Evidence of meeting #20 for Industry, Science and Technology in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was industry.
A recording is available from Parliament.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
What would you recommend as a means of making the current system better and more effective?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
It's not our job to make recommendations. All we can do is explain the measures in place.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
It's not your job to make recommendations, but perhaps you shouldn't be telling me this at this time.
Conservative
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Nevertheless, we would appreciate a comparison of programs in place in other countries, as this would help the committee to make some important recommendations. Compared with other countries, is the sum of $2.6 billion out of $35 billion a higher, or somewhat lower percentage?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
That's a high percentage.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
The Canadian R and D tax credits support a much larger proportion of business expenditures on R and D than the comparable U.S. R and D tax credit.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Are tax credits still tied to innovation?
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Are tax credits still tied to innovation? Can a company qualify for R&D tax credits without innovation factoring into the equation? Canada is lagging behind in so far as productivity and innovation are concerned.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
We accept the Organization for Economic Development and Cooperation's definition of research and development. This definition is used by the majority of the world's countries. No one sector has a monopoly on activities eligible for tax incentives. Quite simply, R&D must be carried out in accordance with certain criteria, one of which is ensuring scientific and technological continuity.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Thank you, Mr. Chairman.
Welcome, and thank you for coming out to our committee.
Earlier in your presentation you talked about the capital cost allowance--what that actually means and the definition of it. One of the things you talked about was the useful life of an item. Can you tell me who defines that?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
I think it's related to what Kevin was talking about earlier. Based on representations from industry, the research we do, and the analysis we do in consultation with industry and other departments, we determine what an appropriate rate would be.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
During these discussions that have come about and the concern about it...it's a whole review brought about not only by yourselves but by the industry and those within it.
Do you know why it is different? When you look at capital cost allowance schedules there seems to be a wide variation. So I'm going back to the first question I had on who defines it. There seems to be a wide variation from country to country, mostly with the United States because it's the largest trading partner in a lot of the cases. Can you tell us why there may be that sort of difference, when there's collaboration between industry and your ministry?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
I'm afraid I don't really have that kind of analysis at hand, but we could certainly have a look at that.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
I could offer a couple of comments. When we do our analysis, because we try to base it on useful life, we look at considerations such as what the engineering life of the asset is and how long it could last physically. Then what gets added into that is questions of obsolescence—whether a product is becoming obsolete because of new products coming onto the market. As well, we look at whether a particular asset requires frequent upgrades and the extent to which those impinge upon the return the asset generates.
We here in Canada have tended to follow this idea of having rates reflect useful life fairly closely. In recent years, certain other countries have a similar approach. Some other countries—the United States being an example—do not take the same approach. The U.S. have tended to use their tax depreciation allowances more as a tool of economic development.
As Nancy said earlier, we have taken an approach whereby we try to provide a broadly neutral and efficient tax system that will then allow us to lower our tax rates and have the system be competitive on a broad basis. The United States, by comparison, has fairly high corporate tax rates with targeted tax incentives.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
So they use theirs, and some other countries maybe beyond them use it as an economic development issue, rather than as basically a component of their tax regime. You're basically telling us that they have higher corporate tax than we have and lower depreciation or capital cost allowance than we have.
I think we always get, with our industry, to what makes them viable and what is sustainable. Are you saying, then, that basically the economic development part of it is secondary to the financial part of it? Or is it that there's a balance now that has to be determined between capital cost allowance and economic development within the industry?
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
It's a question of how the tax estimate system can be most conducive to economic growth. In recent years in Canada we've taken the approach that the tax system can best facilitate economic growth, investment, and advancements in productivity by providing an efficient tax system that is broadly neutral and by lowering tax rates, to the extent we can afford to do so. This approach was adopted by many countries about two decades ago. There were various tax reforms around the world. Canada was part of that movement at the time; the United States was as well. Since then, the United States has tended to move back towards a system with more targeted incentives. In Canada, successive governments have remained relatively consistent in the approach.
Conservative
Bev Shipley Conservative Lambton—Kent—Middlesex, ON
Oh, crumb!
I was just going to say, then, that we've had pretty much every industry and manufacturing company in here talking about capital cost allowance and its importance and significance; that's all. I'm just wondering whether it is a collaborative consultation that we're having with the industry and your ministry about adjusting those. I looked through your comments to see what the next step is going to be to help us through the manufacturing industry's dilemma with capital cost allowance.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
The request many industry groups have been advancing for accelerating capital cost allowance.... Because they are not making, and we haven't been hearing, the argument that the capital cost allowance rate for manufacturing needs to be higher in order to reflect useful life, it hasn't come to the kind of dialogue we were talking about earlier, wherein they would want to try to convince us, based on a useful life argument, of their position. Instead it's more a question, I think—and they are pretty clear—that they would like higher CCA rates for manufacturing as an incentive.
Conservative
