Thank you, Mr. Chairman.
We appreciate the opportunity to speak here today. Mr. Irving sends his regrets that he wasn't able to be here in person today, due to another commitment.
Canadian manufacturers, and particularly exporters, have been challenged by a high Canadian dollar, increased energy costs, and increased transportation costs. In the forest products sector, recent pulp mill, paper mill, and sawmill closures highlight the human tragedy that results when capital investment is not made and productivity is not improved to ensure ongoing competitiveness. For many years, J.D. Irving has understood the need to continually reinvest in our people and to upgrade our operations.
Global capital investment in new pulp and paper capacity illustrates the glaring gap in Canada capital projects. From 2000 to 2007, there's going to be $14 billion invested in pulp and paper in Asia, $12 billion in Europe, $7 billion in South America, and only a little over $1 billion in Canada. This is an industry that we used to dominate. Recent studies confirm that for the past seven years, North American capital spending in the pulp and paper sector has been consistently below 100% of depreciation, and today is hovering below the 50% mark. Capital investment of anything less than annual depreciation, as a minimum, puts Canada seriously behind in this very fierce global competition.
We believe that current capital cost allowance rules and rates are one of the factors that are contributing to this problem. We recommend increasing CCA rates for manufacturing and processing equipment from 30% declining balance rates to 50% on a straight-line basis. This change reflects more appropriately the economic depreciation that's caused by rapid changes in technology that are occurring in a highly competitive world market. This will improve the payback and reduces the risk associated with very large capital-intensive investments.
We also believe the CCA rate for manufacturing and processing buildings should be changed from 4%—a very low rate—to at least a 10% declining balance rate. This will better reflect the economic depreciation associated with buildings and heavy-use processes.
The renewable power production incentive should be expanded to include modernizing existing facilities. Expansion or some modifications to existing equipment and facilities should be eligible for accelerated capital cost allowances, not just new facilities. This would allow us to make changes to our existing facilities to make them more competitive and more environmentally friendly.
We believe that the government should eliminate the half-year rule for new investments. Elimination of the half-year rule is one of the things that would significantly reduce the risk and improve the payback for large capital investments. Also, the current capital cost allowance regime has a “ready for use” rule that should be abandoned and changed to one that properly reflects assets at acquisition.
One of the other areas where we see there is opportunity for changes is in the regime around taxation of productivity improvements. Under the current taxation regime, when it comes to incentive pay or variable pay for improvements in productivity, it is taxed at very high marginal tax rates. We believe there should be some non-taxable or low-taxable category of employee income for productivity bonuses, up to a maximum of $2,500 per year for employees who earn up to $50,000 a year. This will place variable compensation for productivity improvements in the same category as medical and pension benefits.
Government and employees are also facing very significant challenges when it comes to containing health costs. There are three primary preventable contributors to poor health in employees: smoking, inactivity, and excess weight. Companies like ours are willing to make investments in wellness programs that would tackle these problem areas. For every dollar invested in comprehensive prevention and health promotions programs, we're saving $3 to $8 in terms of a payback. However, the tax system is putting up roadblocks.
Every time a company today pays for a smoking-cessation program, a weight-reduction program, or a fitness club membership for employees, employees get an income tax bill. We believe the government should encourage greater participation in programs such as fitness programs or smoking-cessation or approved weight-loss programs. The government should consider employee reimbursement of these programs the same as they treat health care benefits--that is, they're not taxed in the hands of employees. We're recommending that employers fund these initiatives, not governments, but the government should get out of the way and allow it to happen.
Thank you for the opportunity to present here today.