April 25, 2000
The Honourable Paul Martin
Minister of Finance
Finance Canada
140 O'Connor Street
Ottawa, ON
K1A-0G5
Dear Minister Martin:
Over the years, CATAAlliance members in Ontario have found the combination of support for R&D provided by the Ontario "Super Allowance" and the Federal SR&ED tax credits important incentives for investing in that province. Similarly, the new super deduction in Quebec is seen by our members as an important incentive which complements the Federal SR&ED tax credits. Our concern is that the recent Federal Budget impacts significantly on the effectiveness of such provincial allowances as incentives. Specifically, the Federal Budget proposes to treat the full amount of the savings obtained from "Super Deductions" as government assistance.
Firms that have factored the Ontario Super Allowance into their decisions to invest in Ontario are most immediately impacted by this proposal. Many long-term investments were made on the assumption that the Federal-Ontario system would remain a constant during the lifetime of the investment. However, the recent Federal Budget reduces the value of the Ontario Super Allowance by 50% to 60%. We are already hearing of companies in Ontario that are putting on hold plans for new investments while they rerun their forecasts.
As well, your Department's actions are retroactive to years ending after the Budget announcement - not just impacting future investment decisions, but investment decisions implemented before the Budget. This unexpected move caught many fully established and ongoing investments that had been made on the basis of the old rules. Retroactive applications of technical rules such as this announcement are unacceptable as they undermine business's confidence in Canada's tax system.
We have met with your officials to find out why these changes were brought forward after the Super Allowance had been around for years and was well accepted. They argued that this move levels the playing field between provinces. We would argue that this proposal increases the cost of providing effective incentives for the provinces that use this mechanism and, as mentioned, that it raises serious concerns about the stability of the Canadian tax system.
Also, your officials were concerned about the value of some of the Quebec allowances and the potential for abuse. We are equally concerned when there is potential for abuse, but this concern does not apply to all allowances per se. They have been an effective instrument with which the Ontario government supported business. We do not believe that the measure outlined in the Federal Budget is the right way to deal with what is an isolated and, if real, a very specific problem. The actions proposed in the Budget could be considered as equivalent to "throwing the baby out with the bath water."
On this issue, we have been working in a coalition with the Information Technology Association of Canada (ITAC) and the Alliance of Manufacturers & Exporters Canada. We would like to lend support to ITAC's recent request for a meeting with your Deputy Minister, Kevin Lynch and senior company officials. The purpose of this meeting would be to discuss the implications of this measure and to see if a workable solution can be found. We would also ask that your staff follow these discussions given its importance to investors in Ontario and Quebec.
Finally, as I am sure you are aware, the Ontario Super Allowance has helped to tip the scale in favour of Ontario for investments in major high-tech, research-linked facilities in the automotive, aerospace, information technology, and telecom sectors. It is important to both large and small businesses in Ontario. The super deduction is also particularly important for future investments in Quebec.
Historically, the spinoff in jobs in Ontario, both those directly associated with the R&D and those due to the associated manufacturing effort, can be seen throughout Ontario. We had expected similar spinoffs from the super deduction in Quebec. For this reason, we are forwarding this letter to associations in the Automotive and Aerospace sectors whose members should likely be invited as well.
We trust that your government will take the appropriate initiatives to ameliorate the undesirable and unanticipated impacts of this measure.
Sincerely yours,
John Reid
President, CATAAlliance
c.c.: Kevin Lynch, Department of Finance
David Adams, Canadian Vehicle Manufacturers' Association
Peter Boag, Aerospace Industries Association of Canada
David Burn, Nortel Networks
Bob Crow, ITAC
Nat Ferlaino, Pratt & Whitney Canada
S. A. George, IBM Canada Ltd.
Russ Roberts, CATAAlliance