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Archived - 8. Competitiveness Agenda: Pulblic Policy Priorities for Action

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As noted earlier, our work has been directed at establishing a clear plan of action for enhancing Canadian competitiveness. While there is a significant role to be played by the private sector, it is equally crucial for Canadian government policies to be calibrated to facilitate our global competitiveness. Governments must provide a solid framework, and set the conditions for the private sector to succeed.

National competitiveness will be achieved only if governments ensure that, across the areas that serve as the foundation of the economy, policies are appropriate to deal with Canada's circumstances in the global economy. In carrying out our examination of Canadian competitiveness, our mandate includes not only the core legislative and policy areas discussed in the previous chapter, but also the range of factors that constitute the conditions for success in the global economy.

We wish to emphasize that competitiveness is a journey, not a destination. Periodic reforms will not get us to where we need to be. Unless we keep moving forward as soon as we catch up, we will begin to fall behind. Canada's policy improvement process must be ongoing and continuous. We believe that the Competitiveness Council proposed later in this report will play a key role in assuring that improvement is continuous.

In this chapter, we discuss those public policy areas where we see reform as being most critical to Canada's future competitiveness. In the submissions we received and in the consultations we conducted, we were told that action in these areas is of equal or greater importance to Canada's competitiveness than action on our core mandate. We agree. By drawing attention to these issues and offering our recommendations, the Panel seeks to ensure that all levels of government dedicate the focus and attention that will be necessary to achieve Canada's economic objectives.

Taxation

In the global economy, both capital and people are increasingly mobile. Other things being equal, capital and people move to jurisdictions that offer lower taxes and higher returns. High business taxes reduce the return on investment, which in turn reduces domestic and foreign investment in Canada and discourages innovation and entrepreneurship.

Statutory income tax rates applicable to individuals and businesses remain relatively high in Canada. Historically, tax revenue as a percentage of gross domestic product in Canada has exceeded the OECD average.1

The federal government has recognized the significance of reduced business taxes in improving Canada's international competitiveness. In its October 2007 Economic Statement, the federal government announced that it would reduce the federal corporate income tax rate to 15 percent by 2012.2 The federal government's aim is to have the lowest statutory corporate tax rate in the G7. Likewise, several provinces have reduced their corporate tax rates and are eliminating capital taxes.

Income, Capital and Value-Added Consumption Taxes

Tax policy involves more than deciding how much revenue must be raised. An equally important policy issue is the design of a scheme of taxation and its impact on individual and corporate incentives and behaviour. For example, high corporate and personal income taxes discourage investment and work, whereas value-added taxes do not.

The superiority of value-added consumption taxes as a policy tool has been confirmed by research by the Institute for Competitiveness and Prosperity. Its study demonstrates that reducing corporate and personal income taxes would also benefit the average Canadian — more so than reductions in consumption taxes. Shifting taxation from business expenditure to consumption expenditure will increase the motivation for business investment, which in turn improves wages and job creation.3

Business investment in machinery and equipment, including advanced information and communications technology, has been shown to contribute to productivity and prosperity. In this regard, a study by economists from the Department of Finance suggests that a reduction of taxes on investment that results in a permanent and significant decline in the cost of capital will lead to a significant increase in investment.4

While reduced consumption taxes also offer economic benefits, they do not specifically encourage investment and work. From the standpoint of Canada's competitiveness, an overwhelming majority of economists and submissions to the Panel which dealt with this matter argue that priority should be given to the reduction of income taxes over consumption taxes because they are more conducive to business investment, which in turn improves productivity, creates jobs and increases wages. The Panel accepts and agrees with these submissions.

The Benefits of Tax harmonization

The most recent Ontario budget demonstrates the considerable tax savings that can be generated from tax harmonization between federal and provincial governments. As of April 2008, the Canada Revenue Agency began to collect and administer Ontario's Corporate Income Tax, Capital Tax, Corporate Minimum Tax and Special Additional Tax on life insurers.

As the 2008 Ontario Budget notes, "The single tax administration will reduce compliance costs for business and improve Ontario's competitiveness. Ontario businesses will save $90 million annually in Ontario Corporate Income Tax from a harmonized corporate income tax base and up to an additional $100 million annually in compliance costs from one tax return, one tax administration and one set of tax rules."5

In this regard, the federal goods and services tax (GST) is generally well conceived and superior to non-harmonized provincial sales taxes that tax capital investments. While several provinces have harmonized their retail sales tax regimes with the federal GST, Ontario, Manitoba, Saskatchewan, British Columbia and Prince Edward Island have not.6 Beyond such retail sales taxes being a disincentive to capital investments, which enhance competition and productivity, in those provinces that have not harmonized their sales taxes, tax administration is also more complex and costly than it needs to be, making compliance for businesses and consumers more time-consuming and financially burdensome. Submissions made to the Panel highlighted instances in which the lack of harmonization and additional taxation on capital investment have affected investment decisions to the benefit of harmonized provinces.

Competitive Advantage

Unlike all other G7 countries, the federal government is in surplus and has been since 1997–98. This gives Canada a unique and historic opportunity to turn its fiscal advantage into a competitive advantage.

We believe that Canada must do more than try to "catch up" to other nations, particularly the US. With federal–provincial cooperation, Canada can and should move to secure a competitive edge. Given the rise in the Canadian dollar and US border impediments, Canada must use every means available to attract investment that might otherwise go to the US. Our fiscal strength is a source of competitive advantage in this regard. The Panel believes that it should be used.


The Panel recommends that:

18. The federal, provincial and territorial governments should continue to reduce corporate tax rates to create a competitive advantage for Canada, particularly relative to the United States.

19. Provinces should expedite the phase-out of provincial capital taxes, and the provinces of Ontario, Manitoba, Saskatchewan, British Columbia and Prince Edward Island should move expeditiously to harmonize their provincial sales taxes with the goods and services tax.

20. The federal, provincial and territorial governments should give priority to reductions in personal income taxes, particularly for lower- and middle-income Canadians, and should provide incentives for investment and work by shifting a higher proportion of governments' revenue base to value-added consumption taxes.


International Taxation

The Panel received submissions and heard presentations from a number of private sector tax advisers that Canada's tax system advantages foreign acquirers relative to Canadian acquirers in contests for Canadian assets, thereby undermining the competitiveness of Canadian-based companies and contributing to the acquisition of Canadian firms by foreign-owned companies.

Concerns were expressed to the Panel with respect to recent changes to Canadian tax legislation that will deprive Canadian companies making foreign acquisitions of some of the same advantages that foreign companies enjoy when making acquisitions in Canada. These measures will not enhance Canadian tax revenues but will disadvantage Canadian companies seeking to become global players. Our focus on Canadian competitiveness leads us to share the concerns we heard.

The Minister of Finance has announced an Advisory Panel on Canada's System of International Taxation to look at ways to make our international tax system more competitive and fair. The Panel is chaired by Peter Godsoe and is to report by December 1, 2008.7 Our recommendations below with respect to international taxation are made solely within the context of our mandate, which is focused on enhancing Canada's competitiveness.


The Panel recommends that:

21. The International Tax Panel should give particular attention to an assessment of tax provisions disadvantaging Canadian companies relative to non-Canadian companies in Canadian acquisitions, with the objective of recommending ways to allow Canadian-based companies to compete on an equal footing.

22. The International Tax Panel should assess the provisions of Canadian tax legislation limiting interest deductibility by Canadian companies in respect of foreign acquisitions to ensure that Canadian companies seeking to compete globally enjoy every advantage relative to their foreign competitors.


Attracting and Developing Talent

Post-Secondary Education and Training

In recent years, the federal government set the goal of developing a knowledge advantage for Canada by creating the best educated, most skilled and most flexible workforce in the world. We believe that this is a critical goal: having a world-class education and training system should be a top priority for Canada.

In the knowledge-based economy, a skilled workforce is critical to attracting and retaining investment. For Canadians with strong education and training, the reward for meeting the economy's changing and rising labour market requirements is the opportunity to pursue good jobs and rewarding careers.

Fortunately, relative to most industrialized countries, Canada has high levels of human capital. Among OECD countries, Canada has the highest proportion of working-age adults with post-secondary education.8 Canada also attracts a relatively high proportion of foreign students enrolled in post-secondary education.9 This is an excellent foundation. However, to assure our future competitiveness, Canada needs to address emerging weaknesses. We need to produce more university graduates holding advanced degrees, particularly in math and science. We need to better match the abilities of Canadian workers with the changing skills needed in the economy. We also need to improve upon Canada's low levels of adult literacy and workplace training,10 improve Canada's level of business education relative to the US,11 and attract and retain more international students.

Education and training is a broad and complex subject, and a full treatment of it is beyond the Panel's capacity. However, we see four specific means by which Canada can improve its educational performance in order to enhance its competitiveness.

First, governments must continue to commit to and invest in education and training. There is no reason to suggest that governments are not already aware of the profound importance of high-quality education to Canada's economic and social goals. We simply underscore the fact that continued improvement to our educational performance will require continued investments by governments. This is particularly important in light of increasing post-secondary education enrolment in many jurisdictions and the attendant operating and capital cost pressures borne by institutions serving more students.

Second, our educational institutions must make choices in order to focus on achieving world-class expertise and pursuing excellence through greater specialization. To be competitive on the global scene, it is critical to aspire to be the best. Just as firms benefit from focus and economies of scale, so too can universities. Specialization and a continued drive to focus on excellence in chosen strategic areas is vitally important. Canada has some leading global institutions in specialized fields. We need more. The world's best students and professors can choose to go anywhere, and they typically choose the top universities in the world for their field of study. The attraction of top talent reinforces the excellence of these institutions.

University Co-ops

"Experiential learning is the cornerstone of the University of Waterloo. UW is home to Canada's first and the world's largest post-secondary co-operative education program. UW co-op gives students up to two years of work experience in their future professions, enables them to apply their classroom-acquired knowledge in real-life situations, and exposes them to opportunities rarely encountered in typical student jobs."

David Johnston, President, University of Waterloo.

Third, post-secondary education institutions must collaborate more closely with the business community. The model of the academy being withdrawn from the economy is outdated. Business–university collaboration is key to Canada's ability to be more competitive in the future. Business leaders can contribute to the governance, direction and financing of educational institutions. Close collaboration will help ensure that universities better prepare their graduates to capitalize on opportunities in the private sector by tailoring their programs to labour market needs. It is in Canada's best interest for programs taught on our campuses to be better aligned with our economic objectives.

Fourth, more use should be made, where appropriate, of post-secondary co-op programs, because they provide a vital link between the campus and the workplace. They help ensure that Canadians are equipped to meet future labour market needs and that students have a better understanding of business as they enter the labour market. Co-op programs also support Canada's commercialization performance by allowing students to complement their technical studies with real-world business experience.


The Panel recommends that:

23. Governments should continue to invest in education in order to enhance quality and improve educational outcomes while gradually liberalizing provincial tuition policies offset by more student assistance based on income and merit.

24. Post-secondary education institutions should pursue global excellence through greater specialization, focusing on strategies to cultivate and attract top international talent, especially in the fields of math, science and business.

25. Governments should use all the mechanisms at their disposal to encourage post-secondary education institutions to collaborate more closely with the business community, cultivating partnerships and exchanges in order to enhance institutional governance, curriculum development and community engagement.

26. Federal and provincial governments should encourage the creation of additional post-secondary education co-op programs and internship opportunities in appropriate fields, to ensure that more Canadians are equipped to meet future labour market needs and that students gain experiences that help them make the transition into the workforce.

27. Governments should provide incentives and undertake measures to both attract more international students to Canada's post-secondary institutions and send more Canadian students on international study exchanges.

28. Governments should strive to increase Canada's global share of foreign students, and set a goal of doubling Canada's number of international students within a decade.

29. Governments, post-secondary education institutions and national post-secondary education associations should undertake regular evaluations, measure progress and report publicly on improvements in business–academic collaboration, participation in co-op programs, and the attraction and retention of international talent.


Immigrant Selection and Integration

Seventy-five percent of Canada's workforce growth now comes from immigration, and this is expected to reach 100 percent before the decade ends.12 At present, one in five Canadian workers are foreign born.13 In many regions and sectors, Canada is experiencing acute skills shortages, which slows economic growth. As our population ages and labour force growth declines, attracting and retaining skilled workers will become even more important.

Recent studies indicate that our record on immigrant integration is deteriorating. While recent immigrants have high average levels of education, their incomes relative to their Canadian-born counterparts eroded over the past 25 years. In 1980, immigrant men who had some employment income earned 85 cents for each dollar received by Canadian-born men. By 2005, the ratio had dropped to 63 cents. The corresponding numbers for immigrant women were 85 cents and 56 cents, respectively.14

Efforts to improve Canada's competitiveness will require Canadian governments, professional and trade associations to expedite efforts to assess and recognize foreign credentials. In 2001 alone, more than 340 000 Canadians held unrecognized foreign credentials, mostly post-secondary degrees and diplomas.15 Part of the answer is for employers to show greater openness to immigrants with foreign education and experience.16 But systemic change is also required.

An impediment to progress has been Canada's backlog in processing immigrant applications. As of June 2007, the backlog of immigrant applications to Canada was 870 000 cases, of which 570 000 were in the skilled worker category.17 Depending on the country, some wait more than five years to finalize their applications. This backlog has meant long waits for prospective Canadians and lost opportunities for a Canadian economy that requires their skills.18

In order to meet urgent employer needs, Canada has introduced a Temporary Foreign Worker Program. Budget 2007 announced changes to streamline this program to enable employers to bring in workers more quickly to address their immediate labour shortages. The federal government also introduced the Canadian Experience Class to expedite the process for skilled temporary foreign workers and foreign students with Canadian credentials and work experience to remain in Canada as permanent residents. Budget 2008 announced further action to help address the growing demand at Canadian missions abroad for temporary resident visas for students and skilled workers, and committed to improve service and speed up processing for student visas.19

Canada's immigration policy and attractiveness to highly educated and skilled immigrants can and should be used as a source of competitive advantage, particularly vis-à-vis the US.

Immigration Advantage

In July 2007, Microsoft announced the opening of a new Microsoft Canada Development Centre in the Greater Vancouver area. The location "allows the company to recruit and retain highly skilled people affected by immigration issues in the US" and to "attract the next generation of leading software developers from all parts of the world."20

Finally, the Panel heard that our immigration policies impact Canada's attractiveness to investment and, particularly, as a site for corporate and divisional head offices. Our policies should facilitate management interchanges to give Canadians global experience and allow diffusion of international capabilities, and to preclude restrictive and time-consuming immigration procedures from becoming an impediment to the timely approval of multi-year secondment of foreigners to Canadian sites. In this connection, consideration must be given to providing working status to accompanying spouses and children.


The Panel recommends that:

30. Reforms to Canada's immigration system should place emphasis on immigration as an economic tool to meet our labour market needs, becoming more selective and responsive in addressing labour shortages across the skills spectrum.

31. Canada's immigration system should develop service standards related to applications for student visas and temporary foreign workers, and should be more responsive to private employers and student needs by fast-tracking processing and providing greater certainty regarding the length of time required to process applications.

32. In order to ensure that Canada is able to attract and retain top international talent, and respond more effectively to private employers, Canada's immigration system should fast-track processing of applications for permanent residency under the new Canadian Experience Class for skilled temporary foreign workers and foreign students with Canadian credentials and work experience.


Head Offices and Cities

Head Offices

The head office of an enterprise is its "brain." It is the place where strategy and other critical decisions are made by its key management personnel. Very large multinational enterprises (MNEs) that operate in more than one line of business will sometimes establish a divisional head office to provide such functions to a particular business or geography within parameters determined by the corporate head office. When one company acquires another, the head office of the acquirer invariably becomes the head office of the combined enterprise.

While Canadian head offices tend to be small, employing on average fewer than 50 employees,21 they are a significant source of high-skilled, high-paying jobs. In 2005, average salaries at head offices in Canada were $74 900, well above the overall average salary of $37 800.22 In addition to their direct employment impacts, head offices make a significant indirect contribution by attracting high value business services — legal, accounting, consulting, information technologies, marketing and advertising — to the community. The communities in which head offices are located also benefit from philanthropic activities. These include corporate charitable contributions, support for specific community causes and initiatives to encourage volunteering by senior managers and employees, who often play leading roles in such organizations.

In light of the evident benefits of head office activity, the spate of Canadian merger and acquisition activity in recent years and the resulting loss or downgrading of head office functions at acquired firms have given rise to unease about the impact on Canada and its leading head office cities: Toronto, Calgary, Montreal and Vancouver. The statistics indicate that, while Calgary is gaining head offices and Montreal and Vancouver are losing them, in the aggregate Canada is not losing head offices.23 This analysis and the lack of research quantifying the value of head offices have led some to conclude that public policy need not be concerned about the implications of the loss or downgrading of head office functions consequent on the sale of large Canadian companies. While the Panel does not dispute the statistics, we dispute that view. Our experience tells us that the head offices of large private companies and of public companies disproportionately provide the benefits that a head office provides to its host city and country. When a Canadian company is acquired by another Canadian company, Canada loses a head office but gains a stronger company. When the acquirer is foreign, Canada loses a head office and a company.

To ensure that Canada continues to benefit from head office presence, Canada needs to have public policies that nurture and develop Canadian-based MNEs (whose head offices will replace those of companies that are being acquired by foreigners). Canada also must ensure that its major cities have the attributes that will make them an attractive base for the divisional offices of non-Canadian MNEs. The United Nations Conference on Trade and Development24 identifies eight key factors influencing the location of MNE head offices: excellent international accessibility, a skilled workforce especially with multilingual skills, high quality of life to attract international staff, low corporate and personal taxes, excellent information and communications technology infrastructure, well-developed business support services, low risk and proximity to customers. The study particularly emphasizes the importance of a highly skilled workforce.

The recommendations in this report, if heeded and implemented, will enhance Canada's competitiveness as a destination for capital and talent as well as the emergence of Canadian-based MNEs. As a consequence, they will enhance the quantity and quality of head offices located in Canada, and the associated benefits will accrue to Canadians.

Cities

In The Rise of the Creative Class, Richard Florida argues that successful cities attract the "creative class" by offering diverse job opportunities as well as social and cultural amenities. The creative class is a "fast-growing, highly educated and well-paid segment of the workforce on whose efforts corporate profits and economic growth increasingly depend."25 The continued growth and success of our cities lie in their ability to attract and retain the best and the brightest.

Canada demonstrates Florida's thesis. More than 80 percent of Canadians live in urban areas, anchored by Toronto, Montreal, Vancouver, Ottawa–Gatineau, Edmonton and Calgary.26 Canadians will continue to urbanize.

Our major urban areas are therefore the locus of talent. They attract the highly educated from within Canada, and they are also magnets for talent from abroad as the primary gateways for recent immigrants. Immigrants settle in large cities in pursuit of job prospects. In fact, 97 percent of recent immigrants settled in urban centres — fully 69 percent of these in Toronto, Montreal, and Vancouver27 — bringing new cultural and linguistic diversity to Canada and a network of global connections. In short, our cities provide the critical mass of talent and productive capacity, underlie innovation, and attract investment and employment. It is no surprise, then, that our biggest and most competitive firms are located in our six largest urban centres. Indeed, these six urban centres are the sites of 62 percent of all head offices in Canada.28

We have concluded that these large, dynamic urban centres have a national importance that transcends their significance to a region or province, in the same way that the national railways were recognized in the 1800s as having a national significance. Our largest urban centres have a role to play in assuring Canada's future prosperity that transcends their municipal and provincial boundaries.

Canadian cities continue to rely primarily on property taxes and user fees to finance municipal services. In the US, all cities levy a selective sales tax of some kind. For example, alcohol and beverage taxes are levied in Atlanta, Chicago, and Detroit, while tobacco taxes are levied in Chicago.29 Many other cities employ user fees, cost recovery, and public–private partnerships to address funding issues. Most cities in other OECD countries have broader and more secure tax bases than Canadian cities.30

In addition to costs associated with a growing population, urban centres bear the burden of maintaining and building new infrastructure and integrating immigrants. As the Conference Board of Canada concludes, "The infrastructure of Canada's major cities is not keeping pace with the needs of the manufacturing and service businesses whose competitive advantage is tied to the existence of a modern, accessible and reliable network of roads, rail and air transport."31 It is estimated that the cost of repairing or replacing civic infrastructure (public transit, roads, highways, bridges, and waterworks) to meet current requirements ranges from $50 billion to $125 billion.32

In recent years, governments have begun to address these funding issues. In 2007, the federal government announced Building Canada, a seven-year plan totalling $33 billion; part of this is earmarked to municipalities, including the GST rebate and Gas Tax Fund.33 There are also notable new investments by the provinces of Quebec, Ontario and others.

During the Panel's consultations and in the submissions we received, there was recognition of the advantage to Canada of the effective functioning of large urban centres. There was also recognition that the lines of accountability, program and service responsibility, and revenue sources in Canada are misaligned with respect to urban centres. While the federal and provincial governments possess the key levers to raise revenue, municipal leaders are responsible for administering urban centres with inadequate access to secure revenues. This results in poor governance and declining quality of life in our urban centres, with negative knock-on effects on Canada's competitiveness.

Governments should establish a more adequate, stable and diversified revenue base to underpin Canada's urban centres. Canada's municipalities, particularly those anchoring our largest urban areas, need to be seen as key partners in executing Canada's Competitiveness Agenda, and to be given the tools to attract the business, investment and talent needed for the continued growth of our economy.


The Panel recommends that:

33. Given the national importance of Canada's largest urban centres, the federal government should provide leadership to deal with critical urban issues, particularly those affecting infrastructure, immigration, and higher education and training.

34. In addressing urban issues, municipalities need a more stable, secure and growing revenue source. In particular, provincial governments should assess the feasibility of allowing any municipality to levy a 1 percent value-added tax within their jurisdiction, assessed on the harmonized goods and services tax base, which would be collected by the Canada Revenue Agency (or Revenue Quebec) on behalf of the municipality.

35. In dealing with these issues, municipal authorities that have not already done so should make greater use of financing mechanisms such as user fees, cost recovery programs, debt financing and public–private partnerships.