The Chemistry Industry Association of Canada (CIAC) represents
leading companies engaged in the business of chemistry. Member companies apply
the science of chemistry to create innovative products and services that make
people's lives better, healthier and safer. Responsible Care®, a continuous
improvement program, is a requirement of membership in CIAC. Through Responsible
Care, member companies dedicate themselves, their technology and business
practices to sustainability. This commitment involves working with all
stakeholders in support of innovation for safer products and processes, which
conserve resources and improve people’s lives and the environment, and to
ensure the stewardship and security of chemistry products through their
lifecycles.
Chemistry is an enabling industry and is uniquely positioned within energy and
downstream manufacturing value chains. Our members take energy products (oil
and gas components, electricity) and convert them into value added manufactured
products, adding 5 and 10 times to the initial value of the commodities. When
these products are further upgraded by our many customers such as the auto
parts, packaging, medical devices, textiles and communication equipment
industries, the value added is considerably more. Chemistry is innovative and
values inputs that are often considered as waste or residual products by other
industries such as energy. For example, our members can take off gases from oil
sands upgraders as well as natural gas liquids, which form a very small portion
of natural gas, and convert these relatively minor components of energy into
high value manufactured products. They also convert electricity, minerals and
agricultural bio-mass into chemical products that are used in a wide range of
industrial and consumer applications. A significant service sector has grown up
around and evolved from the chemistry sector which is highly
knowledge-intensive. This service sector, which includes many of our member
companies, depends upon the growth and continued health of the business of
chemistry in Canada. At the public policy level, moving up the value chain
through chemistry means that governments at all levels and Canadians benefit
from the collection of taxes on higher value sales and jobs.
The business of chemistry is a $19 billion a year enterprise for CIAC
industrial chemical manufacturers through which they provide the basis for the
broader $45 billion a year chemical and chemical products sector (this includes
pharmaceuticals, paints and coating, etc). The chemical industry is the fourth
largest in the manufacturing sector, creating close to 80,000 direct jobs.
After information technology (IT), chemistry is the biggest employer, within
the manufacturing sector, of university graduates as a percentage of its total
workforce. In addition, each job in the chemical industry creates 4.8
additional jobs elsewhere in the economy[1].
Chemistry jobs are well-paying and require skilled workers whose knowledge is
often applied to other sectors of the economy. Our member companies provide
solutions to many energy conservation, environmental and health-related
societal issues. For more information and specific examples, please consult our
webpage at: www.canadianchemistry.ca.
CIAC, on behalf of its membership welcomes the opportunity to
provide input into the House of Commons Standing Committee on Finance (the
Committee) as it conducts its 2011-2012 pre-budget consultations. CIAC looks
forward to meeting with the Committee to discuss the Canadian economy and our
industry’s role as an innovative, value-added manufacturer and creator of jobs
and wealth. As a natural resource-based and developed economy, Canada needs to
continually attract investment in value-added resource upgrading to improve
productivity and environmental performance and generate wealth for future generations.
Within the context of creating sustainable jobs, maintaining announced and
scheduled corporate tax reductions, and restoring a balanced budget, we urge
the Committee to adopt the following recommendations:
- Five years
Accelerated Capital Cost Allowance (ACCA) extension - Stimulate new
investment in manufacturing, put new and improved tools into the hands of
Canadian workers and encourage the adoption of new technology to achieve environmental
goals, through one specific investment-enhancing policy measure; a five-year
extension of the ACCA for new machinery and equipment (two-year rapid
write-off).
- Maintain the
Scientific Research and Experimental Development (SR&ED) tax credit program
and streamline its administration
- Focus on a
value-added manufacturing strategy. We need government commitment to
work on rebuilding and growing value-added manufacturing in the country,
creating jobs and restoring wealth creation.
Canada is envied the world over for its rich portfolio of natural
resources, skilled workers and proximity to the world’s largest market. This
portfolio and its elements need to be managed for the long term. This requires
careful consideration of what is needed to continue generating healthy returns,
or in other words, wealth and quality of life for Canadians today and tomorrow.
It is believed by many that manufacturing is declining in economic importance.
This is absolutely false and is a misconception that needs to be addressed if
Canada is to continue to benefit from investment and innovation. Manufacturing
has traditionally been and will continue to be a significant and essential part
of the Canadian economy and wealth creation for generations to come. The manufacturing
sector plays essential roles: It adds value to our natural resources and in
doing so creates employment in all economic sectors including the service and
high-tech sectors. It provides diversity to our economy and helps smooth out
the bumps during commodity swings which are a risk given our continued and
growing dependence on resource exports.
When we focus on extracting and shipping our resources elsewhere to
be upgraded, we lose out on the demand and associated job opportunities. We
become less innovative and productive as a nation. Canada’s resource base has
generated significant industrial clusters such as chemistry based on resource
upgrading. The linkages between industries such as chemistry and Canada’s
natural resource base need to be recognized and supported through policies that
allow for growth. The Committee needs to ask how to keep these industries here
and continue to drive innovation through the value chain and into competitive
advantage. Clearly resource abundance is not enough. We need investment in
upgrading and innovation and the remainder of this submission identifies tax
policy and government leadership as essential elements of a strategy.
Chemistry is a highly capital-intensive business. It is also
global. This means that we must recognize that capital is mobile and global
production is shifting. Facilities in Canada are in constant competition within
their corporate families for investment capital that is allocated worldwide. Therefore,
our focus is on measures which will ensure that Canada attracts a necessary
share of investment to grow and renew its value-added industrial base to
generate jobs and wealth for today and tomorrow. We firmly believe that the
Committee should focus on key policy measures that work to enhance investment
and ensure that Canadian industry is ready and equipped to take on what is
increasingly tougher competition for future investments.
We commend the Committee and the government for extending the ACCA
for a further two years in the last budget. This is an important tax lever to
attract new capital and investment in Canada. However, we believe that the ACCA
and subsequent extensions have not been sufficient in duration to stimulate
enough investment in machinery and equipment (M&E) to raise labour productivity
levels in our sector and across the manufacturing sector. Already our sector is
more productive than its U.S. counterpart but this advantage is
narrowing as the productivity enhancing effects of large investments made in
the early 1990’s taper off. We need more to sustain our advantage and drive
innovation. In particular, an emphasis needs to be made on the upgrading of
energy products (in line with sector growth) to ensure that valuable feedstocks
are available to the chemistry industry so that it can supply its customer
base. The ACCA is an important part of this mix but to attract major new
investments it needs to be in place for the necessary amount of time to be
factored into investment planning decisions that are more often than not made
at the global level with many locations under consideration.
Investment cycles do vary depending on the type of industry but a
period of five years is a minimum. It is important to note that the ACCA
is only available when machinery has been ordered and put in place. This is
because, there is an inherent construction time lag built into the investment
decision process for projects. Large projects have to go through development
phases such as detailed engineering design, construction and major regulatory
reviews which collectively can last several years before the M&E becomes
operational. A typical board of directors will look at the entire time horizon
for a project. If the ACCA is only available at the front end and not when the
machinery is installed, it will not be factored into the decision making
process. Therefore, an eligibility period of less than five years is just too
short to impact investors’ decisions on the large-scale capital intensive
projects that Canada needs.
Our need for an extended ACCA is based on the fundamental view that
services and manufacturing do not compete for the same capital. Service
industries are subject to different regulatory structures, standards and have
different capital/labour ratios. A lower corporate tax rate for all is good but
we must also consider the huge capital requirements of manufacturing industries
and their markets and investment environments which are truly global. We must
also look to the competition and the role of government policies that impact
the opportunities for extracting maximum value from Canada’s natural resources
such as energy. For example, oil sands upgraders that convert bitumen into
synthetic crude oil do not qualify for the temporary ACCA in Canada. Meanwhile,
U.S. refineries are making large scale capital investments to retool to handle
Alberta bitumen as they take advantage of a five-year ACCA that was put in
place in 2007. And that measure has recently been extended a further three
years, maintaining a five-year investment planning horizon. It would seem
therefore that U.S. tax policy is designed to encourage and favour the upgrading
of Canadian natural resources in the U.S.
Another important component of Canada’s tax policy mix is the
SR&ED tax credit program. Research and development (R&D) is important
to value creation in the Canadian economy and our industry plays a significant
role. The manufacturing sector accounts for over 50% of all R&D investments
in Canada, of which 14% is generated by the chemistry industry. The SR&ED
tax incentive program is cited by many member companies as a critical factor in
their decisions to locate R&D facilities in Canada. It yields economic
benefits and is viewed by many other countries as a model for success. Finance
Canada estimates that for every dollar of assistance provided via the SR&ED
tax incentive, there is a net economic gain of 11 cents. We believe that this
return could be even higher if administration of the program was streamlined.
This would bring down costs and provide greater certainty to investors as to
the value of the tax incentive. Businesses need to be confident about what
R&D is eligible; however, at times they find the administration of the
program unpredictable and inconsistent. As a result many companies have to
exclude R&D tax incentives from return on investment (ROI) calculations
because of uncertainty. Other issues such as inconsistent technical
interpretations, increasingly complex requirements for compliance and delays in
claim processing diminish the value and efficiency of the SR&ED tax credit
system. In recommending streamlining of the program, we believe that this
Committee needs to ensure that Revenue Canada does not move forward with any
changes to the program in isolation and prior to completion of the comprehensive
review of federal support to R&D.
Each year CIAC prepares competitiveness scorecards with supporting
texts for Canada as well as the key chemical producing provinces. Federal and provincial scorecard documents can be found on our website.
The scorecards identify the key priority issues for our members and
what needs to be done to address them. Tax policy and measures such as the ACCA
and SR&ED tax credit are key components of a strategy to attract new
investment in value-added manufacturing and resource upgrading but more needs
to be done.
The rapid development of shale gas is providing new opportunities
for petrochemical development in North America and we need to ensure that
Canada gets its share. Complexes such as the one in Sarnia, Ontario are getting
new life and an opportunity for growth as a result of the new feedstock supply
from shale gas. Tax policy can help leverage these new opportunities into
investments but government also needs to have strategies and policies to
develop value-added resource upgrading complexes. We need more timely regulatory
policies and policy alignment.
That is why we believe that there needs to be a government
commitment to value-added manufacturing in Canada. Canada needs to develop a
value-added manufacturing strategy. Canada needs a realistic assessment of the
future of manufacturing and what government can do and what role industry must
play. The Alberta Competitiveness Act and the Alberta Competitiveness Initiatives associated with that legislation is one example and one way to proceed. Reclaiming
manufacturing for Canada is a worthy partnership to embark on.
New sources of feedstock such as shale gas promise a once in a
generation opportunity for growth. We need to seize this with new investment to
create wealth and jobs and strengthen and grow our manufacturing base. As
mentioned earlier, chemistry is what we call a keystone industry because we are
part of so many different value chains in the economy. We transfer knowledge
and deliver value and solutions through products and services. These are
provided from and to other sectors of the economy including oil and gas
extraction; petroleum refining; mining; forest products; metals; plastics;
motor vehicles; telecommunications; computer and electronic products;
electrical equipment; pharmaceuticals and food. Therefore when we grow, the benefits
are spread throughout the economy.
Our goal as an industry is to become the North American leader in
value-added resource upgrading. We need more innovation and upgrading. That is
why we are recommending measures to encourage investment such as the five-year
ACCA and improvements to the SR&ED tax credit program that will provide an
upfront incentive to invest in Canada and add value to our natural resource
base here rather than elsewhere.
It is appropriate to ask what the added cost of a five year ACCA
will be. Since this measure has now been in place several years and been
extended by a year or two in several Budgets, the incremental cost of a further
five year extension is relatively small. Estimates by the Canadian
Manufacturers and Exporters (CME), using investment figures from Finance
Canada, suggest costs in the order of $594 million over the next five years. This
estimate does not credit any incremental investments that will result from the
five year extension. CIAC urges the government to measure current machinery and
equipment investments (average over the past three years) and compare it to the
next five years to establish the real and incremental net benefit/cost to
Canada. On top of this will be the added co-benefits of improved energy efficiency,
reduced environmental footprint and increased productivity.