5.1 General observations

Different federal programs are aimed at businesses at different stages of their development. Several witnesses offered ideas on how to improve these programs.

Some witnesses observed that it is important to assess existing federal programs and focus on what works well.[125] This assessment should be based on different objectives, such as creating businesses or jobs.[126] However, some programs have objectives that are more difficult to quantify, while for others, benefits may only be generated over the very long term.[127] Loans that are provided should not be taxed back,[128] or should in fact be provided in the form of grants.[129]

Certain programs are so complex, particularly for SMEs,[130] that businesses are sometimes discouraged from applying.[131] Several programs also differ across regions of Canada. According to one witness, they should be standardized across the country for the sake of fairness.[132] As such, a manufacturer in Saskatchewan should “get funding to automate his plant,”[133] a possibility offered in the other federal regional development agencies.

Some programs are aimed only at small businesses; however,

[w]e need to consider alternatives to our tax structures that not only encourage innovation, but have the potential to attract new foreign investment and generate new untapped revenues…. We have a disincentive to growth in the form of our business tax structure that penalizes companies that grow beyond a certain level. The same is true for R and D direct incentives, which are geared towards small companies.[134]

Scott Smith

Canadian Chamber of Commerce

RECOMMENDATION 7

The Committee recommends that the federal government conduct a comprehensive assessment of its programs to support research, innovation and commercialization in the manufacturing sector in order to simplify those programs, quantify how well they meet their objectives, and determine whether eligibility criteria based on region or company size are still appropriate.

5.2 Programs to help innovation and research and development

The National Research Council Canada’s Industrial Research Assistance Program (IRAP) targets SMEs of 500 or fewer employees. Some witnesses mentioned that the program helped them to commercialize their research.[135] However, the officials who work for IRAP cannot be experts in all the cutting-edge technology in which SMEs are involved. Moreover, managers of SMEs have to hire experts to navigate all the government programs, which is inefficient.[136] IRAP could also be expanded to foster not only research, but commercialization and increased production and exporting.[137] The Strategic Aerospace and Defence Initiative was also mentioned as being key to these industries:

In the innovation chain, research and development programs, the strategic aerospace and defence initiative being one of them, … are absolutely critical. We're talking big research dollars that have to go into making this kind of equipment. If we're not doing it, we're certainly not going to be world class, as we are today.[138]

Christyn Cianfarani

Canadian Association of Defence and Security Industries

RECOMMENDATION 8

The Committee recommends that the federal government consider ways to improve the Industrial Research Assistance Program, the Strategic Aerospace and Defence Initiative, and the Technology Demonstration Program to include support for commercialization activities.

Certain businesses no longer even try to obtain tax incentives under the Scientific Research and Experimental Development Program (SR&ED) because there is no guarantee that the tax credits will be accepted. A witness said that there was “uncertainty in getting your claims through.”[139] The application of credits varies with the agent who processes the application,[140] or from one region to another.[141] Some businesses have had to reimburse claims that had initially been accepted.[142] One witness indicated that businesses sometimes have to seek outside professional help at a cost of $30,000 to $100,000 to properly fill out the application, which discourages them from doing so.[143] Certain witnesses believe that capital expenditures for SR&ED should be eligible for tax credits, as they were previously.[144]

The Accelerated capital cost allowance for manufacturing allows for deferring the payment of taxes for investments in machinery and equipment. One witness mentioned that this has enabled many Canadian manufacturing companies to invest in machinery.[145] According to one witness, the allowance should be re-established for oil sands, upgrading and petrochemical industries in order to support the energy sector supply chain.[146] Meanwhile, a witness from the automotive industry proposed making this deduction and other programs permanent, or at least extending their terms, so that investors can count on this funding for an extended period.[147]

RECOMMENDATION 9

The Committee recommends that the federal government: improve the Scientific Research and Experimental Development Program by providing ongoing, standardized training to assessment agents across the country so that eligibility criteria are interpreted consistently; expand and/or ensure that experimental development of new manufacturing processes is eligible for the program; provide ongoing seminars to teach industry how to apply for the program; and that the federal government report publicly on the changes and their impacts.

Many Canadian manufacturing start-ups seek priority patent filing in the United States first because that market is larger, which means that some of these ideas are commercialized there.[148] The problem of Canadian ideas being commercialized outside of Canada due to the failure of large Canadian manufacturing companies to adopt the innovations of start-up companies, and the difficulty of attracting venture capital, were also highlighted during the Committee’s visit to the District 3 Innovation Centre at Concordia University. Its representative suggested increasing R&D income tax credits and offering incentives to large companies to be the first to adopt innovations from start-up companies.

Several witnesses suggested that one solution to the lack of R&D in Canada would be to create an “innovation box,” through which preferential tax treatment would be given for “intellectual property that resides in Canada.”[149] A similar concept known as a “patent box” is used in countries such as the United Kingdom, Belgium and the Netherlands. It involves decreasing “the corporate income tax rate for products that are the result of commercialization of intellectual property [developed] in the country.”[150]

Innovation centres could serve as service centres for government programs, which would make them more accessible.[151] It would also be interesting to create a network of innovation centres such as the one in the United States, with 400 regional offices.[152] This network helps manufacturing companies to commercialize their products, adopt new technologies and develop new markets.[153]

RECOMMENDATION 10

The Committee recommends that the federal government study the best way to link the various innovation centres to create a network in which entrepreneurs could receive all the federal services available to manufacturing companies, and that it report publicly on the results.

5.3 Financial assistance to teaching institutions

According to one witness, consideration should be given to more equally distributing the research funding provided to universities, which receive almost the total amount, and colleges and polytechnics, which receive very little. In reality, almost all applied research is carried out in colleges and polytechnics[154], which consult the industry so that they fulfill their needs, in terms of research aimed at new products or processes:

The research services provided by colleges and institutes are highly focused on industry innovation. They meet the needs of their partners by providing access to facilities and cutting-edge equipment, and, more importantly, access to the time and expertise of professors and students. Our projects all fall in the category of “applied research”. In manufacturing, examples would include product development and enhancement, prototyping, testing, process improvement, and experimenting with new materials and equipment. There is also support for business innovation such as improving the work environment, expanding to new markets, and developing new strategies for interacting with customers and the firms in their supply chains.[155]

Christine Trauttmansdorff

Colleges and Institutes Canada

On the other hand, one witness reminded the Committee that basic research is still critical, and should remain the priority of the National Research Council Canada.[156]

RECOMMENDATION 11

The Committee recommends that the federal government assess the impact of research funding that is granted to colleges and polytechnics in support of Canadian manufacturing industries; and that this analysis be made public.

5.4 Financing and venture capital

At the federal level, funding for start-up companies is one of the responsibilities of the Business Development Bank of Canada (BDC). In fiscal year 2015–16, the BDC approved 202 loans to manufacturing start-ups, which is 7% of all loans provided to the manufacturing sector, representing a total of $23 million.[157] Several witnesses criticized the BDC’s high level of risk aversion. One witness indicated that perhaps the BDC “should be looking at ventures that potentially, in the short term, have more risk.”[158]

Some witnesses nevertheless qualified the criticisms that might be directed at the BDC, and opportunities for improvements have been identified.[159] Furthermore, one BDC representative said that the agency is now working with organizations like Futurpreneur, which help young entrepreneurs, and that this relationship is working very well.[160] The BDC is also investing in collaboration with private venture capital funds.[161]

In a brief submitted to the Committee, DirectTech Solutions said that the BDC “does offer alternative business financing with potentially more favourable terms and conditions,” but that it should “discontinue offering business consulting services,” mostly because “[t]here is a clear conflict of interest in offering consulting by a lending institution.”

The BDC can continue to play an important role in partnership with other financial institutions and sources of financing, as the guarantor or co-lender assuming more of the costs and passing on less to the entrepreneur.[162]

During its visit to Montreal, the Committee heard that risk aversion is cultural and is difficult to change. Access to venture capital (including for Canadian companies) is less available in Canada than in the United States.[163]

The financial culture of Canadian financial institutions could also be a factor:

[W]hen we're trying to adopt a brand new, unproven technology, in taking it from demo scale to commercial scale, there's a lot of risk of failure involved, and financiers don't like that. They charge a huge premium if they're even willing to touch it, so government financial support can certainly give a lot of confidence to the other financiers to get their project off the ground.[164]

Paul Lansbergen

Forest Products Association of Canada

 Private Canadian investment funds do not have venture capital dedicated to additive manufacturing.[165] Furthermore, financial institutions and the BDC don’t finance start-up SMEs enough:

One of the biggest issues of our spin-outs, I think, as an SME—we're asking not-for-profit organizations, etc., to spin out companies—is that the financial institutions and the crown corporations such as BDC don't really finance SMEs with short track records. Essentially, we're making it very difficult to survive that valley of death, with few venture capital investment opportunities, because VCs look for big home runs—drug molecules, etc. They show very little interest in manufacturing, in terms of a venture capital spin.[166]

Martin Petrak

Precision ADM

Members of the Committee feel that the role, culture and actions of the BDC and the private chartered banks regarding financing of start-ups or SMEs, in the manufacturing and other sectors of the economy, warrant further study, including the role of banking regulations as regards to venture capital.

As an alternative source of access to funding, angel investors constitute a community that is seeking to increase in number and to organize into a network.

[A]ngel investors are high-net-worth individuals who are usually former entrepreneurs or professionals. They depend on social networks to identify entrepreneurs or investments they want to make. They're usually locally focused, but they enjoy investing in early-stage high-risk companies, something that is often seen as rare in the Canadian marketplace.[167]

Yuri Navarro

National Angel Capital Organization

One witness mentioned that there is a tax credit in British Columbia for venture capital investments in small businesses.[168]

RECOMMENDATION 12

The Committee recommends that the federal government identify how the Business Development Bank of Canada (BDC) can play a more active role in developing manufacturing companies from start-up through to commercialization; and that the performance of this initiative be included in BDC’s annual report.

5.5 Sectoral programs

Some federal sectoral programs, such as the Investments in Forest Industry Transformation program, can accelerate the innovation process in specific sectors.[169]

Certain witnesses feel that the Automotive Innovation Fund should be extended, but in a modified form. In particular, the contributions should be made non-refundable and the total budgetary envelope should be increased so that the grants are more competitive with what is being done in other jurisdictions.[170]

5.6 Large businesses

During its visit to Montreal, the Committee heard representatives from large businesses discuss their needs in terms of government assistance to solidify client confidence and increase liquidities during the maturity phase, when they have to manufacture products before they have sufficient revenues.

For example, representatives from Bombardier claimed that numerous countries support their aerospace companies (Boeing, Airbus, Embraer, etc.) through direct participation in company ownership, grants or tax relief.

Witnesses who were asked about potential federal government participation in Bombardier had different opinions, with some supporting the idea[171] and others favouring more support for SMEs.[172]

If you were to fund multiple SMEs or medium-sized companies with $10 million to grow their business, there could be a huge impact that would be much larger in terms of number of jobs created and opportunities.[173]

Martin Petrak

Precision ADM

5.7 Regulations and standards

Several witnesses commented that regulations and standards are very stringent in Canada.[174] According to one witness, the government should consult industry more when developing regulations, as they have an enormous impact.[175] Regulations represent a challenge for manufacturing businesses, even for those not willing to export products:

We have many barriers in Canada among provinces that restrict our company size in certain industries. That's a problem, and we've got to deal with it. It's been on the books since 1995 or so. These things prevent us from being competitive, and I think that the message of competitiveness is fundamental. Canada is a trading nation. We want to trade. We've got to be prepared, and some of these barriers are in front of us.[176]

Darrell Toma

Chambers of Commerce of Alberta

[W]e have challenges surrounding interprovincial intertie. It’s easier to send electricity to the U.S. than it is to send across provinces.[177]

Scott Smith

Canadian Chamber of Commerce

Certainly in terms of trade barriers, internal trade is a key issue, and for any processing company, having consistent rules and regulations across the provinces is critically important. We see that being critically important in terms of attracting foreign investment into Canada. Understanding the rules of the game between each province and having some kind of level playing field as we move products across the country is important.[178]

Andrea Johnston

Department of Agriculture and Agri-Food

However, while Canadian regulations are considered stringent, they are sometimes helpful for selling Canadian products abroad, as they help create a good reputation:

Studies have found that we have among the most stringent regulatory regimes in the world.… When we're trying to sell our products around the world, the Canada brand is very important. It doesn't get a premium, but in a price tie, it might win us the day. That's important.[179]

Paul Lansbergen

Forest Products Association of Canada

Perhaps the most important factors in maintaining and expanding access to foreign markets are the efficacy of the food safety system in Canada and the credibility of the competent authority, which is the CFIA [Canadian Food Inspection Agency].

Lyzette Lamondin

Canadian Food Inspection Agency

The representative of the Canadian Food Inspection Agency also mentioned that a new regulatory framework for food safety will be implemented that will replace 13 sets of regulations with one.[180]

Harmonization of standards and regulations is an important factor of success for the manufacturing sector. One witness mentioned that priority should be placed on harmonizing standards internationally, for example in the food industry, which would favour the Canadian industry because it already has very high standards.[181] The representative of the Canadian Food Inspection Agency explained that the agency is working to harmonize its regulations with those of other countries.

According to one witness, the harmonization of automotive industry regulations is a good example to follow.[182]

In terms of regulatory harmonization, a good example would be how the automotive sector has been able to harmonize regulations for vehicle sales across North America, whereas 25 years ago the emissions regulations and standards were different. It's about solving some of those problems across the board.[183]

Scott Smith

Canadian Chamber of Commerce

Sanofi Genzyme (see Appendix A) explained that unlike the U.S. Food and Drug Administration and the European Medicines Agency, Health Canada does not have an innovation mandate, but simply a protection of health safety mandate.

According to the Aerospace Industries Association of Canada, the lack of employees for certifying compliance in Transport Canada’s (TC) Civil Aviation branch can slow down the delivery of its members’ products.[184] In a brief submitted to the Committee, Discovery Air Defence mentioned that “a lack of resources within TC has resulted in a decline of Civil Aviation Service Standards Activities, in particular the [l]evels of [s]ervice required to oversee and support Discovery Air Defence’s specialized air operations.”[185]

RECOMMENDATION 13

The Committee recommends that the federal government: regularly review its regulations; ensure that federal regulatory authorities have the necessary resources to quickly approve products requiring certification; play a leadership role in an inter-provincial process aimed at greater harmonization of provincial and territorial standards and regulations to encourage domestic trade; and continue its efforts for better harmonization with international standards in order to encourage international trade.

5.8 Federal government procurement

The federal government can foster innovation and the promotion of Canadian manufacturers’ products through its procurement policies.[186] For example, it could demand greener,[187] or more innovative[188] products, for which patents were developed in Canada. But according to one witness:

[Public Services and Procurement Canada] has its own fairness scale which makes the process too convoluted. It pays no heed to the Canadian content or development of the Canadian [high tech] SMEs.[189]

One witness highlighted the importance of federal government procurement on the defence industry:

[T]he growth potential for defence manufacturing is highly sensitive to federal government actions or inaction. Federal government policies and programs, especially procurement decisions, influence heavily, if not determine outright, our sector's growth path.[190]

Christyn Cianfarani

Canadian Association of Defence and Security Industries

A representative from the Department of National Defence explained to the Committee that even if efforts could be made to buy more from Canadian manufacturers, and this could be done for reasons of national security, it is important to continue to buy internationally. If the federal government considered buying more Canadian defence products: “Canada being a reasonably small player on the international scene, it would restrict access to technologies that are game-changers for the Canadian Forces.”[191]

A representative of Public Services and Procurement Canada spoke about the success of the Build in Canada Innovation Program, which helps companies in the pre-commercialization period to sell prototypes of their products to federal departments, which can test them, suggest changes, and eventually buy them in greater quantity, giving these businesses their first big client and a reference they can use with other potential clients.[192]

The representative also spoke of the American program called Small Business Innovation Research, which legislatively requires the 11 largest American departments to set aside a certain percentage of their R&D spending to purchase innovative products from the private sector, each in its particular field.[193]

RECOMMENDATION 14

The Committee recommends that the federal government implement a procurement strategy that encourages procurement of innovative Canadian goods and services.

5.9 Difficulties specific to the manufacturing sector in rural settings

It appears that some businesses in rural settings know less about government assistance programs than those in urban settings:

We have urban and rural manufacturers. Urban manufacturers in Alberta, in Edmonton, Calgary, and Red Deer tend to be fairly well serviced, and they are in the pipeline of information on IRAP [Industrial Research Assistance Program] and BDC, and so on. However, in rural Alberta a lot of them are not aware of those kinds of programs, frankly. Awareness is one of the challenges.[194]

Darrell Toma

Alberta Chambers of Commerce

RECOMMENDATION 15

The Committee recommends that the federal government better inform manufacturing companies and potential entrepreneurs in rural areas about federal programs.

One witness mentioned that “[i]n a digital world, innovation is everywhere.”[195] However, digital technology still has to be accessible and affordable. Several witnesses claimed that broadband connectivity in rural communities is deficient, and this poses difficulties for businesses.[196]

RECOMMENDATION 16

The Committee recommends that the federal government explore ways to continue to expand and improve broadband connectivity in rural areas in order to promote the growth of the manufacturing sector in rural areas.

5.10 Other measures

The federal government, provinces and territories recently announced a Canada Pension Plan (CPP) enhancement. This should translate into a one percentage point increase, from 4.95% to 5.95%, in the employer and employee contribution rates to the CPP, implemented gradually between 2019 and 2023. One witness referred to this increase as “adding costs that would not be present in other jurisdictions.”[197]

Another witness recognized Canada’s skilled workforce as a benefit over labour costs:

We have to take advantage of Canada's assets, and what's our biggest thing? We have a skilled workforce. Why? We have high education, medicare, and we have so much going for us that we need to take advantage of it. One of the issues that was raised, and that I want to finish on, is the whole issue of labour costs. Five per cent of the cost of a car is labour.[198]

Jerry Dias

Unifor

Witnesses also discussed price on carbon dioxide (CO₂) emissions. The provinces and territories can decide to impose their own pricing – some are already doing so – and determine how to use the revenues. Otherwise, they can choose the same method as the federal government.[199] Some witnesses expressed their concern that Canadian manufacturing companies would no longer be able to compete with businesses located in countries where such pricing does not exist:

We've spent years working with the provinces. Ontario is going down a cap-and-trade route, as is Quebec. B.C. has a carbon price. Alberta has an approach that's a hybrid, with a carbon tax plus regulatory requirements and performance standards. There is a concern that just as we are coming to grips with how those are going to work and how we can make our own contributions within those systems, there is something else on top. How the federal efforts will work with the provinces is a key point of concern for us at this time.[200]

… [C]arbon pricing is but one cost of production. There is absolutely nothing wrong with the approach Canada is taking, but we have to remember that it's one more cost at a time when competitors aren't putting that cost in.[201]

Bob Masterson

Chemistry Industry Association of Canada

Another witness said “it benefits to source the cleanest, most GHG [greenhouse gas]-efficient inputs possible.”[202] It is too early to measure the net impact of these changes.

RECOMMENDATION 17

The Committee recommends that the federal government identify the business opportunities and challenges to a significant portion of the manufacturing sector, due to the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change, once the provincial and territorial governments have indicated their respective approaches to this.

The Committee further recommends that the federal government commit to monitoring closely the development and implementation of the proposed changes to both the Canada Pension Plan and carbon pricing on the manufacturing sector in Canada.