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Budget 2010: Prebudget Submission

August 14, 2009 ( Ottawa, ON )

 

 

SUMMARY OF RECOMMENDATIONS


1. Strengthen credit availability for goods producers and their customers

  • Ensure adequate availability and liquidity of credit for goods-producing sectors.


2. Ensure that economic stimulus measures strengthen industrial competitiveness bycreating short-term demand and enhancing longer-term productivity.

  • Maintain and extend accelerated capital cost allowances (ACCA) on new machinery and equipment for a total of at least five years.
  • Complement public sector infrastructure spending with a tax credit or program to support industrial maintenance and repair projects that would provide short-term employment while contributing to longer-term productivity.
  • Implement a “cash for clunkers” automotive scrappage program comparable to the program in place in the United States.
  • Expand resource exploration incentives for qualifying Canadian investments.
  • Increase support and maintain broad industrial applicability for new environmental technologies such as Carbon Capture and Storage (CCS).
  • Commit funding support and accelerate new large-scale energy projects, including east-west and “smart” energy grids.


3. Ease corporate cash management pressures through full refundability of key tax credits, allowing full offsets across all types of remittances; and seek additional ways to streamline the tax system.

  • Make investment tax credits, such as the SR&ED credit, fully refundable.
  • Provide tax credits for private investments in training in addition to stable funding for existing service delivery organizations.
  • Greater use of offsets in the tax system allowing businesses to apply refunds owing against other remittances.
  • Repeal withholding taxes on non-domestic professional services, to be replaced by disclosure forms, to bring Canada in line with major trading partners.

INTRODUCTION

The Canadian Steel Producers Association (CSPA) is the national industry association for Canada’s primary steel industry, including steel pipe and tube producers. Collectively, CSPA members employed some 30,000 Canadians and generated approximately $14 billion in turnover in 2008. CSPA members produce a wide range of high-quality, value-added carbon steel and tubular products.

CSPA member companies are significant suppliers to the North American manufacturing, energy, construction and mining industries, and are closely integrated into their respective supply chains. Steel is a major internationally-traded product for Canada, with about half of total production (approximately $7 billion) exported in 2008.

The past several months have witnessed a sharp downturn in steel demand across North America, with direct consequences for Canada’s steel producers. In the near term, this places a premium on government budgetary policies that can stimulate demand for steel, decrease producer costs, and/or contribute to improved cash flow.

Longer-term perspectives and the global economic context must also be fully recognized. In addition to competing in domestic and export markets on a fair and open basis, Canadian producers must increasingly compete internationally to attract capital to strengthen and expand Canadian production. Federal fiscal policies are a key factor in determining the investment attractiveness of Canada for steel production.

Accordingly, CSPA’s recommendations for Budget 2010 fall into two broad categories: measures to alleviate short term pressures and contribute to the revival of the Canadian economy; and measures to strengthen investment prospects over the longer term.

CASH MANAGEMENT AND PRIVATE CAPITAL IN THE CRISIS

Much has been written already on the historic, serious nature of the current economic downturn and its devastating impact on manufacturers, a significant source of employment, value creation and wealth generation for Canada.

In the steel industry, overall capacity utilization rates dropped from almost 90% in the fall of 2008 to just over 40% by the spring of 2009. It is only now beginning a slow recovery. This has profound economic consequences in such a capital-intense, advanced manufacturing industry. The sharp fall in demand is further complicated by a volatile Canadian currency, and by continued global overcapacity in steel. That leaves the Canada’s steel industry especially vulnerable to foreign trade practices such as dumping and subsidization that distort the fair and effective functioning of the market.

Within this challenging operating environment, companies have been driven to respond with difficult measures in the short-term, while continuing to position themselves for longer-term sustainability in Canada. Employment has been curtailed or reduced across industry supply chains in which steel producers are a key link. Investments have been deferred or restructured where practical. Discretionary capital spending has been sharply curtailed. Production capacity has been idled for significant periods of time.

A primary motivator for such actions is to preserve capital and manage sharply-diminished cash flow. The steel industry is leaving no stone unturned internally, and recommends supportive fiscal policies in a number of areas that would enhance short-term and long-term viability.

This is the context for CSPA’s recommendations for Budget 2010.

RECOMMENDATIONS

1. Strengthen credit availability for goods producers and their customers.


The Government must maintain a strong focus on improving the supply and liquidity of investment and working capital. Steel and its ultimate customers in other steel-producing sectors require an early return to more “normal” credit conditions.

CSPA recognizes the significant actions taken in Canada and globally that have targeted credit flows among financial institutions. The Government must remain vigilant that those actions translate into desired outcomes for industrial credit. Concerns persist that borrowers, including steel-using industries throughout the “real” economy, have yet to see the full benefit of credit relief measures supported by both the Government and the Bank of Canada. The government must maintain a strong focus on this issue.

2. Ensure that economic stimulus measures strengthen industrial competitiveness by creating short-term demand and enhancing longer-term productivity.

The recent attention to the importance of accelerated capital cost allowances (ACCA) on new machinery and equipment was welcomed by the business community, particularly manufacturers. The CSPA appreciates action to date. The ACCA measure remains, however, quite time-limited and uncertain for the steel sector, which requires long lead times and very long payback periods for capital spending. The Government should extend this measure for a total period of at least five more years, to strengthen industrial prospects for the long-term by attracting investment capital and improving cash flow in the near term. Immediate action on this front will enable producers to make earlier investments, including important capital investments that have been deferred to conserve cash.

CSPA supports the importance of the government’s economic stimulus spending, including crucial funding directed towards public infrastructure, buildings, and other projects in order to put Canadians to work. However, public projects need not be 100 percent of the ‘solution’. Some of the fiscal stimulus funds could be directed to private sector projects achieving the similar goals of job retention and creation, utilizing the ability of the private sector to act quickly with greater speed and less complicated approval processes. One such measure could be an employment tax credit for projects that have been shelved due to the economic crisis, such as facility repair, upgrade and overhaul projects. These would not be production or capacity expansion subsidies, but would create immediate work in the near-term projects contributing to longer-term industrial productivity.

A new measure that could accelerate both economic and environmental performance is a so-called “cash for clunkers” automotive scrappage program, similar to those in United States and Germany. A Canadian program would provide much-needed stimulus in the automotive sector, with new cars improving the overall environmental footprint of Canada’s vehicle fleet. Such a program would provide considerable economic stimulus throughout the automotive supply chain (which includes steel). As a further benefit, the steel industry’s unmatched record of recycling will ensure a very high degree of recycling of the steel in the “clunkers” retired from use via the program.

For Canadian resource industries, including oil and gas exploration and mining, all available incentives must be considered to ensure that the Canadian market remains an attractive destination for investment capital. In addition to being major customers of steel products, resource investments deliver substantial economic and social benefits to Canadian communities in all regions. The Government should also consider expanded federal assistance for next generation “green” projects such as carbon capture and storage (CCS) that will help position Canada as a world leader in emerging environmental technologies.

New sources of energy supply are required in many parts of Canada as older sources reach the end of their economic life. This creates both need and opportunity to deliver significant stimulus to the Canadian economy and reposition Canada as a globally competitive destination for new investments, particularly in manufacturing. As both major suppliers to these projects and significant energy consumers, CSPA members have an interest in a stable and cost-competitive energy market. Projects offering particular indus trial promise include East-West infrastructure development and “smart grids”. The federal government should promote and support these energy projects in an integrated way, working in close partnership with the Provinces and the private sector.

3. Support corporate cash management through the full refundability of current tax credits, ensuring full offsets across all types of remittances: and by exploring additional ways to streamline and simplify the tax system.


The Scientific Research & Experimental Development (SR&ED) Tax Credit is the best example of a tax incentive that efficiently promotes projects that improve long-term competitiveness through enhanced productivity and the development of new products to open new markets to Canadian businesses. Howeve r the effectiveness of non-refundable tax credit programs has diminished in the face of strong cash management pressures. In order to re-establish the positive impacts of investment tax credits on the Canadian economy and to help preserve and create highly skilled jobs, all such credits should immediately become fully refundable.

Human capital is a critical dimension of Canada’s competitive advantage for global investments. As an advanced technology industry, the steel industry emphasizes the critical importance of investing in the skills of Canada’s industrial workforce. These benefits extend beyond individual firms and sectors; they are important across the industrial economy, particularly with an increasingly mobile workforce. The ability of the private sector to upgrade workforce skills would thus be strengthened and extended were the government to play a stronger role in partnering with industry through tax credits or other forms of assistance to upgrade existing skills and broaden the availability of skilled workers through apprenticeships. One specific proposal, supported by many manufacturing industries, is a fully-refundable employers’ training tax credit, creditable against contributions for Employment Insurance premiums. In addition, and particularly for the steel industry, a particular need is adequate and predictable government support for the well-regarded training programs offered by the Canadian Steel Trade and Employment Congress (CSTEC), a collaborative industry/union undertaking.

Tax simplification can also reduce inefficiencies that burden industry unnecessarily. The government should consider all means to this end. CSPA recommends two particular measures. First, where tax refunds are due to a corporation, these should be applicable against remittances owing in other areas (e.g. CPP, EI). This would streamline administrative demands and compliance costs for both business and government.

Second, the tax system must recognize fully that access to the best engineers, best consultants and best technologies is essential for Canadian business to remain competitive. While increasing the administrative burden on Canadian businesses, withholding taxes with respect to regulations 102 and 105 increase the actual cost of contracting specialist services since foreign service providers factor the cost of the withholdings into the price charged to Canadian clients. Among major industrialized countries, Canada appears to stand alone in requiring businesses to enforce domestic tax legislation relevant to foreign service providers. To alleviate this problem, withholding tax regulations could be replaced by disclosure forms, bringing Canadian practice into line with those of global competitors.

CONCLUSIONS

Canada has rightly received international credit for a number of its policies prior to and during the economic crisis. However, Canada must acknowledge that other economies are taking significant actions to improve competitiveness. We cannot afford to stand still.

The CSPA believes that additional actions in support of (a) enhanced access to credit; (b) more effective stimulus measures; and (c) steps to assist cash management and compliance through the tax system are practical and necessary to positioning Canada for success in the eventual recovery. Improving our overall competitiveness will allow all Canadians to benefit from our natural advantages by supporting a return to growth and continued and
sustainable prosperity.