Draft Working Group Report
Fiscal and Investment Policy Working Group

Report for CAPC meeting, May 30, 2003

Support for Investment

The working group recommended the following measures that would establish a clear after-tax competitive advantage for undertaking automotive investments in Canada:

• Eliminate the federal Large Corporations Tax (LCT) and provincial capital taxes to remove a key impediment
• Establish an Investment Tax Credit 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 and provincial rates to gain a competitive tax advantage in NAFTA.

The working group welcomed the news in the Federal Budget announcing that the LCT would be phased out over the next five years. Additionally, the Ontario Budget also announced a reduction in the provincial capital tax rate by 10% effective January 1, 2004 with an additional commitment to eventually eliminate the capital tax in the same five year period during which the Federal Government has committed to eliminate the LCT. The working group commends the Federal and Ontario Governments for its action on one of the group's recommendations and encourages the Governments to move to eliminate the capital taxes immediately and to take action on the remaining two recommendations.

Support for Technology and Innovation

The working group recommended the following measures to ensure that Canada earns strategic technology opportunities for the future:

• 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 Tax Credit 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 fuel 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

The Federal Budget announced $2 billion to help implement the Climate Change Plan for Canada. This allocation includes $250 million for Sustainable Development and Technology Canada to encourage the development of greenhouse gas reducing technologies and $1.7 billion over five years to support innovation and targeted measures to promote energy, sustainable transportation and alternative energy sources (including fuel cells and ethanol). Of this $1.7 billion, at least $200 million will be dedicated to further investments in long-term climate change technologies. While the specifics of how this allocation will be spent are not fully outlined as yet, this funding can be seen as related to the Innovation recommendations in the Pre-Budget submission.

In February, the Province of Ontario outlined its Auto Sector Strategy, announcing it will invest $625 million over the next five years to enhance research and development, expand training opportunities and improve infrastructure. $500 million of the new investment will enhance the Ontario Research and Development Challenge Fund to support industry-based innovation activities and $125 million will be invested to enhance existing training programs. No amount was announced related to infrastructure. While the new program's funding allocation criteria are still being designed by the Province, this announcement signals that the Ontario Government is in part responding to the recommendations on Innovation.

The Working Group encourages the Governments to move quickly to determine and communicate the criteria for implementing these funds. Investors need certainty with respect to how these funds will be allocated and the means to obtain access. The Working Group also encourages the Governments to ensure that there is sufficient flexibility in the creation and application of the criteria.

The Ontario budget announced an increase in the rebate for alternative fuel vehicles to a maximum of $2000. While this measure was not specifically referenced in the CAPC Fiscal recommendations, it is a valuable measure as consumer incentives are needed to assist customers in offsetting the premium costs of these new technologies. Consumer-based measures can provide important assistance to ensuring that these new technologies gain sufficient acceptance in the marketplace leading to the significant volumes required to bring overall costs down. We encourage the Federal Government to adopt a similar measure. This initiative is also being put forward by the CAPC Kyoto Working Group.

Note to follow on Quebec.

Infrastructure

The Working Group recommended the following measures:

• 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

As mentioned above, the Ontario Auto Sector Strategy referenced funding for infrastructure improvements although the details were not fully spelled out. The inclusion of funding for infrastructure improvements indicates that the Working Group's message on the importance of infrastructure improvements for competitiveness is being heard. The Working Group encourages the Governments to utilize a flexible definition of infrastructure that could be required to win automotive investments.

The Working Group commended the actions of the Federal and Ontario Governments following the Pre-Budget submission. The Working Group looks forward to continuing to work with Governments to provide further definition on its recommendations and towards progress on those recommendations not already addressed by Government action. Implementing this suggested fiscal and economic framework is necessary to improve Canada's competitive position for future automotive investment.

The Working Group is evaluating Canada's competitiveness in the automotive sector by reviewing several studies (KPMG, Industry Canada, etc.) to ensure that the group is addressing the necessary items to ensure that the Canadian auto industry increases its competitiveness and is able to win in the global auto industry.