Finance Committee on Oct. 28th, 2014

[The Chair, Conservative, James Rajotte]

Keep it brief.

[Scott Brison, Liberal, Kings—Hants, NS]

I've seldom seen such unanimity on important issues facing the Canadian economy between labour and business, both small business and larger business, on issues of training, infrastructure, good data. I just think it's encouraging and informative for parliamentarians as we move forward in considering what we should do to grow this economy.

[The Chair, Conservative, James Rajotte]

Thank you, Mr Brison.

We'll go to Mr. Keddy, please, for seven minutes.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chair.

Welcome to our witnesses.

To the Canadian Chamber of Commerce, you recommended adopting an innovation box. You're saying this would “reduce the normal corporate tax rate for income derived from developing and commercially exploiting patented inventions and other intellectual property connected to new or improved products, services and related innovation processes to the benefit of Canada.” I'm reading your words.

I'd like to talk a little more about that. I'd like to know the cost of an innovation box. I'd like to know if you're intending to reinvest those extra dollars that you'd get out of an innovation box, and if it wouldn't skew the patent process beyond what it is today, because you already have a product that's in demand, as you're the only person who can manufacture it, if you've patented it to begin with.

[Hendrik Brakel]

That absolutely is a great point, and we haven't been prescriptive about the specifics or the rates of how much. We would like to work with Finance or tax policy to design how a program would look like. We've seen some really great examples, as we said, in the U.K. or in the Netherlands, where instead of just giving the SR and ED tax credit for some sort of R and D activities in the businesses, which may or may not actually result in innovations, they really put the focus on commercializing the products. Whatever patent that the innovation box refers to, you check a box on your corporate tax return to say this revenue comes from this particular patent, and it goes through at a lower rate. The idea is much simpler and easier to administer than the SR and ED and it really goes at developing that innovation.

The risk is that if you do a whole lot of R and D activities and you don't get any innovation out of it or you don't actually commercialize the product, you won't benefit from the tax credit. That's why we want to put that in centre right on the actual product. But in terms of actual costing, we think it might be great to replace one with the other, but we haven't.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

On the same subject I have another question.

Beyond cost recovery, if you used an innovation box for cost recovery but you recover the cost of producing that patent, now you still have an advantage over all of your competition. Why should you continue to get a reduced rate? And is there danger, quite frankly, of evergreening? You suddenly decide you're going to evergreen this patent, you've changed it a little bit and you're already getting a tax break.

[Hendrik Brakel]

You're absolutely right. That is one of the risks with the policy, so it has to be designed very specifically, so that it can't be evergreened and there are limits to it. Either you would cap the amount, so you can say up to $200 million or half a billion, whatever, in tax relief on this particular patent box, or you would define more specifically what sort of innovations would count as a new patent. You're right, there would absolutely have to be tight guidelines and rules around how that would be done. It could be abused, certainly.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you.

To Mr. Wilkes from the Retail Council of Canada, the made in Canada branding campaign has been successful in other countries. I think it's successful in Canada with products like Canada Goose and some others that we could name. But does it really encourage companies to manufacture inside Canada? Can you name some other examples besides the very obvious ones, some that I've noted.

[David Wilkes]

The short answer is that Canadians do like to purchase products that are made in their own country, whether they're manufactured or they're grown from a grocery perspective, or other aspects. I believe there is an opportunity to continue to promote products that are made in this country. We have seen very specific examples, and let me once again use something that we purchase every day from a grocery point of view. There is a preference to buy local, and we've seen in it our consumers, and you see our members within those categories promoting those types of products within local growing season because that's how they compete.

I do believe you've also seen in the sporting good areas and, as you mentioned, in some of the clothing areas where people enjoy supporting those products that come from this country—I apologize I'm repeating myself—but at the same time those products have to be of the right price, they have to be of the right quality, and they have to be available where consumers are looking for them. So it is something where we see consumer preference. We believe there is an opportunity to exploit that type of marketing. We see many of our members already doing it, and we see there's more opportunity as well.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

One of my pet peeves on buy local is, what exactly is local? I mean the Retail Council of Canada is a good place to ask this question, especially in fresh produce. If it's local in Nova Scotia, is it Nova Scotian produce? My understanding is that different regions and different provinces set their own parameters of what local is, and local's usually within 24 hours of travel. Well, 24 hours of travel is a long ways today. So do we have a standard, and are you promoting a standard? Because I really think we do need one if we want our consumers to truly buy local.

[David Wilkes]

There is no standardized definition of local that I'm aware of, but certainly any claims that are made by local have to be backed up by that explanation, whether it's within a region such as Atlantic Canada, to continue with your example. There is indeed a lot of work that our members support both from not only purchasing local products, but also supporting local campaigns and various other activities within the community. So the short answer is no. The long answer is it is defined as the claim is made.

[The Vice-Chair, NDP, Nathan Cullen]

A short question if you like, Mr. Keddy.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I guess that a point that I would make is that I think the definition needs to be bit clearer, and I actually think it would be a sale point for the Retail Council of Canada. It wouldn't be a disincentive; it would be an incentive.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you, Mr. Keddy and Mr. Wilkes.

Mr. Caron will start off our second round of questions. You have just over six minutes. Please go ahead.

As well for our witnesses, I think everybody has their earpieces in.

Committee members, it's just a little short of seven minutes to make up our time.

Monsieur Caron, you have a little over six minutes please.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

I would also like to thank the witnesses for their informative presentations.

I will start with Mr. Brakel.

Your brief is very interesting. I assume you support balancing the budget and reducing Canada's deficit.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Certainly.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I could support a number of your recommendations, particularly increased infrastructure investment. You talk about labour market information. The question was asked. No problem. I see, though, that you would like a lower tax rate for corporations and yet fewer tax credits for individuals and corporations. There is a direct connection there.

Furthermore, you would like the government to create a financial incentive to increase apprenticeship completions. Very often, such a measure takes the form of a tax credit. You are asking for another reduction in income derived from patented inventions, in other words, the innovation box, but you want greater investment.

I am trying to understand how you can want the budget balanced and the debt eliminated while, at the same time, calling for a lower tax rate, lower income derived from patented inventions and more investment in infrastructure.

[Hendrik Brakel]

We believe that certain tax reductions will generate economic activity and thus more revenue. Given the labour shortage in some industries, investment in training could really help stimulate economic activity that, we hope, will in turn raise revenues.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I thought you might say as much. That is in keeping with what Ms. Pohlmann indicated in the Canadian Federation of Independent Business's submission. It states that, "[a]ny lost tax revenues for the federal government in the short term will be severely outweighed in the longer term by the benefits of small business' contributions to the economy through job creation and the growth of small businesses. . . ."

Given that reducing the tax rate and reducing—or eliminating—patent-related taxes represent a fairly sizeable loss of revenue, I have a really hard time believing that economic growth would offset that loss. Our current tax rates are fairly low for an OECD country, and that is especially true when you compare them with those in the U.S.

Unless we're on the wrong side of the Laffer curve, I don't see it being enough to compensate for the loss of revenue, especially since we'll need that revenue to invest in infrastructure and other expenditures and investments that will be needed by businesses.

Could you comment on that?

[Hendrik Brakel]

Yes.

The Federation of Canadian Municipalities estimates that $172 billion in infrastructure investment is needed in Canada. If you add to that figure airports, ports and highways, you get $500 billion. That is massive.

The private sector could play a key role in that investment. That is why it's important to establish a plan that incorporates the private sector, particularly by offering incentives to invest in Canada's infrastructure obligations. We really believe this kind of investment is crucial to generate that economic activity.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I agree wholeheartedly. But even if the private sector does contribute, which is often done through PPP arrangements, the federal government still has to make massive investments in infrastructure. I don't think the private sector has the resources to invest $175 billion in infrastructure or identified it as a priority.

So the question remains. If you want to reduce corporate taxes and eliminate taxes on patented inventions, for example, where will the money needed for the investment come from?

I agree with you. If a lower tax rate results in a loss of $10 billion, the total loss will not amount to $10 billion because of the increase in economic growth. That increase, however, will not reach $10 billion. So it would represent a tax loss for the country at a time when we need that money to make investments.

[Hendrik Brakel]

I understand your concerns fully and I agree with you.

It has been suggested that rates be lowered by eliminating special reductions for certain tax credits. But we think it would be possible to balance the budget by making infrastructure investments without granting huge reductions.

The Caisse de dépôt et placement du Québec is a massive fund, with investments in Australia and India. Bonds and investment vehicles should be created so that the fund could invest here, in Canada. That is the reason that people look to pension and insurance funds for money.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Mr. Wilkes, you talked about the elimination of tariffs on a variety of products set out in the last budget. You said the savings achieved were passed down to consumers. Is there evidence of that? Has any research been done on that? The other possible outcome of that tariff elimination is a higher profit margin for retailers.

[The Vice-Chair, NDP, Nathan Cullen]

You have time for just a brief answer, Mr. Wilkes.

[David Wilkes]

We have surveys from our members where they have indicated that in a savings comparison of like-for-like products, we do see a direct reduction in prices as tariffs are eliminated. They were some of the examples that I provided.