Industry Committee on Nov. 1st, 2012

[Geoff Regan, Liberal, Halifax West, NS]

Your report states that Canada's competitive position in the world, based on tax rates and R&D tax credits, is declining. In 2008, Canada was ranked 9^th in the world. Before the budget, it was 13^th, and after the 2012 federal budget it will be 17^th. How has that happened?

[Martin Lavoie]

From a methodological standpoint, I would just like to say that that comparison takes repayment of investment into consideration. For every dollar that a large company spends on R&D—we did not look at the situation of small companies—how much money is returned to the tax system? In fact, the tax system has two factors, the corporate tax rate and the tax credit. A 20% tax credit with a 30% tax rate is more favourable than a 20% credit with a 50% tax rate. So you have to look at both.

In 2008, when our tax rate was higher, we had a 20% tax credit under the SR&ED program. For every dollar that a large company spent on R&D, 18¢ was returned to it through the federal tax credit. In 2012, this year, as a result of the reductions in the corporate tax rate, the return is slightly larger for the reason I mentioned, that is to say that our tax rate has fallen, but our tax credit has remained the same.

Other countries have also taken rigorous action, either by lowering their corporate tax rate or increasing the R&D tax credit. This means that countries have been more rigorous than we have on these two aspects and that they have moved ahead of us.

The 5-percentage-point reduction in the tax credit will result in a repayment of investment in the order of 13.6¢ per dollar invested in R&D. I believe that is the figure that appears in our report. That is less than what it was in 2008, even though the corporate tax rate was higher.

In our opinion, this will take us to 17^th place. As we discussed earlier, a rank is just a rank: 17^th, 13^th or 9^th. However, what is a much greater concern for us, and what we are seeing, is that the countries that will now be ahead of us will not just be industrialized countries; they will increasingly be what we call developing or emerging countries.

[Geoff Regan, Liberal, Halifax West, NS]

On that point, you mentioned the difference between large, medium and small enterprises. What is your argument in favour of assisting large businesses? I believe that many Canadians would say we should help small and medium Canadian enterprises that will help Canada grow and create employment. Why not focus on them?

[Martin Lavoie]

That is a big problem. I believe we have already discussed that here, with other witnesses, in the past.

We need to expand our businesses further. With regard to R&D tax credits, the OECD and other, Canadian observers have said that, in Canada, even if we take into account the SR&ED program tax credit, we are moving from a non-refundable tax credit of 20% to a refundable tax credit of 35%, depending on the size of the business. And it does not take much to cross that line. In fact, we are using the definition of a Canadian-controlled private corporation. I believe that means taxable income in the order of $400,000.

This leads some people, such as Mark Pearson, of PricewaterhouseCoopers, who published a report last year, to say that this is virtually an obstacle to the growth of small businesses. If they suddenly exceed that level in one year, they lose 15% of their tax credits. If they are not in a profitable position, they will no longer have access to the refund.

In the report it published before the summer, the OECD said that you should slightly reduce tax credits for small business and reallocate them to direct support activities, in particular to provide some harmonization of the tax credit offered to all businesses. To answer your question, I would say that the OECD found that it was much more important to provide direct support for small businesses because assistance is often needed in research pre-commercialization or commercialization activities.

The tax credit may be more important for large businesses in that they have much more mobile capital than small businesses. As I said earlier, multinationals have the ability to go to the most favourable places, whereas the smallest businesses may perhaps not have that ability.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lavoie.

Thank you, Mr. Regan. That's all the time we have for that round.

We're going to move to our five-minute round.

We begin with Mr. Lake, for five minutes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

I'm going to continue with this discussion that we've been having, because I find what I'm hearing from the opposite side rather interesting. Some time ago in question period, the finance minister, in referring to the NDP policy on the economy, referred to their concept of a “magic money fairy”. There is absolutely no limit to how much money they would be willing to spend—

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I have a point of order.

[The Chair, Conservative, David Sweet]

Mr. Lake, Ms. LeBlanc has a point of order.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Sure.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I would like to ask my colleague Mr. Lake to refrain from making personalizations. When I ask questions to a witness, I don't make comments about the government; I ask questions about the policies that are in front of us. I would like the member to just ask the question.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Madame LeBlanc.

I remind all members that points of order should be restricted to procedure and not to those things that we debate.

I hope that Mr. Lake, being a kind man, may take your advice, but that really is not a point of order.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, David Sweet]

Please continue, Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Mr. Chair, I forgive her—and I'm not referring just to this meeting but to the last meeting as well.

With respect to the finance minister, I think he might have it wrong: the source of the money wouldn't actually be the magic money fairy, Mr. Lavoie; it would be your members.

To be very clear on this, when you look at the policies we're talking about.... During the last election campaign we had a good conversation about the corporate tax rate, for example. We've lowered the corporate tax rate from 22% to 15%. That has been opposed by both opposition parties every step of the way.

How important is that reduction in the corporate tax rate for your members?

[Martin Lavoie]

It's very important. The corporate income tax rate reduction is important because it increases the after-tax cashflow of businesses. Why is after-tax cashflow important? It's important because it's the main driver of business investment in either knowledge technology, people, or capital. We have been arguing that there would be 200,000 fewer Canadians employed today without these tax reductions.

We also published at the time a report on the economic impact of CIT cuts. We have been quite supportive—I would say across the board among our membership.

Of course, the CIT rate is never the real rate, because there are other tax features that will alter the taxes a company will pay, according to its particular situation. SR and ED is one of them, among others including the depreciation rate used by the CRA on machinery and equipment, taxes on capital that have been eliminated in Canada, and harmonization of sales tax as another one. There are many factors.

But the CIT is definitely the overarching tax rate.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'd also like to speak to another proposal by the opposition parties to go to a 45-day EI program, basically where you work for 45 days and then qualify for EI for the rest of the year. There was a lot of commentary on the cost to businesses if we were to go down that road. Of course, that was a Bloc proposal, completely supported by the NDP and the vast majority of members of the Liberal Party in the last Parliament.

Maybe you could speak to the impact that such a change would make to your members.

[Martin Lavoie]

Again, the employment insurance contributions are in the form of a tax. For companies, it's a spending. It's a tool that you can use to make companies invest more in skills and in the training of their employees.

We've been arguing that you should have a system in which you reward companies' investment in skills training and so on. For example, that's one recommendation we made in our pre-budget submission, to provide a tax credit for employee training that you could apply against your EI premium. That's one example of how you could do it. I think you can use it just as a cost for companies to fund a program. You can also use it as a tool to make companies invest in people, which is one of the three pillars of business investment, with knowledge and capital.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Finally, during the last election campaign there were a lot of promises funded in the NDP platform. On page 4 of their costing document, you could see very clearly that it was a $21.5 billion increase over four years in carbon taxes.

I just want to know what the CME position would be on that. Would your members be in favour of $21.5 billion in carbon taxes? And how would that affect them?

[Martin Lavoie]

I've never asked our members about this particular proposal, but we did participate in the British Columbia tax panel consultation that was going on during the summer. We did express our opposition to the way they view the carbon tax over there. As a general philosophy, we believe that before you get to a carbon tax, we should use all the tools we have and invest in technologies to make companies more carbon efficient, if I can use that term.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

I'm going to ask you one more question. I had a meeting with the CME in Alberta, the Alberta branch. They told me that they're 141,000 workers short in Alberta right now. Can you verify that number, 141,000 workers short, in just the manufacturing sector alone?

[The Chair, Conservative, David Sweet]

The time is up, so if you could just say yes or no on that....

[Martin Lavoie]

Yes.

[The Chair, Conservative, David Sweet]

All right. That's very good.

Mr. Harris, five minutes.

[Dan Harris, NDP, Scarborough Southwest, ON]

Thank you very much, Mr. Chair.

With that line of questioning we seem to have gone right off the rails. We'll see what we can do to bring it back onto an actual study on intellectual property, rather than a partisan “magic money fairy” witch hunt.

I'm going to start with Mr. Davies. I notice in your background, and I can't help but go there, that you worked with Nortel for 16 years. When we talk about Canadian companies going under, and the intellectual property and what happens to it afterwards...there was of course a gigantic sell-off of the intellectual property that Nortel had. It was over $40 billion. It was actually larger than the bricks and mortar sales of their infrastructure.

Do you think Canada got good value for the investments when the intellectual property was sold off?

[Gordon Davies]

I'm not sure I'm prepared to talk about Nortel here.

You're quite right that Nortel had 55,000 patents, and it ended up being the largest valued asset of Nortel through the bankruptcy process. The various assets were auctioned off, and I believe it was $4.5 billion that they received for that.

It certainly does make it clear that intellectual property and patents, in particular, particularly in that sector, are very valuable.