Mr. Chairman, ladies and gentlemen, we appreciate the invitation to be here with you this morning to express our views concerning the forest products business here in Canada.
For those of you who don't know anything about J.D. Irving Limited, our head office is based in Saint John, New Brunswick. We've been in business for about 125 years. We're a fully integrated forest products company, from timberland through to lumber, pulp, paper, tissue, and corrugated medium packaging. We're also in a number of other businesses, as outlined in our presentation. I won't take you through all the details.
Just as these other presenters have said, in the forest products industry we're going through a transition today unlike anything we've ever seen before, certainly in living memory. It's tragic and destructive, and its effects will be long-lasting. There's no doubt about that. It's a major restructuring.
We have the record-high Canadian dollar, as you folks are very much aware. If you're from rural communities or communities where your constituents depend on exporting for their livelihood, you know the pain that the Canadian dollar is causing us, certainly in eastern Canada. It's enormous. The volatility of high energy prices is affecting our transportation costs for bringing our goods to market. In the case of the softwood lumber business, there's a total collapse of the U.S. housing market at the present time.
At the same time, we're dealing with enormous change in competitors in the marketplace. The marketplace is shifting dramatically, and competition for skilled workers is intense. The knowledge-based economy is changing our fundamental world. That's fine; that's life; that's the world and we're prepared to deal with it. We have to deal with it because hiding our heads in the sand is not going to fix this problem.
The good news, at least in our particular case and for most of the Canadian forest products business, is that the markets are increasing globally for the products we're making, whether it's tissue, pulp, paper, or even newsprint. So there is opportunity out there, and there are opportunities for good, solid companies that are dedicated to making a difference.
The federal government has a major role to play in making sure we're there and we survive for the long term in this country. I give the federal government credit for the recent announcement made on carbon sinks. You included forestry in the carbon sink announcement this week, and that's a positive and important note. We hope the details that get finally published on this are extensive enough to be of value, and encourage and recognize good forestry practices that have been going on in some jurisdictions in this country for a very long time. We think that should be recognized.
Extending the capital cost allowance on the depreciation rate was another good move, and I'm going to talk a bit more about the importance of that in a second.
Clearly the federal government can't fix everything. A number of our policies are directly related to provincial regulations, whether it's management of crown land, local power rates, or infrastructure costs. Those are provincial problems or opportunities. But from the federal government's perspective, the ability to encourage capital investment is enormous, and we have to handle that in the proper fashion.
This shouldn't be done through subsidies; it should be done, as far as we're concerned, through the tax system. There are different ways to do it, but if you take some of the examples, in terms of scientific research and experimental development, there are things that are fundamental to our business.
Some of the other presenters talked about new products. That's what we need. We need to be creative and innovative. Finland is a great example. It's a small country, but that's where we go to buy our logging equipment and our paper machine equipment. That's where we go for our technology. We don't have any of it here in Canada, and it's a national disgrace. It's a shame.
We have to use the tax system to encourage that. Today there is SR&ED, but if you're not making any money and you do research, you can't claim it and get a refund. You should automatically get a refund. In the province of New Brunswick today, as I understand it, about 15% is refunded. If we spend a dollar, we get 15% back, whether we have taxable income or not. But we don't have that with the federal government.
Quite frankly, 20% or 15% is pretty measly in terms of not just the forest products business, but research in general in this country. We need to be really constructive, aggressive, and bold about encouraging research. We should take the shackles off. Let's really go at that. Put a cap on it if you want--so many million dollars a year per company, or something--but let's really encourage it. We should be innovative, and we think we have the opportunity to do that.
I'll talk about the available-for-use rules and half-year rules. This comes back to depreciation and the capital cost allowance. I don't want to make this any more complicated than it has to be, but people in this industry have to spend billions of dollars. We spoke about the $350 million or so spent in one year against the $2 billion or more spent in Finland in one year. That's criminal. We have to spend enormous amounts of capital to be up to speed with the new technology. We've got paper machines running this country that were built in the 1920s. That's no good.
In our organization, for the last 15 years or so, we have spent about 125% of our depreciation. A good company needs to spend at least 100% of their depreciation a year to reinvest in capital and technology. The North American average in the forest products business is about 60% at the present time. It's way underfunded.
That was all built around the ready-for-use rules. Today, if we make major capital expenditures in a pulp and paper mill, these are hundreds of millions of dollars, and they sometimes take two and three years to complete. We made this presentation before to the federal government, and we said, look, once you've committed to the project, once you've issued the purchase order, allow your auxiliary depreciation to start. It's a form of financing. We'll take depreciation. We can sell that depreciation to General Electric, if you will, or some other company. It's a great way to finance projects. The capital money gets spent. Yes, the federal government will get less income tax this year, but as soon as the depreciation is used up, there's taxable income available. Yes, it's a deferral in revenue for the federal government, but you get modern technology. You get new plants. You have places for young people to go to work with all the skills we need.
We have to be creative. The capital cost allowance that's been put in place in the last year or two has been a good start, but it's only for a year or two. We're talking capital projects that take two and three years to build. We need some certainty. We need a longer timeframe. We need to get rid of the half-year rule, which means you can only take your depreciation for six months, regardless of when you spent the money, even if you had 12 months ahead of you. We should get rid of the ready-for-use rule, or put that in place, if you will, so we can take the depreciation immediately upon issuing a purchase order.
These are small details, maybe, but they have an enormous impact, and the subtleties shouldn't be lost on anybody.
Earlier I talked about training our workforce. There is big opportunity. This is a big issue. We need to get our workforce trained. Let's find a way to do that in such a fashion that it's productive, whether it's off of our EI payments or through some other method that allows for people to get properly trained. Encourage it. Encourage industries to be proactive.
We also believe, given the technological changes that are going on--which are enormous for the working man and management--that the federal government would be wise to put a tax-free incentive in for the first 5% for anybody making up to $50,000. If the money comes from incentive-based pay, productivity-based pay, treat that as you would medical or pension benefits. Give everybody a little bit of encouragement to not fight it. Let's not fight the change. Let's not fight the system. Let's say, “Folks, step up here. We're going to change a lot of things. You're going to have to be a partner.” Let's encourage those people and give them a little bit of a boost.
There are some other issues around biomass, heat incentives, energy policies. We think at the present time some of the energy policies--which are good--are restricted to using biomass to make electricity. If you just want to burn biomass--and for you folks, that means bark and sawdust and branches from the forest--or you want to make steam and reduce your oil input costs.... It's $110 for oil today--my heavens--so we should be all over this one. Let's create a policy broad enough so we can use biomass not just for creating electricity but for steam and to reduce our costs. It's a big environmental boost. Why not? It's a smart thing to do from the government's perspective.
In conclusion, we'd like to make sure that we encourage you to really think about the tax issues. We don't believe in subsidies.
We'd like you to really think about helping the workforce transition, because it's critical. The government has a role to play through incentives and encouraging a very broad and progressive attitude about it, and helping things like cost competitiveness through better use of biomass and cogeneration. Also, you can help the provincial governments, I think, at least in the case of New Brunswick. We've had enormous cuts in the bureaucracy, to the point that we don't have enough people around to really understand what the competitive issues are and how we're going to deal with them locally.
This is not “one size fits all” in Canada. It's a complex country, a complex business. At least in the case in New Brunswick, somehow we need more support to say, “Folks, for you down here—the province with the biggest percentage of GDP from the forest product business—we're going to give you a hand to try to figure out some of these complex problems”, because they are complex.
Thank you very much, sir.