:
I call the committee to order.
We are continuing our study of the manufacturing sector, and we have two sessions today. The first session is with the Food and Consumer Products of Canada, and the second session is with officials from the Department of Finance. For the first hour, from 3:30 p.m. to 4:30 p.m., I would like to welcome the Food and Consumer Products of Canada. We have Gemma Zecchini, senior vice-president in public policy. We also have Blake Johnston, vice-president of government affairs.
You're the only witness for the first hour so you have the full hour. We usually allow a ten-minute opening statement, so you can take up to ten minutes for your opening statement and then we'll have questions from members.
I believe, Ms. Zecchini, you will be starting the presentation at this point.
:
Thank you, Mr. Chairman.
I was joined by a few members before we started to entertain you today. I'm not sure that my entertainment skills are up to the occasion, but I certainly hope in some small measure to inform you about some of the challenges that are facing the food and consumer products industry in Canada, and I hope to have a genuine dialogue with members of the committee.
I'll start off by thanking you for inviting us. It's a great pleasure to be here. The issues you are exploring are of a great importance to our industry.
By way of a short introduction, the Food and Consumer Products of Canada is an industry association. We are the largest trade association representing food and consumer products in Canada.
In 2005, to give you some small measure of the scope of our industry, it employed about 325,000 Canadians, making it the largest employer in the manufacturing sector. We contribute about 12% of Canada's manufacturing GDP, about 6% of Canada's GDP overall.
I essentially want to do four things today. One is to give you a little bit of an overview, a snapshot, of some of the trends in our industry today and how the industry is faring. In sharing that information with you, I hope you will come away sharing some of our concerns about what the future holds for food manufacturing in Canada. What I would then like to do is focus on one key barrier to growth and productivity that we're facing in our industry. The good news about that key barrier to growth is that it is very much in the government's purview to be able to do something about. It's not something that is sort of monetary policy, international trade, or any of those things that bedevil governments but a lot of governments can't do anything about.
The third thing is a review of some specific asks that are germane to our own industry, the food industry in particular, and that represent in our view some low-hanging fruit for action.
The fourth thing I will do is end with an urgent recommendation to follow the advice of the OECD, which reported in 2004 that Canada should look to renewing and revamping its regulatory environment.
I hope after that we can answer some questions and have some dialogue about my presentation.
I think everybody has a copy of the brief in front of them, beginning about halfway down. I won't read everything through, but there are a few trends taken from the Conference Board of Canada's most recent industrial outlook. These are some of the trends that I think are most troubling in the food manufacturing sector.
As of the winter of 2006, as you can see, our investment is lagging in this sector. It lags behind manufacturing as a whole. It's about 1.9% of nominal investment, which is the value of goods and services produced, versus 2.7% in manufacturing. The ability to commercialize innovation is a key factor here, and I'm going to talk more about that as we go on.
Capital intensity in this sector is also lagging. In manufacturing as a whole, you have about $85,000 of capital stock per employee. In the food manufacturing sector, we have about $54,000 in capital stock per employee. As a result of that lag in investment in capital intensity, we have, unsurprisingly, labour productivity also down. Again, profits this year are expecting to climb marginally, about 2.6%, after having dropped about 20% last year.
These are some of the trends that bracket our industry. That, of course, raises some real concerns about the viability of the industry overall and whether or not the future of the sector is secure. Some of you around this table probably are aware of industries that have sort of gone the way of the dodo, Canada Textiles being one of them. Obviously, today, pulp and paper is also under threat.
Traditional food manufacturing is a low-growth industry. Natural areas, where it usually grows...it is because of population growth. We have a fairly stable population in Canada. We have an aging population, which also affects how much traditional food you can actually produce from growth.
When reviewing the transcripts from this committee, I noted you heard from a number of witnesses, including the Governor of the Bank of Canada, David Dodge, and he outlined for you a number of challenges that I will not repeat that are facing the manufacturing sector. A lot of those challenges were well beyond your control.
However, there are certain important levers of productivity and competitiveness that domestic governments do retain and that this committee can directly influence. While fiscal policy is important, equally important is a flexible and responsible regulatory system. That's a powerful instrument governments can use to put Canadian manufacturers in a better position to innovate and grow.
Mr. Chair, is there a problem following the text?
:
When Governor Dodge was asked what role the federal government had in helping the manufacturing sector, one of the things he cited was a flexible regulatory regime. He said that was going to be critical, and we couldn't agree more.
Regulatory modernization has to get on the Government of Canada's economic and competitiveness agenda. We've heard this now from the OECD in 2004 in their report. We heard it from the External Advisory Committee on Smart Regulation in 2005. We've also heard it from various sectors in manufacturing who, while they all have different specific regulatory issues...overall the problems with regulatory frameworks are similar.
This represents for us the most significant barrier to innovation and growth, and an outdated and poorly functioning regulatory system is what stands in the way for most of what we as an industry would like to see in the future.
We're by no means alone in this regard. There are many barriers an inflexible system puts in our way. Just to name a few, we have complex and lengthy product approval procedures and processes. Sometimes the time it takes to get a product approved will be anywhere from two to four years. The window of opportunity for that product may only be 18 to 24 months, so the complex and lengthy approval process procedures are a real barrier.
We have unresponsive regulatory departments, through no fault of their own. The pace of innovation is much different today than it was when government departments and certain regulations were promulgated, so we're now facing thousands of product approvals, for example, and regulatory departments just cannot cope with the sheer volume.
We have a lack of jurisdictional and departmental cooperation. In some cases we have regulatory voids, in the sense that there is no regulatory framework to go through to be able to get a product to market. This frustrates the product launches and creates a drag on our competitiveness, our productivity, our investment, and our growth.
And it's going to be critical for the new global economy for us to have a flexible governance regime where we are not plagued by the tyrannies of small regulatory differences between trading partners, where we have an inability to adopt international standards and scientific evidence when they meet Canadian policy standards and objectives. At the same time we have regulatory multi-jurisdictional and multi-departmental processes that are not coordinated that are in need of being streamlined to keep pace with better and more rapid product innovation. In our sector alone, there have been significant advances in food technologies. These are creating unprecedented opportunities for product innovation, and our regulatory system is just not set up to meet them.
One of our CEOs commented recently that if, twenty years ago, he had been able to anticipate the state of Canada's regulatory approval system for food today, he would not have invested in Canada. And this is not a CEO from a multinational corporation; this is a CEO from a Canadian corporation.
We will need a modernized system that is results-focused and transparent, that minimizes the regulatory differences between trading partners, and that eliminates costly delays. This is going to be absolutely essential for our industry.
Without it, our sector will continue to languish, and it will leave Canadians without access to new products and, without that, without access to manufacturing jobs and economic prosperity.
One of the key things to remember is that while consumer expectations of our industry have evolved in step with product innovation elsewhere in the world, the Canadian regulatory system that governs food manufacturing hasn't. This is despite the fact that government is preoccupied with rising health care costs. There's a desire everywhere to embrace prevention, to give consumers the tools to manage their own health, and also--and I think this will be familiar to many of you--to help our farmers grow higher-value crops. That's something we hear. The inability to commercialize food innovation represents a barrier.
When the Food and Drugs Act was promulgated in the 1960s, you had maybe a few hundred products making their way to the market in Canada every year. It was a fairly negligible amount if you track that through the statistics provided by A.C. Nielsen. Today that numbers in the thousands, and in some cases the many thousands. So what you have is a regulatory system that was set up to deal with a couple of hundred products a year now dealing with a barrage of new products.
I'll just give you one example. In the natural health products area, there was an expectation that when the new regime was launched there might be somewhere between 2,000 and 4,000 applications for natural health products. The expectation is that there are probably 15,000 at the moment, with 10,000 in a backlog and perhaps as many as 45,000 to 50,000 products that might have to go through the process. The regulatory system is just not set up to respond to that.
I'll give you some specific examples of lost opportunity, since we're talking about health and the need to help consumers manage their own health. Food fortification is one. Most countries around the world have policies and regulatory frameworks for the discretionary fortification of food. Canada currently lacks such a policy. We started working on one in 1997 and 1998. It took five years to give birth to the policy. That was in 2003. The policy was born in 2003 and regulations were promised. Those regulations have yet to surface. So that's three years of waiting for regulations for food fortification. Our major trading partners have such frameworks. In Canada alone, if we take only the beverage manufacturing sector, we're estimating about $400 million of lost opportunity every year.
It is the same story with respect to health claims. If you want manufacturers to invest in higher value-added products, if you want them to invest in products that help manage consumers' health, you have to allow manufacturers to market those products accordingly and make claims about their health-enhancing benefits. Currently in Canada there is no regulatory framework for health claims. We have about five. Our closest trading partner has eighteen and twelve more in the pipeline. So we are still waiting for a process, and we are told that consultations are going to begin later in the year. We are just hopeful that the consultation process for health claims doesn't take as long as it did for fortification.
I won't go through the approvals for novel foods and food additives. The story is very much the same there. There's an example here of a Canadian company that lost over $5 million in revenue just waiting for an approval, which speaks to the issue of why Canada can't accept international standards for scientific evidence.
I'll just move quickly to the recommendations.
I think as a sector we can very much support the recommendations on fiscal policy with respect to corporate tax rates and capital cost appreciation made by some of the manufacturing sectors that spoke before us. But I think our most urgent priority as a sector is to make regulatory modernization a key component of the economic and competitiveness agenda of Canada. That requires pursuing a long-term, focused, government-wide initiative. And again, I'll just make the point that we are by no means alone in requiring that in order to move forward.
The two recommendations I will end with are specific to some of the issues I've raised from my sector alone, and they are to urge the government to move forward with regulations on food fortification and to develop a responsive regulatory framework for health claims.
That's where I'll end my remarks, Mr. Chairman.
:
Thank you, Mr. Chairman.
Welcome, ladies and gentlemen.
I've read through your brief quickly and on listening to you speak, aside from the general demands of the manufacturing sector, our sense is that you're experiencing a particular problem because of regulatory structure that has not kept pace with growth in your sector.
I read somewhere that you are governed by 442 separate pieces of legislation. How many federal and provincial departments are you required to deal with, if you look at the research, development, product manufacturing and marketing side of your operations?
:
There have been several failed attempts to try to get that on the agenda.
To your point, despite its economic clout, the industry is very much an orphan when it comes to a champion that coordinates all of its efforts. We don't have a home in Industry Canada. There is nobody at Industry Canada we can go to that will be a champion. Agriculture and Agri-Food Canada is often a champion, but they are typically very preoccupied with the issues around producers, so they're further up the supply chain, and that's what takes up a lot of their time. And then you have the regulator, of course, which is Health Canada.
In many respects, trying to get this issue on the political agenda in the last ten years has been very difficult, because the political agenda in health over the last ten years has been very much preoccupied with wait times and other health issues that in many cases are largely of provincial jurisdiction but that also have a national dimension. So getting on the radar has been very difficult, and that has eroded the industry. The industry has not grown, and that's why you're seeing some of the leading indicators that I've presented to you. I think what you've said and what you've suggested would very much help if we could coordinate the efforts.
:
Thank you for your presentation.
Your testimony to the Standing Committee on Industry, Science and Technology is proving to be very interesting. There's only one problem. In your submission, you make some recommendations to Health Canada, but not to Industry Canada. You're making a plea for help, because there is no white knight defending the food processing industry.
Are you aware that today, the public looks upon the food and processing industries as two very unwieldy industries guilty of gross excesses?
Yesterday evening, I watched a report advising consumers that there was no guarantee the ground beef they purchased was free of E. coli bacteria. There's no question that these kinds of reports create problems. Two weeks ago, a warning was issued about spinach and last week, carrot juice was singled out. Consumers were advised to throw out any carrot juice in their refrigerators.
What are you asking? What can you as an industry do as well to rectify this situation?
The current situation is reminiscent of the situation faced by doctors. Consulting a doctors doesn't cost anything if one has medical insurance. However, people are prepared to pay $35, $50 or even $100 to consult a naturopath. That means that people don't have a lot of confidence in the traditional medical system. The same is true of organic food products. This sector has grown because people are turning away from the traditional industry. What can be done to reverse this trend?
:
I would say that when it comes to the food processing industry we don't duck our responsibilities, and we're certainly aware of some of our image problems particularly. We're also aware of some of the responsibilities we have to help not just correct image problems but actually be part of the solution.
As everybody on this committee will be aware, obesity is probably one of the great epidemiological issues in today's society: we live in a society of excess. The question, and I think I spoke to you folks a little bit about it, concerns the need for innovation. We are only going to get out of this problem if we innovate the food supply. Over a period of five, ten, or fifteen years, the food supply in Canada is going to change; it's going to undertake some remarkable transformations.
As I said, health is the future of food. The ability to take the innovation that's coming out through all of our great research institutions and commercialize it, so that we can help Canadians deal with a lot of the health issues they experience as a result of aging, as a result of obesity, is something our industry takes very seriously. If you're asking specifically what we can do about it, we can very much help be part of the solution.
When it comes to global supply chain issues, such as the spinach issue you talked about, BSE, or a number of others, those are things that are also going to require cross-jurisdictional cooperation. The BSE question is actually very apt.
I know one of my colleagues from the meat industry is in the audience. I hope I don't misrepresent, but I know that closer collaboration between Canada and the U.S, particularly on inspection practices and certain regulatory practices around food safety, would go a long way towards addressing some of those issues as well.
:
I'll try to clarify for you.
My brief refers to the fact that Canada does not have a regulatory framework for bringing fortified products to market. So, for example, if you wanted to add vitamin C or you wanted to add a vitamin or a mineral to a food product, right at the moment there is really no established regulatory framework in Canada to do it.
We have a policy in place that, as I said, was released in 2003. In order for food companies to commercialize their products and bring them to market, we require regulations; we need a regulatory framework for it. What I'm asking here is.... We've been three years trying to give birth to these regulations; it's probably time we did it.
The same is true for health claims. These are situations.... It's not that we want to undo regulation. We need regulation, and we need modern regulation that meets our ability to commercialize.
:
Thank you very much, Mr. Chair.
I have three specific questions. Let me read them out, because I'd like you to answer them, if possible, in order.
One is a Health Canada issue. I had a private member's bill in the last session, Bill . There were problems with the bill, but we had a compromise solution whereby they would change schedule A and subsections 3(1) and 3(2) of the Food and Drugs Act and modernize the regulation. It's been over a year and they still haven't come forward. I've been on the phone with them just up to last week. They're still not moving on it.
So I was wondering specifically who you are dealing with over there and whether you had some information I could ask for. I'm very curious about this, because I've been approached by natural health food producers, herb producers, food producers who are really concerned about trade issues with the United States and how this is going to affect their industry if we don't get it solved.
The second question is on free trade agreements. We're talking about markets overseas. We've had some concern here about Korean free trade, especially with some manufacturing—the auto industry, for example. How would you say a free trade agreement with Asian markets would...? Would they help? Would they hinder you? Do you have any impact studies on where this issue is? That's question number two.
The third one is, what did the previous government do to help fix the regulatory regime, what should we continue with, and are there more suggestions for where we could move ahead as a new government?
Thank you.
:
I guess the answer to your question is that listing fees are obviously a challenge and are part of the cost of doing business. Some manufacturers will be able to absorb the cost of doing business more easily than others.
If you're a small manufacturer, part of the problem you're referring to is how you get on the shelf anyway, regardless of what the listing fee is. Do you have enough brand power to actually even get there? Those are some of the realities you face in an industry in which the retail sector is very consolidated, so I understand your point there.
For manufacturers, as I said, listing fees are one cost of doing business. There is a whole host of costs of doing business. At some point, you look at the whole market and you ask yourself if you're able to bring in higher value-added products. Can you commercialize those? What are the listing fees? What are the prices you can get for them? Once you add all those up, then you make a decision that you will produce this in Canada or you will not product it in Canada.
Thank you so much for coming out.
As you mentioned, I am one of those who has a plant in my riding, the Heinz plant, which has been there since 1905, I think. We had the opportunity to tour that plant, and the innovation is remarkable. They spoke about some of the things you spoke about too, some of those frustrations. As a multinational, especially a company being owned by a United States company, it was a concern of theirs too that the regulations you talked about were increasingly being a burden for them.
It's interesting. When you made your recommendations, you had the normal recommendations of lower taxes, capital gains, and those things, but repeatedly you gave us a picture of something that's somewhat unsettling, and that's what's happening in Health Canada. Can you give us some specific instances, some examples of some of the frustrations you receive right now, today? I don't know if anybody has asked you that question.
I'll give you two concrete examples, in a very quick way, that speak to the lost opportunity for our sector, and also for the health of Canadians and for the agricultural sector as well.
There's a Canadian-owned company that developed a fiduciary process to isolate what's called plant sterols, which are from the outside of soybeans. They're sometimes made from pulp and paper products as well. These are food additives that are used in the European Union and in the United States. They are both approved in the European Union and the United States, and they have a health claim on them. They lower the risk of cardiovascular disease if taken in very small amounts.
Large multinationals, such as Unilever and Dannon, have used entire product lines in Europe and the United States to deliver these to the population. They have such a wide acceptance that European insurance companies have started to rebate their policyholders who eat margarine containing plant sterols as part of their normal diet. They rebate their insurance costs for life insurance. They're a $300-million-a-year Canadian business, in the United Kingdom alone. In Canada, they're not approved for use as a food additive.
So we have a Canadian company that developed a fiduciary process to make plant sterols out of residue from pulp and paper. They had to invest in the United States. They built a manufacturing plant in Texas, of all places, and they sell their product around the world. But because Health Canada has yet to approve plant sterols for use as a food additive and approve them for a health claim, they can't even commercialize their own product in Canada. That's example number one.
The plant sterols that Unilever uses in Europe are made from soybeans.The implications of that are that at a time when Ontario soybean farmers are certainly looking for another avenue to sell their product, we can't commercialize that technology in Canada.
So the implications of the lack of a framework around health claims, and in this instance the lack of regulatory approval for the food additive, have repercussions both throughout the agricultural and value chain and also to us as manufacturers. There are numerous examples of that--hundreds of them--across the system.
:
If I could just add to that, the point we're trying to leave members of the committee with is that the largest potential growth area for food manufacturing in the world is in the area of functional foods. Those are foods with higher scientific profiles. There has been value added to them. They're functional for a certain diet or a health goal that a consumer is going to face. That's the future of food.
Canada does not have a competitive regulatory framework. Countries that we're going to compete with for product mandates to manufacture those functional foods are investing heavily. The American government is funding the FDA to streamline the Food and Drug Administration in the U.S., the group that makes the decisions similar to Health Canada in Canada. They've just injected a massive amount of money to speed up their approval process for health claims, which we mentioned earlier. They're investing heavily. The European Union has just agreed on a joint policy, among all their membership, on health claims. Canada doesn't even have a policy yet.
So as we go forward, the companies we represent are going to be forced to make decisions about where they commercialize innovation. It is not going to be in Canada unless we have the regulatory system that allows us to compete with our competitors.
That's the large, top-line story we're trying to commit here.
:
Thank you, Mr. Johnston.
Thank you very much for being with us today and thank you for your answers. We certainly had some very wide-ranging questions, and we appreciate you being open to them. I want to thank you particularly for your recommendations, which are very specific.
I have one point--and I won't ask you to respond--on the regulatory framework, on that recommendation. If you have anything further or specific on that, on a regulatory framework that you would like to see in place, your ideal regulatory framework, pass that along to us as well. We certainly appreciate you being here before the committee.
I want to thank members for their questions.
We will suspend for a minute or two and then have officials from the Department of Finance with us.
:
Members, we'll begin our second hour.
We have two officials with us from the Department of Finance. Nancy Horsman is director of the business income tax division of the tax policy branch, and Kevin Shoom is acting chief, economic development, of the business income tax division of the tax policy branch.
I'd just like to remind members about why we invited finance department officials here. There have been recommendations, a series of them, made to us by various organizations to amend the capital cost allowance, to change the way we depreciate capital in this country, and also to expand the SR and ED tax credit program to make it more relevant for manufacturers. These are two of the recommendations we've heard.
For the benefit of the witnesses, we've heard a number of recommendations on CCA, the main one being moving towards a two year writeoff, if I recall correctly.
So that's the main reason you were invited, to give us some background so that we can make a very informed recommendation. We did have a brief provided on each of these subjects by Library of Parliament researchers.
I don't know if one or both of you will be speaking, but we would ask you to keep your presentation to under ten minutes. Then we'll go to questions from members.
Thank you for being here, and welcome to the committee.
:
Thank you, Mr. Chairman.
I have been asked to provide you with some background on the scientific research and experimental development tax incentives and on the capital cost allowance system in Canada. I will give a brief overview of what these measures are and how they work, and then we'd be happy to answer any questions you might have from a tax policy perspective.
The concept of providing tax assistance for scientific research and experimental development, which we call SR and ED in the department, is grounded in the economic principle of externality. The basic logic is that when a business performs SR and ED activities, the benefits are not restricted simply to the business itself but also go to others in the economy. For example, once a new technology or process is developed, other businesses may be able to adopt it at little or no cost. The public benefit of the activity is actually higher than the private benefit to the individual business. In the absence of government support, there would be an underinvestment in the activity.
Canada’s SR and ED tax incentive program is one of the most advantageous in the industrialized world. It provided over $2.6 billion in tax assistance to over 12,000 businesses in Canada in 2006. The tax policy objectives in supporting SR and ED activities are: one, to encourage the activities in Canada, given this externality that is brought about by SR and ED investments; two, to assist small businesses in carrying out these activities; three, to provide incentives that are as simple to understand and comply with and are as certain in application as possible and; and four, to promote SR and ED activities that conform to sound business principles.
The scientific research and experimental development tax incentives help Canadian businesses to develop new products and processes, improve productivity, enhance competitiveness and economic growth, and create jobs in Canada. To be eligible, SR and ED has to be performed in Canada by a business, and eligible activities may take the form of basic research, applied research, or experimental development. Most claims are for experimental development.
I'd like to give a bit of an overview of how the structure of the tax incentives work. They come in the form of deductions and credits. With respect to deductions, current expenditures and capital expenditures on machinery and equipment are fully deductible in the year incurred and unused deductions may be carried forward indefinitely.
Perhaps more important are the tax credits that are provided. There are two rates. The general rate is 20%, which means that the federal government provides a tax credit of $20 for every $100 of spending undertaken in Canada. Then there's an enhanced credit rate of 35% for smaller, Canadian-controlled private corporations on their first $2 million of qualified expenditures. The investment tax credits may be deducted against federal taxes otherwise payable, and unused credits may be carried back three years or carried forward twenty years.
In recognition of the difficulty they can face in accessing capital, smaller, Canadian-controlled private corporations that are not taxable may obtain a refund of their credits earned in a year. Current expenditures that earn SR and ED ITCs at a 35% rate are fully refundable up to a maximum of $2 million. That means a small start-up could be eligible for a refund cheque of up to $700,000 on its SR and ED expenditures. Also for these smaller, Canadian-controlled private corporations, investment tax credits on capital expenditures and on current expenditures in excess of the $2 million limit are eligible for a 40% refund.
It should be noted that provinces also provide various types of incentives for research and development activity undertaken in their own jurisdictions.
Together, all of these tax incentives provide a generous environment for Canadian research and development.
To illustrate, the 2005 tax expenditure and evaluations report provided estimates of the 2010 marginal effective tax rates on business investment. The marginal effective tax rate measures the extra return on an investment required to pay corporate-level taxes, expressed as a percentage of the total return on investment. According to the 2005 report, R and D tax incentives reduced the Canadian marginal effective tax rate for the manufacturing sector from 28.5% to 21.8%, a reduction of 6.7 percentage points. The marginal effective tax rate for R-and-D-intensive manufacturing firms decreased even more dramatically, falling from 31.7% to 3.4%, a drop of 35.1 percentage points.
I'd like to turn now to the capital cost allowance system. Generally, the cost of capital investment cannot be written off in the year incurred; rather, the cost must be written off at the capital cost allowance rates that are permitted under the Income Tax Act, and this is similar to the concept of depreciation used for accounting purposes.
The annual deductions that may be claimed under the CCA system will eventually result in virtually the entire capital cost being allowed as a deduction.
The approach that's been taken to setting the rate for a particular class of assets is based on the objective that capital cost allowance rates should reflect the useful life of assets so that they would provide adequate recognition of the capital costs over time. This approach helps ensure that investment choices are not distorted and are directed towards the most productive uses. There is an explicit exception to this approach in the provision of accelerated rates in certain instances, such as efficient and renewable energy equipment.
As you know, the government regularly receives requests for accelerated CCA rates for particular assets and for assets used by particular sectors. By advancing the timing of deductions, accelerated CCA represents a subsidy for investment with associated fiscal cost to the government, such that proposals therefore need to be evaluated by considering their likely effectiveness and their economic impact relative to the impact on government revenues.
To conclude, the SR and ED tax incentive program is an important element of the federal strategy of providing assistance for research and development. The Department of Finance continues to review the program on an ongoing basis to ensure its effectiveness in the context of the overall federal strategy of providing assistance for R and D.
Similarly, the department reviews capital cost allowance rates on a regular basis to ensure they reflect useful life and therefore contribute to the efficient allocation of resources in the economy.
I'd be pleased to answer any questions the committee may have on the tax policy aspects of the SR and ED tax incentives or capital cost allowance rate.
Perhaps you can clarify this, but I believe Canada leads--in a negative way, unfortunately--the OECD nations in terms of taxation on investment, which, as you can appreciate, is not a good thing because it directly affects innovation, it affects jobs, etc.
We've now heard from many different witnesses before committee, and many of them argue that the CCA rates are outdated given the rapid acceleration of technology relevant to their industry.
My second question, after the sort of general first one, would be on how often you adjust these rates and what the process is. We tend to hear they're not working for the industry, that due to the rapid rate of innovation within that particular sector, the equipment changes so fast and technology changes so fast that those rates are not compatible.
:
You're talking about $2.6 billion out of a total of $35 billion. Fine.
WIth respect to the capital cost allowance system, you cite efficient and renewable energy equipment as one instance in which CCA rates apply. However, we can't forget tar sands development costs which have also benefited from a 100 per cent write-off from the outset.
You stated that you periodically receive requests for CCA rates to apply to particular assets. Have you compiled a list of these requests showing which ones were rejected, and which ones were allowed? For example, the printing sector systematically applies every five years, but the government always stands firm.
Do you have a list of areas in which progress has been made, and of areas in which we are still at the same stage?
:
The useful life for a class of assets is intended to be roughly a weighted average of the assets that are included there. We typically define our assets by the asset itself, rather than by the industry in which it's used. There would be an assumption that there should be some comparability to the lives of particular assets whether they're used in industry A or sector B. We would then try to get a sense of the representative life of that asset.
We acknowledge that this means the CCA rate applied to any particular asset may be too high or too low, depending on the actual experience for that particular asset. The way to compensate for that is through provisions related to recapture and terminal loss. When an asset does not depreciate as quickly as the CCA rate provides for and is then disposed of--let's say it sold for more than what it was written down for--then there is a potential that the difference will be taken back into income, reflecting that there were CCA deductions in excess of the depreciation actually realized.
On the other hand, when an asset depreciates much more rapidly than provided for, there can be a terminal loss, such that the additional deduction necessary to reflect the experience of that asset occurs at disposition.
The description I've given you becomes more complicated when you take into account that we group assets in pools. Some of these provisions would occur when a pool gets exhausted or if an asset is being depreciated on a stand-alone basis. The government introduced a provision several years back to try to make the system more reflective of differential experiences for actual depreciation by providing what we call a separate class election for manufacturing and processing equipment. If a business is concerned that an asset is going to depreciate more quickly than is reflected by the 30% rate provided for those assets, it can put it into a separate class. Then if it disposes of the asset after, say, four years, it can claim a terminal loss at that time, rather than allowing the difference to go into the general provisions for the pool.
:
We're not going to deny that filling out a nine-page form or whatever can be a bit of a burden. Unfortunately, because research and development is a very complicated question, and verifying that is difficult and the incentives are so generous, certain administrative processes need to be in place that the Canada Revenue Agency has decided to put into effect.
That said, CRA is also very sensitive to the needs of particularly smaller businesses. They've developed a variety of initiatives to try to help out small businesses and deal with some of these things. I can quickly identify a couple of them.
They have public information seminars, for firms that are interested in applying, talking about the program generally, going through eligibility criteria, what expenditures are eligible, and how to file a claim.
They have industry-specific seminars that reflect that there are particularities about research and development, when conducted in particular sectors, that require a more in-depth analysis to see how the activities in that sector relate to the question of whether it is R and D.
They have put in place a first-time claimant service. A business can get in touch with a representative from the SR and ED directorate, who can provide them with information tools and assistance to help complete the first-time claim. There is a pre-claim project review service--
:
Thank you very much for coming before us.
I do just want to make sure we follow up with respect to the corporate tax rates between Canada and the U.S., if you can get us a comparison from the finance department. Also, we do have the capital cost allowance classes provided by our researchers, but do you have something comparable between CCA rates here in Canada and CCA rates in the U.S.?
I think a question that was started by Ms. Stronach and a thread throughout is how the finance department decides the criteria by which if someone comes forward--and this goes to Monsieur Arthur's question--and says the useful life of an asset is....
A computer can last for ten years, but from an economic point of view, it's really only useful for about one or two years, if that. So what are the criteria? If you can help us understand that, it would be very helpful in terms of useful life versus actual economic life.
I think, just responding, you've heard the concerns. The concerns from the manufacturing sector are that we're at a disadvantage vis-à-vis the U.S., particularly with regard to CCA rates. If there were better CCA rates, there'd be more capital investment in the manufacturing sector across this country, and it would be better for the environment because you'd have newer processes and newer machinery. We need to get a fundamental answer, and unfortunately we don't have time, but I think that sort of ties in some of the threads from various committee members.
If we could get a formal response to me and the clerk, we'll distribute that to all the members.
We thank you very much for being here. There's a lot of interest in these issues, obviously. Thank you for your time.
We'll ask members to stay. We do have a future business meeting, which we will try to keep very short.
We're going in camera, so we'd ask anyone who is not a member or associated with a member to kindly depart.
[Proceedings continue in camera]