Industry Committee on Dec. 5th, 2007

[Avrim Lazar]

I like the questions left around the table.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair.

I thank the guests for coming here.

Somebody brought up a scenario that for the next six months we're going to lose at least 50,000 jobs. I guess my first question is whether this is the best-case scenario or worst-case scenario.

And could you give us a snapshot of how it's going to roll out the next six months? What regions do you see being hit first—Atlantic or western or central Canada—and what industries will they be and how are they going to be hit? Are we going to see plants shut down or just see them cutting back staff? I just need a snapshot of what we're going to be facing over the next six months, probably by June, and the unemployment rate or percentage, and things like those.

I'll open it up. It doesn't matter...whoever.

[Dr. Jayson Myers]

If I could refer you to this graph that shows the relationship between the appreciating dollar and employment in manufacturing, I think there's a pretty close relationship between the movement of the dollar and employment within the sector.

As I was saying, we're in a situation right now where we're responding not only to the high dollar, with companies having to cut costs in order to respond to the dollar, but also to the very different circumstances of a weakening of key export markets in the United States, in the automotive and consumer products sectors—including paper—and the housing market in the United States as well. So those are the key sectors.

The regions that will be affected by this most, or the companies that will be affected by this most, frankly, are the companies that are going to suffer as a result of overcapacity in North American markets. We'll see closures as a result of consolidation on a North American basis or of suppliers who've found they've lost their customers, either because of imports now coming into the country or because their customers have closed their facilities.

So it's the supply chains around housing and the automotive, forestry, and consumer products industries that I think are most vulnerable, particularly in Ontario and east of it, because that's where we have sectors that have become much more integrated within the North American market. I'm talking generally, because there are many, many companies in western Canada too that are also dependent on the U.S.

The companies that will do well are the companies that have a specialized, unique product that can sell anywhere around the world, regardless of what the value of the dollar is. The ones that can leverage pricing with their customers, the companies that are selling into the economic and energy developments in western Canada and the infrastructure and the construction industry across the country, those are the sectors that will continue to do well.

But I think there are a number of sectors that just cannot respond, either in terms of diversifying their markets or changing their cost structures, and those are going to be the hardest hit over the next six to eight months.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

So you're saying it will mostly be eastern Canada—Ontario and east of Ontario—you see as being hardest hit?

[Dr. Jayson Myers]

Yes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Mostly in the wood products and automotive sectors?

[Dr. Jayson Myers]

If you look at the composition of the industrial base in Ontario and east and it, you will see it is very highly dependent on the automotive, forestry, and resources and forestry processing sectors. Those are the ones that are going to be hardest hit.

[The Chair, Conservative, James Rajotte]

Mr. Lazar, do you want to comment?

[Avrim Lazar]

I just wanted to add that rural British Columbia will be hit very hard as well, because they're highly dependent on the forest industry.

So it's going to be the manufacturing heartland of Canada, but it's also going to be those rural towns that are dependent on their forestry industry, with B.C. being hit quite hard, and Saskatchewan and Alberta to a lesser extent.

[The Chair, Conservative, James Rajotte]

You have a little less than a minute.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

I don't know if these are also under your umbrella, but do you people represent fish plants and french fry plants as well? They're not usually mentioned in the conversation, but how do you see some of these other sectors being affected, such as food processing?

[Dr. Jayson Myers]

I would include them as some of the key areas that are going to be hit within the consumer products field. Again, many of them are often reliant on the U.S. as their major or largest market. So yes, they're under exactly the same pressures here; there's price compression on their sales side, their export side, and there are higher and higher business costs as a result of the increasing processing costs. And if consumers are buying less, they're going to be buying less food products, consumer products, as well as cars.

[Perrin Beatty]

If I could add to that, Mr. Eyking, basically any sector where we are paying Canadian-dollar costs for our inputs and we're looking to export is going to be under pressure, particularly if our export market is in the United States. Secondly, here domestically, obviously, any instance where American firms are exporting into Canada will increase pressure, with the exchange rate on the Canadian dollar, on the Canadian industry.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Eyking.

Gentlemen, I'm going to take the last Conservative spot.

I do want to thank you all for being here today. I want to thank you for this discussion. I also want to thank you for the leadership you showed, certainly in the manufacturing report, in terms of putting pressure and bringing forward specific recommendations. I do want to thank you all for that.

As well, I want to counsel you to keep hope, because if you look at these recommendations, I'm quite positive about the reaction.

I even look at your presentation, Mr. Myers, and you said that short-term interest rates should be reduced by at least 25 basis points in December. I don't know if you have a direct pipeline to David Dodge, but that's exactly what he did. In part, you mention the U.S. and the Canadian economy. If you look at the Canadian economy, there is actually a weakness, especially in the conventional oil and gas sector in western Canada, that I think is causing some room for the governor to move.

I do, though, want to drill down to one of the recommendations—and I think most of you, or all of you, have mentioned it here—with respect to refundability for R and D tax credits. First of all, it's something that's said, and I think most members of this committee are familiar with it, but I don't know how many members of Parliament are familiar with exactly what that means. So I want you to drill it down on a very basic level, but secondly, address the issue that you know we will get from the finance department, which is that this is an $8 billion fiscal cost over five years. That's what Finance does; they look at fiscal cost, which is appropriate, but they don't look at fiscal benefits.

So address the issue of what refundability for SR and ED actually means; and secondly, the response in terms of an $8 billion fiscal cost over five years.

If you can address those two issues, I'd leave it open to whoever would like to address that.

[Avrim Lazar]

I'll just start, a little less technically.

[The Chair, Conservative, James Rajotte]

Mr. Lazar.

[Avrim Lazar]

The tax credit is for investment in research. It's done because we all think it's a public good to have companies that research their ways to being more profitable. It keeps jobs and wealth in Canada. That's why there's a government policy saying, if you do it, we'll give you a tax credit.

There's a hole in that tax credit, a leakage, in that you can't get the credit unless you're making a profit, because you're not paying taxes. So what that does is say, “If you're in trouble, to heck with you. Don't innovate your way out of business. The government is walking away from you.

Because those credits stay, if you get out of trouble, you can get your money. So what the government is doing is betting on our going bankrupt, and then they'll save the money. If we get out of trouble, the money will come; it will only come at the time of profitability. So to count what is in those credits, saying we're kind of hoping all these Canadian companies will go bankrupt so we'll never have to pay them, I find just a little astonishing.

If it's legitimate to provide an incentive to a company that's making big profits to invest in research, I don't see why it's not legitimate to provide at least the same incentive to a company that's trying--not asking for a subsidy, not asking for a handout, but just saying, just give me the tax credit that my profitable neighbour is getting so I can try to innovate my way into profitability.

[The Chair, Conservative, James Rajotte]

Mr. Nantais.

[Mark Nantais]

I certainly agree with all that. I do want to apprise you of the fact that, if you're not already aware, there's already a consultation process going on. Certainly CVMA is responding to that, and I'd be glad to forward our comments to the committee for that purpose.

In addition to that, it's what qualifies and doesn't qualify, which is another key factor here. Pure research is one thing, but that doesn't really get us an advantage in the marketplace. We have to take that research and develop it through the various stages to help to meet the commercialization. All along that pathway, I would suggest there are opportunities where the SR and ED credit should not only apply, but it should provide some real benefit. That includes new technologies, new manufacturing processes on the shop floor. That's something that, thus far, does not qualify, but it's certainly something that perhaps takes us to the next level in terms of innovation and competitiveness from a manufacturing standpoint. So that's one other consideration that I would offer here.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Myers, do you want to comment? Also, can you address the numbers issue, the $8 billion over five years and the fiscal costs.

[Dr. Jayson Myers]

On the numbers issue itself, it's difficult to address this because I don't think anybody has seen how Finance calculates this. It would be nice to sit down with Finance and figure this out.

Our calculations going forward, if we're looking at refundability from the current year forward, and taking into consideration that one-third of the credit is collected in revenue because all these credits are taxable anyway, here the numbers we're coming up with even on a five-year basis are something more like $3.5 billion. It's much less than what Finance is saying.

I think industry would very much like to sit down with Finance. In Finance's statement itself it says that these incentives were put in place because there are very good economic reasons. In Finance's own words, the economic benefits far outweigh the costs of the tax credit itself, so I don't know how that jives with their recommendations.

But I would also say that this is part of an overall. What we have to look at is industrial innovation. Tax credits are a very important part of that. I would recommend to this committee that one issue you would want to look at going forward is how can we strengthen the linkages between the research that's being done, the great research, in this country, and the actual--not commercialization of the technologies from the research--application of that research to industrial innovation? That's where most of the money is generated.

Finally, I'd also like to recognize the leadership of you, Mr. Chairman, and the members of this committee. We wouldn't be talking about these issues if it had not been for the unanimous recommendations of this committee.

Thank you all very much for that.

[The Chair, Conservative, James Rajotte]

Thank you.

I think the chamber wants to respond, as well, so we'll finish up.

[Perrin Beatty]

Mr. Chairman, I would like to just set it in context. This committee, quite appropriately, is very concerned about the impact of the dramatic appreciation of the Canadian dollar, which has certainly exacerbated the challenges so many Canadian businesses are facing. But we shouldn't be distracted by the dollar from the underlying issue, which is the competitiveness of Canadian business.

Faced with growing challenges from abroad and a dramatically changing international marketplace, one of the key elements of our ability to survive in Canada as a business community is the investment we make in innovation. When we look at the future, at our kids and what sorts of jobs they'll have, our future doesn't lie in competing with somebody from western China on the basis of who'll accept the lowest pay; it depends upon our ability to innovate and to constantly invest in new processes and new products that will ensure that we're competitive and that we're able to sustain high wages and good jobs in Canada.

This investment in research and development is absolutely critical to not only the survival of companies today but the growth of the Canadian economy as well. For so many businesses that can't benefit today because of the non-refundability of tax credits, it's going to be important both for their survival and growth in the future that we look at mechanisms that will enable them to make the investment. This could be an important step forward for it that will give major dividends to the Department of Finance when they look at our tax revenues in the future.

[The Chair, Conservative, James Rajotte]

Thank you very much.

Mr. Murphy, did you have a comment? I am well over my time, I should say.

[Michael Murphy]

Yes, I was just going to comment.

The joint consultation that Finance and the Canada Revenue Agency had under way just closed on Friday. A lot of us have made submissions in there. If it's of interest and value to the committee, we'd be happy to provide that to you.