Thank you. I'm pleased to be here on behalf of the Railway Association of Canada. I'm joined today by Victor Wong, a member of the RAC's tax committee and assistant vice-president of taxation at Canadian Pacific.
Canada's freight railway network consists of two Canadian-owned and -operated class I railways, and more than 50 local and regional railways. Railways move approximately 200 billion dollars' worth of Canadian-originated goods each year, which account for 50% of the country's goods destined for export and 70% of all intercity freight traffic. In addition to the movement of goods, nearly 85 million people use railways to travel to and from work or for leisure, reducing emissions, congestion and wear and tear on Canada's roads and highways.
Prior to providing an overview of our key recommendations, I want to take a moment to highlight the critical role that Canada's railways play in supporting trade. Without railways, Canadian industries would be challenged to compete in the global economy as they fully do today. Conversely, railways depend on trade as a principal driver to create a demand that necessitates their services. In fact, 65% of all railway revenues are derived from trade-related traffic, of which the majority of these revenues flow between Canada and the United States.
Railways support trade through their unwavering commitment to invest significant levels of capital back into their network each year. Currently, class I railways invest more than 50% of their net income, or 18% of their revenues, back into their capital, which unlocks the trade potential of Canadian industry. Since 1994, Canadian-owned railways have invested nearly $50 billion to establish a tri-coastal continental railway network that is fully integrated into a North American supply chain required to facilitate the trade of raw materials, industry products and consumer goods. In 2018, the industry is expected to invest more than $5 billion, an industry record.
Capital investments are critical for replacing and enhancing track infrastructure and for the renewal of rail, ties, ballast, signals and bridges. They also fund strategic initiatives to enhance rail capacity through newer extended sidings, high-clearance tunnels, the continued implementation of centralized traffic control, and the development of inland ports across the railway network. Simply put, these investments allow railways to grow in concert with customer demands and ensure that their operations remain safe.
Our recommendations for the 2019 federal budget aim to encourage competitiveness by addressing several barriers to investment for our members. First, U.S. tax reform has introduced significant changes, resulting in a lower federal tax rate, the introduction of the BEAT minimum tax on transactions between U.S. taxpayers and foreign-related parties, and 100% tax depreciation or writeoff on capital expenditures, all of which is either a catalyst for growth of the U.S. economy or a protection of the U.S. tax base.
Of greatest interest to Canadian railways is to have the same ability as U.S. railways to fully depreciate or write off its capital expenditures in the year of spend. This ability would provide significant after-tax dollars for all railways in Canada to reinvest back into the Canadian economy through increased employment and purchasing power of both products and services.
In light of these measures and to ensure that the Canadian economy can continue to benefit from a competitive and resilient railway network, RAC recommends that the government allow railways to deduct the full amount of capital expenditures immediately; that is, allow full depreciation in the year of acquisition for new and used capital expenditures, such as rolling stock like railcars and locomotives, track infrastructure and work equipment. This would be a fundamental shift from our current depreciation system for railway track assets, which requires more than 20 years before 90% of the capital can be written off.
I would like to take the opportunity to highlight the importance of short-line railways to Canada's rail-based supply chain. Short-line railways are privately owned companies that play an integral first-mile/last-mile function to customers in rural and remote locations. Their business model allows them to link Canadian customers to the services provided by CN and CP. However, they are constrained by their limited ability to borrow against their capital and generate the revenues that allow them to compete against their principal competitor: a subsidized trucking sector.
While Canadian class I railways can invest substantive amounts of capital back into their networks each year, short-line railways are not able to match similar levels of investment. To date, neither the new building Canada plan nor the national trade corridors fund have been a significant source of funding for short-lines. In comparison, U.S. short-lines have the advantage of accessing a variety of innovative federal funding programs that include grants, low-interest loans and tax credits.
As a means to improving the competitiveness of short-line railways, RAC recommends that the government create a capital funding program of $365 million over six years, effective in 2019. This program would support short-line infrastructure investment and reduce the costs associated with federal regulatory requirements for railways. This program should leverage private sector investments.
In addition, the RAC strongly encourages the government to support the Huron Central Railway, a short-line that provides a critical rail service for customers from Sault Ste. Marie to Sudbury and requires immediate support to continue operations beyond 2018. This railway forecasts that a federal-provincial contribution of $42 million is required over a five-year period to maintain the line in operation.
In addition, the railway itself has committed to investing more than $4.6 million in the railway. RAC recommends that budget 2019 leverage private sector investment and include a federal contribution to maintain the HCR operations beyond 2018.
Finally, earlier this year, VIA Rail took a substantive step forward in its efforts to ensure that Canadians benefit from travelling in a passenger rail fleet that is efficient, safe, accessible and affordable. Budget 2018 provided funds to replace VIA's aging fleet in the Quebec City-Windsor corridor, and included $8 million for Transport Canada to undertake more work to advance VIA's proposed high-frequency rail project.
To build on the success of government support to date, the RAC recommends that the government empower VIA Rail to leverage the investments in fleet renewal to allow the railway to secure an additional $4 billion from financial markets for the HFR project.
Thank you for the opportunity to appear.