Good afternoon. Bonjour.
The Railway Association of Canada, or RAC for short, is pleased to have the opportunity to submit the views of its membership regarding measures that the Government of Canada must take to improve the competitiveness of Canada's rail system and the economy as a whole.
Railways are an important part of the Canadian economy, moving approximately 65% of toll freight to domestic and international markets, employing more than 35,000 people, and paying more than $1 billion in taxes. The RAC represents some 60 freight, passenger, short-line, and regional railways--virtually all of the railway system in Canada.
The RAC has reviewed the questions pertaining to Canada's tax system, as outlined by this committee. Though the RAC will concentrate on tax issues specific to the Canadian rail industry, we believe Canada's tax system must be internationally competitive, encourage investment and savings, and attract foreign investment. In particular, the RAC would like to see the Canadian tax system reflect the Government of Canada's overall public policy to improve air quality and protect the environment. Such a tax system will better enable rail to make investments that will yield significant public benefits. Railways enjoy an intrinsic fuel efficiency and emissions profile advantage over the other transport modes.
Let me speak specifically to the issue of capital cost allowance for rail rolling stock. The rail industry is highly capital intensive. Canada's railways are spending over $2 billion in order to maintain their infrastructure and ensure they can move their goods in a safe and cost-effective manner. The RAC supports the recommendation of the standing committee in their 2006 pre-budget report to complete a comprehensive review of CCA rates to determine three things: the extent to which similar asset classes are equitably treated, whether Canada's rates are comparable with those of other countries, and whether these rates reflect their useful life. Further, the RAC supports the recommendation of the Standing Committee on Finance to permit rail equipment that reduces noise pollution and vibration to be reduced at a faster rate than their useful life.
It's also important to note that the House of Commons Standing Committee on Industry made similar recommendations. They were very supportive of moving rolling stock rates to over 30%. The current CCA rate for rolling stock is just 15%. It takes 20 years for any new piece of rolling stock to be fully depreciated. The current CCA rate is not in line with similar asset classes, such as truck tractors and other modes, which are all in the 30% to 25% range.
Railways are also in direct competition with U.S. roads. Containers arriving from Asia can be moved by U.S. or Canadian routes. The depreciation rate for rolling stock in the U.S. is approximately 30%. As such, U.S. roads can fully depreciate their rolling stock in eight years, versus twenty years for Canadian railways. This puts us at a significant disadvantage.
In fact let's look at a few statistics. RailPower Technologies, which is based in Montreal and uses state-of-the-art technology developed in Canada, manufactures hybrid locomotives. They reduce emissions by 80% to 90%, including GHGs, and they can save up to 150,000 litres of fuel per year per locomotive. RailPower is Canada's own.
The current CCA rate does not reflect the useful life of rail rolling stock. Locomotives contain a great deal of electronic systems, which are replaced or upgraded every three years. Every system and component under the hood is replaced in three to eight years. The RAC has undertaken a cost-benefit analysis of increasing the CCA rate for rail rolling stock to at least 30%. With $400 million in spending every year, it's estimated that the fiscal cost to the government will be in the range of $5 million to $6 million in year one, moving up to $20 million to $25 million on a fully phased in basis. This is very modest.
The benefits of increasing the CCA rate would accrue, not only to Canadian rail companies, but supply and component companies, which would increase production to meet the industry's new spending requirements.
As outlined above, the current 15% CCA rate for rail must be increased to at least 30%. This would be very much in line with their useful life, be comparable with other assets, and ensure that we are internationally competitive.
Technological change is sweeping every facet of our industry. Our prime focus here today is to emphasize the need to finally modernize the CCA tax treatment of rail equipment in Canada. This will attract the additional investment needed to address our environmental and innovation challenges.
Thank you very much for allowing the RAC to appear before you today. It should be noted that the RAC has also outlined some further recommendations to the committee.
I'd be pleased to answer any questions you may have.