Finance Committee on Sept. 19th, 2006

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you for that answer.

My second question is to the railway suppliers. You ask for an increase of the CCA from roughly 13% to 30%. My recollection of the financial pages of the Globe and Mail is that this has been a banner year for railroads, and that profits, particularly at CN, have been very good indeed. In fact, I think Mr. Gates is probably the single largest shareholder in CN. You have a perverse irony here that if we accepted your proposal, we would, in effect, be conferring a tax benefit on the richest man in the world.

[Glen Fisher]

I think the point is that a lot of Canadians own shares in Canadian National too. I own shares in both railroads, just as a token, because I'm interested in what they do and I like to see the results. The point we were trying to make is that for the manufacturers of the equipment--the rolling stock, the freight cars, for example--the Canadian manufacturers and Canadian leasing companies are at a disadvantage because of the difference in the tax write-off rates between Canada and the United States. A railroad can lease cars from U.S. leasing companies that are U.S.-manufactured more cheaply than they can lease cars from Canada.

This advantage you're commenting on already exists. All they have to do is lease U.S. cars. We would like to see the playing field levelled so that the Canadian manufacturers have an equal chance to do that. This reflects all the way down through innovation, invention, and all of the things that the Canadian suppliers have done quite independently of their competitors in the United States over many, many years.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I take your point, but it does produce its own set of ironies. What I've never understood about the railroaders' argument is this. If this differential in the capital cost allowance is such a disadvantage to Canadian railway companies, why is it that the two Canadian-based railway companies are not only prospering, but they're actually buying and absorbing American-based railway companies?

[The Chair, Conservative, Brian Pallister]

Mr. Fisher, unfortunately there's just a very brief time for a response. I'll give you 30 seconds.

[Glen Fisher]

Because they can get the cars in the United States. It affects the manufacturers and suppliers in Canada more than it affects the railways. Right now, the railways can buy their cars in the United States.

[The Chair, Conservative, Brian Pallister]

Thank you.

Our next speaker is Mr. Paquette.

You have seven minutes, sir.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chairman.

I want to start by thanking you for your presentations. I have three questions for our witnesses. The first is directed to the representative of the Canadian Manufacturers and Exporters Association.

I always appreciate your recommendations, even though I may not always agree with them. It's apparent to anyone who reads the newspapers these days that the manufacturing sector is experiencing some serious problems. That being the case, I would imagine that you would like to see reflected in the economy as a whole the will to keep the manufacturing sector strong and that you would like the next budget to include substantial measures to make that happen.

You propose an interesting initiative, one that the Bloc suggested with respect to the softwood lumber crisis. You propose a refundable tax credit. Take the example of Tembec which invests $80 million in R & D, but has not posted a profit in the past three or four years, which means that it cannot avail itself of the tax credit.

Can you tell us more about your proposal? Furthermore, have you calculated what this tax credit would represent to the federal government in terms of a potential shortfall?

[Dr. Jayson Myers]

If you were to provide a refundable tax credit on the R and D side of the loan, it would be somewhere between $1.2 billion and $1.5 billion.

There are a number of companies that are caught in the existing system. There are many companies that are investing in R and D ahead of their profit curve. There are many companies that are simply, because of the economic situation right now, not in a profit position, and, although they continue to invest in R and D, cannot take advantage of the tax credit for that reason. There are a number of companies that are major investors in research and development in Canada that are subsidiaries of American companies that, because of the treatment of consolidated revenue in the American tax law, cannot take advantage of this tax credit either.

The tax credit system in Quebec is a very good example of a tax credit system that works well under those conditions. The federal tax system, because of the lack of refundability, is I think a disincentive for investment on the part of those companies.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you.

I have a question of a more general nature for you. For the past several years, and again this morning, people have been inquiring about the accelerated capital cost allowance provision. Both the Liberals and the Conservatives do not appear to be very receptive to this idea.

Do you have an explanation for their stand? Why, despite the recommendations of the Finance Committee, have successive governments not followed up on the suggestion to introduce an accelerated capital cost allowance provision to promote investments and productivity?

My question is directed to all of you.

[Jim Laws]

Perhaps it's because the government was finally able to gain more control over the budgetary process. If other options that were not previously apparent now present them, it's time to explore this possibility.

The meat processing industry is a truly North American industry in which there is considerable competition. If the Americans enjoy an advantage over us, for example, when slaughterhouses are located on both sides of the border, then this situation could conceivably encourage them to set up operations across the border. That's why we continue to press. I would imagine it's the same for other industries.

[Pierre Paquette, Bloc, Joliette, QC]

It's unanimous.

I have to ask then why governments have not followed through with this initiative. If you would like to hazard a guess, perhaps the committee could find a more subtle way of getting the government to follow through on a universal request.

[Dr. Jayson Myers]

There have been many recommendations put forward to accelerate CCA.

I think there are three issues the finance department has to grapple with. The first is an assumption that all investments are the same. I challenge that; I don't think all investments are the same. I think some investments are much more productive than others.

The second issue is an economist's argument that there should be uniform tax treatment across all sectors and that the CCA treatment of an asset should reflect the economic life of an asset: the length of time the asset is in production. I'd argue that to some extent, the economic life of an asset reflects the tax treatment of that asset.

My third argument is a reluctance to use the tax system as the Americans and many other countries that are our competitors do: as an advantage to promote investment in high-value-adding sectors of the economy.

The Americans adopted a bonus depreciation system in 2002 explicitly because the American dollar was high and because investment in manufacturing was not only dropping, but they were seeing the rapid closure of many manufacturing operations in the United States. We don't have that. To date, the finance department has not seen this to be an important part of tax policy.

[Pierre Paquette, Bloc, Joliette, QC]

Ms. Beck, as I seem to recall, you stated that funding to the Women's Program at Status of WOmen Canada should be increased by 25 per cent.

[Dr. Gail Beck]

Yes. I can't say which departments exactly are targeted, but the reference was to the Women's Program.

[Pierre Paquette, Bloc, Joliette, QC]

We've heard that Status of Women Canada wants to cut its funding to independent women's groups. I have received many letters from numerous groups.

To your way of thinking, does having groups to promote economic and social well-being have a positive impact overall on women's health? If the federal government ever decided to completely eliminate funding to women's groups, would women's health be adversely affected since there would be fewer programs in place designed specifically for women?

[The Chair, Conservative, Brian Pallister]

Malheureusement, I must take that question as hypothetical or rhetorical, I guess.

We have to move to the next question.

The next questioner would be Mr. Del Mastro for seven minutes, sir.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

I'd like to start with a question for Mr. Laws.

Mr. Laws, in your presentation you spoke about the importance of cutting some free trade agreements, bilateral agreements, that would open up the market to Canadian agricultural exports. Could you talk a bit about some of the barriers to entrance for Canadian agriculture? Because often when we talk about free trade agreements, we hear opposition members talk about how we're trying to give away the country. Perhaps you could discuss how important that is to our agriculture.

[Jim Laws]

Certainly. I'll use the example of Japan, which has a tariff system for pork that requires us to sell at a certain high price. Our preference is for a successful World Trade Organization deal, so that they will have to convert to a much clearer tariff rate, and we want to see those tariffs come down. As well, Korea has some tariffs on pork that we would like to see come down, and both of those markets are very important for Canada.

Right now, there's a lot of pork going to Japan and Korea—in fact, just a bit under the amount we send to the United States.

Those are a couple of examples of what happens, and it's important. However, we're worried about bilateral agreements. Our preference is for World Trade Organization multilateral agreements, because typically under bilaterals, you don't get to deal with issues like the huge American subsides for their farmers that are affecting everybody's trade. So that's a concern.

We also don't want to see the type of agreement with a country in which they see that maybe they're going along very nicely and decide there's a block in agriculture, so they decide to leave out agriculture and do other non-agricultural agreements. So it ends up that the country benefits from a lot of electronics coming into Canada, for example, but that country doesn't give up any access to agriculture. It's a win-lose for Canada; that's the danger of a bilateral.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Mr. Fisher, here is just a quick question. You talked about a number of funding needs for the railway. I'm curious: why is the railway infrastructure in Canada not self-sufficient?

[Glen Fisher]

I beg your pardon?

[Dean Del Mastro, Conservative, Peterborough, ON]

Given the demand for rail right now—and I understand that the rail business is booming in Canada—why is the railway infrastructure not self-sufficient?

[Glen Fisher]

A couple of things have happened. One is that over the last 20 years, to keep freight rates down and keep them going down, we have increased the weight per car. Just in the last five years the weight per freight car has gone up from 263,000 pounds to 284,000 pounds as the new standard. That's almost 35 tons per axle. The European trains are typically 20 to 22 tons, the Russian up to 25 tons. So we're way up there in getting heavy loads on our infrastructure.

One of our problems with this is that although we can change out the rail as it wears and put in a little heavier rail, we have bridges that are 75 or 100 years old. They're well designed, for sure, with lots of room for additional weights and additional loads, but there are something like 3,000 steel railway bridges on each of CN and CP across Canada. If you have to change just one percent of those every year, that's 30 bridges a year, just to do one percent. So there's a constant drain on availability of capital for these kinds of infrastructure upgrades.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay, thank you.

Mr. Myers, you mentioned in your presentation the reduction in corporate tax rates, to 19% by 2010, and your desire for a further reduction in those rates. Often when we discuss this in the House we hear about the notion of giving away dollars to wealthy corporations and taking away from the poor. Perhaps you could discuss the importance of making manufacturing in Canada competitive through tax rate reduction.

[Dr. Jayson Myers]

I think a very important part of the global economy today is competing for investments in the product mandates we manufacture or that other businesses take on here in Canada. This is no longer an economy where we're looking at domestic production and capital investment that does not move anywhere; this is an economy where we have to compete and where manufacturers and other businesses are all a part of global supply chains. That means companies are looking at the best place—as any investor would—in the world for return on their investment.

We often look south to the United States for a comparison, but the reality is that companies are making investment decisions to locate in Singapore or Sweden or South America or Asia, where tax rates are not only much lower but where all sorts of other incentives are also provided for investments.

There are two issues: keeping the nominal tax rate competitive, and keeping the effective tax rate competitive—because there are all sorts of other taxes that are paid by business as well. The nominal tax rate has to be in at least a competitive range, because on the part of global companies—and these companies are not necessarily foreign companies, but Canadian companies too, looking to make a major expansion—in many cases the first reference they look at is simply the nominal tax rate. That's why, given that countries around the world are all focused on attracting investment in productive assets, many companies are looking at future tax rate reductions.

This is why I think we also have to be competitive, and not just with the U.S. in particular, because the attraction of the U.S. market is going to be a major attraction for investment itself. I would make the argument we have to present something much more competitive to draw that investment and retain that investment capital.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, sir.

I have how much time, Mr. Chairman?