SUBJECT: CME s pre-budget submission

Transcription

1 February 29, 2016 The Honourable William Francis Morneau Department of Finance Canada 90 Elgin Street Ottawa, Ontario K1A 0G5 SUBJECT: CME s pre-budget submission Dear Minister: As you undertake your mandate as Canada s 39 th Minister of Finance, I wish to sincerely offer you the support of Canadian Manufacturers & Exporters (CME) and the entire Canadian manufacturing and exporting sectors to help achieve your mandate and that of the new government. Canada s manufacturing sector is remains the cornerstone of Canada s economy being directly responsible for over 11 per cent of all economic activity and with 1.7 million direct employees being paid over $114 billion in wages. Like the Canadian economy as a whole, manufacturing is struggling to regain its footing. While the decrease in the exchange rate of the Canadian dollar has helped some exporters find new business opportunities abroad, many companies continue to face significant head-winds. Decreasing commodity prices have led to a drop in investment and extraction of natural resources. Lower consumer spending at home and abroad have led to fewer sales. Decreasing exchange rates have made it more expensive to invest in machinery and equipment. General global economic uncertainty is directly impacting investment decisions. We believe the Federal Budget will play a crucial role in determining the direction that we as a country will take on economic growth for the foreseeable future. We have an opportunity to establish Canada as a location for foreign investment, innovation and job growth and this budget can set the framework for this opportunity. Canada s economic future depends on the ability of our businesses to compete and grow in international markets by successfully commercializing innovative products and services, as well as adopting advanced technologies to boost customer value and enhance productivity. The rapid development and deployment of digital technologies is transforming the business of manufacturing and exporting within Canada and around the world. Technologies that have now become commonplace, such as computers, and smart phones will soon be joined by autonomous vehicles, selflearning robots, digital factories and 3D printers. New technologies are disrupting established markets and supply chains. They are blurring the lines between goods 1 Nicholas Street, Suite 1500/1 rue Nicholas, bureau 1500, Ottawa, ON K1N 7B7 T F

2 producing industries, technology companies and service providers and transforming just about every aspect of our economy and society. There is tremendous opportunity for Canadian businesses that can successfully commercialize and adopt new technologies to provide unique, reliable, manageable and cost-competitive solutions for their customers. Canada has big social challenges that need to be addressed through the application of new technologies; health care and how we care for an ageing population, environmental management and the reduction of greenhouse gas emissions, food, water and energy management, social and economic development within our communities, protecting our security and the need for smart and efficient logistics and energy infrastructure. Our ability to respond to these challenges, capitalize on commercial opportunities and ensure long-term economic growth cannot be taken for granted. Canadian businesses are lagging behind competitors in other countries when it comes to the commercialization and adoption of new technologies. It is important to understand why and to plan for what actions can be taken to strengthen our competitive performance. Many countries have begun the implementation of national strategies to understand the changes that disruptive technologies will have on their economies and societies and have moved to support and capitalize on their applications. Industry 4.0 in Germany is one of the best examples. It focuses on the impacts of digitization on the creation and adoption of advanced manufacturing technologies and on Germany s business and social ecosystems. The United States has created national manufacturing and innovation networks intended to deploy digital technologies in critical economic sectors. One outcome of these focused efforts is the rapid development of 3D printing technologies and the impact it is already having on the development of lightweight materials and manufacturing production processes. In both cases, and in others, the strategies are not supporting the development of technology in isolation; rather, the nations aim to answer questions about the implications of technological change for business and the economy, workers, governments and society at large. How can advanced technologies be integrated and leveraged more effectively to support economic growth and social development? How can the collective efforts of both private and public sectors leverage innovation, new technology applications, education and training, global trade and integrated supply chains? Canada needs a competing strategy and an integrated approach to build and take advantage of the opportunities that new technologies offer. We cannot afford to fall further behind. We need to build on the strong innovation, manufacturing and services base that we have to ensure that we have the policy frameworks, education and training systems, business and social supports and innovation infrastructure in place that meet the needs of our economic future. We need to engage leading stakeholders in shaping a vision of what that future should look like, better understand the

3 obstacles that stand in the way and develop a plan to overcome them. But, that plan must be accompanied by real action. Over the coming months CME will begin leading a national dialogue on these issues in partnership with the federal government and all relevant stakeholders to create this long-term strategy on the fourth industrial revolution. This initiative will be called Industrie 2030 and through it we hope to create a roadmap for sustainable action to double value-added economic activities in Canada and exports. While these discussions are just getting underway, and we look forward to partnering with you and your cabinet colleagues on them, we believe that there are some immediate steps that the upcoming budget can focus on in the short term. Increasing investment and productivity: Canada s ageing population has a major impact on our labour market and the Canadian middle class. Four Canadian provinces in particular will be facing a strong decline of their active population: Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador. Combined with our economy s low productivity, these two factors, if not addressed, will not only limit our ability to grow our economy, but will put more financial pressure on Canada s shrinking middle class. More importantly, at a time when Canada has signed trade agreements with European countries and Korea, among others, it will limit our ability to compete with companies from those countries in Canada and in their home markets. Increased productivity is the only long-term solution to our demographic and labour challenges. Increasing our economy s output per hour of work will mean more jobs, more exports, and more money in the pockets of middle class workers. Productivity improvements can be achieved through the adoption of new technologies, mainly automation, robotics, and additive manufacturing. Furthermore, accelerating the rate of technological progress--the adoption by industry and consumers of new and more efficient products, technologies, and processes, faster rates of capital turnover, the use of less carbon-intensive energy, and more efficient infrastructure--is key to sustaining economic growth and lowering environmental emissions. Canada needs to offer businesses a competitive environment in which to invest investments that are lost will erode economic growth and simply shift production (and GHG emissions) elsewhere. Business investments in less carbon intensive processes and/or technologies will need to increase productivity in order to offer competitive rates of return. There is a role for government to play in providing additional investment or financial incentives if productivity improvements are insufficient. Initiatives such as cap-and-trade by itself are unlikely to generate sufficient revenues or incentives for the capital investment that will be required. CME recommends: Implement national advanced manufacturing hub and networks of excellence in the field of automation, robotics and additive

4 manufacturing, similar to the United States National Networks for Manufacturing Innovation (NAMI). These Networks both help with the development and commercialization of new technologies for manufacturing, they support the adoption and re-risking of technologies by established manufacturers, especially SMEs. Simplify and expand tax credits and investment incentives to de-risk and accelerate the adoption of new technologies. Canada s current investment support mechanisms are overly complicated, not applicable across the country in all regions, sectors and sizes of companies, and not globally competitive. Adopt a tax incentive to help manufacturers invest in new technologies that will achieve major reductions in GHG emissions. This tax incentive could take the form of an investment tax credit. End the double taxation of provincial (Quebec) carbon credits: under the Canada Revenue Agency interpretation of the Income Tax Act, carbon credits provided by the Quebec government to large emitters are considered as inducement under paragraph 12(1)(x). Those credits are considered by the CRA as taxable income when received by the company from the government, and are taxed a second time if sold on the carbon exchange market or do not give right to a deduction when remitted to the government. As a consequence, the CRA interpretation is that the same carbon credit should be taxed twice. CME recommends that the government amends Finance Regulation 7300, specifying that GHG credits/units granted by governments are not inducements and that their value is a prescribed amount for the purposes of 12(1)(x). Improve private sector R&D and innovation performance: Despite often being singled out as a model business support program, Canada s innovation policy framework significantly lags the best in the world. This impacts our ability to create new innovative products and processes and be globally competitive, which undermines Canada s overall economic performance. The Scientific Research and Experimental Development program (SR&ED) is the federal government s biggest program to support private sector R&D investment, which is critical to support companies in the creation of new products, technologies and processes. Canada s manufacturing sector is responsible for nearly 45 per cent of all private sector R&D and 85 per cent of commercialized patents in the country. However, the current system is failing the sector and the results speak for themselves. Over the past four years, and as a result of the Jenkins Panel on Canada s private sector R&D, more than half a billion dollars of funding to manufacturers R&D, and specifically capital expenses, were eliminated. As a result, Canada s private sector R&D performance in 2015 has declined to the lowest level since the 2008 global financial crisis. The cuts to the tax credit had a negative impact on many company s R&D investments, especially among larger corporations. The reforms proposed by the last government have not only failed at increasing Canada s private sector R&D

5 investments, they have worsened our performance by providing a less competitive fiscal environment to attract large R&D mandates. To make matters worse, the current SR&ED framework is largely based on a 1960 s understanding of innovation, commercialization and economic growth. While most other countries have modernized their innovation framework and SR&ED supports multiple times since they were created in the 1960 s, Canada has not. This directly impacts those companies attempting to do R&D as well as negatively impacts Canada s ability to secure domestic and foreign investments in R&D and manufacturing. CME recommends: Immediately reinstate capital expenses as an eligible expense in the existing SR&ED program; Implement Patent Box Tax measure to improve commercialization of technologies developed in Canada. Canada has a great track record of inventing new technologies, but has a poor track record in commercializing those technologies and creating investment and economic growth opportunities. A patent box is a tax incentive that provides relief from corporate tax on income generated from certain types of qualifying intellectual property (IP), particularly patents. Patent box regimes provide tax relief at a later stage of the innovation lifecycle, in the years when income is generated from exploiting IP. Relief can be given either as a reduced tax rate or a deduction for a portion of the patent box income. Patent boxes generally target the commercial or manufacturing activities that follow development rather than R&D activities themselves. A patent box tax incentive would support companies at a critical point in their product development and financing cycle while encouraging them to commercialize new products in Canada. Task a parliamentary committee to undertake a full review of Canada s R&D framework, with a strong focus on the modernizing SR&ED legislation. Leverage infrastructure spending to accelerate innovation and sustainable economic growth: While we applaud the government s intent to boost infrastructure sending in Canada, we are concerned that most of these investments do not fully maximize the economic benefits for the Canadian economy. While the vast majority of our trading partners have adopted policies to maximize domestic content and spur domestic innovation using government procurement, including infrastructure projects (ex: United States Buy American policies), the federal government has never taken advantage of its infrastructure spending to do the same. As a result, Canadian manufacturers, especially in the fields of steel fabrication and water & wastewater equipment are competing on an unleveled playing field both domestically and abroad. This limits our

6 ability to innovate with new products and our capacity to export those products globally to maximize economic benefits for Canada. CME recommends: Leverage federal infrastructure spending and adopt a strategic procurement policy for all its infrastructure projects, which will emphasize the need to maximize domestic economic benefits for the manufacturing sector, creating jobs and enabling economic growth, while respecting its current international trade obligations. Boost Canadian exports: Canada s non-commodity export performance indicates that Canadian trade with FTA nations or regions is not necessarily greater than non-fta regions. In other words, the fact that an FTA exists, or will exist, does not mean that Canadian exports to that region will increase. From CME s experience, very few Canadian companies are looking internationally. Moreover, while most Canadian small and medium sized enterprises understand that they need to diversify away from an over-reliance on the US market, most fail to understand how to go about looking at alternative markets. And while helpful resources exist within government, including the Trade Commissioner Service and Export Development Canada, company specific challenges to exporting persist. CME recommends: To invest in new programs to educate companies about the new market opportunities afforded by Canada s FTA s and increase their internal capacity to capitalize on such opportunities. Specifically, CME urges the Federal government to work with Canada s robust community of public and private sector trade experts to build atop of Canada s Technology Accelerator Program and offer a National Export Accelerator Program similar to what is available in other markets. This national accelerator program should link local and international business development experts, trade finance experts, logistics and supply chain experts, federal and provincial government trade personnel and industry associations, among others, in a network that supports SME s with the greatest export and job-creation potential. Such accelerator s would focus on preparing successful applicants for new markets and address company specific barriers to exporting, including training, technology gaps, productivity gaps, access to value or supply chains or financing gaps. Such an approach would move the needle on exports by recognizing the wide range of issues preventing companies from increasing their exports, while systematically addressing such complex challenges on a company-bycompany basis over and above a blanket funding approach to export support.

7 Thank you for your consideration and I look forward to supporting you and your government in the preparation and implementation of the next federal budget. Sincerely yours, Jayson Myers President and CEO Canadian Manufacturers & Exporters

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