Finance Committee on Sept. 29th, 2011

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Can the Shipbuilding Association of Canada explain why Canada's drive toward a bilateral free trade agreement is not creating jobs in shipbuilding in Canada?

[VAdm Peter Cairns]

Shipbuilding was excluded from the North American Free Trade Agreement, essentially because of an American regulation called the Jones Act. It states that in order to build a ship to be used within the United States, it must be built in the United States, crewed in the United States, and owned by an American. Therefore, we are not able to access their commercial market in any way for those ships.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

And trade regarding Europe...?

[VAdm Peter Cairns]

The problem we have with Europe is that most of the countries we deal with have very mature industries. Most of these industries have been well subsidized and well funded by their governments. Now they're free traders. It's amazing to me how countries that have been given subsidies and many investments by their governments are now free traders. We are not at that maturity yet in our industry.

[The Chair, Conservative, James Rajotte]

Thank you.

We will go to Mrs. McLeod, please.

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

Thank you Mr. Chair.

I would also like to thank the panel of witnesses. I know there are a lot of complicated subjects, and to have only five minutes is certainly a challenge in terms of the important issues you want to present to us.

I'd like to start with Mr. Penney.

You briefly talked about the importance of tax reductions for corporations. We will also get you to lead into some of your suggestions. But as you're probably aware, there has been great debate amongst the different parties on the value of tax reductions. Some people believe that if you simply raise taxes to corporations, government will solve the deficit problems. So I would like you to talk about that on a broader scale, in terms how those will continue to be important. As you're probably aware, we're planning another reduction in next year's budget.

Then, because it is fairly complicated, I'd like you to talk about those two regulations to help me understand a little better what you were talking about there and what those impacts might be on the government's bottom line.

[David Penney]

On your first question, our observation is that certainly within the OECD there is a tendency to reduce business taxes. We're in a competitive world. Canada is competitive relative to its OECD trading partners. But to respond to you more generically, we need to continue to make sure we're benchmark competitive as a tax system, because we believe that jobs and most of the wealth in the country are created by business, and the more competitive business is in the global economy, the more prosperous the country will be.

With respect to the question on the regulations, it's a very interesting question. One of them, regulation 105, has to do with services provided by non-residents in Canada and international business. Particularly between Canada and the U.S., it's very common for services to be provided back and forth. When a business service is provided by a non-resident in Canada, the Canadian company is required to withhold 15% from the service cost. In our observation, members...and certainly the government's analysis in its panel review of that was what is more likely to happen is that the non-resident will simply add the 15% onto the price of his goods.

The reason the Canadian company has gone there in the first place is that it has a special skill. Basically you're surcharging the Canadian business the 15%. Non-residents can get that 15% back, but that involves filing corporate tax returns and probably hiring advisers to help them with that. It's such a hassle that more likely than not they will just add the 15% and it will get absorbed by the Canadian business.

On the other hand, if they added it onto the price and they did go to the trouble of getting a refund, it's unlikely the Canadian company would get the benefit of that refund coming back. That's one of the problems with regulation 105. In addition to that, in order to avoid the withholding tax, taxpayers have to file for a waiver to demonstrate to Revenue Canada that they will not be taxable. They have to do that 30 days in advance, and that's an impracticality. It probably happens with some frequency, but it is an impracticality. Most of these non-residents will not owe any tax in Canada. What we have suggested, rather than a waiver process, is the non-resident would give a certificate to the Canadian payer that they aren't taxable in Canada, and that information would be available to CRA.

Regulation 102 relates to employment in Canada by a non-resident. If the non-resident comes to Canada in the absence of a waiver from Revenue Canada, his employer should be running a payroll system to make remittances to Revenue Canada. The individual will then file a tax return and get his tax back. That probably doesn't happen very often. Most of those individuals would be treaty-exempt or wouldn't be in Canada long enough to be taxable or wouldn't have earned enough in Canada to be taxable. They're not exempt from the waiver process, which again has to be done 30 days in advance—totally impractical. Again, what we're suggesting is that particularly for big companies that have a lot of people going back and forth—in fact for anyone—is to have a certification system that identifies the individuals and pre-certifies that they're not going to be taxable.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. McLeod.

We'll go to Mr. Eyking for a five-minute round, please.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Chair.

Thank you, guests, for coming here today.

I have five minutes. I have a couple of questions.

My first question is for you, Mr. Cairns. I think I have met you before. I'm from Cape Breton, and in my riding we have Marine Atlantic. Marine Atlantic ferry service, as you know, goes from Cape Breton to Newfoundland. It's a federal crown corporation, and just in the last year it has purchased two super ferries from Europe. These ferries are adequate but could be better. I don't know if you are aware, but it was six years ago that the board of directors of Marine Atlantic had a meeting and a study, and they knew they needed these ships, and out of that meeting it was concluded that we could build those ships in Canada. It would take four or five years, and 90% of the content would have been Canadian—you would have had a few parts coming in from Finland or wherever. That was kind of neglected or didn't go through. The present government here kind of—I don't know what you call it—ragged the puck, used the old equipment, and then had to get these new ferries. I don't know if you are aware of the file.

As the finance committee goes forward, talking about Canadian shipbuilding, can you tell me what you think of what happened there and what laws we should have in place to make sure that doesn't happen again?

[VAdm Peter Cairns]

Yes, sir.

Marine Atlantic is a very interesting case. The Shipbuilding Association has advocated for the national shipbuilding procurement strategy for quite some time. It looks as if we are almost there. When we made that advocacy initially, when we looked at Canadian government vessels, we included ferries like Marine Atlantic's. We felt that—along with BC Ferries, I might add—although it claims it is a company that needs to make a profit, it is subsidized heavily by government. We looked at it in a broad-brush way as being essentially government-type vessels. Whether they be federal or provincial, we thought they could all fall in there. For whatever reason, of which I'm not aware, it didn't happen that way. They then went offshore.

I don't know what drove the board to do that. We, of course, were not in favour of it. We felt we should be given an opportunity to build. We had built the ones they were replacing. Very similar to the BC Ferries issue, they went offshore. To me, it's a case of quick gain for long-term pain. What happens with these ships is that now you're going to be beholden to those countries that built those ships for the in-service support. All the good people in Canada who make parts, radars, gyros, and everything are going to be excluded. That was one of the reasons we were against it.

I personally, and I think most of our membership, did not agree with that decision, but it was made outside of our.... We said our piece.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you very much.

My next question would be for Mr. Reilly-King. I'm the CIDA critic, and you mentioned the UN goals and benchmarks we're trying to achieve, and many times we hear about millennium goals and UN targets. Can you give me a little snapshot of how we compare to countries like the Netherlands, Norway, and Denmark when you look at our GDP? Where are we on reaching goals, compared to these other countries, or how far behind these northern European countries are we?

[Fraser Reilly-King]

The millennium development goals primarily apply to how developing countries are doing, although I think Canada is also ranked. Canada ranks highly. It has met, for the most part, all of the millennium development goals, unless you disaggregate things and look at aboriginal communities, for example, where I think we fall far behind. It's more a question of how Canada is doing as a donor in terms of its aid quality and aid commitments. Compared with the Netherlands, in terms of providing funding, we're currently around 16th out of 22 countries. A number of Scandinavian countries—I think five countries—have already reached the UN target of 0.7%, with two or three others, like the United Kingdom and Australia, on track.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

You are saying we are 16th out of 22 on the percentage of GDP towards aid?

[Fraser Reilly-King]

Yes, exactly.

Currently, we are around 0.3% of our gross national income versus other countries that are closer to 0.6% or 0.7%, or even some that are up around 0.9%.

[The Chair, Conservative, James Rajotte]

You're out of time. Thank you, Mr. Eyking.

We'll go to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

And I want to thank each and every one of you for coming today.

Unfortunately, we only get five minutes. I have questions for everybody, but I think I'm going to zone in on one area. I hope some of my colleagues will pick up on other areas.

The area I want to zone in on is the aerospace industry because I see so much future in the aerospace sector. With regard to some of the asks here, I need some clarification on how we can justify them to taxpayers.

Under the title “Preserving and enhancing the Scientific Research and Experimental Development tax credit”, one of your points is recognizing that the aerospace projects are international in nature and allowing R and D costs incurred outside of Canada to be eligible for SR and ED tax credits.

How do I sell that to taxpayers, and why should I sell that to taxpayers? If you're not doing the R and D work in Canada, why should there be a tax credit for that work? Can you give me an example of why this is necessary?

[Jim Quick]

Mr. Chair, I've brought a colleague with me, Maryse Harvey, who is our SR and ED expert.

Would I be permitted to allow her to answer the SR and ED questions?

[The Chair, Conservative, James Rajotte]

Quickly come to the table.

[Maryse Harvey, Vice-President, Public Affairs, Aerospace Industries Association of Canada]

Thanks for the question. This is a case where the IP would reside in Canada and the exploitation of the IP and the fruits of the R and D would be generated in Canada. A specific case for that, for example, is when a U.S. submarine has a plant in Canada and does some R and D--most of it--in Canada, but a small part is done abroad. It could be in the U.S. or in Europe.

We're simply saying that all of the R and D should be claimed in Canada, should be applicable under SR and ED. That's what we're saying. We're saying as long as the IP is exploited in Canada and by Canadians, this should be considered.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you.

Again, I wanted some clarification because at first glance--

[Maryse Harvey]

You're welcome. It makes sense. We probably should have included that the IP should reside in Canada.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay. When we go to the certification part of Canadian aircraft, are we losing sales because of the certification process?

[Maryse Harvey]

Not yet, but if substantial cuts are made to the process....

This is the end of the process, right? Once you've developed technologies and you've sold them, they have to be certified before they leave the country and are delivered.

But we're afraid, especially in a context of the review of programs right now, that if cuts are made to Transport Canada it could have an impact on R and D activities in Canada. In the end, if we cannot sell or deliver our product, everything we do at the front end of the development of a project is basically useless.

[Randy Hoback, Conservative, Prince Albert, SK]

When we see competing aircraft from other countries getting componentry certified more quickly, or getting different componentry certified, how do we react when those components are sold here in Canada? They've been certified, for example, in Europe but they are still not yet certified in Canada. Are you still able to access that componentry? How does that work?

[Maryse Harvey]

Transport Canada has been very, very good to the aerospace industry, very understanding of how quickly and how diligently we need them to look at our systems and technologies. It hasn't been a problem so far. However, we're concerned that it could become a problem at some point, which would basically have a negative impact on everything else we do in Canada.

So far everything is working well. Our standards are amongst the highest in the world. We can compete with anyone. We're looking forward to collaborating with other countries to teach them what standards to apply to their technologies.

The problem is not occurring now, but we're concerned that it could happen in the near future if cuts are made in that division of aerospace. We want to make sure that MPs in the government's opposition understand that the decisions we make here in a certain context also have an impact on the other decisions we make. For example, we fund R and D in Canada. We want SR and ED to be efficient. We want SADI to work well. Well, in the end, if we can't certify, or if it takes too much time, it's beside the point.