Don’t extend accelerated CCA: Conference Board

A higher dollar might be good for your shopaholic clients, but it hurts manufacturers who rely on the American market for business. To combat the negative effects of a soaring loonie, the Canadian government introduced an accelerated capital cost allowance (CCA) in 2007, a tax deduction that, according to the Canada Revenue Agency, “allows a business to claim for the loss in value of capital assets due to wear and tear or obsolescence.” The CCA expires in 2011, but should it be extended?

One economist says no. Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, says if the CCA is extended, businesses will start depending on it, rather than using the credit as a tool to bolster business.

“You shouldn’t give exceptional treatment to various sectors forever,” he says. “Then it goes from being a springboard to a crutch.”

Hodgson says implementing the credit, which has helped manufacturers and some resource sector companies invest in machinery and equipment (M&E), was a good thing considering how quickly the dollar shot up. But the Conference Board’s forecast shows that Canadian businesses are “adapting neatly.”

You wouldn’t know it by the profit numbers, however. Hodgson admits that it’s hard to measure the success of the accelerated CCA right now, as many companies haven’t shown improved revenues. He thinks we’ll see the impact of the credit down the line.

“We haven’t seen a boost in productivity yet, but it should come,” he says. “If firms are investing in new technology and equipment, it will boost productivity and that’s what you need to respond to the rising dollar.”

Related Stories

Budget 2007: Some boosts for small companies Budget 2008: Capital investment will garner writedowns

While the CCA might not yet be paying off in dollars, the Conference Board has calculated that M&E investment is set to grow by 7.5% in 2008 and 2009. The growth is led by the energy sector, which is expected to boost its M&E investment by 30% in 2008 and another 15% in 2009.

On the flip side, non-energy firms, which are mostly based in Ontario and Quebec, are projected to increase M&E investment by 3.7% this year and 6% in 2009.

The area that might benefit the most from CCA is the auto sector, which has been shrinking over the last few years. Hodgson says M&E investment in the sector is likely to fall by 15% this year, but should improve next year thanks to new Toyota and Honda production facilities.

However, “It is important to note,” adds the economist, “that the accelerated CCA only helps firms that make a profit.”

A recent Canadian Manufacturers & Exporters (CME) survey showed that 62% of its members were using the accelerated CCA rules, while 87% want the measures extended to the end of 2012.

While it’s a positive sign to see that many companies are using the accelerated CCA, if they continue to use it beyond 2011, the Canadian economy could be adversely affected.

“It could artificially encourage resources to move into or remain in the manufacturing sector at the expense of other sectors of the economy, in the long run actually lowering Canadian productivity growth,” Hodgson writes in a Conference Board report titled Should the Accelerated Capital Cost Allowance Be Extended Any Further?

But what if the allowance hasn’t worked, and profits don’t increase? Even then Hodgson says the CCA shouldn’t be extended. “If firms can’t capitalize on this, then they should rethink how they’re doing business in Canada.”

The CME has major issues with Hodgson’s comments. Jayson Myers, the CME’s president says the Conference Board has “totally underestimated” the weakness in the manufacturing sector.

“I don’t agree at all with the Conference Board,” he says. “It’s the same old economic orthodoxy it’s wrong. This is coming from a group of economists who know nothing about what it takes to run a business.”

One part of Hodgson’s report that he takes particular issue with is the idea that an accelerated CCA would give an unfair advantage to the manufacturing sector. Myers explains that the CCA would help create more assets in the country.

He’s also confused at how Hodgson could think that the industry is about to turn around, and therefore, not need the credit. “We’ve come off declines of 3% and 4%,” says Myers. “What makes the Conference Board think that will turn around and increase?”

Myers says the accelerated CCA program should be extended to at least 2013. “You have a lot of companies, where period of time to take advantage of the two year write off is far too short to order customized equipment and put it in place and get it operational in a facility,” he explains. “In many cases it takes two or three years just to get regulatory approval for this stuff.”

He also adds that a lot of companies can’t take advantage of the accelerated CCA because they’re not bringing in enough cash. “A lot of cost don’t have profit, so this doesn’t mean anything if you’re not making money. And the outlook for investment is extremely weak this year.”

So what can the government do to help manufacturing? “Extend the write-up for at least five years. Make ways to turn the CCA into a tax credit to carry tax losses over a period of time, and get it as a refundable tax credit,” Myers explains. “That would be a far more affective way of loosening investment.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(08/13/08)

Bryan Borzykowski