A renewed capital cost allowance program, research spending and a small business tax cut will all help manufacturers leverage the opportunity to grow
OTTAWA—The Harper government dropped its 2015 federal budget and the tax measures contained in it makes one thing clear: manufacturing is at the top of the agenda for the sitting government and will be counted on to pick up the slack from the struggling oil, commodities and energy sectors.
“The Manufacturing sector can help us make up the shortfall we are currently experiencing—and will likely continue to experience in the near term—in the oil and energy sectors,” said Jim Menzies, a partner and National Leader, Manufacturing industry at accounting and advisory firm Grant Thornton.
Menzies says the manufacturing sector is an area of our economy that, over the next few years, has real opportunity to grow, and the tax measures in this document can help.
“Manufacturing is an industry that’s in a good spot right now, and companies are in a position to take advantage of some really good economic factors—in particular the low foreign exchange rate,” he says. “So the fact that some funds and tax measures have been dedicated to manufacturing is a good thing. You are going to get all sorts of different views on whether enough is being done to support manufacturing, but I would suggest that it’s important for the government to continue to focus on manufacturing because it will always be critical to the Canadian economy.”
Indeed, the 2015 budget includes several programs to woo the manufacturing and exporting sectors:
The top line item for many in the manufacturing sector is the pledge to reduce small business taxes from the current 11 per cent down to nine per cent, on the first $500,000 of profit. However, the tax cut is phased-in over the next four years, culminating in the full two per cent cut by 2019.
The very popular accelerated capital cost allowance (CCA) program will be extended until the end of 2025, and this is no small gesture, according to Menzies. But he cautions the Budget 2015 version has seen a significant change.
Currently the CCA—which was set to expire at the end of 2015—provides a 50 per cent “straight-line” depreciation rate, which basically allowed a company to claim 50 per cent the depreciation of capital equipment each year. In this program a company could claim 100 per cent of the depreciated value of equipment over about three years.
The new version of the program has changed the calculation to a “declining balance” method, which means a company now can claim 50 per cent of the full amount in year one, but only 50 per cent of the remaining depreciation value in year two, and so on. Ultimately, Menzies says the change in calculation means that in three years a company will be able to claim back about 87 per cent.
While the change is substantial, it does not detract from the value of the program for a manufacturer looking to invest in new capital equipment.
“Manufacturers view this as a very helpful tool,” says Menzies. “Even with this change, there are not many assets you can write off as quickly.”
The government says the deferral of tax associated with this new accelerated CCA is expected to reduce federal taxes for manufacturers by $1.1 billion from 2016 to 2020.
Also for manufacturers, this time of the automotive ilk, the budget plans to provide up to $100 million over five years starting in 2016 to support product development and technology demonstration by Canadian automotive parts suppliers through the new Automotive Supplier Innovation Program.
Of this amount, $50 million over three years will be reallocated from the existing Automotive Innovation Fund. Another $50 million over two years will be provided starting in 2018–19. The program will help commercialize research by supporting product development and technology demonstration on a cost-shared basis with participating firms.
The budget reallocates $6 million in 2016–17 from the Strategic Aerospace and Defence Initiative toward a new program to improve the performance and competitiveness of small and medium-sized enterprises in the aerospace sector.
$2.5 million per year, starting in 2016–17, will go to Industry Canada to undertake research on Canada’s defence industrial base and its ability to participate in and support the Defence Procurement Strategy.
Research and Development
In total, the federal budget proposes more than $1.5 billion over five years to advance science, technology and innovation.
$1.33 billion over six years will go to the Canada Foundation for Innovation—a not-for-profit corporation that supports the modernization of research infrastructure at universities, colleges, research hospitals and other not-for-profit research institutions across Canada. This money starts flowing in 2017–18.
$9 million per year will go to the Research Support Fund to support the indirect costs borne by post-secondary institutions in undertaking federally sponsored research.
Resources and Forest products
Natural Sciences and Engineering Research Council (NSERC), will get $15 million per year, of which $10 million per year is earmarked for collaborations between companies and researchers from universities and colleges.
The balance of $5 million per year will be directed to industry-driven research initiatives at Canada’s polytechnics and colleges through the College and Community Innovation Program.
$15 million per year to the Canadian Institutes of Health Research, of which $13 million is for the expansion of the Strategy for Patient-Oriented Research. The balance of $2 million per year will support additional research to better understand and address the health challenges posed by anti-microbial resistant infections.
Really, really big telescope
A whopping $243.5 million over 10 years, starting in 2015, will secure Canadian participation in the construction of the Thirty Meter Telescope, a project in Pasadena, Calif. That will give scientists a deeper glimpse into space and its celestial bodies.
$72.3 million in 2015–16, on a cash basis, will go to Atomic Energy of Canada Ltd. (AECL) to maintain safe and reliable operations and meet licensing and other regulatory requirements at the Chalk River Laboratories.
The Canadian Space Agency will get $30 million over four years starting in 2016–17 to support research and technology development through the ARTES program at the European Space Agency. The money is aimed at enhancing the competitiveness of Canada’s satellite communications sector throughout its supply chain, and to open new markets for Canadian space innovation.
$119.2 million over two years, starting in 2015–16, will enable the National Research Council Canada (NRC) to continue to fulfill its new role as Canada’s research and technology organization by supporting business innovation initiatives across Canada.
While no money was attached to this program, the budget outlines a need to modernize Canada’s intellectual property framework to keep pace with internationally recognized best practices.
The Government will propose amendments to the Patent Act, Trade-marks Act and Industrial Design Act to provide intellectual property agents with a statutory privilege for confidential communications with clients, enhancing Canada as a place in which to invent and market inventions.
Amendments will also be proposed to modernize administrative practices and increase clarity and legal certainty for businesses.
Exporting and Trade
$50 million over five years to share the cost of exploring new export opportunities with small and medium-sized enterprises.
$42 million over five years to expand the resources of the Trade Commissioner Service.
$18.1 million over two years, starting in 2016–17, to promote trade opportunities for the agriculture and agri-food sector.
An additional $12 million over two years, starting in 2016–17, to market Canadian agricultural and agri-food products around the world.
$5.7 million over five years, starting in 2015–16, to help secure new market access for Canadian seal products.
Finally, $3 million over three years, starting in 2015–16, for the International Maritime Centre to attract foreign shipping companies to establish their headquarters in Vancouver.
Natural resources development
The big addition in the resources file is allowing assets used in facilities that liquefy natural gas to claim the accelerated capital cost allowance. The energy sector has, until now, been unable to claim the CCA.
The government is also extending the Mineral Exploration Tax Credit until March 31, 2016.
$135 million over five years starting in 2015–16 will be allocated to the Major Projects Management Office Initiative, an NRCan initiative that reviews major resource projects and helps modernize the regulatory system for such projects.
$34 million over five years, starting in 2015–16, for consultations related to projects assessed under the Canadian Environmental Assessment Act.
Dedicating $80 million over five years, starting in 2015–16, to the National Energy Board for safety and environmental protection and greater engagement with Canadians.
Providing $30.8 million over five years, starting in 2015–16, to enhance the safety of marine transportation.
$22 million over five years, starting in 2015–16, to renew the Targeted Geoscience Initiative, which enhances the capacity of industry to detect buried ore deposits.
$23 million over five years, starting in 2015–16, to stimulate the technological innovation needed to separate and develop rare earth elements and chromite.
$86 million over two years, starting in 2016–17, to extend the Forest Innovation Program and the Expanding Market Opportunities Program.