Finance Committee on Nov. 7th, 2013

[Jean Lortie, Corporate Secretary, Confédération des syndicats nationaux]

I would like to make three remarks concerning these pre-budget consultations.

Regarding innovation and research, there is a tool in Quebec that is known as the workers' funds. There are two. These workers' funds generate hundreds of thousands of jobs, particularly in venture capital sectors where there is a need for innovation, and where there is innovation thanks to this available venture capital.

Over the next few years, the federal government intends to gradually reduce the 15% tax credit that is granted to these workers' funds. This will cause considerable damage to venture capital generally, in Quebec in particular, because these two workers' funds invest and are on the front line where venture capital is most needed, that is to say in innovation in green technologies, and in information technology.

The fact is that the government thinks it will be recovering millions of dollars, but it will not be doing so. Indeed, for each tax dollar that is spent, it recovers $1.09 in direct or indirect jobs. There is thus a net gain for the federal state when it provides this 15% tax credit to Canadian and Quebec workers who invest in these workers' funds, either those of the CSN or the FTQ.

I want to take advantage of my opportunity to speak to the parliamentary committee to underline that fact. If we are to have research and innovation, there has to be a favourable environment for it. The Conservative government will certainly not be improving conditions for people by adopting anti-labour laws. These laws are going to affect 4.3 million unionized Canadian men and women, who make up the middle class in Canada. The Conservative government's plans will make these people vulnerable in the years to come. We are particularity concerned because the economic climate in Canada is going to deteriorate considerably and this will affect millions of consumers.

To continue on the topic of innovation and technology, the next federal budget includes large funding cuts for CBC/Radio-Canada. We consider that our public broadcaster has to be funded in order to be considered a national public network and not a private enterprise.

The Confédération des syndicats nationaux is particularly concerned; we represent more than 300,000 working men and women throughout Canada, among these, federal corrections workers, and the employees of CBC/Radio-Canada in Quebec and Atlantic Canada.

We wish to take advantage of this forum to reiterate that these workers' capital funds are essential to Canada's economic development, to research and innovation, as well as to support small and medium enterprises that are capital-poor. Bay Street does not lend to Main Street; that is the role of workers' funds. We want the federal government to reinstate the 15% tax credit for these workers' funds so that they can play their role fully, which is that of a fundamental agent of economic development.

[The Vice-Chair, NDP, Peggy Nash]

Thank you, Mr. Lortie.

Mr. Van Iterson, you have five minutes.

[Andrew Van Iterson, Manager, Green Budget Coalition]

Honourable committee members, thank you very much for inviting the Green Budget Coalition to speak to you today.

The Green Budget Coalition, as many of you would know, is a unique initiative that brings together 14 of Canada's leading environmental and conservation groups representing over 600,000 Canadians, ranging from Ducks Unlimited, the Nature Conservancy of Canada, to Nature Canada, and the crazy radicals at Greenpeace.

We exist to present an analysis of the most pressing issues regarding environmental sustainability in Canada and to make a consolidated annual set of recommendations to the federal government regarding strategic fiscal and budgetary opportunities.

Please note that we sent you a more detailed set of our recommendations back on October 8, 2013, and later this month we will send you a final set of recommendations.

We want to thank the government for its environmental progress in Budget 2013 and subsequent announcements, including reductions in subsidies to the mining industry, funding for nature conservation, the major infrastructure investments, and for committing a couple of times to enshrine the polluter-pay principle in legislation.

To build on this progress for Budget 2014 we have identified and developed three feature recommendations as well as 10 complementary recommendations.

Firstly, to build further on the government's progress in increasing tax neutrality and phasing out inefficient fossil fuel subsidies, the coalition recommends two targeted measures: enabling the Canadian exploration expense only for unsuccessful exploration, which is only about 10% of the wells that are drilled, and not renewing the mineral exploration tax credit for flowthrough shares.

These were both identified as subsidies for potential reform by the Deputy Minister of Finance in a March 2010 memorandum to the finance minister and could save the government about $340 million, helping to reduce the deficit further.

Secondly, we were pleased to see the government's throne speech recommit to implementing the national conservation plan, a unique opportunity to accelerate Canada's conservation achievements by our 150th anniversary in 2017. To be effective, Canada's national conservation plan should focus on completing the terrestrial and marine protected areas networks, ensuring sustainable management of working land and seascapes, maintaining or restoring healthy populations of species of wild plants and animals, and building a conservation ethic in Canada by better connecting Canadians with nature.

Thirdly, Canada's fresh waters are of national and regional importance and contribute extensively to the social, ecological, and economic wellbeing of our country. The Green Budget Coalition recommends the government set up a five-year Canadian water fund to build on past and current progress to address some of the gaps in these efforts by focusing on alleviating land-based runoff of pollutants and nutrients in areas specific to federal jurisdiction as well as actions specific to the Great Lakes and invasive species.

We also have further complementary recommendations in our document that were not in the brief addressing energy sustainability, climate action, and green infrastructure. I'd like to focus on three of those opportunities that relate specifically to today's theme.

Regarding energy storage and electricity storage, the coalition recommends amending classes 43.1 and 43.2 of the Income Tax Act to specify that capital cost allowances also apply to expenditures on tangible, stand-alone energy storage investments, and to create a 30% investment tax credit for emerging energy storage technologies. Both of these would help to drive renewable energy growth and help to make our energy systems more efficient across the country.

Further, to reduce diesel fuel dependency in northern and remote communities, we are recommending a strategic $10 million to $15 million fund be set up to provide feasibility staged funding in the range of half a million to $2.5 million per project—which is not easily available right now—to catalyze renewable energy, transmission interconnection, large-scale improvements in community energy demand, and major enhancements to promote enhanced home and building facility energy efficiency for off-grid communities.

These measures together would help make Canada achieve transformative progress towards environmental sustainability as well as creating numerous jobs across Canada in time for our 150th anniversary in 2017.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now hear from Mr. Gupta, please, from ITAC.

[Karna Gupta, President and Chief Executive Officer, Information Technology Association of Canada]

Thank you, Mr. Chair.

Thank you to the panellists for inviting us.

ITAC represents the ICT sector. In our case we represent over 325 companies across Canada, and 80% of our members are what you call small and medium-sized businesses.

With respect to the jobs, growth, and innovation, just to make a point we represent about one million jobs, direct and indirect, in the ICT sector. The growth in revenue was about $155 billion, growing at a 5% rate and outpacing the overall economy.

On innovation, I would underscore that the total private sector spending is about $4.8 billion and it is about five times the second-largest, which is the pharmaceutical.

I am very pleased to be here because the main priorities of ITAC are very much in line with this topic. One of them is driving the adoption of technology and productivity in the country. The second is driving innovation and competitiveness in the technology sector.

We did submit a pre-budget submission. We had several recommendations, but given today's discussion, I'll focus on the three that capture the area of tax, R and D, and finance.

The very first one is the venture capital action plan. ITAC was extremely pleased with the announcement that was made by the government on this area: leveraging a $400-million allocation and turning it to $1 billion by leveraging the private sector. However, the process of getting it in play has been very, very long, and companies in our sector are struggling.

The start-ups are in micro-electronics. These complex software areas are particularly challenged by this delay when you have other issues, like the removal of SR and ED. Our recommendation to the government on the venture capital action plan was that we needed to get this moving and engage the sector recipients in this case to not only design but also implement how it needs to be allocated across various sectors. So we are looking forward to further action in this area.

The second area I want to cover concerns indirect tax measures to support innovation. In the budgets of 2012 and 2013 the government began to remove the indirect tax credit, which was known as SR and ED, from research and development and made some announcements on direct measures.

Consultation is under way on the direct funding initiatives, and we expect these will be rolled out later in 2014. This delay is hurting the industry quite a bit, particularly on advanced manufacturing, where funding is required now.

We continue to believe that indirect measures like SR and ED are one of the best ways to continue to support the Canadian ICT sector, in large part due to the small businesses. This is a predictable source of funding to drive the innovation.

One thing I would note is that the ICT sector jobs are highly migratory. If we do not have the proper instruments in place, these high-paying jobs and the innovation we're seeing in the country may not be here for long.

So our recommendations, as submitted in the budget document, state that we do need to revisit the SR and ED, and in the meantime the government should continue to track the changes and what the impact has been. Our recommendation was to take the qualified pool balances from 15% to 17% or return capital expenditures for R and D.

Finally, we need to have the tools that clearly measure the impact of these programs to support the research and development.

The last item I will cover today is the adoption of innovative technology. One of the key ways to make Canada promote the innovation is to support the adoption and use of technology in business. This is fundamental to improve productivity. The Canadian companies continue to under-invest in technology. Canada's current rate for ICT investment per worker is only at 53% of the United States.

To address this, the Canadian government needs to be the champion in promoting the benefits of adopting technology.

There are also some specific initiatives to consider here. It can be difficult for small and medium-sized businesses to get started on technology projects when their main priority is just making a go of it.

There was a government program called DTAPP, a digital technology adoption pilot program, which is winding down. I believe we should reinstate that program in some fashion and call it the generation two of the program and engage the industry to not only design but also to implement that program in the field.

The adoption of innovative technologies is key to Canada's ability to grow and prosper, and we need to take some action now.

In closing, research and innovation is fundamental not only to the ICT companies' growth, but also for all sectors of the Canadian economy to fully benefit from the adoption of new technologies.

Thank you, and I look forward to your questions during the Q and A session.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from Ms. Cannon, please.

[Dr. Elizabeth Cannon, Vice-Chair, President and Vice-Chancellor, University of Calgary, U15 - Group of Canadian Research Universities]

Thank you, Mr. Chair.

As president of the University of Calgary and vice-chair of the U15 Group of Canadian Research Universities, I'd like to thank the committee for its invitation to participate in its pre-budget hearings.

The U15 is an association of 15 of Canada's top research-intensive universities, focused on advancing research and innovation at Canadian universities. From Dalhousie to UBC, we include institutions from coast to coast. U15 universities conduct $5.3 billion worth of research each year, $1.5 billion of which is privately funded. They account for 87% of all contracted private sector research in Canada and hold 80% of Canadian university patents and start-ups. They are home to 47% of Canadian university students and 71% of full-time doctoral students.

The talented and creative people who teach, learn, and conduct research at our universities are the foundation of our nation's research and development capacity. They inspire the innovations that offer enterprises crucial advantages, create new businesses, strengthen health outcomes, enhance security, and ultimately drive the social, economic, and cultural development of our country. The federal government understands and supports this, as demonstrated in the vision articulated in its white paper, Mobilizing Science and Technology to Canada's Advantage, and its commitment in last month's throne speech to “continue making targeted investments in science and innovation”, as well as the ones in 2011 and before.

Even with the recent economic downturn, the government has worked to preserve the research base that is so integral to Canada's innovation ecosystem, continuing to make targeted investments in key programs. Yet despite these investments, Canada faces growing challenges as our international competitors, both advanced and emerging economies alike, seek to secure advantage by focusing resources and introducing programs that enhance the ability of their universities to compete among the global best for the most talented faculty and students, for the most important research projects, and the most prized and profitable partnerships. It is in this context of heightened international competition that we are proposing the Advantage Canada Research Excellence—or ACRE—fund.

ACRE will add to the strong foundation for research already established in Canada. It is based on measurable excellence as judged by rigorous peer review through the Tri-Councils. It builds strategically on existing programming, supporting the best of Canada's research talent, scholarship, and innovation.

The ACRE fund will support the global positioning of Canadian universities as preferred partners for the best international research universities. It will improve partnerships with industry to create research industry clusters, attract and retain the best talent from around the world, stimulate the rate of ground-breaking discoveries, and enhance our international competitiveness. The government has stated that its support of research excellence and innovation is a means of advancing our social and economic goals, domestically and abroad. We firmly agree.

Central to the ACRE proposal are the established principles of excellence and inclusion. All Canadian universities that meet this standard based on measurable excellence, as judged by independent peer review, and are currently employed as a hallmark approach that is the Tri-Council programs, will be eligible to be benefiting from the fund.

Success under the ACRE fund will also be measured on excellence. This includes universities' abilities to attract research funding from international public and private sources; increases in a number of international research partnerships; improvements in Canada's international standings; the attraction of new, highly qualified people; and improved knowledge translation and commercialization. Each university will be accountable through straightforward framework agreements with the government.

We propose that the government implement ACRE over multi-year timeframes, starting with an initial investment of $100 million of new money, gradually increasing over four years to $400 million annually, as fiscal capacity allows. Through previous investments, Canada has established a strong research foundation on which to build. We believe ACRE will be a game-changer for the country, and we fully support its focus on excellence.

Thank you for your time. I'd be happy to answer any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Cannon.

We'll now hear from Mr. Aronshtam.

[Natan Aronshtam, Global Managing Director, Research and Development and Government Incentives, Deloitte LLP]

Thank you very much.

Thank you to the committee for inviting me. I will try to say a little bit about the global competitive landscape of what's happening and then focus on three recommendations, with time permitting.

In general we see Canada continuing to do well relative to the rest of the world. At the same time we are constantly looking at Canadian productivity and are seeing tremendous challenges in our competitiveness. Our view is that innovation is the tool that will help Canada improve our productivity, and we truly think that is the essence of how Canada will become globally competitive.

When we look at the global landscape we see many countries very actively and thoughtfully approaching.... As Mr. Gupta said very well, global R and D today is very competitive, and we think it's time for Canada to really think through a number of issues: balance of direct and indirect support models for business, refundability of tax incentives, patent boxes, small versus big business strategies, capital expenditures and how they are treated, as well as the links between academia and industry.

Just to give some data points—and these are very real and very recent—governments at just the state and local level in the U.S. are spending $80 billion annually in business support. In the EU over the next seven years the European Parliament has allocated $500 billion euros in business support. In that, there's a $70 billion euro program just to promote innovation.

There's a new special economic zone in China just announced a couple of weeks ago, and similarly just a couple of weeks ago Spain announced that they were making their new tax credit—the classic R and D tax credit—fully refundable.

We've seen in the U.K. both an R and D tax credit and the patent box, and in general we see patent boxes appear all across Europe and, by the way, Asia as well.

Just to list some of the European countries: the U.K.; Netherlands; Belgium; China—not European; France; Hungary; Ireland; Liechtenstein; Luxembourg; Spain; and Switzerland. That's just to give you a flavour of how common these are becoming.

We have seen that incentives in Canada have achieved tremendous results. We can use Ontario as an example with our digital media credit here. It has demonstrated that a government policy and focused incentives can achieve tremendous results, and we're seeing that these are a great tool to attract foreign investment. But we're also seeing a lot more activity in the rest of the world, and we are concerned about Canada falling behind.

Let me focus on three specific recommendations that we've made to the committee. The first one is to encourage foreign investment through full refundability of R and D tax credits.

The second one is spurring the start-up economy with improved financing support and then considering the introduction of the patent box model as is being done in other countries.

Our view is that only full refundability of SR and ED tax credits can achieve the kind of financial result that modern businesses look for, and it is a trend around the world.

I think that we've studied the tax consequences, especially to the U.S. companies, of our current non-refundable SR and ED system and we think that a solution of making it refundable will come a long way.

We clearly think that the B.C. angel tax credit has been a good test and has shown that it's a good way to promote innovation and get companies launched and moving in the right direction. We think that more of that kind of angel tax credit modelled on the B.C. tax credit would be a very good way to get these companies ready for venture capital when it flows.

On the patent box I've listed the countries that have already done this. Patent boxes are not complicated, but it is a way to make companies hold their IP in Canada in return for preferential tax treatment. We think around that IP you will see more innovation and more jobs.

[The Chair, Conservative, James Rajotte]

If we could ask you to wrap up just very briefly please, sir.

[Natan Aronshtam]

I am actually done, but I look forward to your questions and comments.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will begin members' questions with Ms. Nash for five minutes, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you all for your very interesting presentations.

We only have five minutes each for our questions.

Mr. Gupta, you spoke about venture capital and said that we need to take more action in that area. Can you give us a sense of the impact today in Canada of having insufficient access to venture capital? What is the impact on our economy?

[Karna Gupta]

Maybe I'll answer from two aspects. One is not having available structured funds. Most early-stage companies always have to go through family, friends, and then angels. It's a very difficult way to grow past the first stage. They continue to struggle and cannot scale.

I can name for you companies that are going through that. They are stuck, because scalability is an issue after some point in time. At the early stage, angel funding is good, and family and friends are good, but after, when you want to scale a company, you need structured financing. We just don't have sufficient venture funding taking place. This is stunting the growth of the sector at this stage.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Would you agree that we have a particular problem in Canada with growing small companies into medium-sized or large companies because of the lack of access to venture capital?

[Karna Gupta]

That is correct.

[Peggy Nash, NDP, Parkdale—High Park, ON]

This would mean economic losses, job losses, as a result.

[Karna Gupta]

Absolutely. If we cannot build companies of scale, we cannot compete globally.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Would the government's intention to cancel the labour-sponsored venture funds exacerbate this particular problem?

[Karna Gupta]

I think it would. The impact is obviously there; you're right.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

I have a very short time, but Mr. Van Iterson, your approach is very interesting. The whole green budget notion, I think, is very important.

I raised this question and didn't get time for an answer in the previous panel. We're in globally competitive markets, and part of our competition is around energy efficiency and our ability to invest in innovative new energy efficiency technologies. Is it your sense that Canada is keeping pace with the best countries in the OECD in energy efficiency and in our innovation around new and green technology?

[Andrew Van Iterson]

I don't think I can accurately assess where we stand compared with other countries, but I can certainly say that putting in new tax incentives for energy storage would be a critical step forward. Stronger energy storage would be a real tool to accelerate the growth of renewable energy and of energy systems as a whole. These are structures that we already have in place.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Let me also ask you a very concrete question. Mr. Gupta described the information and communications technology sector, and you would think that in a country of the size and scale of Canada geographically, we would be world leaders in ICT, as in transportation—and we had the aerospace industry here in the last panel.

I want to ask you about rail transportation. It's a very local question for my community. The Government of Ontario is putting in rail service from Union Station, the rail station, to the airport.

They are going to be running up to 400 trains per day to the airport, and they are investing in diesel technology. The community very strongly wants this rail service, but they want it to be electric.

Do you have an opinion on that?

[Andrew Van Iterson]

I think the cleaner electric service would certainly be a better way to go in all facets of growing your electricity—

[Peggy Nash, NDP, Parkdale—High Park, ON]

It would be a little quieter too, and probably a lot more energy-efficient.