FINA Committee Report
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In Chapters Two and Three, the focus is two important aspects of competitiveness: the competitiveness of our people and the competitiveness of the communities in which our people live and our businesses operate. While the people and communities of a country are important influences on the extent to which countries can compete successfully in today’s increasingly global and competitive environment, the role played by businesses — and the extent to which they contribute to competitiveness — must also be considered.
In a capitalistic economy such as ours, economic growth and a rising standard of living depend on the ability of businesses to transform — effectively and efficiently — scarce resources into the goods and services desired by consumers. If Canadians are to continue to have a high standard of living, a good quality of life and the government programs they desire, the competitiveness of Canadian businesses must — at a minimum — be maintained, and ideally enhanced.
As noted in Chapter One, the World Economic Forum’s Global Competitiveness Report 2006-2007 indicated that Canada’s overall position has declined since 2005. On the World Economic Forum’s Business Competitiveness Index in particular, Canada’s ranking fell from 13th in 2005 to 15th in 2006. This relatively low ranking, when considered alongside the growing importance of emerging economies and increased international competition, highlights the need for Canadian businesses to be as competitive as possible. Some believe that businesses should move away from competing on the basis of endowments or comparative advantages — that is, low-cost labour or natural resources — to competing on the basis of superior or distinctive products and processes. Certainly, Canadian businesses should consider this shift in emphasis.
In the same way that governments have an important role to play in ensuring that our people and our communities are competitive, they can help to ensure a business environment that facilitates competitiveness. They should both provide the right incentives and remove any barriers that impede the ability of businesses to be competitive. In particular, governments should provide businesses with a competitive taxation system, programs and other measures that promote research and innovation, and a regulatory environment that is not burdensome.
Corporate taxation affects the after-tax rate of return on an investment, and differences among countries in the nature and level of corporate taxation can influence the location of new business investment as well as the incentive to invest. As a result, many countries have reduced their corporate taxes in order to attract foreign direct investment that is increasingly mobile.
1. Effective Tax Rate on Capital
Witnesses told the Committee that corporate taxation in Canada must be competitive with other countries for the benefit of domestic businesses and in order to attract foreign direct investment. A number of witnesses — including the Business Tax Reform Coalition, the Canadian Association of Petroleum Producers, the Canadian Bankers Association, the Canadian Chemical Producers’ Association, Canadian Manufacturers & Exporters and Caisses Desjardins Group — referred to a C.D. Howe Institute report that ranked 36 countries according to their effective tax rate on capital, which is the amount of corporate income and other capital-related taxes paid by a business as a percentage of the pre-tax rate of return on capital. According to the C.D. Howe Institute’s The 2006 Tax Competitiveness Report: Proposals for Pro-Growth Tax Reform, in 2006 Canada has the sixth highest effective tax rate on capital among 36 industrial and leading developing countries, as shown in Figure 13.
Figure 13: Effective Tax Rate on Capital, Selected Industrial and Leading Developing Countries, 2006 (percentage)
Source: C.D. Howe Institute, The 2006 Tax Competitiveness Report: Proposals for Pro-Growth Tax Reform, September 2006.
While our ranking has improved since 2005, when Canada had the second highest effective tax rate on capital, many witnesses argued that the federal government should take action in order to provide a more competitive fiscal framework for businesses operating in Canada. Witnesses told the Committee that the effective tax rate on capital has important implications for our country, especially since Canada is an open economy that relies heavily on international trade and global capital markets.
Caisses Desjardins Group noted that high effective tax rates on capital limit the number of economically viable investments, since higher rates of return are needed in order for a project to be undertaken. Less investment in new equipment and technology may, in turn, result in lower productivity growth. Furthermore, the Canadian tax base may be eroded as corporations shift their capital and profits from jurisdictions with relatively high taxes to those with relatively low taxes.
Other witnesses, including the Canadian Chamber of Commerce, argued that high effective tax rates can reduce the level of foreign direct investment (FDI) that a country is able to attract, and may limit the job creation often associated with FDI. According to Canadian Manufacturers & Exporters, Canada accounted for approximately 25% of all foreign direct investment coming into North America in 1990; today, this share has fallen to less than 10%. Such witnesses as the Business Tax Reform Coalition told the Committee that Canada is a net exporter of FDI. As illustrated in Figure 14, since 2001, Canadians have invested more abroad than foreigners have in Canada.
Figure 14: Net Flow of Foreign Direct Investment in Canada and Canadian Direct Investment Abroad, 1995 to 2005 (millions of dollars)
Source: Statistics Canada Table 376-0015.
The Canadian Chemical Producers’ Association commented that Canada must restore its attractiveness to foreign investors. The Committee was told by the Canadian Chemical Producers’ Association, the Canadian Institute of Chartered Accountants and the Saskatchewan Chamber of Commerce that Canada could follow the example of Ireland, which significantly reduced its corporate taxes and, as a consequence, attracted relatively large amounts of FDI; the result was high rates of economic growth. The Manitoba Chambers of Commerce noted that Ireland also relied on what has been described as a genuine and enlightened partnership among government, business and labour.
Not all witnesses agreed, however, that lower corporate tax rates necessarily result in increased competitiveness. The Canadian Centre for Policy Alternatives told the Committee that a number of non-fiscal factors — such as the availability of a skilled workforce, proximity to markets and transportation availability — also influence decisions about where to locate, and that Canada already performs relatively well in terms of international competitiveness.
The Canadian Centre for Policy Alternatives, and such other witnesses as the Confédération des syndicats nationaux and the Canadian Labour Congress, also argued that corporate tax reductions do not necessarily result in enhanced business investment. As an example, the Committee was told that the recent corporate tax reductions in Canada did not lead to higher business capital investment. As Figure 15 illustrates, corporate tax reductions since 1999 coincide with record levels of corporate profits and declining business investment in buildings, machinery and equipment as a share of Gross Domestic Product (GDP) between 1999 and 2005.
Figure 15: Corporate Profits and Investment in Machinery & Equipment as a Share of Gross Domestic Product, Canada, 1999-2005
Source: Statistics Canada and computations by the Library of Parliament.
The Canadian Labour Congress advocated targeted incentives in the form of direct grants or temporary investment tax credits to encourage new investments, particularly in the manufacturing sector, while the United Steelworkers suggested that the federal government focus on tax measures which favour those industries that provide well-paid jobs and that are facing international competition, rather than on broadly based corporate tax reductions. Witnesses also noted that corporate tax reductions erode the federal tax base, which affects the extent to which the federal government is able to invest in programs that enhance competitiveness.
A number of witnesses, such as First Call: BC Child and Youth Advocacy Coalition and the Social Planning Council of Winnipeg, noted that Scandinavian countries attain high rankings in the World Economic Forum’s Global Competitiveness Report even though, overall, they have relatively high levels of taxation and spending. These countries, however, distinguish between capital income and non-capital income for taxation purposes, and tax capital income at a lower rate.
A number of witnesses advocated further reductions in the corporate income tax rate as well as in the tax rate applied to qualifying small business income, believing that such changes would enhance Canada’s competitiveness. Some witnesses told the Committee that they support the reductions in the general corporate income tax rate announced in May 2006, but many — including the Canadian Council of Chief Executives, the Canadian Federation of Independent Business, the Canadian Electricity Association, the Canadian Hardware & Housewares Manufacturers Association, the Canadian Retail Building Supply Council, the Canadian Printing Industries Association, the Greater Kitchener Waterloo Chamber of Commerce, the Canadian Bankers Association, the Toronto Board of Trade and the Toronto Financial Services Alliance — requested that the corporate income tax rate reduction be expedited.
Such witnesses as the British Columbia Chamber of Commerce, the Canadian Plastics Industry Association, the Canadian Vehicle Manufacturers’ Association and Canadian Manufacturers & Exporters requested further reductions in the corporate income tax rate, with suggestions ranging from a rate of 15% to a rate of 17%. A number of witnesses also urged the immediate elimination of the corporate surtax.
The Canadian Labour Congress indicated its opposition to the corporate income tax reductions announced in May 2006, suggesting that many of the benefits of these changes would accrue to the shareholders and executives of certain sectors rather than support new investments in the industries that are most in need of assistance.
The proposed reduction in the small business income tax rate was also mentioned by witnesses. The Canadian Construction Association and the St. John’s Board of Trade, among others, argued for further reductions in the small business income tax rate. The Canadian Automobile Dealers Association told the Committee that the current small business income tax rate, which is phased out on a straight-line basis for companies having between $10 million and $15 million of taxable capital employed in Canada, is unfair to capital-intensive industries. Consequently, a proposal for a reduced income tax rate for all privately owned businesses with revenue less than $50 million was presented to the Committee.
With the $300,000 limit on qualified business income that can be taxed at the small business tax rate proposed to increase to $400,000 as of 1 January 2007, the Certified Management Accountants of Canada advocated an additional increase of $100,000 in the limit on qualified business income that can be taxed at that rate.
A number of witnesses, including the Canadian Bankers Association, told the Committee that the federal government should encourage the elimination of provincial capital taxes as part of federal-provincial negotiations. Furthermore, the Canadian Life and Health Insurance Association, the Toronto Financial Services Alliance, the Canadian Council of Chief Executives and the Canadian Bankers Association urged the government to reduce or eliminate the capital tax on financial institutions, which was originally introduced in 1986 as a temporary measure to help reduce the federal budgetary deficit.
4. Capital Cost Allowance Rates
Witnesses expressed a variety of concerns about the federal government’s capital cost allowance (CCA) rate structure, which allows the cost of business-related assets to be deducted from income over a prescribed number of years. Canadian legislation currently sets out more than 40 classes of assets and their associated CCA rates, which are expressed in percentage terms.
According to such witnesses as the Canadian Chamber of Commerce, if corporations are permitted to write off an investment more quickly, they are more likely to invest in productivity-enhancing assets. Witnesses argued that it is essential that CCA rates reflect the true economic life of assets if Canada’s businesses are to remain competitive.
Nevertheless, some witnesses also indicated to the Committee that, in certain instances, a CCA rate that reflects the economic life of the asset is inadequate: some assets should be depreciated at an accelerated rate in order to stimulate investment. Many witnesses focused, in particular, on the CCA rates that they believe should apply to investments in productive technologies, which have significant implications for the productivity and competitiveness of Canadian businesses.
The Business Tax Reform Coalition and the Canadian Chemical Producers’ Association argued for a straight-line two-year CCA rate for productive technologies. The Canadian Federation of Independent Business proposed that businesses be allowed to expense (that is, a 100% CCA rate) up to $100,000 in technology costs in the year of purchase.
A number of witnesses, including the Canadian Council of Chief Executives, the Business Tax Reform Coalition and Canadian Manufacturers & Exporters, highlighted the need for accelerated CCA rates for the manufacturing sector in order to encourage productivity-enhancing investments in the sector, which is facing rising input costs, a relatively high Canadian dollar and intense competition from emerging markets. The Canadian Plastics Industry Association, for example, advocated a two-year CCA rate for investments in new manufacturing capital expenditures, while the Canadian Vehicle Manufacturers’ Association and J.D. Irving, Limited supported a 50% straight-line CCA rate for manufacturing and processing equipment.
Witnesses also commented on the available-for-use rule in accordance with which assets can be depreciated for tax purposes only when they become available for use and not necessarily in the year in which they are purchased. Canadian Manufacturers & Exporters and J.D. Irving, Limited, among others, argued that eliminating this rule would encourage investment in large capital projects that require significant expenditures over prolonged periods but that do not generate income in the short term. Furthermore, J.D. Irving, Limited also stated that the half-year rule — which is an Income Tax Act provision that limits, to one-half, the normal CCA rate that can generally be claimed during the first year that an asset is acquired or first used — should be eliminated in order to reduce risk and improve the return on large capital investments.
A number of witnesses proposed enhanced CCA rates for environmentally friendly investments. The Union des producteurs agricoles argued that investments in farm assets that would have beneficial environmental impacts should have a CCA rate of 40%. The Canadian Trucking Alliance advocated the establishment of accelerated CCA rates for the acquisition of near-zero emission trucks, with a sunset clause to encourage the rapid introduction of the technology. The Forest Products Association of Canada suggested to the Committee that accelerated CCA rates to encourage investment in biomass cogeneration technologies and investment targeted at emissions reductions be implemented.
Moreover, the Canadian Electricity Association argued that “Smart Meters” — which allow customers to see, and react to, the higher prices typically incurred during peak hours of consumption — and related Advanced Metering Infrastructure (AMI) equipment should have a CCA rate of 45% for communication software, firmware and related information technology components, and a CCA rate of 12% for hardware. A CCA rate of 12% for new electricity transmission and distribution assets was also proposed. Furthermore, Direct Energy suggested a new CCA class for investment in demand-side management systems which help retail customers reduce their energy consumption.
Such witnesses as the Pembina Institute and the Green Budget Coalition advocated a reduction in the 100% CCA rate that is currently available to oil sands projects so that it would be consistent with the CCA rate for conventional oil and gas projects. The accelerated CCA rate for oil sands projects was established in order to encourage capital investment at a time when oil prices were low; since technological knowledge related to the oil sands has increased and the current high price of oil provides an incentive to invest in oil sands projects, the Committee was told that the federal government should remove this accelerated CCA rate. The Pembina Institute proposed that the federal fiscal savings resulting from the elimination of the accelerated CCA rate be allocated to investment in renewable energy and energy efficiency.
The Canadian Printing Industries Association argued that CCA rates for the printing industry should be adjusted to enable businesses to depreciate equipment at a rate similar to their U.S. competitors. The Railway Association of Canada and the Canadian Association of Railway Suppliers also informed the Committee that Canadian railways and leasing companies are at a relative disadvantage when compared to their U.S. counterparts.
The Credit Union Central of Canada told the Committee that, in order to align better the tax treatment of revenues from the leasing of grain bins and the CCA rate that can be claimed on the purchase of them, grain bins should be included in at least Class 10, which has a CCA rate of 30%. The Canada West Equipment Dealers Association proposed an acceleration in the CCA rate to 40% for all investments in new agricultural equipment, and the Association of Equipment Manufacturers also argued for an accelerated CCA schedule for the agricultural sector — as well as for the forestry, mining, construction and utility sectors — to allow full depreciation over three years for investment in new equipment.
The Canadian Federation of Independent Business suggested that businesses be allowed to expense the first $75,000 in annual business capital costs, while the Retail Council of Canada proposed that retailers be permitted to write off fully the investment they make in computers, peripheral equipment and software in the year in which they are purchased. La Chambre de commerce de Québec proposed that small and medium-sized enterprises with fewer than 100 employees be able to deduct 100% of their investment in equipment, machinery and production-related computer equipment.
Finally, the Canadian Gas Association recommended an increase in the CCA rate for natural gas distribution pipelines to 8%, and the Canadian Home Builders’ Association argued for the deductibility of land carrying costs (that is, the cost of maintaining inventories, such as interest payments) as expenses.
Excise taxes and duties include the Goods and Services Tax (GST), energy taxes (such as the excise tax on gasoline), customs import duties, and other excise taxes and duties (such as the Air Travellers Security Charge). Witnesses presented proposals to the Committee in a number of these areas.
Such witnesses as the Canadian Federation of Independent Business, the Canadian Vintners Association, the Nova Scotia Home Builders Association, the Canadian Restaurant and Foodservices Association and the Retail Council of Canada supported the proposed reduction in the GST rate to 5%, but some witnesses noted that the federal fiscal cost of this measure may affect other fiscal decisions taken by the government. The Canadian Hardware & Housewares Manufacturers Association suggested that the proposed reduction in the GST rate not occur at the expense of other tax reductions, such as changes to personal income taxes.
A number of witnesses commented that the recent rise in oil prices, coupled with the federal excise tax on fuel, has hampered the competitiveness of their industry. For example, Air Canada, WestJet, the Air Transport Association of Canada, the International Air Transport Association, the Air Transport Association of America, and the Tourism Industry Association of the Yukon advocated the removal of the excise tax on aviation fuel. The Canadian Federation of Independent Business argued for a 1.5 cents per litre reduction in the excise tax on gasoline as well as a change that would allow the GST to be charged only on the basic price of oil and not on the federal excise tax and provincial tax.
The 2006 federal budget increased the excise duties on tobacco and alcohol in order to leave the after-tax retail price of such goods unchanged as a consequence of the one percentage point reduction in the GST rate. The Brewers Association of Canada noted its concern with the increase in the excise duties on tobacco and alcohol that occurred when the GST rate was reduced to 6%. While the duties were increased to keep the after-tax retail price of these goods unchanged, the consequences have been pressure on an industry experiencing stagnant growth and unfair treatment of the lower-priced value product segments of the tobacco and alcohol markets, since the excise tax is imposed on the basis of volume rather than price.
Furthermore, Spirits Canada/Association of Canadian Distillers told the Committee that the current federal excise duty structure undermines the competitiveness of the Canadian beverage alcohol market because of non-standardized units of measurement and rate complexity, among other things. Consequently, the imposition of beverage alcohol excise duties based on the level of alcohol, rather than on the manufacturing process, was advocated. Moreover, the Canadian Vintners Association urged a reduction in the federal excise duty on wine to 56.2 cents per litre.
The Canadian Cancer Society and the Chronic Disease Prevention Alliance of Canada suggested that federal tobacco taxes increase by, for example, $10 for each carton of 200 cigarettes and that similar levels of taxation be imposed on roll-your-own tobacco and tobacco sticks as on cigarettes.
The Canadian Real Estate Association and the Canadian Home Builders' Association informed the Committee that the price thresholds associated with the GST rebate on the sale of new homes have not been adjusted since the GST was introduced in 1991. Consequently, it was suggested that the price thresholds be indexed to inflation. The Canadian Real Estate Association also argued that the requirements which must be met in order to be considered a “substantial renovation” under the Excise Tax Act should be amended to include renovations for the creation of secondary suites.
The Committee was informed, by the Canadian Automobile Dealers Association, that if an automobile dealer purchases a used car from an individual, the GST is applied; however, if the individual sells the car to another individual, no GST is applied. To correct this perceived inequity, we were presented with three options: eliminate the GST on the sale of all used vehicles; apply the GST to the sale of all used vehicles; or restore the system of a notional input tax credit to dealers.
A number of witnesses, such as the Manitoba Hotel Association, the Ontario Tourism Council and the Tourism Industry Association of the Yukon, commented on the federal announcement that the Goods and Services Tax/Harmonized Sales Tax Visitor Rebate Program would be eliminated. The federal government was urged to reverse its decision because of the anticipated negative consequences for visitors to Canada.
The Canadian Health Food Association and the Direct Sellers Association suggested that natural health products not have the GST applied to them. The Canadian Health Food Association told the Committee that the benefit of this measure would exceed the loss in tax revenues once savings in health care costs are considered. Regarding natural health products, the need for the Natural Health Products Directorate of Health Canada to receive adequate and sustained funding to fulfill its mandate was also identified.
The Canadian Electricity Association informed the Committee that wind energy project developers are required to pay the GST on land-lease payments to GST-registered landowners, which is believed to be inequitable when compared to the treatment of developers of other natural resources. A proposed amendment to the Excise Tax Act to provide GST relief for wind energy project developers on payments for rights to use wind resources was presented to us.
The Toronto District School Board argued that the GST rebate for school boards should be increased to 100%, which would provide financial assistance to schools and reduce the administrative burden associated with the current system of monthly rebates. It was also argued that the issue is one of fairness since municipalities, among others, already receive a 100% rebate for the GST paid on their purchases. The Face of Poverty Consultation proposed the removal of the GST on the Nova Scotia portion of the Harmonized Sales Tax (HST) on family necessities, such as children’s clothing and basic utilities.
The Committee was told, by the Canadian Association of Research Libraries, that university libraries receive a full rebate on the GST paid on printed books as well as on subscriptions to magazines and periodicals containing advertising under a certain threshold. Since much scholarly research material is now delivered in electronic format, it was suggested that section 259.1 of the Excise Tax Act be amended to permit scholarly materials in electronic format to qualify for the full rebate.
The Direct Sellers Association proposed that the Direct Sellers Mechanism, which allows the pre-collection of GST/HST by the direct selling companies and hence removes the need to be GST/HST registered, also be available to independent sales contractors who operate on a sales agent basis.
The Association of Canadian Airport Duty-Free Operators informed the Committee that the duty-free industry has faced a number of challenges in recent years, including the war on Iraq and the forthcoming documentary requirements to enter the U.S. associated with the Western Hemisphere Travel Initiative. Consequently, an increase in the 24- and 48-hour duty-free allowance to $250 and $500 respectively, as well as the introduction of a dual quantitative limit on spirit and wine/beer, were advocated.
A number of witnesses, including the Hotel Association of Canada and the Tourism Industry Association of Canada, urged a reduction in, or elimination of, the Air Travellers Security Charge. According to witnesses, this charge has generated more revenue for the federal government than has been spent on the delivery of airport security services.
Finally, the Indian Taxation Advisory Board argued for measures that would increase First Nations’ revenues, such as expanding the First Nations GST to more reserves. The Makivik Corporation and Kativik Regional Government suggested that the GST credit consider the high cost of living for residents of northern Canada compared to other Canadians.
6. Capital Gains and Dividend Taxation
The Canadian Federation of Independent Business informed the Committee that the limit on the lifetime capital gains exemption, which is $500,000, has not changed since 1985 and has lost value in real terms. Consequently, an increase in the limit to $1 million in increments of $100,000 over five years was advocated.
Moreover, a number of witnesses, including the Canadian Automobile Dealers Association, La Chambre de commerce de Québec and l’Association des Propriétaires de Québec Inc., argued that a business owner should be permitted to defer capital gains taxes associated with the transfer of their business to their child, which is already permitted for farmers under certain conditions. The Canadian Automobile Dealers Association also argued that such business transfers should be eligible for a lifetime capital gains exemption of $5 million.
The Union des producteurs agricoles also spoke about the capital gains deduction in the context of the transfer of farm businesses that remain in operation, and recommended that the limit on this capital gains deduction be raised to $1 million.
A number of witnesses, including the Canadian Home Builders’ Association, the Vancouver Board of Trade and the Investment Funds Institute of Canada, argued that an investor should be able to defer capital gains taxes on the sale of an asset provided the proceeds are reinvested within a limited timeframe. The Toronto Real Estate Board and the Real Property Association of Canada made a similar recommendation for investment properties in particular. Moreover, Canada's Venture Capital & Private Equity Association proposed that Canadian shareholders be able to defer capital gains when cross-border mergers occur.
Some witnesses, including the Canadian Association of Petroleum Producers and the Canadian Bankers Association, supported the reduction in the tax rate applied to dividends of large corporations, and urged the federal government to take a leadership role in encouraging the provinces to introduce similar measures.
Finally, a number of witnesses expressed concern with the income trust structure. The National Pensioners and Senior Citizens Federation, for example, argued that the distributions of income trusts are inaccurately measured, and urged the federal government to ensure that the distribution of capital is clearly differentiated from the distribution of income.
Some witnesses, including the Canadian Chemical Producers’ Association, informed the Committee that Canada is now a net exporter of foreign direct investment, and that capital investment per worker in Canada is lower than in the United States, China and a number of other Organisation for Economic Co-operation and Development countries.
In terms of attracting foreign investment into Canada, witnesses highlighted the importance of a competitive tax system and spoke about withholding taxes imposed on investment income flowing to foreign resident investors. A C.D. Howe Institute study that suggested a strong link between increased foreign direct investment and the elimination of withholding taxes on interest and dividends for both related and unrelated parties was mentioned by witnesses. The Institute’s study concluded that the elimination of withholding taxes on interest and dividends would result in increased capital investment in Canada of approximately $28 billion, and an increase in the income of Canadians of more than $7.5 billion annually.
The Tax Executives Institute, Inc. advocated the expeditious negotiation and implementation of a provision in the Income Tax Convention with the United States that would eliminate withholding taxes on interest and dividends for both related and unrelated parties. The Committee heard that the United States has recently negotiated similar agreements with other trading partners, including the United Kingdom, Japan, Mexico, Australia and the Netherlands.
Other witnesses — including the Canadian Chamber of Commerce, the Manitoba Chambers of Commerce, the Canadian Institute of Chartered Accountants and the Canadian Bankers Association — presented a somewhat narrower proposal, and maintained that withholding taxes on interest payments between investors in Canada and the United States should be eliminated through treaty negotiations or that, at a minimum, withholding taxes imposed by Canada on arm’s-length interest payments should be completely eliminated through changes to the Income Tax Act.
The Canadian Association of Mutual Insurance Companies told the Committee that foreign-owned property and casualty insurance companies doing business in Canada often benefit from tax provisions in other countries that allow them to set aside tax-free reserves to meet their obligations in cases of catastrophes. Consequently, it was suggested that catastrophe reserves be established in Canada, free from income tax and similar to the catastrophe reserves found in many European countries, in order to provide the Canadian mutual insurance industry with the opportunity to compete with foreign competitors on a level playing field.
The Direct Sellers Association argued that such programs as Employment Insurance should be changed in order to minimize the clawback on benefits received when income increases, a measure that the Committee was told would encourage people who benefit from such programs to earn extra income by establishing their own direct selling business.
Canada's Venture Capital & Private Equity Association informed the Committee that the limited liability corporation structure is the most common form of corporate organization among U.S.-based private investment firms but that its flow-through character has not been recognized by Canadian tax authorities; consequently, many U.S. investors avoid the Canadian market. It was recommended that Canadian-based fund managers be permitted to file the necessary tax return on behalf of all of their foreign investors collectively, where no taxes are payable, because many very large pools of international capital are prohibited from investing in jurisdictions which impose a requirement to file a tax return.
The Horse Racing Alliance of Canada told the Committee that the Canadian horse racing industry is unfairly treated by the Income Tax Act, which weakens its competitive position with respect to other Canadian sport and entertainment industries as well as its U.S. counterpart. While losses that are incurred while operating a business generally are fully deductible against other sources of income if it can be shown that there is a reasonable expectation that the business will generate a profit, section 31 of the Income Tax Act restricts the ability of part-time farmers — that is, taxpayers for whom the income derived from their farming business, including the maintaining of horses for racing, does not constitute their main source of income — to deduct all of their losses against other income. With the restriction imposed by section 31, race horse breeders can deduct a maximum loss of $8,750 against income from other sources in any given year. It was suggested that the Income Tax Act be amended to remove taxpayers engaged in the breeding and maintaining of horses for racing from the application of section 31.
Regarding the deductibility of losses, the Union des producteurs agricoles told the Committee that private forest operators are also adversely affected by section 31 of the Income Tax Act. While private forest operators harvest the wood from their forests on a cyclical basis that may be as long as 50 or 60 years in order to follow sustainable management practices, they incur regular expenses for the maintenance of the forest. The differential timing of income and expenses results in a situation where, for many years, business income is insufficient to deduct expenses for tax purposes. Because these operators are considered to be part-time farmers for the purpose of section 31 of the Income Tax Act, they are restricted in the amount of losses that they can deduct against other sources of income and, since they have high income in a small number of taxation years, there is a significant increase in their tax burden for those years. Since this situation discourages sustainable forest operation, it was recommended that the federal government consider allowing private forest operators to average taxable income over a period of 10 to 20 years and to be exempted from the application of section 31.
The Canadian Construction Association recommend that driving a company vehicle to and from a personal residence not be considered to be a taxable benefit, provided certain conditions are met.
Finally, witnesses commented on what is, in essence, inequitable treatment regarding taxes owed by taxfilers to the Canada Revenue Agency and rebates owed by the Canada Revenue Agency to taxfilers. According to the Canadian Federation of Independent Business and the Canadian Chamber of Commerce, equality should exist and the interest rate that is applied should be the same in each case.
The Committee feels that the business environment — in terms of taxation, access to capital, regulation, incentives to undertake research and development as well as to innovate and train employees, and trade agreements and market access — must encourage businesses to make decisions that will enhance their prosperity, the productivity of their workers and the productivity growth of the nation. Prosperous businesses, productive workers and Canadian productivity growth are — we believe — key contributors to the nation’s competitiveness.
From this perspective, the Committee believes that the federal government must act to encourage business capital investment, to assist employers in training their employees, to support industry and negotiate secure market access during international trade negotiations, to ensure that businesses are able to access the capital they need to grow, prosper and be competitive, and to provide incentives for research, development and innovation. Once actions are taken, we feel that ongoing review of all federal measures in each area is needed to ensure that Canada is seen to be — and is — competitive with the rest of the world.
The Committee believes that, at a minimum, Canada’s capital cost allowance rates must meet three criteria: similar asset classes are treated equitably; Canadian rates are similar to the rates for comparable asset classes in the United States and other countries; and Canadian rates at least reflect the useful life of these assets. We also feel that regular review of these rates is needed in order to ensure that they continue to meet the three criteria identified.
The Committee’s view, as indicated above, is that these criteria are a minimum standard that should be met. If our nation is committed to the goal of competitiveness, then we believe that a comprehensive review of capital cost allowance rates is needed, and that the current approach of examining the rates on a case-by-case basis is inadequate. We also feel that, in the case of assets that have environmental benefits, setting the rate at the useful life of the asset is not sufficient: an accelerated rate is needed. From this perspective, and bearing in mind the Minister of Finance’s comments to us on 23 November 2006 about CCA rates that reflect the useful life of assets, the Committee recommends that:
RECOMMENDATION 24
The federal government, by 30 June 2007, complete a comprehensive review of capital cost allowance rates in Canada with a view to determining the extent to which similar asset classes are treated equitably, Canadian rates are comparable with those in other countries, and rates reflect the useful life of assets. The government should also review the feasibility of eliminating the available-for-use and half-year rules, and should study the feasibility of reducing the capital cost allowance rate for oil sands projects to 25%.
Following this review, the government should, no later than 31 October 2007, indicate whether accelerated capital cost allowance rates would, in general, enhance productivity. If the review concludes that accelerated rates would enhance productivity, changes to capital cost allowance rates should be made.
As well, the government should, no later than 31 October 2007, permit environmentally friendly assets, and rail equipment that reduces noise pollution and vibration as well as related nuisances, to be reduced at a rate faster than their useful life. The accelerated rate should be available on a time-limited basis in order to encourage early adoption.
Thereafter, capital cost allowance rates should be reviewed at least once every two years.
In Chapter Two, the Committee highlighted the importance of high-quality health care and a well-educated population for a high quality of life for Canadians and for a competitive nation. At present, the lack of a full GST rebate for universities, colleges, school boards and hospitals, as well as for scholarly research materials, has the potential to undermine the quality of education and health care provided to Canadians. Consequently, the Committee recommends that:
RECOMMENDATION 25
The federal government amend the Excise Tax Act in order to ensure a full rebate on the Goods and Services Tax paid by universities, colleges, school boards and hospitals and on behalf of scholarly research materials.
The Committee believes that the proposed reduction in the Goods and Services Tax rate to 5% should not occur. We support the view of the Organisation for Economic Co-operation and Development, as indicated in its Economic Survey of Canada, 2006, that value-added taxes raise revenue more efficiently than personal or corporate income taxes, since the base is broader and the work, saving and investment disincentive effects are lower. As well, we feel that the fiscal cost of such a measure would unduly restrict other decisions that could be taken by the federal government. From this perspective, and bearing in mind the comments made to us by the Minister of Finance on 23 November 2006 about the proposed reduction in the GST rate to 5%, the Committee recommends that:
RECOMMENDATION 26
The federal government not amend the Excise Tax Act in order to reduce the Goods and Services Tax rate to 5%.
Moreover, the Committee feels that fairness should be a hallmark of our taxation system. In our view, fairness in the system includes fairness when taxes are payable by taxfilers and when rebates are payable by the Canada Revenue Agency. In particular, we believe that the interest rate that is applied to late taxfilers and to taxfilers that incorrectly calculate their taxes owed should be the same as the rate that is applied to the Canada Revenue Agency when it is late in providing a rebate to a taxfiler or when it provides a rebate that is lower than the amount to which the taxfiler is entitled. From this perspective, the Committee recommends that:
RECOMMENDATION 27
The federal government amend relevant legislation/regulations in order to ensure that the interest rate applied is the same in situations where taxes are owed by taxfilers and rebates are owed by the Canada Revenue Agency.
Finally, while the Committee does not make any recommendations at this time regarding the range of other business tax measures brought to our attention, we urge the federal government to review the detailed — and, in some cases, technical — presentations made to us to determine whether the changes recommended by witnesses have merit and should be implemented.
INNOVATION, RESEARCH AND ENTREPRENEURIAL ACTIVITY
In a knowledge-based economy, productivity and competitiveness are a function of the rate of change and the amount of knowledge, training and education vested in workers, which in turn form the basis for technological advancement. Ensuring that the right incentives and the right environment exist can increase a country’s ability to innovate, and thereby improve its level of productivity growth and competitiveness.
Although research and development (R&D) is undertaken by both the private and the public sectors, technological change is — in part — the result of actions taken by private businesses to earn profits. Technology may, however, be intangible, and may not be specifically attached to a physical location or to a particular product or person. Furthermore, some technology can be reproduced at a very low or virtually no cost.
For many innovative ideas, it is not possible to use laws or other means to preclude others from using them. Thus, in general, private businesses investing in R&D cannot capture all of the benefits of a new technology developed by them. The part of a technology that is not captured exclusively by the developer becomes public knowledge.
As a consequence of this inability to capture totally the full benefits of their R&D and technological innovation, economists believe that the private sector will generally invest in R&D to a lower extent than is socially optimal and that the role of governments has generally been to provide tax incentives and/or subsidies to encourage a level of spending on private R&D that is more socially desirable.
1. Research, Development and Productivity Growth
The Committee was told that there is a strong correlation between R&D and productivity growth, which indicates that expanding Canada’s R&D activities and capacity would likely result in new business opportunities and increased competitiveness. Witnesses, including the University of Manitoba and Queen’s University, observed that — relative to most member countries of the Organisation for Economic Co-operation and Development (OECD) — Canada invests relatively less in R&D. As shown in Figure 16, Canada’s gross domestic expenditure on R&D, as a percentage of GDP, was 2% in 2004, a figure that was lower than the average among OECD countries in that year.
Figure 16: Gross Domestic Expenditure on Research and Development
as a Percentage of Gross Domestic Product, Selected Organisation
for Economic Co-operation and Development Countries, 2004
Note: (1) 2003
Source:Organisation for Economic Co-operation and Development, Main Science and Technology Indicators, June 2006.
2. Publicly Funded Research and Development
The federal government provides significant support to basic research performed in Canadian universities and teaching hospitals, and the Committee was told that a large proportion of the research conducted in Canada is performed in the public sector. For example, McGill University informed us that Canada spends more on university research as a percentage of GDP than any other Group of Seven country. Queen’s University indicated that Canadian universities conducted almost $9 billion worth of research in 2004-2005, which represented more than one-third of all of Canada’s annual research undertakings.
According to the Association of Universities and Colleges of Canada, the investments made in recent years by the federal and provincial governments and universities themselves have transformed Canada from a country at risk of experiencing a major “brain drain” to one that is benefiting from a “brain gain.” The Committee was told that a variety of federal supports contributed to this success:
- the federal granting councils fund research projects that generate new ideas, insights and understandings, as well as new applications;
- the Canada Research Chairs Program, Canada Graduate Scholarships and individual granting support programs administered by the three federal granting councils provide support to attract, retain and develop highly qualified researchers;
- the Canada Foundation for Innovation as well as Industry Canada, through its support of CANARIE, fund state-of-the-art research infrastructure; and
- the indirect costs program contributes to the institutional support that universities provide to researchers.
The Canadian Association for Graduate Studies, among others, recommended that funding of the three federal granting councils — the Natural Sciences and Engineering Research Council of Canada (NSERC), the Canadian Institutes of Health Research (CIHR) and the Social Sciences and Humanities Research Council of Canada (SSHRC) — continue to increase significantly. The Canadian Consortium for Research noted that increases to the budgets of the federal granting councils at or below the rate of inflation will not allow Canada to keep pace with competitors.
The Canadian Federation for the Humanities and Social Sciences advocated increased funding for the federal granting councils by amounts exceeding the rate of inflation. The NSERC argued that it requires more funding to realize fully the benefits of Canada’s existing human and infrastructure resources for research, and believed that, by 2009-2010, an additional $400 million per year in funding will be required. The National Council for Graduate Studies urged funding increases of $110 million for the NSERC and of $75 million for the CIHR in 2007-2008.
The Canadian Association of University Teachers advocated an increase in unrestricted research funding available through the federal granting councils, which the Committee was told should help to protect the integrity and independence of academic research. The Université Laval argued that the core budgets of the federal granting councils should be increased to a level sufficient to halt the exodus of researchers and to fund a growing number of students in graduate programs.
The University of Prince Edward Island suggested that funding for the three federal granting councils be increased to a level that would permit full funding of proposals judged by panels of experts to be worthy of funding. The Committee was told that, at present, about one-half of the proposals made are rejected, and the proposals that are accepted are not fully funded.
The Canadian Foundation for Innovation (CFI) informed the Committee that, after its last major competitions, its capacity to invest in cutting-edge research will largely be depleted. Consequently, additional funding of at least $1 billion between 2007 and 2010 was requested by such witnesses as the CFI, Research Canada: An Alliance for Health Discovery, the Association of Faculties of Medicine of Canada and the Hospital for Sick Children. Moreover, the Canadian Council of Chief Executives and the Université Laval argued that the federal government should extend the mandate of the CFI and expand its funding base.
Seneca College of Applied Arts and Technology urged an increase in the funding of the federal granting councils, but with a requirement that funds be dedicated to polytechnics and institutes in order to stimulate applied research. Other witnesses, such as the Alberta Association of Colleges and Technical Institutes, the Atlantic Provinces Community College Consortium, Red River College of Applied Arts, Science and Technology and the Yukon College, urged enhanced college or technical institute access to federal programs for research and innovation.
Furthermore, witnesses told the Committee that smaller universities do not receive their fair share of federal funding for research and innovation, and some —including the Association of Nova Scotia University Teachers and the University of Manitoba — recommended that regional inequities in research funding be addressed.
Moreover, the Canadian Consortium for Research told the Committee that the majority of research funding from federal programs is allocated to the natural, engineering and health sciences rather than the humanities and social sciences. The Canadian Federation for the Humanities and Social Sciences informed us that nearly 90% of the almost $5 billion in direct federal investment in university research is allocated to the natural, engineering and health sciences.
The National Association of Indigenous Institutes of Higher Learning argued that the federal government should ensure that institutions controlled by First Nations have access to all grants and special funding available to mainstream colleges and universities, such as research grants and research chairs. The Registered Nurses’ Association of Ontario urged increased federal funding for nursing researchers, while the Université de Montréal suggested that Canadian fellows be allowed to use their fellowships to study at universities abroad and that similar fellowships be created for foreign students in order to facilitate the development of international networks.
McMaster University recommended continued and expanded funding for the Canada Research Chairs program, as well as the creation of Canada Learning Chairs, which would be dedicated to learning and educational innovation and modeled on the Canada Research Chairs program.
A number of witnesses, including the Association of Universities and Colleges of Canada, the Canadian Association of Research Libraries, Queen’s University, the Association of Faculties of Medicine of Canada and the Hospital for Sick Children, suggested that the indirect costs of university research be funded at a minimum rate of 40% of every dollar of federally sponsored research. The National Council for Graduate Studies advocated funding at the rate of 65% in the 2007-2008 federal budget, while McMaster University advocated full federal funding of the indirect costs of research.
Witnesses, including the Canadian Cancer Society, the Health Charities Coalition of Canada, and the Heart and Stroke Foundation of Canada, argued that the federal government should support charities through the indirect costs of research program.
Recognizing the range of vehicles through which the federal government invests in basic research and the amount that has been invested over time, a number of witnesses highlighted the need for a clear and accountable framework in order to evaluate the return on federal investment in R&D. The Partnership Group for Science and Engineering, for example, proposed that the federal government — through the development of a new, forward-looking national science and technology (S&T) framework — evaluate the return to society on public investment in S&T and the efficacy of the investment mechanisms employed. Moreover, Intuit Canada recommended that the federal government examine how each federal program or agency can use public-private partnerships to further the delivery of federal programs.
Polytechnics Canada identified a need to rationalize research funding and to focus on investments that meet the needs of the marketplace. Precarn Incorporated advocated the incremental investment of S&T funds where they will have the greatest impact on industrial R&D and commercial outcomes. As well, the Committee was told that, even though an effective federal research base is essential, the mandate of federal research institutions should be clarified and reinvestment should occur in those that are required to meet the government’s regulatory responsibilities, to provide the government with the capacity to respond to emergencies, and to support private sector initiatives.
The Ottawa Centre for Research and Innovation argued that the federal government should increase funding to research grant programs in order to address commercialization at all stages of research. Furthermore, the Coalition for Canadian Astronomy urged the federal government to re-examine its approach to scientific funding in order to ensure that priority is given to disciplines with a proven record of success. The University of Alberta maintained that public policy choices as well as government investment must stimulate innovation by building bridges between universities and industry.
The Association of Canadian Academic Healthcare Organizations suggested that the federal government consider the unique characteristics of Canada’s teaching hospitals/centres and their research institutes as well as the role they play in the commercialization process. BIOTECanada recommended that, considering the success of current immunization programs, the federal government continue to invest $100 million annually in existing immunization programs and an additional $100 million per year for new initiatives.
The Canadian International Polar Year National Committee informed the Committee that Canada is the only arctic nation without an arctic university, and urged the establishment of academic institutions in the Canadian North. The need to improve the research stations and platforms in the Canadian North was also identified.
The Canadian Foundation for Climate and Atmospheric Science argued for increased federal funding of university research and federal laboratories in order to address environmental challenges.
The Canadian Renewable Fuels Association and the Canadian Petroleum Products Institute advocated increased federal involvement in R&D efforts, in partnership with the private sector, to develop and advance biofuels in Canada.
Furthermore, Hydrogen & Fuel Cells Canada requested federal support for R&D in hydrogen and fuel cell technology at a level equal to the industry commitment of $130 million annually over the 2006-2015 period. The Committee was told that hydrogen and fuel cell technology has the potential to bring about cleaner air, innovation-based job creation and greenhouse gas reductions, among other benefits.
The Railway Association of Canada argued that, short of eliminating the federal excise tax on locomotive diesel fuel, the federal government should create a rail technology development fund, which would help in the creation, acquisition and use of new rail fuel-saving and emissions-mitigation technologies.
In asking for the development of a new space plan for Canada, such Canadian space companies as MDA, COMDEV, Telesat and Bristol Aerospace informed the Committee that the last such plan was approved in 1994. The need for a consultative process leading to a new and invigorated national space plan was brought to our attention.
Genome Canada told the Committee that genomics can offer real solutions to real problems of daily life, and requested federal funding of $380 million over three years. Genome British Columbia and Genome Prairie, which are partly funded by Genome Canada, also asserted that genomics could address real challenges, including in such sectors as health care and agriculture, and supported the funding request made by Genome Canada.
The Fraser Valley KAIROS Group urged the federal government to fund fully and support the planned Canadian Index of Wellbeing, which could be used to develop policies and assess the effectiveness of tax and program spending by considering the notion of well-being.
The Canadian Council of Professional Engineers identified a need for increased funding of labour market studies in order to identify areas of skills shortage and the skills that will be required in the future in order to ensure Canada’s competitiveness.
3. Privately Funded Research and Development
The Committee heard that private sector R&D in Canada lags other industrialized countries, and that most R&D undertaken by private businesses is directed to product development and commercialization, which is viewed by some as applied research.
Such witnesses as Precarn Incorporated urged the creation of additional incentives to encourage R&D and innovation by the private sector; suggestions included offering federal support to the private sector beyond monetary incentives, and identifying and encouraging the utilization of successful models.
Witnesses told the Committee that the federal government must ensure that all federal policies and regulations, including intellectual property protection, are appropriately aligned with Canada’s commercialization efforts and innovation objectives. Canada’s Research-Based Pharmaceutical Companies (Rx&D) indicated that the federal government should have a better understanding of the impact of regulatory requirements under the National Pharmaceutical Strategy and the Patented Medicine Prices Review Board, and suggested that both programs contribute to regulatory inconsistencies and discourage the introduction of new innovative products. Merck Frosst Canada Inc. suggested that the federal government develop a national strategy on innovation that would target life sciences R&D and create a regulatory environment conducive to private sector innovation and commercialization.
Furthermore, witnesses discussed Canada’s intellectual property rules and the need for effective and competitive protection of intellectual property, such as data protection and patent-term restoration. The Committee heard that Canada does not have a competitive data protection regime when compared to other countries; consequently, it is more difficult for Canadian pharmaceutical companies to attract foreign investment than it is for companies located in other countries. Canada’s Research-Based Pharmaceutical Companies (Rx&D) urged the federal government to implement immediately data protection regulatory changes that would provide eight years of data protection for innovative research.
A number of the Committee’s witnesses suggested that the federal Scientific Research and Experimental Development (SR&ED) investment tax credit be improved. The Canadian Chamber of Commerce, the Canadian Council of Chief Executives, Canadian Manufacturers & Exporters, Canadian Manufacturers & Exporters — Ontario Division, Canadian Manufacturers & Exporters — British Columbia Division, the Canadian Plastics Industry Association, the Forest Products Association of Canada and The Business Group for Improved Federal SR&ED Tax Credits recommended making the SR&ED investment tax credit refundable for every business, since foreign-controlled corporations, public corporations or businesses structured as partnerships cannot take full advantage of the benefits of the tax credit if they do not have sufficient taxable income. Witnesses indicated that this proposal would provide additional incentives for Canadian corporations, including small and large public companies and Canadian companies owned by foreign firms, to undertake R&D in Canada.
Furthermore, the Committee heard various other suggestions with respect to extending the types of expenses that can be claimed under the SR&ED investment tax credit. Canada’s Research-Based Pharmaceutical Companies (Rx&D) and Merck Frosst Canada Inc. recommended that research in social sciences be considered to be an eligible expense, while such witnesses as Canadian Manufacturers & Exporters proposed greater recognition of R&D activity that is conducted on an international collaborative basis. Other witnesses proposed extension of the SR&ED investment tax credit to expenses incurred for activities such as patenting, prototyping and product testing.
The Union des producteurs agricoles recommended expansion of the SR&ED investment tax credit eligibility to support certain R&D activities in the agricultural sector, while the University of Prince Edward Island supported the inclusion of market research as an eligible expense under the SR&ED investment tax credit.
A number of witnesses, including the Canadian Chamber of Commerce and the Certified Management Accountants of Canada, recommended that corporations be permitted to apply their unused SR&ED investment tax credit to offset other federal taxes and levies, such as payroll remittances. Witnesses also proposed that the 10-year carry-forward period be extended.
Other SR&ED investment tax credit-related suggestions by witnesses —including BIOTECanada and the Canadian Electricity Association — included increasing the annual R&D expenditure limit to $10 million, raising the taxable income and taxable capital thresholds used to determine eligibility for refundability of the credit, and allowing the credit to flow through to limited liability partners.
4. Access to Entrepreneurial Capital and Commercialization
Witnesses highlighted the need to improve the rate at which innovative ideas emerging from publicly and privately funded R&D are transformed into commercialized products. The Committee was told that a key ingredient in the commercialization of new technologies is the availability of risk capital and management expertise for start-up firms.
The Committee heard that angel investors — that is, individual private investors who often are successful entrepreneurs — involved at the early stage of product development and commercialization can supply start-up firms with risk capital and expertise, both of which are critical to the success of emerging innovative firms. The Ottawa Centre for Research and Innovation advocated the creation of a 30% tax credit for angel investor investment in eligible start-up companies. It was argued that this proposal has the potential to generate a substantial increase in the rate of capital formation and commercial success for early-stage companies in Canada.
The Canadian Federation of Independent Business and the Canadian Medical Association proposed that the federal government allow entrepreneurs to borrow from their Registered Retirement Savings Plans (RRSPs) for business financing purposes, similar to the Home Buyers’ Plan and the Lifelong Learning Plan.
Witnesses, such as the Certified General Accountants Association of Canada and Université Laval, also observed that increased federal funding for the commercialization of new technologies is needed, particularly in universities, colleges and research organizations. The Association of Canadian Community Colleges recommended the creation of a college and institute research development and commercialization support fund, which would be targeted exclusively for colleges and institutes in order to strengthen the innovation and commercialization capacities of applied research performed in these institutions.
Polytechnics Canada and Seneca College of Applied Arts and Technology urged the federal government to provide funding for applied research projects, capacity development, and commercialization chairs in polytechnic institutions, particularly targeting activities promoting partnerships with the business community.
The University of Prince Edward Island recommended that the federal government develop a program for Canadian entrepreneurship chairs in order to foster product development, market research, business management of early-stage companies, and best practices in the development and functioning of angel investment networks.
The Canadian Association of Railway Suppliers argued that the Freight Sustainability Demonstration Program and the Freight Incentives Program are useful in the commercialization of freight transportation research, and should be maintained and funded at a higher level.
The Partnership Group for Science and Engineering and the Canadian Council of Chief Executives proposed that the federal government create a business-led commercialization partnership board to review the various proposals for commercialization programs.
In terms of commercialization and early-stage business financing, Caisses Desjardins Group suggested that cross-border venture capital partnerships with the United States could benefit Canadian investors and high-tech companies. Canadian start-up firms could gain easier access to the United States for capitalization and marketing, and Canadian investors could gain from the experience of U.S. venture capital managers.
Caisses Desjardins Group, Canada's Venture Capital & Private Equity Association and BIOTECanada, however, told the Committee about an impediment in the Canadian tax system that makes such cross-border partnerships costly and difficult to establish. U.S. venture capital funds are often established under a limited liability company (LLC) structure that is not found in Canada, and the lack of recognition by Canada of U.S. LLCs under the Canada-U.S. tax treaty is a disincentive for these types of U.S. venture capital companies to invest in Canadian technology start-ups.
Witnesses recommended that Canada-U.S. tax treaty benefits apply to U.S. limited liability corporations. The Committee was reminded that U.S. venture capital investors can invest anywhere in the world; Canadian technology start-up companies, however, need improved access to U.S. venture capital and expertise in order to grow and prosper. As such, the federal government was urged to create a joint government-industry working group to study and propose market-based actions — such as the removal of regulatory barriers to foreign capital inflows — to encourage the growth and competitiveness of the Canadian venture capital industry.
A number of witnesses told the Committee that the creation of the Labour Sponsored Venture Capital Corporation (LSVCC) program has contributed significantly to the development and stabilization of the Canadian venture capital industry. We were informed that in some periods of slow economic growth, LSVCCs were raising the majority of all new venture capital in Canada, and that LSVCCs represent approximately 50% of the venture capital in Canada.
GrowthWorks Capital Ltd. told the Committee that, on a per-capita basis, the value of venture capital assets in Canada is about 40% of that in the United States. We were also informed that the annual supply of new venture capital in Canada declined sharply from $4.5 billion in 2001 to $2.2 billion in 2005.
GrowthWorks Capital Ltd. and GrowthWorks Atlantic Ltd. recommended that the maximum amount an investor may claim for the LSVCC investment tax credit be increased to $1,500, which corresponds to an investment of $10,000, in order to ensure a steady source of venture capital investment in Canada. VenGrowth recommended that this amount be increased to $2,250, which corresponds to an investment of $15,000. The Association of Labour Sponsored Investment Funds and ENSIS Growth Fund requested that an investor be able to claim the LSVCC investment tax credit on an investment up to the maximum annual Registered Retirement Savings Plan contribution limit, which will gradually increase from $18,000 in 2006 to $22,000 in 2010.
Moreover, the Committee was told that co-operative enterprises are limited in their ability to raise equity capital. Canadian co-operatives make significant contributions to the economy and to rural communities, especially in the financial and agricultural sectors. A number of witnesses — including the Canadian Worker Co-operative Federation, the Co-operative Housing Federation of Canada, the Co-operators Group Limited, the Conseil canadien de la coopération and the Canadian Co-operative Association — recommended that a federal co-operative investment plan, based on a similar plan introduced in the province of Quebec in 1985, be adopted. The proposed plan would provide a tax deduction to co-operative members and employees who invest in their co-operative’s preferred shares. Reinstatement of the Social Economy Initiative and the development of a new public-private partnership, based on the Co-operative Development Initiative, were identified as measures that would encourage the development of co-operatives and other community-based enterprises.
According to the Canadian Federation of Independent Business’ 2005 report entitled Prosperity Restricted by Red Tape, which was brought to the Committee’s attention, the cost to Canadian business of complying with regulations is at least $33 billion annually. This cost is relatively greater — when calculated on a per-employee basis — for smaller businesses since, in most cases, they face the same regulatory requirements as larger businesses.
In spite of such federal measures as the Paperwork Burden Reduction Initiative and the BizPal Initiative, a number of witnesses told the Committee that the federal government should do more to reduce the regulatory burden on business. The Canadian Chamber of Commerce suggested that the federal government undertake a cost/benefit analysis of all existing and proposed federal regulations, while the Canadian Federation of Independent Business recommended that the federal government act quickly on paperwork burden reduction commitments in order to measure the government-wide regulatory impact and announce reduction targets. The Ontario Chamber of Commerce advocated the establishment of a five-year framework, in conjunction with the provincial/territorial and municipal governments, to reduce red tape, with annual benchmarks combined with a five-year sunset clause for new regulations.
The Canadian Conference of the Arts endorsed a less onerous but sufficiently rigorous accountability framework for recipients of arts and cultural funding, while the Canadian Meat Council and Maple Leaf Foods Inc. advocated a more up-to-date, flexible and straight-forward regulatory environment in the agri-food sector and clearer accountabilities among the three orders of government.
La Chambre de commerce de Québec recommended that the federal government reduce inter-provincial barriers to trade.
A number of the Committee’s witnesses, including the Canadian Bankers Association and the Canadian Chamber of Commerce, argued that Canada should adopt a single securities regulator. The Committee was informed that the benefit of such a change would be greater consistency in the interpretation and enforcement of rules across the country, resulting in lower administrative and compliance costs. The Ontario Chamber of Commerce noted that Canada is the only Group of Seven country without a single securities regulator.
The Committee was told that overlapping tax regimes between different orders of government are a burden on business and individual taxpayers. A number of witnesses, including Bell Canada Enterprises and the Canadian Institute of Chartered Accountants, indicated that harmonizing the federal GST with the remaining provincial sales taxes would reduce the administrative burden and costs, since business would deal with only one tax authority and one set of tax laws. The federal government was urged to take a leadership role in negotiating with the provinces to harmonize the GST with the remaining provincial sales tax.
The Committee believes that, in a very fundamental manner, research, development and innovation yield returns that exceed the initial investment in them. Moreover, we feel that these types of investments will be important as the nation attempts to attain the levels of productivity growth which will result in the standard of living that Canadians want and the competitiveness that our nation seeks.
While federal investments in research and development have been substantial in recent years, the Committee believes that — as the country moves forward and seeks enhanced competitiveness — organizations of all sizes and types, and in all regions of the country, must be able to access needed federal research funds. From this perspective, and bearing in mind the Minister of Finance’s comments to us on 23 November 2006 about improved and targeted public investments in research and development, a comprehensive science and technology strategy, accessing the technology development and application capacity that exists in community colleges, the consolidation of research funding mechanisms and the Industry Canada review of the federal granting councils, among others, the Committee recommends that:
RECOMMENDATION 28
The federal government increase its support to research through all federal granting councils and research agencies and ensure that the indirect costs of research are funded at a minimum rate of 40% for every dollar of federally sponsored research. As well, the government should increase the base budget of the Canadian Institutes of Health Research by $350 million over three years.
The government should ensure that the federal granting councils and research agencies consider the concerns of smaller universities and colleges when disbursing funds, with a view to ensuring that they do not face discrimination.
Moreover, institutions in all regions of Canada should have meaningful access to funds, and the role that could be played by colleges — particularly with respect to applied research — should be recognized through the allocation of an appropriate share of research funds to them. The feasibility of Canada Research Chairs for colleges in Canada’s northern territories should also be considered.
The Committee believes that Canada must fully explore all opportunities to be a leader in innovation. In our view, one area in which we currently enjoy an advantage is astronomy, which has a variety of commercial applications. While past support in this area has been given through federal granting councils and research agencies, we feel that targeted funding is needed — at this time — for the Long Range Plan for Canadian Astronomy and Astrophysics if Canada is to continue to be a world leader and to benefit from its commercial spin-offs. From this perspective, the Committee recommends that:
RECOMMENDATION 29
The federal government allocate $235 million over seven years to fund the Long Range Plan for Canadian Astronomy and Astrophysics.
The Committee believes that changes to the Scientific Research and Experimental Development investment tax credit are needed. While the credit is an important measure by which private sector organizations are encouraged to engage in the research and development activities that will lead to productivity growth and enhanced competitiveness, the tax credit is only successful if it can be easily and usefully accessed by them. For this reason, the Committee recommends that:
RECOMMENDATION 30
The federal government, following consultations with relevant stakeholders, make changes to the Scientific Research and Experimental Development investment tax credit with a view to ensuring high levels of private sector research and development. Changes should be implemented no later than 30 June 2007.
The Committee feels that access to adequate, and appropriately priced, capital is important if our businesses — particularly our smaller, start-up businesses — are to grow and prosper. We know that these businesses are often seen as — and often are — more risky; consequently, they sometimes have difficulty accessing affordable financing. For them, access to expertise may also be a concern. Recognizing the valuable role played by Labour Sponsored Venture Capital Corporations in ensuring that some businesses have access to needed venture capital, the Committee recommends that:
RECOMMENDATION 31
The federal government amend the Income Tax Act to increase to $1,500 the labour-sponsored funds tax credit limit.
The Committee believes that co-operatives play a vital role, particularly in rural communities and in such sectors as financial services and agriculture. We realize, however, that they — like start-up companies — often face challenges in accessing needed capital. We feel that the federal government has a role to play in assisting them in meeting their need for capital and, for this reason, recommends that:
RECOMMENDATION 32
The federal government, in consultation with the co-operative sector, create a co-operative investment plan and develop a modified version of the Co-operative Development Initiative that extends beyond 2008. In the interim, the Initiative’s advisory services component should receive increased funding.
In the Committee’s view, access to microcredit could play an important role in enhancing the opportunities available to those who, for whatever reason, are unable or unwilling to access financing from traditional financial service providers. In some instances, traditional financial service providers may be unwilling to loan relatively small amounts, while in other cases they may be unwilling to loan based on the risk profile of the borrower or the venture. It might also be the case that the borrower wishes to access financing from non-traditional sources. Access to an alternative source of credit, such as microcredit, may enhance the ability of these individuals to contribute meaningfully to Canadian business and to society. From this perspective, the Committee recommends that:
RECOMMENDATION 33
The federal government create a tax incentive to encourage investment in microcredit initiatives.
The Committee feels that while research, development and innovation are useful in their own right, there is an urgent need to ensure that commercialization occurs. One aspect of commercialization is the ability to access risk capital, a topic that was discussed by us above. In that regard, we support federal efforts aimed at commercialization and the ability of Canadian firms to access Canada-United States partnerships, with their associated funding and expertise. From that perspective, and bearing in mind the comments made about the Canada-U.S. tax treaty and commercialization partnerships by the Minister of Finance in his appearance before us on 23 November 2006, the Committee recommends that:
RECOMMENDATION 34
The federal government expedite the review of the tax treaty between Canada and the United States. This review should specifically address Canadian recognition of United States limited liability corporations.
The Committee is aware that, in our increasingly global economy, the movement of capital is generally viewed as positive to the extent that capital is able to flow to the most productive opportunities. The existence of tax havens — which are generally considered to be countries with low or no taxes on income and profits — can lead to decisions to invest capital based purely on a desire to avoid taxation. The result may be lower investment, reduced government tax revenues and diminished competitiveness for those countries that are not considered to be tax havens. Consequently, the Committee recommends that:
RECOMMENDATION 35
The federal government eliminate the use of tax havens in an effort to ensure that all corporations, businesses and individuals pay their fair share of taxes.
The Committee is of the view that while regulation is an important tool for such purposes as protecting health and safety and preserving the environment, regulatory efficiency is needed in order to ensure that businesses are as productive, and as competitive, as possible. We are aware of, and appreciate the efforts of, the Advisory Committee on Paperwork Burden Reduction and the External Advisory Committee on Smart Regulation, and believe that their recommendations have merit.
As well, the Committee believes that business productivity would also be enhanced if inter-provincial/territorial trade barriers were reduced, if not eliminated entirely. In our view, these barriers are problematic in a number of areas, including labour mobility. For that reason, bilateral efforts between British Columbia and Alberta and between Ontario and Quebec designed to reduce trade barriers between them are to be applauded. From this perspective, and bearing in mind the Minister of Finance’s 23 November 2006 comments to us about the reduced paperwork burden on business, the elimination of unnecessary and costly regulations and red tape, a principles-based legislative framework to guide regulatory departments and agencies, and discussions about the elimination of internal barriers to trade, the Committee recommends that:
RECOMMENDATION 36
The federal government undertake a comprehensive cost-benefit analysis of existing and new federal regulations, as well as their cumulative effect, to ensure that their benefits clearly outweigh their compliance costs for business. This review should be completed no later than 31 December 2007.
The government should also take a leadership role and meet with the provincial/territorial governments, on a priority basis, with a view to eliminating unnecessary barriers to inter-provincial/territorial trade.
While the Committee believes that smart regulation is needed in all sectors, we feel that there is a particular and urgent need to ensure smart regulation in the area of securities. In our view, a commitment among the federal and provincial/territorial governments to a single securities regulator is needed. In this regard, we appreciate the efforts of the Council of Ministers of Securities Regulation and the Canadian Securities Administrators, and support the conclusion reached by the Wise Persons’ Committee to Review the Structure of Securities Regulation in Canada and the Crawford Panel on a Single Canadian Securities Regulator. Feeling that Canada must not continue to be the only Group of Seven country without a single securities regulator, and bearing in mind the 23 November 2006 comments to us by the Minister of Finance about a common securities regulator, the Committee recommends that:
RECOMMENDATION 37
The federal government conclude an agreement with the provincial/territorial governments on a single securities regulator no later than 31 March 2007. The regulator should begin operations no later than 30 June 2007.
INTERNATIONAL TRADE AND INTERNATIONAL AID
Many observers believe that globalization has a positive impact on economic growth and competitiveness. The integration of world markets expands opportunities for products and people, while the international transmission of market information and labour mobility are thought to accelerate the rate of knowledge creation and transfer. As well, the competitive pressures associated with international trade may induce domestic firms to devote more resources to increasing their level of competitiveness.
Moreover, to the extent that the world’s citizens live in an increasingly interconnected world, and bearing in mind the moral imperatives that may lead people to focus on poverty alleviation, the extreme poverty found in some less-developed countries may result in increased global insecurity, public health threats and environmental degradation, which could ultimately affect Canada’s prosperity and competitiveness.
A number of the Committee’s witnesses supported the view that globalization and international trade create both challenges and opportunities for Canadian businesses. The Canadian Meat Council argued that Canada should take a leadership role in reviving the suspended Doha Round of World Trade Organization (WTO) negotiations; the aggressive pursuit of bilateral trade agreements was also recommended in light of the suspension of the Doha Round, as were actions designed to eliminate trade remedy law within the North American Free Trade Agreement.
Witnesses expressed concern about how free trade in goods and services at the international level is currently affecting the Canadian economy. The Canadian Labour Congress, for example, spoke about the impact of the manufacturing crisis — which is, in part, due to increased international competition — on good jobs for working families. The Union des producteurs agricoles also noted that market openness, among other factors, has resulted in downward pressure on farm profit margins.
The Union des producteurs agricoles argued that the proposals under discussion in the Doha Round prior to the suspension of negotiations would not improve agricultural prices or enhance foreign market access for Canadian farmers. It was suggested that the WTO negotiations ensure real and transparent market access and that, as a result of negotiations, supply-managed sectors not be subject to any reduction in over-quota tariffs or to any increase in tariff quotas. Moreover, it was recommended that the final conditions of the agreement reached prevent WTO countries from bypassing rules on which the WTO member countries have agreed.
The Confédération des syndicats nationaux indicated that the lack of minimum environmental and labour standards in trade agreements is exacerbating the pressure experienced by some Canadian industries facing increased competition from emerging countries. The federal government was urged to ensure genuine reciprocity in trade relations with other countries.
The Association of Canadian Publishers urged the federal government to ratify the World Intellectual Property Organization Copyright Treaty, which provides additional copyright protections determined to be necessary in an information-based economy, including copyright in computer programs and databases, as well as the rights of authors to control the distribution, rental and public communication of their works.
The Fraser Valley KAIROS Group told the Committee that Canada should reduce its economic dependence on the United States. Consequently, the promotion of market diversification through a tax credit to companies involved in the development of new markets, especially in Europe, South America and the Far East, was proposed.
A number of witnesses spoke about Canada’s standard of living, and compared it with the quality of life in other countries that are less fortunate. The Committee heard that Canada would benefit from significant enhancements in the living and socio-economic conditions of the world’s poorest populations; the benefits would include improved global security and the moral satisfaction associated with meeting our international responsibilities.
The Committee heard that a sizeable proportion of the world’s population lives in absolute poverty, resulting in the death of 50,000 people every day. The Society of Obstetricians and Gynaecologists of Canada informed us that, each year, more than 500,000 women die from the complications of pregnancy and childbirth. Action Canada for Population and Development told us that a person dies of starvation every 3.6 seconds.
Many witnesses — including World Vision Canada, RESULTS Canada, the British Columbia Council for International Cooperation, the Canadian Council for International Cooperation, the Saskatchewan Council on International Cooperation, Action Canada for Population and Development, Association québécoise des organismes de coopération internationale, the Society of Obstetricians and Gynaecologists of Canada, the Canadian Paediatric Society, Health Partners International of Canada, the Canadian Federation of University Women, the Canadian Public Health Association, the Canadian Co-operative Association and KAIROS: Canadian Ecumenical Justice Initiatives — urged the federal government to uphold the commitment made to the Millennium Development Goals. A plan to devote at least 0.7% of Canada’s Gross Domestic Product to foreign aid by 2015 was recommended, and witnesses observed that Canada should increase its funding to official development assistance by a proportion varying from 12% to 18% per year in order to meet that target. Action Canada for Population and Development noted that, among the European countries, five countries have already met that goal.
Furthermore, such witnesses as RESULTS Canada, the British Columbia Council for International Cooperation and the Saskatchewan Council for International Cooperation supported the passage of Bill C-293, An Act respecting the provision of development assistance abroad, which would ensure that Canadian development assistance abroad is directed to poverty reduction, and in a manner consistent with sustainable development and Canadian values and standards. Witnesses argued that as Canadian spending on foreign aid increases, the federal government must exercise caution in delivering quality foreign aid that is efficient and accountable in reducing global poverty.
Other witnesses highlighted the need to improve the health of poor populations and to increase the level of medical aid. The Canadian Public Health Association suggested that public health and its determinants be emphasized. RESULTS Canada recommended that the federal government commit an additional $60 million to the Global Fund Against AIDS, Tuberculosis and Malaria, stressing that this fund is crucial for the global fight against the two preventable diseases of tuberculosis and malaria. World Vision Canada maintained that Canada should increase its foreign aid funding to care for the children of families devastated by AIDS and HIV, while the Society of Obstetricians and Gynaecologists of Canada recommended that the federal government invest $30 million in the Safe Motherhood and Newborn Health strategy with the objective of achieving the Millennium Development Goal related to maternal health.
The Committee heard that foreign aid goals can also be achieved in partnership with Canadian industries. Health Partners International of Canada noted that gift-in-kind foreign assistance does not technically contribute to the 0.7% commitment, and that the United States proportionately provides more private donations than does Canada; the creation of a tax incentive that would encourage manufacturing, pharmaceutical and medical companies to donate urgently needed products out of inventory or manufactured specifically for that purpose was recommended.
The Association of Consulting Engineers of Canada argued that Canada’s foreign aid strategy should specifically include direct investment in physical infrastructure in the poorest countries. The Committee was told that Canada has gradually moved away from providing such direct foreign assistance, which would help to alleviate the pressing infrastructure needs in the developing world while helping the federal government to meet the goal of being active in sectors that can add the greatest value in the form of Canadian expertise. The Canadian Co-operative Association recommended that the role of Canadian co-operative organizations in the delivery of Canadian aid be reinforced by increasing the share of Canadian foreign aid going to the Canadian Partnership Branch of the Canadian International Development Agency.
Another area where efforts must be directed toward ensuring that the business environment is appropriate is with respect to international trade. The Committee believes that while it is inevitable that certain sectors or regions will be harmed by liberalized trade in the short run, international trade is beneficial in the longer term, provided the signatories to trade agreements respect the obligations imposed on them by such agreements.
The Committee feels that, on balance, fair and free trade is beneficial and should contribute to enhanced competitiveness. Consequently, we support the negotiation of bilateral and multilateral trade agreements. We also believe, however, that some sectors — for example, agriculture and forestry — are harmed, from time to time, by the actions taken by other countries in the global marketplace, particularly with respect to frivolous trade challenges and unfair subsidization. For this reason, and bearing in mind the comments made to us by the Minister of Finance on 23 November 2006 about the creation of a global commerce strategy as well as bilateral and regional trade, investment, and science and technology agreements, the Committee recommends that:
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The federal government vigorously defend Canadian interests in the negotiation and administration of international trade agreements, including through support for the Canadian International Trade Tribunal.
Moreover, the government should ensure that industries that suffer as a result of unfair trade actions by other countries receive the assistance needed in order to combat the negative effects of those actions.
Finally, it is also important that Canada play a role in the international community by helping those individuals and nations that are less fortunate. Canada cannot stand by as other nations and their residents suffer. As world citizens, we have an obligation to help them overcome the challenges they face.
Canada must also view these other countries as potential trading partners: their prosperity will help to ensure ours. Moreover, we must consider them as potential sources for the immigrants that Canada will need as we attempt to address the implications of our ageing population. While the federal government provides financial aid, there are many ways in which assistance can be given, and both public and private sector foreign aid have a role to play. From this perspective, the Committee recommends that:
RECOMMENDATION 39
The federal government adopt a foreign aid target of 0.7% of Canada’s Gross Domestic Product by 2015. A plan for reaching this target should be developed no later than 31 December 2007.
The government should also consider the range of means by which the Canadian private sector could play an expanded role in helping to meet Canada’s goal of assisting less developed nations.