Good morning, gentlemen.
It's a pleasure to be here with you this morning to participate in trying to put our point of view across to you on this most important subject.
My name is Jim Irving, and I'm president of J.D. Irving Limited. If you don't know too much about J.D. Irving Limited, we're a New Brunswick-based company. We've been in business since 1882, and we're a fully integrated company in forest products, consumer packaged goods, shipbuilding, retail distribution, transportation, and food processing. We have over 15,000 employees in Canada and the United States. Our major markets are in the United States and Canada, and our head offices are in Saint John and Moncton.
I had a presentation to hand out to you, but I understand we're non-compliant, so we'll do the best we can with it. Hopefully, we'll get it handed out to you during the course of the morning after it gets translated for proper presentation. You'll have to bear with me a little bit.
There are three key things that we'd like to talk to you about this morning: encouraging capital investment and new technology; trade agreements regarding shipbuilding and the marine sector; and encouraging productivity improvement and employee skill-building.
I'm going to hold up a chart, if you don't mind. The first one is going to be in the context of the forest products business. We're in the forest products business. The forest products business is a major industry in Canada. New Brunswick is a province in which forestry is of major importance. My first three or four slides are background that could be used in any business--the automotive sector in Ontario, the mining business, or any other manufacturing and exporting part of this country.
The first chart shows the importance of the forest products sector to New Brunswick. It shows all the provinces in Canada, and it shows the importance of forestry to the provincial economy in New Brunswick, of which it makes up about 9%. We're the part of Canada's forest products sector that is the most dependent on manufacturing.
I'm going to go right to slide three, which shows how dependent New Brunswick as a province is on manufacturing. Of all the Canadian provinces, New Brunswick is the third most dependent on manufacturing. I'm going to illustrate with a fourth slide, which talks about the global capital. Maybe just before I show you that, I'll give you a little more background.
Because of our capital intensity in the forest products business, this fourth slide shows capital additions and capital expenditures on a global basis and how Canada ranks in that field. These numbers are in billions of dollars. They show Asia at $13 billion between 2000 and 2007. This is in capital investments, in this particular case in the forest products, pulp and paper sector: in Asia, $13 billion in this timeframe; South America, $7 billion; Europe, over $12 billion; the U.S., $3.3 billion; and Canada, slightly over $1 billion. Again, that speaks to the capital expenditures on a global basis in the forest products business, a business in which Canada historically has had a major global position.
As well, this particular slide is a little more detailed. It shows the rate of capital expenditures in North America in the pulp and paper sector. This one will show this as a percentage of depreciation. Historically in a business, as most of you know, you should spend about 100% of your depreciation to be in the game, to keep up to date. This chart shows us, starting in 1975, up here at over 200%, and where we are today, at 2001, with less than 50%. In 1975 the industry was spending at the rate of about 225%. Today, in 2001, the industry is down here, at slightly over 50%.
So the North American industry--Canada and the U.S.--is not spending its depreciation. Actually it's spending less than half, so we are in a serious state of decline from the point of view of capital investment in this capital-intensive industry.
So what do we do about it? That's the fundamental question, and that is the backdrop for a key part of our presentation this morning. Our recommendation--and this is not a new recommendation, we've made this repeatedly, but we have not been successful in its implementation--is to increase the capital cost allowance, or the CCA. This is an amount for manufacturing and processing equipment. We recommend an increase in the CCA--or capital cost allowance--from what is presently a 30% declining balance to one of perhaps 50% on a straight-line basis.
This really all goes to the tax rate that we're going to pay. If you have a business today, you're writing off your equipment in your plant. You're taking that depreciation against your current year's tax bill. What we're advocating--and we've had it in this country in the past--is that you could go, and you could make a capital expenditure, and you could accelerate the depreciation, take more depreciation in that year. Yes, your payments to Ottawa are less in that year. Your tax bill is less, but you've made an investment in new technology. The federal government then, or the provincial government, depending on how the thing is structured, will receive its tax revenue at a later date--perhaps it's deferred for two or three or four years, but it will definitely come. The result is that rather than have businesses not being invested in and subsequently going out of business and bringing all the social and economic problems that go with that, we'll have businesses that will have up-to-date technology and a strong base, particularly for people in the manufacturing business in this country.
If you're manufacturing and if you're exporting, you're subject to the strong Canadian dollar or the fluctuations of the dollar and high energy costs. It takes a lot of energy to manufacture your product or to get it to market, and you're subject to a lot of fierce global competition, which everybody is. These are fundamental problems that are affecting the manufacturing business, and I'm sure you've heard it across the country in your tour. You'll hear it from a lot of people. They'll be in different industries, perhaps, but they'll have the same problem.
We think this is a fundamental elementary basis that we have to put into the manufacturing segment in Canada. We have to be more aggressive. We can't just design the tax laws to capture all the tax and have businesses that don't reinvest. We have great surpluses in Ottawa. Clearly that's been well run, but if we're going to be progressive and bold--which we surely need to be in the manufacturing business in this country--we need to have a tax structure that represents that.
If, for example, you take the CCA on buildings that are used to house manufacturing plants, today at a 4% depreciation rate it takes 57 years to depreciate 90% of the asset. If we had a 30% declining balance, nine years would depreciate about 95% of the asset. We're living in the past to think we can write off buildings at such a slow rate. Nothing today is staying at that speed. I think as a country there are enormous opportunities for us, if we can get our mind around it.
At the present time, under the available-for-use rules, if you have a fish plant or you have an automobile factory in Ontario or you have a pulp mill in B.C. or a ship, and you go out and make a major capital investment, you're only allowed to start to depreciate that investment once the investment is up and running, say in 12, 18, or 24 months. You've spent your money, and you've incurred all the costs, but you have no depreciation to set off against your tax bill. What we had at one time was ready-for-use.
If you committed New Year's Eve to spend.... Pick a number. Mr. MacLeod over here wants to buy a new ship New Year's Eve. We'll give him a good deal on one--say $50 million. He could take his depreciation that year on that ship against his taxable income. He's made the commitment.
Provided you've made the commitment, signed the purchase order, and entered into a contract, you can start to depreciate the asset. Even though you haven't got the asset, you can start to depreciate it--today, 18 months or 24 months.
This is a form of financing. It's a smart form of financing. It's well done around other parts of the world. It's a method that is not countervailable, not seen as a subsidy. It's well in practice in other parts of the world.
I think we're missing a big opportunity here: (a) we should change our rate of depreciation, be very aggressive; and (b), we should make sure, if the laws are changed, if you are successful, that you can take advantage of that depreciation when you make the commitment, not when you can use the asset. That would be a subtle but enormous change to the success of the investment.
Again, relating to depreciation, we have the half-year rule. With regard to the asset you buy, you can depreciate it for six months only in the year you make the acquisition. Forget about it; let's make it that whenever you buy it during that year, you can accelerate it and maximize the depreciation very aggressively. You might not do this in all sectors, but clearly the manufacturing sector, clearly the sector that's exporting, and clearly the sector that's capital-intensive should receive very favourable rulings in this regard.
That's our presentation so far. I hope I'm not taking up too much time. I have a couple of other points I'd like to raise on the acceleration side.
