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.
Senior Vice-President, Public Policy, Food and Consumer Products of Canada
First of all, just to clarify, if the product is not approved for sale in Canada, it means more than that it can't be manufactured in Canada. It also can't be sold in Canada. So it can't be imported either.
With the types of things we're talking about here--fortified foods, novel food--no manufacturer can import them into Canada either. They're currently just not available to the population. They're not available for sale to consumers.
Bloc
Robert Vincent Bloc Shefford, QC
We've heard that you cannot spray your crops with certain products, whereas other countries can. Therefore, it would appear that different standards apply to Canadian producers and to producers in other countries. Is that in fact the case? Or, do the same standards apply to everyone?
Vice-President of Government Affairs, Food and Consumer Products of Canada
I can take that one.
Are you speaking about agriculture pesticide rules for minor-use pesticides?
I'm certainly aware that there are differences in Canadian and American rules for the use of minor-use pesticides, but that's not an area of expertise that our association, as manufacturers or end-users of the product, would be--
Bloc
Robert Vincent Bloc Shefford, QC
Some countries use other products. Take Morocco, for example. I'm not talking solely about the United States. I'm talking about products from another world country where production costs are much lower and where additives or pesticides are still used. Product prices surely vary. Your pesticides are much more expensive than the ones used in other countries.
How does this impact your industry? I noted that your revenues were off last year by 20 per cent over the previous year. So then, how is this impacting your industry?
Senior Vice-President, Public Policy, Food and Consumer Products of Canada
The issues with our industry are not related to cheap imports. It is not a question of the industry withering as a result of foods being imported from other countries, that have been produced with cheaper commodities. In fact, in Canada, we have a fairly competitive regime for producing food in the traditional way. So we're really talking here about the next generation of food, enhanced foods, fortified foods, novel foods. These are the things that are going to change the food supply to deal with some of the problems that Mr. Crête was talking about. I'm fairly confident that we have a fairly competitive environment in Canada for producing traditional food. That's not where our problem is.
Vice-President of Government Affairs, Food and Consumer Products of Canada
If I could just add to that, the point we're trying to leave members of the committee with is that the largest potential growth area for food manufacturing in the world is in the area of functional foods. Those are foods with higher scientific profiles. There has been value added to them. They're functional for a certain diet or a health goal that a consumer is going to face. That's the future of food.
Canada does not have a competitive regulatory framework. Countries that we're going to compete with for product mandates to manufacture those functional foods are investing heavily. The American government is funding the FDA to streamline the Food and Drug Administration in the U.S., the group that makes the decisions similar to Health Canada in Canada. They've just injected a massive amount of money to speed up their approval process for health claims, which we mentioned earlier. They're investing heavily. The European Union has just agreed on a joint policy, among all their membership, on health claims. Canada doesn't even have a policy yet.
So as we go forward, the companies we represent are going to be forced to make decisions about where they commercialize innovation. It is not going to be in Canada unless we have the regulatory system that allows us to compete with our competitors.
That's the large, top-line story we're trying to commit here.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Johnston.
Thank you very much for being with us today and thank you for your answers. We certainly had some very wide-ranging questions, and we appreciate you being open to them. I want to thank you particularly for your recommendations, which are very specific.
I have one point--and I won't ask you to respond--on the regulatory framework, on that recommendation. If you have anything further or specific on that, on a regulatory framework that you would like to see in place, your ideal regulatory framework, pass that along to us as well. We certainly appreciate you being here before the committee.
I want to thank members for their questions.
We will suspend for a minute or two and then have officials from the Department of Finance with us.
Conservative
The Chair Conservative James Rajotte
Members, we'll begin our second hour.
We have two officials with us from the Department of Finance. Nancy Horsman is director of the business income tax division of the tax policy branch, and Kevin Shoom is acting chief, economic development, of the business income tax division of the tax policy branch.
I'd just like to remind members about why we invited finance department officials here. There have been recommendations, a series of them, made to us by various organizations to amend the capital cost allowance, to change the way we depreciate capital in this country, and also to expand the SR and ED tax credit program to make it more relevant for manufacturers. These are two of the recommendations we've heard.
For the benefit of the witnesses, we've heard a number of recommendations on CCA, the main one being moving towards a two year writeoff, if I recall correctly.
So that's the main reason you were invited, to give us some background so that we can make a very informed recommendation. We did have a brief provided on each of these subjects by Library of Parliament researchers.
I don't know if one or both of you will be speaking, but we would ask you to keep your presentation to under ten minutes. Then we'll go to questions from members.
Thank you for being here, and welcome to the committee.
Nancy Horsman Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
Thank you, Mr. Chairman.
I have been asked to provide you with some background on the scientific research and experimental development tax incentives and on the capital cost allowance system in Canada. I will give a brief overview of what these measures are and how they work, and then we'd be happy to answer any questions you might have from a tax policy perspective.
The concept of providing tax assistance for scientific research and experimental development, which we call SR and ED in the department, is grounded in the economic principle of externality. The basic logic is that when a business performs SR and ED activities, the benefits are not restricted simply to the business itself but also go to others in the economy. For example, once a new technology or process is developed, other businesses may be able to adopt it at little or no cost. The public benefit of the activity is actually higher than the private benefit to the individual business. In the absence of government support, there would be an underinvestment in the activity.
Canada’s SR and ED tax incentive program is one of the most advantageous in the industrialized world. It provided over $2.6 billion in tax assistance to over 12,000 businesses in Canada in 2006. The tax policy objectives in supporting SR and ED activities are: one, to encourage the activities in Canada, given this externality that is brought about by SR and ED investments; two, to assist small businesses in carrying out these activities; three, to provide incentives that are as simple to understand and comply with and are as certain in application as possible and; and four, to promote SR and ED activities that conform to sound business principles.
The scientific research and experimental development tax incentives help Canadian businesses to develop new products and processes, improve productivity, enhance competitiveness and economic growth, and create jobs in Canada. To be eligible, SR and ED has to be performed in Canada by a business, and eligible activities may take the form of basic research, applied research, or experimental development. Most claims are for experimental development.
I'd like to give a bit of an overview of how the structure of the tax incentives work. They come in the form of deductions and credits. With respect to deductions, current expenditures and capital expenditures on machinery and equipment are fully deductible in the year incurred and unused deductions may be carried forward indefinitely.
Perhaps more important are the tax credits that are provided. There are two rates. The general rate is 20%, which means that the federal government provides a tax credit of $20 for every $100 of spending undertaken in Canada. Then there's an enhanced credit rate of 35% for smaller, Canadian-controlled private corporations on their first $2 million of qualified expenditures. The investment tax credits may be deducted against federal taxes otherwise payable, and unused credits may be carried back three years or carried forward twenty years.
In recognition of the difficulty they can face in accessing capital, smaller, Canadian-controlled private corporations that are not taxable may obtain a refund of their credits earned in a year. Current expenditures that earn SR and ED ITCs at a 35% rate are fully refundable up to a maximum of $2 million. That means a small start-up could be eligible for a refund cheque of up to $700,000 on its SR and ED expenditures. Also for these smaller, Canadian-controlled private corporations, investment tax credits on capital expenditures and on current expenditures in excess of the $2 million limit are eligible for a 40% refund.
It should be noted that provinces also provide various types of incentives for research and development activity undertaken in their own jurisdictions.
Together, all of these tax incentives provide a generous environment for Canadian research and development.
To illustrate, the 2005 tax expenditure and evaluations report provided estimates of the 2010 marginal effective tax rates on business investment. The marginal effective tax rate measures the extra return on an investment required to pay corporate-level taxes, expressed as a percentage of the total return on investment. According to the 2005 report, R and D tax incentives reduced the Canadian marginal effective tax rate for the manufacturing sector from 28.5% to 21.8%, a reduction of 6.7 percentage points. The marginal effective tax rate for R-and-D-intensive manufacturing firms decreased even more dramatically, falling from 31.7% to 3.4%, a drop of 35.1 percentage points.
I'd like to turn now to the capital cost allowance system. Generally, the cost of capital investment cannot be written off in the year incurred; rather, the cost must be written off at the capital cost allowance rates that are permitted under the Income Tax Act, and this is similar to the concept of depreciation used for accounting purposes.
The annual deductions that may be claimed under the CCA system will eventually result in virtually the entire capital cost being allowed as a deduction.
The approach that's been taken to setting the rate for a particular class of assets is based on the objective that capital cost allowance rates should reflect the useful life of assets so that they would provide adequate recognition of the capital costs over time. This approach helps ensure that investment choices are not distorted and are directed towards the most productive uses. There is an explicit exception to this approach in the provision of accelerated rates in certain instances, such as efficient and renewable energy equipment.
As you know, the government regularly receives requests for accelerated CCA rates for particular assets and for assets used by particular sectors. By advancing the timing of deductions, accelerated CCA represents a subsidy for investment with associated fiscal cost to the government, such that proposals therefore need to be evaluated by considering their likely effectiveness and their economic impact relative to the impact on government revenues.
To conclude, the SR and ED tax incentive program is an important element of the federal strategy of providing assistance for research and development. The Department of Finance continues to review the program on an ongoing basis to ensure its effectiveness in the context of the overall federal strategy of providing assistance for R and D.
Similarly, the department reviews capital cost allowance rates on a regular basis to ensure they reflect useful life and therefore contribute to the efficient allocation of resources in the economy.
I'd be pleased to answer any questions the committee may have on the tax policy aspects of the SR and ED tax incentives or capital cost allowance rate.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Ms. Horsman.
We will go to Ms. Stronach for six minutes.
Liberal
Belinda Stronach Liberal Newmarket—Aurora, ON
Thank you.
Perhaps you can clarify this, but I believe Canada leads--in a negative way, unfortunately--the OECD nations in terms of taxation on investment, which, as you can appreciate, is not a good thing because it directly affects innovation, it affects jobs, etc.
We've now heard from many different witnesses before committee, and many of them argue that the CCA rates are outdated given the rapid acceleration of technology relevant to their industry.
My second question, after the sort of general first one, would be on how often you adjust these rates and what the process is. We tend to hear they're not working for the industry, that due to the rapid rate of innovation within that particular sector, the equipment changes so fast and technology changes so fast that those rates are not compatible.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
Maybe I should start by just clarifying.
Do we have the OECD numbers?
Liberal
Belinda Stronach Liberal Newmarket—Aurora, ON
It's either one or two. The U.S. and Canada are very high when it comes to taxing investment.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
We can clarify that.
In terms of looking at CCA rates in general, we do review them on an ongoing basis. In fact, there have been several changes. In the 2005 budget, I think there were a number of increases in rates. So on an ongoing basis we do review the rates, and if we receive representations that the rates are out of line with the useful life of assets, we review them.
Liberal
Belinda Stronach Liberal Newmarket—Aurora, ON
Yes, but can you perhaps clarify what the process is to do that? Do you have an opportunity to hear from the stakeholder groups yourselves? We continuously hear complaints from industry.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
Every year during the pre-budget consultation process, associations and others provide their views to the finance committee. Those views are made available to us as well, and we do review them and review the rates on an ongoing basis.
Liberal
Belinda Stronach Liberal Newmarket—Aurora, ON
Who would make the final decision on whether the rate gets changed?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
The Minister of Finance.
Liberal
Belinda Stronach Liberal Newmarket—Aurora, ON
Thank you.
Do you have something to add? We have some time left.
Liberal
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
In the course of the recommendations that you have looked at in the past, when was the last time you made substantive changes to the taxes we're talking about here, particularly as they relate to depreciation? Was that done in the last three years?
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
The way the system works, there are a number of classes of assets. Each has a different rate that applies to it. We would review those on an ongoing basis.
Do you have the 2005...?
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Just to give you an example, assuming I'm a dentist or a chiropractor and I have equipment, clearly that's not something the Minister of Finance is going to look into specifically, and you're not going to catch these things subtly. But clearly we have a situation in which manufacturers are now suggesting that one of the reasons they find themselves in some difficulty is that we're not keeping pace with the modern and innovative realities of their business. As a result of that, they are extremely frustrated and are suggesting that Canada lags behind because either the department or the agency seems to be incapable or unable to respond to these changing times.
From a pragmatic point of view, I'm wondering—and I think this is also in line with Ms. Stronach's comments—what your department does specifically to ensure that our tax policies are in line with the kinds of changes we're seeing around the world.
Director, Business Income Tax Divison, Tax Policy Branch, Department of Finance
The general approach to tax policy in recent years has been to try to keep rates low and to eliminate distortions in the tax system. The way to do that is not to have targeted tax incentives to particular industries. Rather, it's to try to make the CCA rates reflect useful life, as I said, and to keep the overall tax system neutral in terms of what investments are made, so that those investments are made for business reasons and not for tax reasons.