Manufacturers are welcoming Ottawa’s plan to allow businesses to immediately write off the cost of equipment and machinery, a move they say will reduce their taxes and spur new investment flows.
The federal government announced the measures on Wednesday in its fall economic statement, which also included similar changes to spur investment in energy-saving equipment, and quicker deductions for other business purchases such as software and vehicles. The changes will help some companies lower their corporate income tax bills.
Dennis Darby, chief executive of Canadian Manufacturers and Exporters, which represents 2,500 businesses, said the changes will encourage companies to expand their factories and buy new equipment. “When you spend the money you get the tax break right away,” Mr. Darby said. “The upside is this gets you the capital that industry needs to grow.”
The announcement by Finance Minister Bill Morneau fell short of everything businesses had been seeking, “but that’s okay, we’ll keep plugging,” Mr. Darby said.
Business groups have been pushing Ottawa to reduce their tax burdens, pointing to steep tax cuts last December by U.S. President Donald Trump.
Mr. Morneau said he will not match the “aggressive” tax cuts made by Mr. Trump. “If we were to do that it would add tens of billions of dollars in new debt … and it would make the services Canadians depend on more expensive,” he said in Parliament on Wednesday.
Gavin Semple, chairman of Regina-based Brandt Group of Companies, which makes heavy machinery for a range of industries at four Canadian and one U.S. plant, looked forward to the prospect of being able to deduct capital costs from profits, but was reserving judgment until he had a chance to read the details of Ottawa’s proposal.
“It’s a step in the right direction to help us be competitive with the U.S.,” said Mr. Semple, whose company makes machinery for industries that have been battered by low prices and high tariffs – oil, gas and lumber – in addition to facing 25-per-cent tariffs on steel, which is the company’s biggest expense.
He noted accelerated deductions are meaningless to companies that are not profitable, or facing great uncertainty.
“Entrepreneurs will invest in capital equipment if they believe there is an opportunity to profitably manufacture and sell and export their products,” Mr. Semple said, “but it doesn’t matter how attractive the depreciation rates are if you are not optimistic enough about the future to build the plant, to buy the production equipment.”
The U.S. tax reductions announced late last year included cutting the corporate tax rate to 21 per cent from 35 per cent, lowering income taxes for some people, and allowing businesses to write off capital investments in the first year. The United States also widened the kinds of investment that businesses are able to deduct against their profits, reducing their taxes.
In Canada, the federal corporate tax rate is 15 per cent. In both countries, combining federal rates with either state or provincial ones raises the rates to about 26 or 27 per cent. The manufacturers group was seeking a combined federal-provincial tax rate of 20 per cent, arguing businesses need lower taxes to offset the higher costs of operating here versus the United States.
“Canada’s been falling behind in term of production capital for years,” Mr. Darby said. He said it is important Ottawa narrow the tax policy gap with the United States, especially if Canada wants to attract the investment of businesses that operate in both countries.
“They look at it on a line basis and decide whether to put the money here or in the United States,” he said. “Manufacturers very much need to have a tax system that provides more incentives for investment. We’ve been falling behind in capital investment in plants and equipment for years.”
Ottawa also announced an $800-million fund to spur what it called “innovative” investments and a export diversification strategy intended to boost overseas exports.
Mr. Darby said Canada is overdue for broader tax reforms aimed at increasing the number of companies that export. He wants to see special tax treatment for companies that make goods for export markets, noting just 10 per cent of Canada’s manufacturers sell into foreign markets opened up by recent trade deals with the Pacific Rim, Europe and the U.S. and Mexico.