terrain for the government to make choices, but we would support the recommendation of Jenkins in that regard.