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.
NDP
Brian Masse NDP Windsor West, ON
With regard to your comments on our SR and ED incentive being one of the most advantageous in the industrialized world, how do we compare with everyone else? Are we right at the top? What data or analysis do you have?
October 17th, 2006 / 5:05 p.m.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
The international comparison data suggest that we are one of the most generous countries—in the top handful. It's difficult to provide an accurate comparison across countries, because the criteria differs so much. There are so many variables to take into account. But when we look at the rate at which the credit is offered here and the base on which the credit is provided, both of these compare very favourably with virtually every other industrialized country.
NDP
Brian Masse NDP Windsor West, ON
Are these your studies or third-party studies? What studies are you referring to?
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
We can make that judgment just by looking at the criteria used in various countries. We haven't quantified it in detail. Studies have been undertaken by, for example, the OECD, using measures that try to roll up the various components into a single number.
NDP
Brian Masse NDP Windsor West, ON
In comparing Canada with the United States, what type of discussion happens in the department with respect to, for example, the auto industry? Until recently, there was the technology partnership program, TPP, that was available to them. Our tax incentives weren't enough to compete with what's being done in the United States. We've seen recent decisions to expand plants over there instead of in Canada. At what point does the department undertake an examination to find out whether their approach is successful? Are we looking at the Canadian broad-range approach we've been stuck in for twenty years? When does it happen?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
There are more than just tax considerations in the situation you're talking about. If the government decided, for instance, to provide support to a particular sector, the first question would be how best to provide that support. In the recent past, the way we've approached the tax system is to make it as neutral as possible. That's the most efficient way to run the tax system and it results in the most productive and competitive conditions.
NDP
Brian Masse NDP Windsor West, ON
In the case of, say, an exemption for renewable energy equipment, it would be a political decision to introduce an approach different from the broad-range one. At the end of the day, it's a political decision.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
Renewable energy is a special case. It relates to the externality argument we were talking about in the context of the SR and ED. There's a public benefit to be had by encouraging people to use those energies. It's not just a benefit to a company or industry. That's why an exception was made in that case.
NDP
Brian Masse NDP Windsor West, ON
A number of different manufacturing concerns could argue the same thing. There are questions of fair competition from our competitors in aerospace, textile, auto, where there's more than just the tax incentive. There are actually a whole series of tools and credits that other nations are providing.
With regard to the decision to move into the renewable energy equipment, how far is this outside the normal process? Is it a real net benefit for Canada compared with other nations? How do we compare this exceptional situation with what might exist in the United States and other countries? Is it a really good exception that we have developed, or is it one that's just a little different from the current public policy?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
I'm not sure I understand the question.
NDP
Brian Masse NDP Windsor West, ON
Specifically, we have this one exemption. How big is this exemption compared with what's happening in the United States with their renewable energy, or compared with other nations?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
I'm not sure if we have the information available to answer that question, but we could get it for you.
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
To give you a sense of what we provide in Canada relative to what the typical treatment would be, the treatment provided in Canada currently for efficient and renewable energy generation is an accelerated CCA rate of 30%. That's been temporarily increased to 50% until the end of 2012, I believe. If we did not provide those provisions, some of those assets would fall under a 15% CCA rate; others would fall under an 8% CCA rate.
Conservative
The Chair Conservative James Rajotte
We will go to Mr. McTeague briefly and then to Monsieur Lapierre, but I want to get a clarification.
Mr. Shoom, I thought I heard you say that the U.S. has higher corporate taxes than we do here in Canada. Can you identify the corporate tax rates in the U.S. and Canada for us--the effective and marginal rates you were referring to?
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
I was referring to statutory rates, but we can certainly address both those questions.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
Should we just provide you with a table? We have it somewhere in all this paper and we can provide it to you.
Conservative
The Chair Conservative James Rajotte
Mr. McTeague, you have one brief question, and then it is Monsieur Lapierre.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Thank you, Chair.
Thank you, Monsieur Lapierre.
I wanted to home in on a point you referred to: when setting the rate for a particular class of assets based on the objective rates, you should, as a general principle, reflect the useful life of assets. I was beginning to tell you about the difference between a dentist and a chiropractor with the same piece of equipment. One particular set of circumstances would see someone get depreciation over ten years and have 10%. Another might do it in five years. Another may only be able to use that machine for three years. How do you define the useful life of an asset, given the different needs in different industries?
Acting Chief, Economic Development, Business Income Tax Division, Tax Policy Branch, Department of Finance
The useful life for a class of assets is intended to be roughly a weighted average of the assets that are included there. We typically define our assets by the asset itself, rather than by the industry in which it's used. There would be an assumption that there should be some comparability to the lives of particular assets whether they're used in industry A or sector B. We would then try to get a sense of the representative life of that asset.
We acknowledge that this means the CCA rate applied to any particular asset may be too high or too low, depending on the actual experience for that particular asset. The way to compensate for that is through provisions related to recapture and terminal loss. When an asset does not depreciate as quickly as the CCA rate provides for and is then disposed of--let's say it sold for more than what it was written down for--then there is a potential that the difference will be taken back into income, reflecting that there were CCA deductions in excess of the depreciation actually realized.
On the other hand, when an asset depreciates much more rapidly than provided for, there can be a terminal loss, such that the additional deduction necessary to reflect the experience of that asset occurs at disposition.
The description I've given you becomes more complicated when you take into account that we group assets in pools. Some of these provisions would occur when a pool gets exhausted or if an asset is being depreciated on a stand-alone basis. The government introduced a provision several years back to try to make the system more reflective of differential experiences for actual depreciation by providing what we call a separate class election for manufacturing and processing equipment. If a business is concerned that an asset is going to depreciate more quickly than is reflected by the 30% rate provided for those assets, it can put it into a separate class. Then if it disposes of the asset after, say, four years, it can claim a terminal loss at that time, rather than allowing the difference to go into the general provisions for the pool.
Conservative
Liberal
Jean Lapierre Liberal Outremont, QC
I seem to recall reading a study reporting that Canada's spends a smaller proportion of its budget on R&D that do most G8 countries on average. Practically speaking, that's R&D carried out by the private sector. But the private sector is lagging behind. There were problems with R&D being done by university institutions and that lead to the establishment of the Canada Foundation for Innovation.
If our measures were as good as we claim they are, then Canada would at least rank among the average G8 countries and be leading the parade, not bringing up the rear. Isn't there a problem of some kind with our system, which doesn't seem very encouraging?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
While it is true that Canada ranks low in terms of business R and D as a percentage of GDP, since the inception of the SR and ED tax incentives the growth in this ratio has been strong in Canada relative to other countries. More generally, the question of why the ratio is low has to do with much more than just tax measures. For example, there is a working paper the department published that points to our industrial structure as one of the elements.
Liberal
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
For example, in sector A, R and D may be comparable to other countries, but when you put it all together, because of our sectoral variation, we rank low.
That's one factor. But the point I'm making is that the tax system is not the only factor that influences it.