Ottawa Urged To Ensure Manufacturing Tax Break Is Temporary

by Mike Godfrey, Tax-News.com, Washington

15 August 2008

Helping companies adjust to the high value of the Canadian dollar - by extending accelerated capital cost allowances for manufacturers - was a good move on the part of the federal and Ontario governments, but these tax write-offs should be temporary, according to a recent Conference Board of Canada briefing.

“It is appropriate for the federal and Ontario governments to help companies adjust to the extraordinary rise in the value of the dollar over the past six years,” said Glen Hodgson, Senior Vice-President and Chief Economist. “But making these measures permanent would distort investment toward the manufacturing sector and away from other sectors of the economy - which may lower Canada’s productivity growth in the long run.”

The briefing, 'Should the Accelerated Capital Cost Allowance be Extended Any Further?,' argues that the federal government was correct to introduce a two-year window for accelerated capital cost allowances in its 2007 budget, and then to extend the measure to 2010. Ontario’s 2008 budget introduced parallel measures that extend through 2010-11.

According to the briefing, the public policy question is whether this period is enough time for Canadian companies to make machinery and equipment (M&E) investments that improve firm efficiency and raise productivity. Current evidence, in terms of new M&E investment, indicates that many manufacturers are taking advantage of the measure.

Overall M&E in the manufacturing sector is forecast to grow modestly over the next two years—3.7% in 2008 and 6% in 2009. However, these numbers are skewed by the sharp decline in M&E investment in the auto sector, which is bearing the brunt of the adjustment pain. Other sectors such as aerospace, food manufacturing and electronic equipment are forecast by the Conference Board to achieve double-digit growth in their M&E investments this year.

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