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 Updated: 		Working Groups > Fiscal & Investment Group > Reports

CAPC Fiscal & Investment Policy Work Group Summary

December 18, 2002

The Need for A Strategic Automotive Policy for Canada

Canada's automotive manufacturing industry has made enormous contributions to Canada's economic progress in recent decades. For a small country, Canada benefits immensely from a disproportionately large and successful auto industry. We assemble substantially more new motor vehicles in Canada than we purchase here, and we enjoy a large trade surplus in automotive products. Moreover, the unique economic features of the auto industry have ensured that its success has sparked growth and development in a range of other related industries - both the "upstream" industries that supply vehicle and parts-makers with a myriad of supplies and services, and the "downstream" industries that are stimulated by the incomes generated by the auto industry. The success of the auto industry has also generated major fiscal benefits for Canadian governments, stimulating billions of dollars annually in tax revenues.

Active public policy played a crucial historical role in developing our large and productive auto sector. Economic and policy developments in recent years, however, have undermined the effectiveness of our previous automotive policies. Governments in Canada have taken significant steps over the past decade to improve the overall economic environment in Canada, including producing balanced budgets and reducing the debt, which has resulted in lower interest and inflation rates. While these measures have improved the overall business climate, current automotive policies are no longer adequate to ensure that the Canadian industry receives the new investment, production, and employment that will be required if the industry is to continue to play a leading role in Canada's economic growth. Given the high multiplier and strategic nature of Canada's automotive industry, a new automotive policy framework is required to help preserve Canada's automotive leadership, and to sustain the hundreds of thousands of jobs, and billions of dollars of government revenues, which depend on a vibrant and competitive auto industry.

Guiding Policy Principles
The members of the Canadian Automotive Partnership Council have identified a number of guiding principles which should ensure that our new automotive policy framework supports new investment in a transparent, fair, and efficient manner. These principles should provide a useful framework for governments as they work to design a new set of automotive policies:

  • A new automotive policy for Canada must be fairly accessible and equally beneficial to all companies in the industry that undertake new investment spending in Canada.
  • In the auto industry, which is both labour and capital intensive, investments must be renewed every five to eight years to ensure continued jobs and economic spin-offs. Therefore, it is important that any government initiatives are available equally to renewed investments in existing facilities as to greenfield investments.
  • Within the bounds of Canada's international obligations, governments should put in place strategies that encourage and make it advantageous for companies that sell here to invest here.
  • Transparency and certainty is important for all investors, and it is critical that all levels of government work constructively together to attract business investment and jobs. In this regard, government policies must be complementary - between government ministries and between federal, provincial and municipal levels of government.
  • The auto industry functions as a complex system, and all elements need to be healthy for the system to function effectively as a whole. Accordingly, the work of each of the major CAPC policy work groups is equally important. This includes strategies to address investment, human resources development, regulatory harmonization, trade infrastructure, innovation and climate change. In addition, we need to ensure that we enhance the competitiveness and performance of all elements of the value chain in Canada, from raw material suppliers through parts producers and service providers, assemblers, dealers, retailers and the aftermarket.
Fiscal & Investment Policy Recommendations
We have a good foundation in Canada - but in the highly competitive global auto industry, we need a competitive edge to position us to win. Following is a framework of fiscal measures and policy initiatives that individually and particularly, collectively will significantly improve the automotive investment climate in Canada. Some of these recommendations will be well understood by governments, while others may require further definition. The Fiscal & Investment Policy Work Group is very willing to work with governments to provide further definition where required.

Support for Investment
To attract new and renewed automotive manufacturing investment, Canada needs to put in place measures that establish a clear after-tax competitive advantage for undertaking these investments in Canada. The CAPC Fiscal and Investment Policy Work Group recommends that the federal and provincial governments:

  • Eliminate the federal Large Corporations Tax and provincial capital taxes to remove a key impediment
  • Establish an Investment Tax Credit of 20% to encourage investment in new manufacturing machinery and equipment in their next budgets, to be effective immediately
  • Continue and expand the M&P deduction to reduce the effective federal rate to 17.5% and the provincial rates to 7.5%
Support for Technology and Innovation
Automotive process and product technologies are changing rapidly. Investment and Innovation Policy must go together to ensure that Canada earns strategic technology opportunities to position it positively for the future. The CAPC Innovation Work Group is addressing these issues directly. In complement to their recommendations, the CAPC Fiscal and Investment Policy Work Group recommends that the federal and provincial governments:

  • Target funds to encourage and assist in funding automotive innovation to encourage auto makers and parts makers to increase automotive R & D in Canada
  • Establish an Early Commercialization Investment Tax Credit of 20% which would be stackable on top of other available incentives/assistance for early modules of production of a new technology to attract new technology (such as alternative fuels and propulsion technologies) production opportunities to Canada
  • Enhance the definitions of eligible automotive activities for SR & ED credit to better address and encourage automotive product development and manufacturing process innovations
Infrastructure, Skills and the Environment
The CAPC Infrastructure and Human Resources Work Groups are addressing these areas directly. In complement to their recommendations, the CAPC Fiscal and Investment Policy Work Group recommends that the federal and provincial and municipal governments:

  • Fund infrastructure improvements for new auto manufacturing locations as well as any upgrades that may be required to service existing manufacturing facilities
  • Provide fiscal incentives for environmental investments in facilities that will result in reductions to emissions to air/water/land from manufacturing facilities and/or remediate existing properties. This could take the form of immediate write-offs or investment tax credits for machinery & equipment that will result in emission reductions.
Beyond this framework, all levels of government need to also review (as part of a competitive comparison), the use of further measures to encourage increased automotive investment in Canada, including the use of investment incentives. These could take the form of funding to support employee training/retraining, infrastructure improvements, and environmental investments to help offset the aggressive incentives and/or the substantially lower labour cost structure offered by competing jurisdictions within North America.

It is also critical that governments eliminate regulatory impediments to investment. The CAPC Harmonization and Kyoto Work Groups are addressing these issues directly.

Once the key elements of a new Strategic Auto Policy Framework have begun to be put in place, it will be important for Governments and the industry to work together to ensure that automotive investors around the globe fully understand the positive opportunities to invest in this enhanced environment.
 
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