Finance Committee on Nov. 1st, 2012

[Geoff Trueman]

One of the key criteria that the Jenkins panel highlighted was the need to make the SR and ED program less complex and to make it more user friendly. Of the elements that are eligible in the R and D base, capital is certainly the most complex element. There are rules that govern the acquisition of capital equipment, the use of that capital equipment over time, the disposition of that equipment, whether or not there's any recapture. The use of capital is very complex from an administrative and compliance point of view. It's also a relatively small percentage overall of SR and ED expenditures. Canada is not alone in removing capital from the base. Other countries, the United States and Japan, for example, among our G-7 counterparts, do not have capital in the base for R and D. Other countries, such as Australia, Singapore, New Zealand, the Netherlands, similarly do not include capital in their R and D base.

For reasons related to that reduction in complexity, it's a relatively modest proportion overall. We think it's a reasonable change to make.

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

When you talk about a small percentage, what do you mean exactly?

[Geoff Trueman]

Capital overall is less than 5%.

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

All right.

You probably know that groups such as the Canadian Manufacturers and Exporters are speaking out loud and clear against this abolition. They feel that the changes, not only concerning expenditures of a capital nature but also in general, might represent some $660 million for companies. Do you think this is a reasonable figure?

[Geoff Trueman]

I'd prefer to stick with the fiscal estimates from the Department of Finance.

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

Pardon?

[Geoff Trueman]

I would prefer to remain with the fiscal estimates from the Department of Finance.

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

Can you remind us of the estimated amount?

[Geoff Trueman]

Our estimation is included in the budget framework, and it's less than—

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

It is less than $660 million.

[Geoff Trueman]

—the $660 million from the CME.

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

I would like to know how many companies will be affected overall. If you estimated the saving that this change would account for, you must have an idea of the number of companies that would be affected by it.

[Geoff Trueman]

Overall, I'd just go back to that number. There are about 25,000 R and D claimants overall. We wouldn't break it down at a micro level in terms of the application of each measure. That may change over time as well. A company may incur capital in one year, but not in another, for example.

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

Among the changes proposed in the report, the government talks about gradually reducing the substitution rate, which enables a company to declare a portion of its labour expenditures instead of submitting a detailed statement to the Canada Revenue Agency. It wants to reduce the rate from 65 to 55%.

What was the decision to reduce the rate by 10 percentage points, rather than 5 or 15 points, based on?

[Geoff Trueman]

In terms of looking at the use of the proxy amount, it was felt that reducing that by 10 points, from 65 to 55, was reasonable in these circumstances. Again, there is the fact that companies retain the ability to track their actual overhead expenses and use that if it's more advantageous to them.

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

All right.

I would like to come back quickly to expenditures of a capital nature. I talked about the disproportionate impact this measure would have on certain industries in relation to others.

Have you studied the impact that would have on the various sectors of the economy?

[Geoff Trueman]

Certainly, we would look at the measure overall in terms of the impact of capital. Some may be more capital intensive than others. Again, those same industries, for example, may benefit more profoundly from the removal of the capital tax or from some of the capital cost allowance measures that have been put in place over time.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Caron.

Mr. Mai, please.

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

I would like to come back to something my colleague Mr. Harris, mentioned.

You talked about what can be removed from the program, that is, the reduction of expenditures and the fact that this is made up for--maybe even more than made up for--by the expenditures you have.

Can you describe to us the difference in the programs? You talked for instance about risk capital. I would like to have a general idea how this will affect the people concerned with regard to the process enabling them to claim these funds.

[Geoff Trueman]

Certainly, at the general level, as I say, there's a resetting of the balance, as it were, between tax support and program support. Obviously, I can't say how that would play out on a company-by-company basis. Overall there would be a modest reduction in the tax support available. At the same time, some of the most popular spending programs out there, such as IRAP, will see their budgets double. That should certainly give IRAP the ability to take on a large number of new projects.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We shall move on to tax avoidance through the use of partnerships. Are there any questions?

Okay. We'll move on to transfer pricing secondary adjustments.

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

I would simply like someone to brief me on this.

[The Chair, Conservative, James Rajotte]

Mr. Mai, do you want a briefing on this?

Okay, let's have a short briefing on this topic.