Industry Committee on Nov. 9th, 2006

[Milos Jancik]

I beg your pardon?

[Colin Carrie, Conservative, Oshawa, ON]

Do you find that the equipment you would buy or the new products you would buy for your business become outdated that fast, say, within two years?

[Milos Jancik]

Not necessarily. It may be true of some IT equipment where you will write it off over three years, if it's a notebook or something like that, but not necessarily. It's simply the initial investment that is required and getting approval for it. Whether it's new product development, acquisition of new machinery, to get the approval on that project, you want to see a positive cashflow quicker or improved, accelerated, so that the project has a quicker return on investment. That's the critical dimension. It's not that the equipment gets necessarily replaced in two years; that need not be the case.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrie.

We'll go now to Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair, and thank you to the delegation for being here today.

The Canadian dollar and the rapid increase that has taken place over the last number of years developed a lot on the explosion of the oil and gas industry and exportation, pushing the manufacturing aside—about a 30% change. What has mostly been taken out of your business operations with the loss of that 30% that you had there? If you had that same differential today, where would that be going?

[Dave Wood]

There are two answers to that question. First, what have we had to take out? What a lot of manufacturing has done.... You're quite correct, a 43% increase in the dollar is equivalent to a 30% reduction in our selling price, the inverse of the impact of the dollar. What industry has had to do to try to compete with that is either improve their productivity, lower their cost of materials by sourcing globally or using alternative materials and alternate designs, lower their overheads through payroll reductions--which has been the dominant impact in this industry, with an 8% reduction in total employment--or move operations south.

In the appliance industry specifically, there were 34 appliance manufacturers at one time. There are now three left, two of which are in the province of Quebec. One is in Ontario. What our industry has been doing is relocating and downsizing operations, and that's not healthy for the economy.

Embedded in the problem is the overheads, and there are limitations to what industry can do. We can correct labour. We can correct material. In many cases the declining dollar or increasing dollar has actually helped to lower our material costs. But what we're seeing is our overheads are not decreasing. To give you one example, taxes in terms of the U.S. currency have actually increased 69% in the last four years. So our challenge is how to lower those costs. The alternatives are typically to relocate, to downsize, or to outsource.

[Brian Masse, NDP, Windsor West, ON]

In that context from 2002 to today, what would be the profit percentage in there?

[Dave Wood]

In this example--and it's a hypothetical example based on industry statistics--the example in 2002 is that it's a 5% net profit. That's net income before taxes. And that's not untypical of what most industry was doing prior to the increase in the dollar and the increase in commodities.

What you'll see now, though, is that unless you change your business model--and this is all based on the premise that you don't change your business model--you go from making 5% to losing 23.5%. There aren't many businesses that can stay in and survive very long losing 23.5% .

And you can see that this is really what has driven the decrease in employment and the decrease in manufacturing activity in this country.

[Brian Masse, NDP, Windsor West, ON]

I like the chart here on the tax gap for a manufacturer. Maybe you can explain it a little more. Is there no cost in there in terms of from China? You just have the GST and that's it. It's hard to believe that there wouldn't be any other expense. You could be correct, but is that really the...? And do you have a comparable one, for example, to the United States?

[Dave Wood]

We'll start with China. The tax stamp is based on the taxes that we pay in Canada. Another way to look at it from a government's perspective is that these are the taxes you collect. So for every appliance--refrigerator, freezer, dehumidifier, microwave, whatever it is--that we import, the government is seeing a decline in taxes of about 70%.

China does pay tax. There is certainly a tax model there, but their tax model is dramatically different. Their payroll taxes are a fraction of what ours are, partly because their payroll costs are a fraction of what ours are. But they get a tax credit for everything they export, between 13% and 17%.

That covers nearly all taxes paid, because most of their tax burden is based on a consumption model. They also don't pay property taxes. You can't own land in China. You have to lease land.

So you're quite correct in saying there are taxes paid in China. They are relatively insignificant to even the GST, because they get credited for most of that tax when the product is exported.

If you look at it in comparison to the U.S., the U.S. has a very different tax model as well. They are actually in many respects further behind Canada, in that they have no consumption tax at a federal level, which gives you an advantage on an export basis.

But many of the states have stepped up. The state of Ohio I can use as one example. The state of Ohio has moved from an income tax basis to a sales tax basis. You now pay your “income tax”...you pay your state taxes based on what you sell and you only pay based on what you sell within the state of Ohio. So for all the refrigerators and freezers that we export out of the state of Ohio, we pay no tax. That's the tax haven that draws investment into Ohio, and that's why Ohio is starting to now recover their manufacturing base.

[Brian Masse, NDP, Windsor West, ON]

You're bringing up an interesting point, because it's really a dog's breakfast when you try to compare some of these scenarios. And I think that's where, when we look at public discussions about what's fair in terms of either a rebate related to research and development, lowering a corporate tax cut, or other types of subsidies....

You have an analysis here in terms of China that's been interesting. Do you have any information on some of the environmental differences that are allowed there versus the practices over here? In North America, and Canada in particular, they are quite profound in terms of the impact on operations. Do you have any research in that capacity?

[Dave Wood]

I don't. I'm not qualified to really answer that question.

What I can tell you is that we do extensive research on the products imported--not the process, but the products--and I can tell you that the products imported from China, from reputable manufacturers, which for the most part they are, are equally as capable of living up to our standards of quality and safety. And from an environmental standpoint they comply with the rules and regulations of Canada in terms of environmental CFC protocol, and others. And there is no issue in that regard.

As far as manufacturing process is concerned, I'm not sure I'm qualified to answer that.

[Brian Masse, NDP, Windsor West, ON]

Yes, and that's what I'm interested to find out; that, and also the disposal of materials.

[The Chair, Conservative, James Rajotte]

Mr. Masse, we're over time here, so thank you, Mr. Masse.

We'll go to Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

And thank you to the witnesses for coming here today. It's always interesting to hear from the manufacturing sector.

I have just a couple of questions. My first is mainly a comment.

In the past couple of years under the Liberal government there was a lot of reduction in corporate taxes, especially in the last few years--corporate taxes, surtaxes--and reductions all the way around. And corporations seem to have benefited from it, but the manufacturing sector didn't seem to reinvest. You have to take some type of responsibility for that. We didn't see productivity going up. We didn't see investments in capital and equipment. What happened? How come that didn't happen?

[Milos Jancik]

I believe there have been productivity increases in manufacturing in the last couple of years. I believe your own interim report suggests something like 5.6%. And there have been investments. They vary from manufacturing sector to manufacturing sector, but many of our members have made significant investments in manufacturing and improved productivity in implementing lead manufacturing. To say that they haven't been doing it is not accurate, but certainly a lot more needs to be done. We haven't closed the productivity gap.

It's also fair to say that when you're looking at the tax burden, you're looking at the total tax burden, not only the federal taxes. The whole discussion can't only be at the federal level; it also has to flow through to the provincial level. Yet we still have a very significant productivity gap, depending on the sector, and we speak to this; it's in the range of 20%.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I don't mean to interrupt you, but our time is limited and I'd like to go along the lines.

The corporate tax has helped in the past. Now, going in the future, we see the GST cut, which I think you're opposed to, Mr. Wood, from what you were saying. The new government has also introduced corporate taxes. Are those opposite views? Are we going in the right direction? Is the present government going in the right direction or the wrong direction?

[Dave Wood]

I'm not here to make comment on politics. I think any government, from any of the parties, that helps change this tax gap is moving in the right direction. Certainly the GST proportionally gives the importers a bigger tax advantage than it does domestic manufacturers, that's true. But I think any government that can look at this pragmatically and understand that we have to get our taxes down to manufacturing and allow them to compete, or at least allow them to get credit for those taxes when they export, is the key.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Okay. It's simply trying to see what can best help the manufacturing sector, then the committee will decide what is the best avenue. I'm not asking for you to decide, I'm not asking for you to be partisan, but the two avenues don't seem to be consistent. I want that aspect to be clear.

The other aspect when it comes to taxes, and I think Mr. Jancik spoke about it, is should we not maybe do more targeted cuts? For example, if manufacturing companies are going to invest in payroll, perhaps they should get credit for that, and if they are going to invest in new machines and equipment, perhaps they should get a credit for that. Is that the way to go as well?

[Milos Jancik]

Well, I mean....

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Or do we do general...?

[Milos Jancik]

We have made recommendations. No, I.... We haven't had--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Is it going to work? I'm only afraid that we're going to do this piecemeal. We're not going to be able to do all of the things that Mr. Wood suggests, but I'm wondering, in terms of prioritizing, how do we prioritize? There is a limited amount of money in the government coffers and we do want to pick the right solutions.

[Milos Jancik]

First of all, I would not leave you with the impression that we came looking for donations. What we are talking about, for example, is one of the recommendations we made about the introduction of a tax training credit against EI premiums. First you have to do the training, you have to spend the money, you have to spend the resources, before you can talk about a tax credit. In the same way, you cannot get an accelerated capital cost allowance until you have made the investment.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

But is that the priority? Are those the first issues that we should be tackling, training, CCA, or is it corporate taxes, or is it increase in GST? That's what I'm asking. I'm trying to build consensus here.