Viewing cable 03OTTAWA1140, CANADIAN AUTO STRATEGY

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UNCLAS SECTION 01 OF 03 OTTAWA 001140 
 
SIPDIS 
 
STATE FOR WHA/CAN (NORMAN) EB/TPP/BTA/EWH (SHEEHAN) 
 
STATE PASS USTR FOR SAGE CHANDLER 
 
USDOC/IA/KIMBERLEY BULKLEY 
 
USDOC FOR 4320/OFFICE OF NAFTA; 3134/OIO/WESTERN 
HEMISPHERE 
 
E.O. 12958: N/A 
TAGS: ETRD EFIN ELAB ELTN CA
SUBJECT: CANADIAN AUTO STRATEGY 
 
REF: (A) USDOC 01384 
 (B) 2002 Toronto 1916 (Auto Strategy) 
 (C) Toronto 0985 (Ontario Budget cable) 
 (D) Toronto 0246 (Capital Tax) 
 
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Summary 
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¶1. An alliance of the Canadian federal government, 
Ontario provincial government, automotive sector 
manufacturers and labor unions are working to define 
and implement a long-term strategy to keep the Canadian 
automotive sector competitive (Ref B). At least one 
element of the multi-prong strategy, the elimination of 
the federal and provincial capital tax, has already 
been embarked upon. Implementation of the new strategy 
is expected to be a multi-year process with no firm 
timeline. It is, however, very clear from statements 
given by both the manufacturing sector and government 
that all elements of the nascent auto strategy will 
scrupulously comply with WTO and NAFTA ground rules. 
End summary. 
 
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Scale of Automotive Industry in Canada 
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¶2. The importance of the automotive industry to the 
Canadian economy cannot be overstated. It is a major 
contributor to the Canadian economy, creating more than 
550,000 jobs, and generates approximately 12 per cent 
of the manufacturing sector's contribution to Canada's 
Gross Domestic Product. The automotive sector also has 
seen the highest capital investment of all 
manufacturing industries. Between 1991 and 2001, 
capital investment averaged C$2.9 billion per year. 
The Canadian automotive industry is fully integrated 
into the North American market. In 2001, the 
automotive industry produced C$95 billion worth of 
motor vehicles - 90 per cent of which were exported, 
primarily to the United States. 
 
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New Policy to strengthen automotive industry 
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¶3. The maintenance of this vital industrial sector is 
important to the federal government and to the Ontario 
provincial government, where most of the manufacturing 
capacity is located. It is, however, a collection of 
government, labor, and corporate interests that 
comprises the Canadian Automotive Partnership Council 
(CAPC) that is in the process of developing a long-term 
strategic vision for the industry to ensure its growth 
and vitality. Its membership includes the presidents 
of Canada's automotive assembly companies; senior 
executives from the parts, aftermarket, dealership and 
academic sectors; the president of the Canadian Auto 
Workers Union (Buzz Hargrove); and ministers of 
industry and/or economic development for the federal, 
Ontario and Quebec governments. The Council is co- 
chaired by Michael Grimaldi, President of General 
Motors of Canada, and Don Walker, President of Intier 
Automotive, one of Canada's most significant automotive 
components manufacturers. 
 
¶4. CAPC members met in Toronto in mid-December 2002 and 
reviewed a series of papers drafted by working groups 
that address five key dimensions of the nascent 
strategy: human resources; innovation; trade 
infrastructure; fiscal and investment measures; and 
regulatory harmonization. These draft papers, and more 
about CAPC are available at the following URL: 
 
http://www.strategis.ic.gc.ca/SSG/am01451e.ht ml 
 
¶5. The key questions raised in Ref A focus on fiscal 
and investment measures, the relevant CAPC proposals in 
this domain are outlined below. 
 
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CAPC Fiscal & Investment Recommendations 
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¶6. The CAPC Fiscal and Investment Policy Work Group 
recommends that the federal and provincial governments: 
 
-- Eliminate the federal Large Corporations Tax (a.k.a. 
the Capital Tax) and provincial capital taxes to remove 
a key impediment (see paragraph 9). 
 
-- Establish an Investment Tax Credit to encourage 
investment in new manufacturing machinery and 
equipment. 
 
-- Continue and expand the Manufacturing & Processing 
(M&P) deduction (a 7% deduction exclusive to M&P 
profits which the GoC is considering abolishing) to 
reduce the effective federal and provincial rates to 
gain a competitive tax advantage in NAFTA. 
 
¶7. The CAPC group makes clear that any effort to 
provide an investment incentive must be transparent, 
available to all on equal footing (unlike the exclusive 
"Autopact" arrangements) and consistent with WTO and 
NAFTA rules. 
 
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What is the timetable for implementation? 
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¶8. On the question of a timetable, the message we 
received from Guy Leclaire, Director of Automotive 
Policy at the Department of Industry (Industry Canada) 
is that the Canadian Automotive Strategy is a work in 
progress and that there is no firm timetable for 
implementation. 
 
¶9. Nevertheless, one major element has been embarked 
upon. The elimination of the federal capital tax 
proposed in the federal budget of February 18, 2003 
implements a principal recommendation of the CAPC. 
 
¶10. Both the federal and provincial governments in 
Canada levy taxes on the capital of corporations. 
Unlike income taxes, which are paid when a corporation 
has taxable income, capital taxes must be paid 
regardless of whether a corporation is profitable. The 
federal capital tax is levied on all corporations with 
more than $10 million of capital used in Canada; it is 
reduced by the income surtax paid by the corporation 
(Ref D). 
 
¶11. The February 2003 federal budget proposed to 
eliminate the federal capital tax, as follows: - First, 
the capital threshold at which the tax applies will be 
raised, from $10 million to $50 million effective 2004. 
As of 2004 medium-sized businesses under the $50- 
million threshold will no longer have to pay the tax. 
Second, the rate of the tax will be reduced in stages 
over a period of five years so that by 2008, the tax 
will be completely eliminated. 
 
¶12. At the provincial level, Ontario's 2003 budget 
(delivered in late March) also promised to eliminate 
the capital tax, though a 10% cut in 2004 and complete 
phasing out by 2008, in line with the federal 
government's plans (ref C). Ontario's decision to 
start phasing out capital taxes follows similar 
decisions in Alberta and the three Territories, where 
capital taxes already have been eliminated, as well as 
in British Columbia and Quebec, where concrete cuts 
have been announced in recent budgets (Ref D). 
 
¶13. According to the GoC the elimination of the capital 
tax over five years will be fully legislated in order 
to provide businesses and investors with the certainty 
needed to factor the tax reduction into their business 
decisions. The GoC budget documents also allege that 
when the federal capital tax is eliminated in 2008, the 
average combined federal and provincial corporate tax 
rate in Canada will be 6.6 percentage points lower than 
in the U.S 
 
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Comment 
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¶14. Leclaire emphasized that the Auto Strategy is 
intended to be more than simply a wish list for 
handouts from the government to industry. Rather, 
Leclaire expects it will be an effort largely to match, 
or refine, existing government efforts (provincial and 
federal) with industry requirements. For example, 
suggestions include eliminating regulatory impediments 
to investment (such as different manufacturing 
standards in USA and Canada); targeting more R&D funds 
to the automotive sector and making more auto R&D 
eligible for R&D tax credits; and providing more 
targeted investment in technical education to provide 
the workforce of the future. 
 
¶15. Most significantly, there is no proposal for a 
local content requirement in any of the elements of the 
CAPC proposals. The musings of CAW chief Buzz Hargrove 
(Refs A,B) in this respect are not indicative of the 
eventual GoC policy direction, nor industry intentions. 
And although the CAPC does recommend an Investment Tax 
Credit to entice investment in physical plant, it 
remains simply a recommendation whose form is not 
elaborated and one that has not yet been seized upon by 
government. 
 
¶16. The clear message we have received from GoC 
interlocutors, one which is reiterated by CAPC, is that 
whatever the eventual size and shape of the Canadian 
Auto Strategy it will comply scrupulously with WTO and 
NAFTA strictures. 
 
Cellucci