FINA Committee Report

Businesses are an important part of the Canadian economy, and a business-friendly regulatory and tax environment is critical for the nation’s continued economic recovery as well as for the creation and existence of high levels of business activity in the longer term. Consistent with the discussion in Chapter 2, in addition to the jobs that they provide to “properly positioned” people, businesses are drivers of the innovation and productivity that are essential for increasing the standard of living of all Canadians. The continuing economic crisis has led to extraordinary measures in Canada and in other countries to ensure the viability of businesses, and changes must continue to occur in order to “position” our businesses for a prosperous and sustainable future.

I. FINANCING

Access to financing and capital is important for all businesses and at all phases of the business cycle. During the current financial and economic crisis, businesses in a number of sectors had difficulty accessing sufficient financing at an affordable price. These types of difficulties hinder economic recovery, and limit the extent to which businesses can attain the level of productivity needed to be prosperous and globally competitive in the future.

WITNESS VIEWS

In speaking to the Committee about the role that businesses have played – and will continue to play – in Canada’s economic recovery, witnesses focused on the accessible and affordable financing and capital needed to sustain and grow their operations, the research and innovation that enables them to be efficient and globally competitive, business taxation, and other taxation and regulatory measures related to trade and export markets.

A. Access to Bank and Non-Bank Financing

With businesses facing difficulties in accessing affordable financing and capital due to the financial and economic crisis, witnesses told the Committee that there was a significant decrease in both short- and long-term financing during the crisis in 2008. They observed that businesses with unproven and novel business models or products were finding it especially difficult to obtain capital of any kind, and generally proposed that tax measures and other government policies to increase the availability of business credit be expanded.

The Committee was informed that one method to alleviate the liquidity problems of businesses still developing their products is to change the lending practices of government agencies, including the Business Development Bank of Canada (BDC), in order to increase the number of loans to firms that focus on innovative processes and technologies. In the view of witnesses, new lending practices could include increased loan limits to small businesses, streamlined application processes, tailored repayment terms and collateral requirements, and an increase in the total venture capital funds made available to the BDC.

In speaking about the Canadian Secured Credit Facility administered by the BDC, witnesses noted that funds are not directly available to retailers that do not have an affiliated finance company; they argued that the list of eligible participants should be expanded and that the financing terms should be lengthened. As well, they suggested that other credit facilities, such as those for insured mortgages and term asset-backed securities, should be reinforced. Witnesses also proposed that the government provide a guarantee for lines of credit for businesses in the early stages of product development, and that a national fund be created to help automobile purchasers obtain financing. The notion of interest-free secured loans that would later convert to a bond was also suggested.

As noted by witnesses, private equity investors—or angel investors—are an important source of financing for new companies and certain federally regulated entities. Witnesses proposed the creation of an angel community development initiative to foster domestic angel investors, and argued that federally regulated ports should be allowed to access greater amounts of venture capital. In order to decrease the investment risk for angel investors, they suggested that an innovation and productivity tax credit as well as a national co-investment fund should be created.

Moreover, witnesses stated that co-operatives have historically faced difficulty in raising capital since they are unable to issue common shares to the public. As indicated in Chapter 2, they continue to have difficulty in raising capital, and witnesses called for a specific government lending program for eligible co-operatives.

B. Tax Incentives to Increase Capital

In order to increase capital investment in businesses at the early stages of product development through direct investment by business owners or by third-party investors, witnesses suggested new tax policies and government spending initiatives, including: corporate tax rebates for individuals who start their own business subsequent to termination by their employer; a tax credit for individuals who invest in venture capital entities; a tax deduction for members who purchase shares in a co-operative; specific tax credits for those who invest in eligible industries; and a national strategy to improve the supply of risk capital, with coordination of federal, as well as provincial and territorial, programs.

According to witnesses, taxes on capital, such as foreign investments and pools of capital held by an institution, can increase the cost of borrowing. Consequently, they advocated the removal of withholding taxes on foreign investment in Canada and of capital taxes on large financial institutions.

In an effort to increase business liquidity in “business families” with losses in certain affiliates and profits in others, witnesses recommended that the Income Tax Act be changed to allow affiliated companies to file consolidated income tax returns, which would allow tax losses to be shared among them. It was also suggested that Canadian businesses should be allowed to repatriate profits made by foreign affiliates on a tax-free basis.

Finally, the Committee was told that federal loans and grants to businesses that utilize established technologies that do not have an environmental benefit, that are not accountable to the Auditor General of Canada, and that are not accessible by Canadians through access to information legislation should be eliminated. It was also proposed that General Motors not receive further federal aid.

C. Financial Market Regulation, Financial Services and Financial Literacy

Witnesses noted that inadequate financial regulation may have contributed to the financial and economic crisis in 2008, and focused their comments on measures to limit excessive risk-taking by large institutions in order to protect businesses from a future credit collapse. For example, they argued that the investment and lending activities of Canadian banks should be separate, and suggested that the deposits in financial institutions should not be insured through the Canada Deposit Insurance Corporation since it promotes risky behaviour by deposit-taking institutions. In order to prevent short-term risky behaviour by employees of investment entities, witnesses recommended that compensation be based on the long-term performance of investments.

Securities regulation was also a concern of witnesses. In an effort to improve regulatory efficiency and to facilitate internal trade, witnesses suggested that a common securities regulator be created, perhaps with the ability to supervise financial reporting and provide auditor oversight in order to increase the accountability and transparency of security issuers. On this last point, witnesses mentioned that private contracts based on a future event—“derivatives” contracts—should be more transparent, and that financial institutions and other entities should disclose the monetary value of their derivatives.

With witnesses indicating that the financial services industry is important to Canadians and Canadian businesses, it was proposed that the federal government partner with provincial and municipal governments, the private sector and educational institutions to create an improved institutional infrastructure. Moreover, with increased complexity of financial products and recognizing the role that some of these played in the global financial and economic crisis, witnesses advocated government programs to increase financial literacy, as well as clearer language for financial products sold to consumers.

Finally, witnesses highlighted that payment systems, such as the debit card network, play an essential role in the Canadian retail market and that increased competition from US-based payment card networks may increase costs for both consumers and retailers. From this perspective, they shared their view that pricing of all debit card payment services should be cost-based, and that US-based payment card networks should abide by Canadian payment system rules and voluntary codes of conduct.

COMMITTEE RECOMMENDATIONS

In the Committee’s opinion, financing is critical for organizational success: businesses must be able to access adequate capital when they need it, and the financing must be available at a cost that is affordable. We are aware that, during the global financial and economic crisis, a number of Canadian businesses had trouble accessing an adequate supply of reasonably priced financing; while this situation was new for some businesses, it was the continuation of a problem for others. In our view, the federal government has a role to play in ensuring that businesses can access the tools that they need, including financing, in order that they are positioned for future prosperity. Consequently, the Committee recommends that:

The federal government work with the venture capital industry to identify new sources of financing and examine the effectiveness of existing tax incentives related to financing. Moreover, the government should review the feasibility of increases to the Labour-sponsored funds tax credit to 20% of eligible investments, to a maximum eligible investment of $20,000.

II. RESEARCH, DEVELOPMENT AND COMMERCIALIZATION

The “knowledge industry” plays an important role in the discovery of solutions to current and future problems, and research and development efforts can lead to new goods and services, thereby providing consumers with more choices and business with greater prosperity. That being said, commercialization must occur in order to bring these new products to the domestic and international marketplaces.

WITNESS VIEWS

Providing the goods and services that consumers want is critical if businesses are to maintain their competitiveness in the marketplace. Consequently, witnesses focused their comments and suggestions on existing and proposed federal programs that aid businesses wishing to develop and commercialize new goods and services. They also noted that the government could fund various scientific endeavours, and help protect new and existing creations through intellectual property laws.

A. Federal Research Programs and Tax Credits

Witnesses generally indicated that there is a need for government programs and incentives that foster entrepreneurship and investment at early stages of business development and growth in order to ensure global competitiveness and the identification of Canada as a desirable place to do business. In discussing the Industrial Research Assistance Program (IRAP), they suggested that funding for the program should be increased; depending on the witness, amounts from $100 million to $350 million annually were suggested. As well, it was proposed that the IRAP receive additional funding for third-party technical support and the hiring of recent graduates to develop export strategies, and that an IRAP commercialization fund, perhaps called the technology acceleration program, be created. Moreover, the establishment of a three-year federal commercialization voucher program, administered through the IRAP, was suggested as a method by which small and medium-sized businesses could obtain inexpensive research, product testing, prototyping and other development services from a college, university or other research facility.

Witnesses also commented on the Scientific Research and Experimental Development (SR&ED) investment tax credit, and generally held the view that the reporting requirements for the credit should be streamlined in order to decrease administration costs for eligible small businesses and increase the use of the credit. In respect of the filing deadline related to mining investments, it was suggested that the proposed changes should not be implemented; instead, the Minister of National Revenue should have the discretion to extend the deadline. Witnesses were concerned about unclear eligibility requirements, which result in disputes with the Canada Revenue Agency (CRA) and delay the processing of claims. In their view, the CRA should share personnel with Industry Canada, the National Research Council Canada and the private sector in order to increase the technical knowledge within the CRA as well as to standardize eligibility throughout Canada for government grants and tax incentives. Witnesses also suggested that the program should be expanded to include expenses for social science research, research and development in a non-laboratory location, and resource conservation.

The Committee was told that the SR&ED investment tax credit is worth less to companies that do not earn sufficient income to utilize its full value, which may decrease the incentive to initiate research and development. Consequently, witnesses suggested that the SR&ED investment tax credit should be fully refundable in order to help businesses facing liquidity problems as well as to provide an increased incentive for private research in general and for collaboration with entities that have low taxable income, such as the not-for-profit research sector. In order to provide liquidity, it was also proposed that the government buy back investment tax credits from recipients. According to witnesses, the monetary restrictions on the refundable portion of the credit, the annual R&D expenditure limit and the taxable capital threshold should be increased; as well, eligible expenses should include equipment primarily used for research, fees associated with obtaining intellectual property protection and amounts paid to third parties to obtain the tax credit.

Witnesses also proposed the creation of a temporary “super-deduction” or a deduction that is greater than 100% of the value of eligible SR&ED expenses in order to provide increased liquidity for businesses by decreasing their tax payable. Moreover, they suggested that projects related to the storage of greenhouse gas emissions should be eligible for an investment tax credit that is similar in operation to the SR&ED investment tax credit, since they are not yet economically feasible.

Finally, witnesses noted that investments in geo-science research, such as geological data and maps, promote new exploration activity, and proposed that the government maintain a long-term commitment to the Geo-mapping for Energy and Minerals program. As well, it was recommended that the federal government complete a geo-mapping of the country’s energy and mineral resources.

B. Federal Granting Councils

Witnesses spoke to the Committee about the three federal granting councils, and generally believed that the government should increase funding to the Canadian Institutes of Health Research (CIHR), the Natural Sciences and Engineering Research Council of Canada (NSERC) and the Social Sciences and Humanities Research Council of Canada, and ensure that all grants include funding for operating costs. The suggested amount of the increase ranged from 5% of current funding for all granting councils to increased funding for all basic and applied research to 3% of GDP; increased funding for grants in respect of applied research was also advocated.

Regarding the operating costs of grant recipients, it was recommended that the government increase support to the Indirect Costs Program, with a goal of eventually providing 40% of the value of indirect research costs. As well, in the view of witnesses, grant applications for the granting councils should require goals and milestones for eventual commercialization of the research. Furthermore, it was argued that the granting councils should issue grants for general industrial design research.

Finally, witnesses shared the view that granting council support for post-doctoral researchers is important for the creation of innovative business strategies and for new technologies. They suggested that the government should fund additional Canadian and foreign-born post-doctoral researchers.

C. Collaborative Research and Commercialization

Witnesses supported increased funding for collaborative research financed by the granting councils and conducted jointly by educational institutions and businesses. Suggestions included increased support for the NSERC College and Community Innovation Program, for such collaborative programs as Genome Canada and the CIHR Rx&D Collaborative Research Program, and for the creation of a framework to facilitate multijurisdictional collaborations, such as the Canada-California Strategic Innovation Partnership.

Some witnesses believed that Canada does not support commercialization sufficiently, and proposed such solutions as: the creation of tax credits; an investment to develop industry engagement opportunities for Canada’s universities; funding for Sustainable Development Technology Canada to provide additional investment support to businesses at the early stage of development and commercialization; federal matching funds for such provincial commercialization initiatives as the Ontario Emerging Technologies Fund; specific support for colleges to upgrade their facilities to include industry-standard equipment; additional support for Western Economic Diversification Canada to finance or co-finance large-scale research and commercialization with industry partners; coordinated provincial, territorial and federal funding initiatives; integration of the IRAP with the NSERC Centres of Excellence program; and the creation of a pan-Canadian network of centres for commercialization and technology transfer that would provide technical assistance services, product testing, and training for company personnel and students.

Finally, to promote entrepreneurship at the post-secondary level, the Committee was told that the government should invest in Canadian universities so that they can develop and promote training programs that inspire the spirit of entrepreneurship in students, faculty and staff.

D. Scientific Infrastructure

A number of witnesses mentioned specific scientific infrastructure projects that should receive funding from the government to help defray construction costs, such as the Canadian Neutron Centre, a telescope funded jointly by Canada and the US, the McMaster Innovation Park and Canada's National Laboratory for Particle and Nuclear Physics (TRIUMF). As well, witnesses recommended that the government and the private sector work together to develop, adopt and implement a long-term space plan and a defence industrial strategy.

Witnesses also highlighted specific government programs or government-supported entities that should receive additional funding, and identified the need for new programs in certain disciplines, including the Canadian Foundation for Climate and Atmospheric Sciences, the Public Infrastructure Engineering Vulnerability Committee, the Canadian Foundation for Innovation, the NSERC Major Resources Support Program and the NSERC Discovery Grant program for basic research.

E. Intellectual Property

The Committee was informed that tax measures related to income from intellectual property should be created in order to increase research and development conducted in Canada. Suggestions included a tax exemption for royalty income earned on patented products developed in Canada and a “super-deduction” for eligible research and development expenses, with the federal government receiving a royalty for a period of time on marketable products and services developed after utilizing the deduction.

In light of concern over the relatively weak protection granted to name-brand pharmaceuticals and increased litigation by the generic pharmaceutical industry, it was argued that regulatory changes are needed in order to restore balance.

The Committee was also told that intellectual property protection should be aligned with other jurisdictions, and it was suggested that the new approval regime for drugs produced in animals should be consistent with other countries.

Finally, witnesses stated that intellectual property rights can promote innovation, and proposed that the government play a role in establishing a legal framework that vigorously protects copyrights and trademarks, and that strongly enforces intellectual property laws by preventing counterfeiting and piracy of intellectual property.

COMMITTEE RECOMMENDATIONS

The Committee believes that an important element of a prosperous future is investment in the research and development as well as commercialization activities that will make Canada, its employees and its businesses world leaders. In the same way that students and workers are provided with incentives to acquire the leading-edge skills needed by businesses, educational institutions and corporations are provided with tax and spending measures designed to support research and development, both generally and in particular fields. However, in our view, the outcomes of research and development efforts must be commercialized, and the federal government has an enhanced role to play in this regard as well. Recognizing that research, development and commercialization must occur if the nation is to be positioned for prosperity and sustainability, the Committee recommends that:

The federal government simplify the administration of the Scientific Research and Experimental Development investment tax credit, and expand the range of expenditures eligible for the credit to include, for example, the costs of patenting and training employees to work on innovative projects.

Moreover, consistent with the jurisdiction of the provinces and territories, the government should increase its support to research through federal granting councils and research agencies as well as for the indirect costs of research. As well, the government should encourage universities and colleges to partner in complementary areas of research and as well as commercialization of research.

Finally, the government should, recognizing the jurisdiction of the provinces and territories, create a specialized fund for medical research for children’s health.

III. INCOME TAX AND FISCAL MEASURES

The Income Tax Act contains rules that govern the calculation of income and the amount of tax payable in a given taxation year. It also contains specific tax credits that can be used to reduce the tax payable for the taxation year, which may increase the working capital of businesses claiming the credit. Overall, through eligibility rules, tax credits may be targeted in order to provide an incentive for businesses to engage in certain types of activities or to provide tax relief for certain sectors or industries.

WITNESS VIEWS

Witnesses generally believed that specific tax incentives related to the depreciation of income-generating property—known more generally as capital cost allowances—and to mining operations should be modernized in order to reflect new markets and technology in Canada and abroad. They also focused on overall business taxation and on eligible expenses.

A. Capital Cost Allowance

A number of the Committee’s witnesses proposed changes to the temporary 50% straight-line accelerated capital cost allowance (ACCA) for manufacturing and processing machinery and equipment purchases. In general, they advocated: making the temporary measure permanent or extending it for five years, depending on the witness; expanding the list of eligible manufacturing and processing equipment and machinery, such as to include environmental technologies, equipment used in the upstream petroleum industry and certain leased inventory; and allowing companies to carry back any tax losses incurred as a result of the ACCA for a period of seven years.

Some witnesses expressed concern over unequal capital cost allowance treatment for goods with similar business or consumer use, and have advocated harmonization and modernization of the capital cost allowance classes. For example, they commented that the two types of consumer-use broadcasting decoders have different depreciation rates for decoder box distributors. Moreover, it was argued that the modernization of agricultural equipment justifies moving certain agricultural equipment to class 10 from class 8, and increasing the depreciation rate of class 10 to 40%.

Regarding the class 41 special capital cost allowance regime for oil sands projects, the Committee was told that the regime should be renewed for five years to offset decreased business profits resulting from lower commodity prices.

Witnesses commented on other aspects of energy-related capital cost allowance classes as well, specifically classes 43.1 and 43.2, which address energy conservation equipment and renewable-energy-generating assets respectively. It was suggested that a review of the types of machinery and equipment that are “eligible” energy conservation equipment should occur, that carbon capture and storage equipment and machinery should be included in class 43.1, and that the capital cost allowance should be available to future parties of joint ventures with the original recipient.

Regarding class 43.2, witnesses mentioned that carbon capture and storage equipment used in the electricity generation industry should be eligible for class 43.2 depreciation. Moreover, they believed that the capital cost allowance deduction should be transferable to third-party financiers, since the renewable energy companies may not have sufficient income to utilize the full deduction. Finally, they advocated the repeal of specified energy property rules in the Income Tax Regulations to allow for transferability of the deduction.

Witnesses also voiced concern over inadequate capital cost allowances for other classes and types of equipment and machinery. For example, it was argued that the depreciation rate for classes 10, 16 and 38 should be accelerated by changing the calculation of depreciation to a straight-line depreciation basis instead of the declining-balance method of calculation. They also recommended an accelerated capital cost allowance for specific equipment, such as broadband network equipment and machinery, mining machinery and application software.

B. Tax Credits for Specific Sectors and Industries

With a view to increasing private funding for mining operations, witnesses advocated changes to the Mineral Exploration Tax Credit (METC) in order to provide greater tax relief to individual investors in eligible mining operations. Suggested changes ranged from increasing the value of the tax credit for a period of time to making the METC permanent. It was also suggested that the Minister of National Revenue should retain the power to extend the filing deadline for the tax credit, that the list of eligible expenses should be expanded and that the total amount of expenses that can be flowed-through to shareholders should be increased.

Witnesses also proposed the creation of other tax credits: a refundable tax credit to encourage small and medium-sized businesses to invest in information and communications technologies, including both equipment and training; a tax credit to encourage modernization of mineral processing facilities in order to increase productivity and to provide environmental benefits; a refundable tax credit for investment in alternative energy solutions; an investment tax credit for projects related to the storage of greenhouse gas emissions; a tax credit for businesses that renovate their storefronts and sales rooms that would be similar in operation to the Home Renovation Tax Credit for individuals; and a tax credit for winery infrastructure, as noted in Chapter 4.

C. Capital Gains, Corporate Income Taxation and Business Expenses

Regarding capital gains taxation, witnesses argued for deferral of the capital gains tax on the transfer of a small business between an owner and his/her children, for a reduction in or elimination of the 50% tax rate on capital gains, and for taxation of capital gains at the same rate as other forms of income.

A number of witnesses spoke about the corporate income tax rate; depending on the witness, they proposed that the rate be reduced, that the rate be 15% in 2010 instead of in 2012 as legislated or that the rate be raised to its pre-1980 level. A flat tax, which would decrease the administrative burden on both the government and the taxpayer, was also highlighted.

Fair tax treatment of small businesses was a concern of some witnesses, who wanted a lower tax rate through changes to the small business tax rate reduction regime. They suggested raising the capital threshold for the full rate reduction or repealing the threshold altogether.

To decrease the overall administrative burden on small businesses, and to provide a financial incentive to hire additional employees, it was proposed that the monetary amount of employee source deductions be transferred to the small-business employer for employees hired in the current year, with the proportionate amount of the transfer decreasing in value over time. It was also suggested that tax refunds should be directly applied to mandatory employer payments, such as for Canada Pension Plan and Employment Insurance contributions, and that the income threshold for Goods and Services Tax (GST) registration be increased.

Finally, witnesses highlighted issues specific to certain industries that raise the cost of doing business, and recommended that changes occur. For example, suggestions included: exempting energy and infrastructure trusts from mandatory conversion to a corporation; exempting investment income earned on certain reserves held by an insurance company; allowing deductions under the replacement property provisions of the Income Tax Act for expenses related to the replanting of plant species, regardless of the similarity between the original and replacement plant; allowing “super-deductions” for expenditures in the construction industry; and repealing the income tax rules regarding deductibility of expenses related to depreciable railroad equipment with special Canadian Transportation Agency-approved accounting treatment.

COMMITTEE RECOMMENDATIONS

The Committee is of the view that, in order to ensure the prosperity of our businesses and—by extension—our nation, Canada’s corporate tax system must be competitive with other jurisdictions, provide the right incentives for hiring and investment, and be as simple as possible. From this perspective, and recognizing the importance of such a tax system to ensure that our businesses are positioned for success, the Committee recommends that:

The federal government undertake a comprehensive review of capital cost allowance rates in Canada. Moreover, the accelerated capital cost allowance for manufacturing and processing machinery and equipment should be extended.

As well, the government should continue to implement all planned corporate tax rate reductions as scheduled to 2012, ensure that all relevant thresholds related to corporate taxation are changed annually in accordance with increases in the Consumer Price Index, ensure that federal regulations are as simple and modern as possible, and review the federal fiscal implications of allowing consolidated tax reporting.

Finally, the government should improve tax fairness and combat tax evasion by strengthening the Canada Revenue Agency’s underground economy initiatives, and should adopt international tax agreements consistent with the Organization for Economic Co-operation and Development’s tax haven initiatives.

Finally, the Committee believes that particular sectors in our economy require special examination of their taxation regime, the certainty provided by longer-term measures to facilitate planning, or specific tax assistance if they are to be in a position to prosper as they should. For that reason, the Committee recommends that:

The federal government review the Excise Tax Act in order to ensure that domestically produced beverage alcohol is taxed appropriately, extend the Mineral Exploration Tax Credit, and create tax incentives to stimulate investment and growth in the manufacturing industry.

IV. DOMESTIC AND INTERNATIONAL TRADE

Canada is a small and open market in the global economy, and a large proportion of the nation’s production is exported to foreign markets, particularly the United States. Trade within Canada is also important for businesses, and it is essential to eliminate barriers to interprovincial and interterritorial trade in order to ensure the efficient movement of goods and the mobility of labour. Regulatory differences, both within Canada and between Canada and the countries to which goods are exported, can increase compliance costs and hinder fair competition.

WITNESS VIEWS

Fair and equitable regulatory and tax regimes were the focus of comments and suggestions made by witnesses, who generally supported harmonization, simplification and equity. To promote international trade, witnesses mentioned specific changes to excise taxes and international taxation policies in the Income Tax Act.

A. Harmonization and Simplification of Regulations and Tax Systems

Proposed harmonization of provincial retail sales taxes with the federal GST in two of the largest Canadian provinces was an issue for witnesses, and they voiced differing opinions on the potential effects of the proposed harmonization. Some shared their view that harmonization would help exporters and manufacturers, and urged the federal government to work toward harmonizing the GST with the remaining provinces that have a retail sales tax. Others were concerned that harmonization would increase operating costs for financial service businesses and decrease business for restaurants.

Moreover, a number of witnesses were concerned that if a harmonized tax were to be “hidden” in the price of the good or service, large businesses would have different advertised prices throughout Canada, thereby disrupting pre-pricing policies in the manufacturing supply chain where products are priced prior to shipment to the retailer. The Committee was also told that provinces with lower tax revenue after harmonization due to tax rate differences prior to harmonization should be compensated for the shortfall, and that eligibility for the input tax credit should be reviewed.

To reduce the costs for businesses with activities throughout Canada, review and harmonization of regulatory regimes were also suggested. For example, witnesses highlighted uneven provincial, territorial and municipal regulations for environmental services and assessments and for potential greenhouse gas reporting requirements, and recommended harmonization. A case-by-case review by federal authorities of provincially approved environmental assessments was proposed, and witnesses advocated a moratorium on new environmental and security regulations for airports until a proper review can be conducted. As well, the Committee was informed that the Natural Health Products Directorate of Health Canada and the Canada Organic Office of the Canadian Food Inspection Agency should implement appropriate systems to ensure a fair, predictable and consistent regulatory environment for natural health and organic products. Regarding automobile manufacturing, witnesses advocated a reduction in government regulation and conditions. In general, witnesses supported a holistic approach to regulatory refinement, and suggested that similar regulations in more than one jurisdiction should be simplified and modernized based on outcomes and risks in order to decrease the administrative burden on businesses.

Witnesses also had specific concerns about various regulations and tax policies, including: the removal of certain broadcasting fees and a reduction in telecommunication fees in general; allowing certain entities to be eligible for both specific ship building and repair funding under the Structured Financing Facility and the accelerated capital cost allowance in order to promote commercial ship repairs, conversions and construction in Canada; an expansion of the definition of “substantial renovations” for GST rebate purposes; a reduction in the GST rate to 2%; annual indexation of relevant thresholds related to corporate taxation; and a repeal of airport rents, as noted in Chapter 4.

It was proposed that reduced tax complexity could lower the administrative burden on businesses, and witnesses highlighted specific examples, such as the tracking of eligible dividends for the dividend tax credit, and filing errors due to complicated and inconsistent tax forms. Moreover, as indicated in Chapter 2, some witnesses said that the government should appoint a panel of experts to undertake a fundamental review of the tax system in order to determine how the system affects businesses and individual taxpayers, and with a view to simplifying and streamlining the provisions of the Income Tax Act as well as the Goods and Services Tax provisions in the Excise Tax Act.

B. Unequal Tax and Regulatory Treatment

Some witnesses highlighted specific cases of what were characterized as unequal tax treatment for competing businesses in certain sectors. For example, the Committee was told that providers of funeral goods and services are not treated similarly for GST purposes, since certain providers operate as exempt charities; equal treatment for all providers was requested. A requirement for all firms and individuals in the construction industry to register for a business number, regardless of whether the entity is a small business and thereby not required to register for a GST number, was urged. Finally, it was suggested that fees charged by the Competition Bureau for merger reviews are too high for commercial real estate transactions.

C. Imports, Exports and International Taxation

Witness comments about customs duties/tariffs and excise taxes, which can increase the retail price of imported goods or goods made in Canada respectively, were focused on modifications in respect of four specific products: ships, automobiles, domestic fuel and wine. Witnesses called for elimination of the customs duty on new foreign-built ships, retention of the duty on imported used ships for a period of time and retention of the duty on ships imported into Canada after being repaired outside the country. Regarding automobiles, witnesses proposed elimination of both the green levy excise tax for fuel-inefficient vehicles and the excise tax on air conditioners, repeal of all taxes on Canadian-made vehicles for the purchase of two vehicles per person if one vehicle is purchased before and the other vehicle is purchased after the age of 40, and—in order to harmonize rates with the US—reduction in the finished vehicle tariff on imported vehicles. In respect of domestic fuel, the Committee was informed that the excise tax should be repealed or reduced. Finally, witnesses argued for repeal of the excise tax applied to the Canadian content of blended wine.

Since tariffs can increase the price of Canadian goods in foreign markets, and recognizing that other countries have implemented zones where tariffs and excise taxes are not applied, witnesses recommended: the creation of free trade zones; an ability for international travellers to purchase duty-free goods upon arrival; the renewal of wood export programs; and the conclusion of multilateral and bilateral trade agreements in order to reduce tariffs and increase market access. They also spoke about the importance of ensuring that Canadian businesses are integrated into global supply chains.

Witnesses indicated that it is difficult for businesses to market their goods and services abroad in an effective manner. Coupled with this difficulty are challenges in developing partnerships with foreign entities to produce certain cultural works, such as movies and dance productions. To broaden the market for Canadian goods and services, witnesses advocated assistance for international marketing and for improved trade relations with countries, such as China, and with regions, such as the European Union. To rebalance trade deficits with certain countries, they urged renegotiation of certain treaties and agreements. Finally, witnesses supported securing access to the US government procurement market, the negotiation of a reciprocal procurement liberalization agreement, a Canadian exemption to “Buy American” provisions and the conclusion of a comprehensive, multilateral agricultural trade agreement at the World Trade Organization.

Witnesses noted that transportation of goods across the Canada-US border is inefficient, since it requires duplicate information to be sent to customs officials by the transporting entity; they recommended that information be sent only once to customs officials. They also suggested that new technologies, such as radio frequency identification, should be used by border officials to expedite border crossings for transport vehicles. To provide more information about wait times at the border, witnesses proposed that computerized and automated systems be installed. To facilitate the movement of people, they noted that aviation security is an essential service and advocated continued funding for the Canadian Air Transport Security Authority.

Moreover, witnesses were concerned about various aspects of the current system of international taxation in Canada. They indicated that the withholding of Canadian taxes by Canadian entities increases the cost of services performed by foreign entities. They suggested that a disclosure form be used to identify foreign entities that perform services in Canada so that taxes may be paid by the foreign entity instead of the Canadian resident. To reduce the tax burden on non-residents and to increase direct foreign investment in Canada, witnesses argued for an exemption from withholding taxes after the sale of shares of private corporations by non-residents. They also recommended that dividends and other forms of foreign income from investments be exempt from taxation, and indicated that the government should implement the recommendations in the report of the Advisory Panel on Canada’s System of International Taxation.

Finally, the Committee was told about barriers to interprovincial and interterritorial trade in goods and labour mobility. In expressing the need for open and efficient movement of trade and services both within and outside the country, the elimination of barriers and the establishment of an effective dispute-resolution mechanism in respect of internal trade disputes were supported.

COMMITTEE RECOMMENDATIONS

In the Committee’s view, businesses should compete—both domestically and internationally—on a level playing field. Such an approach, in our opinion, requires that barriers to trade, whether internal or external, be lowered or removed. In some sense, it also requires that certain sectors be provided with particular assistance and/or the supports needed to compete in the global marketplace. Recognizing the importance of free and fair trade across provincial, territorial and international borders if our businesses and the nation are to be positioned for growth and prosperity, the Committee recommends that:

The federal government encourage the provinces and territories to remove internal barriers to trade. In doing so, priority should be given to reaching agreement concerning a national securities regulator.

Moreover, the government should continue to support supply management and all other agricultural exporters during the Doha Round of World Trade Organization negotiations.

Furthermore, the government should implement the notion of duty-free purchases for individuals arriving in Canada.

Finally, the government should develop and implement proactive policies to expand key sectors of the economy and to support targeted high-value activities.