Industry Committee on Oct. 17th, 2006

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Accelerated depreciation, though, with a new product, a new modality, a new widget, would require more intense review by your department. How do you do that when new technologies...? Do you have experts within your own department who will go over and say that this new product that does wonderful things, that was invented only last year in Germany, is a great product, will do wonderful things, will have an ancillary effect throughout the economy, but that product will probably wear out in three years, not five years? As a result of the way in which you've structured the Income Tax Act, the effect of depreciation is actually a loss to the manufacturer who is trying to stay current with other industries.

[Kevin Shoom, Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance]

Perhaps I could just spend a couple of minutes talking about how we do our reviews.

Quite often we will receive representations from particular businesses or from industry associations. When we receive these, we of course take a look at what the current rules are and how they will apply.

We quite often meet with the people who bring these requests to us in order to understand things better and learn as much as we can about the technology and the assets they're talking about. We can then supplement our analysis by looking at other factors, such as the accounting treatment of these assets.

We also look at studies on economic depreciation rates—studies that take a more academic approach—and we will often follow up with these groups and get whatever technical knowledge we can find. Sometimes this means we also have to consult with other government departments that have more expertise.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Does that include Industry Canada?

[Kevin Shoom]

Industry Canada is where they would have the appropriate expertise. We also consult with Natural Resources Canada, for example, in the area of efficient generation technologies for renewable energy. It would depend on the particular request.

[The Chair, Conservative, James Rajotte]

Okay.

Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

In your submission, you state that the Scientific Research and Experimental Development Tax Incentive Program is one of the most advantageous in the industrialized world.

Can you compare for us this program with those in place in various other countries?

[Nancy Horsman]

We haven't done an international comparison, but we're aware of some that have been done. For example, the OECD has done a study.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Could you obtain that study for us?

[Nancy Horsman]

We can give you the OECD study.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You mention tax assistance in the order of $2.6 billion in 2006. How many billions of dollars in taxes do businesses pay?

[Nancy Horsman]

It's about $30 billion to $35 billion.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You're talking about $2.6 billion out of a total of $35 billion. Fine.

WIth respect to the capital cost allowance system, you cite efficient and renewable energy equipment as one instance in which CCA rates apply. However, we can't forget tar sands development costs which have also benefited from a 100 per cent write-off from the outset.

You stated that you periodically receive requests for CCA rates to apply to particular assets. Have you compiled a list of these requests showing which ones were rejected, and which ones were allowed? For example, the printing sector systematically applies every five years, but the government always stands firm.

Do you have a list of areas in which progress has been made, and of areas in which we are still at the same stage?

[Nancy Horsman]

We can certainly give you a summary of the changes that have been made. In terms of what people have asked for, I'm not sure we would have a list of that.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Whatever you can come up with would be useful.

Your submission contains the following interesting statement:

Such proposals therefore need to be evaluated by considering their likely effectiveness and their economic impact relative to the impact on government revenues.

How do you evaluate the impact of such proposals on the overall economy? In a given sector, are we seeing certain CCA rates apply and has this had a measurable net impact on the economy?

When you talk about a particular sector, you're talking about tax expenditures as well as revenues and increased productivity that benefits both society and the business in question. Have you done evaluations of this nature?

[Nancy Horsman]

The approach is more like what I was saying before, which is to try to develop a neutral framework in which businesses can operate within the useful economic life.

We know the economic impact of distortions is a less efficient tax system, because it affects the business decisions that people make. Did we measure the economic benefits that might occur if a certain targeted tax measure resulted in additional investment? No.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Getting back to the subject of tax incentives for research and development, is there an R&D tax incentive available to companies -- especially small companies -- that do not earn any profits or pay taxes?

I'll use the forestry sector as an example. For some time, this sector has been struggling to make a profit, even though it is in desperate need of funds to modernize its operations. The same holds true for other sectors as well. Is there any kind of incentive available for sectors that do not pay any taxes? Could it be spread over a period of two, five or ten years?

[Nancy Horsman]

For the scientific research and experimental development tax incentives?

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Yes, and I might be asking you the same question about the capital cost allowance.

[Nancy Horsman]

Certainly, as the presentation shows, in the SR and ED, there is a refund aspect to it for smaller, Canadian-controlled private corporations.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

But what if the company is not earning any profits?

[Nancy Horsman]

Yes, it's refundable.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So, even if the company isn't earning a profit, R&D expenditures are refundable.

[Nancy Horsman]

For qualified expenditures.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I see. What would you recommend to make the overall R&D incentive scheme even more effective?

[Nancy Horsman]

Could you repeat the question?