FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 20, 2001

[English]

• 0933

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this morning.

This committee is meeting this morning pursuant to Standing Order 83.1. We are continuing with our pre-budget consultations. It's our pleasure to have with us representatives from the Aerospace Industries Association of Canada, the Canadian Employee Relocation Council, the Ottawa Centre for Research Innovation, and Pratt & Whitney Canada.

Many of you have appeared before the committee and know how we function. You have approximately five to seven minutes to make your introductory remarks, and then we will proceed to questions and answers.

We'll begin with Mr. Peter Smith, president and chief executive officer of the Aerospace Industries Association of Canada.

Mr. Peter Smith (President and Chief Executive Officer, Aerospace Industries Association of Canada): Thank you, Mr. Chairman.

Before I open my formal remarks, I simply want to commend the committee, in that as recently as two days ago we saw the announcement by the government of a $17 billion reduction in the debt. I can say this with some authority, having been here I guess about eight times now, watching the committee struggle through a $42 billion deficit while it looked at program expenditures, at personal and corporate tax reductions, and now at debt reduction. I for one want to commend you, the committee, the Minister of Finance, and the government for listening throughout this pre-budget consultation process.

• 0935

We don't always get everything we would like to get, but this is a dialogue we would encourage. Certainly the track record of the government has been such that we simply want to say on record how pleased we are with the progress and the fiscal responsibility we've seen as a result of this process.

The views I want to talk about this morning relate to an issue that arose last year, when the government decided it was going to set a target of moving Canada from sixteenth place to fifth place in the world in terms of innovation. We started a very extensive consultation program over the months with our board of directors, with senior officials, and with academics. We have produced a paper, which all of you have seen, and have sent it to all of your member of Parliament colleagues in the various parties. The purpose of this was to set out a dialogue as to what Canada can do to achieve the status that has been set out in the objective.

Regrettably, last Tuesday there was a very tragic event, which had a rippling effect throughout the entire world. Specifically in relation to the aerospace industry, there are some very troublesome signs ahead. Notwithstanding this, I think we should be focused on the future, take a look at what disruptions will occur as a result of this particular tragedy that affected all of our lives, and look at ways and means in which we can address both simultaneously.

There is no question that there are airline shutdowns and capacity reductions. Gradual increases in passenger volume and their confidence will necessarily be the indicator required to see how we can get out of this particular struggle.

We have seen manufacturing and service disruptions, order and option cancellations, order and option delays, reductions in maintenance volume, and in part acceleration of military work. In the short run, this has resulted in some layoffs, which have already been announced, primarily because of the economic slowdown, not as a direct result, at this stage in the game, of the tragedy that occurred last week. However, we also see customers refusing delivery of aircraft. We see the trickle down from those particular refusals of orders into parts suppliers and many of the members of AIAC. Cashflow considerations will be critical, and of course stock prices of publicly traded companies have been hit very hard.

What are the potential solutions to mitigate the impact in the short term? We're encouraging a thorough review in our own country of military programs to accelerate purchases and to accelerate life extension and upgrade work so that there can be a pickup on one side, the civilian side that has been severely impacted.

We're looking at flexible ways in which the EDC, Export Development Corporation, can encourage the use of its facilities for products and services to smooth out the cashflow problems of some of our foreign nations who are very close customers of ours.

Finally, we are encouraging the government to reinforce the importance of the North American continental perimeter, not only because of the issues that have arisen in the last year or so with respect to the international traffic and arms regulations but also because it's a privileged trading partner of ours, and we need to ensure that we have that border as an ally, both economically and for security purposes.

In the long term, I think it's terribly important that we focus on innovative solutions to sustain aviation as a safe and secure mode of transport for both passengers and cargo. We need to maintain public confidence. Therefore, we must ensure that the aerospace research and development link is not broken by these tragic events.

Innovation drives Canadian economic development, it underpins Canada's standard of living, and it sustains Canada's cherished social programs.

• 0940

Aerospace is proud to be an innovation leader. It has an impressive track record of R and D investment. With growth and job creation, it delivers immense economic and social benefits to Canadians and the world. It must be a strategic priority for Canada.

Our sales will reach $23 billion this year. In the past ten years we've created 40,000 new jobs. We currently employ 95,000 Canadians. There are enormous personal and corporate taxes generated from this sector, and 80% of our output is exported. Aerospace is truly a global business. We have market leaders in regional aircraft, business jets, commercial helicopters, small gas turbine engines, flight simulation, landing gear, and space applications.

Every day around the world Canadian aerospace products are at work providing safe, effective, and efficient air travel solutions, enabling secure communications and supporting the operations. Aerospace innovation is a key to competitive advantage in world markets. It requires long development cycles and significant investments in research and development. It's increasingly driven by the criteria of safer, quieter, cleaner, and more affordable product and process innovation.

International collaboration and partnership is the norm today. One thing I want to remind all of you of is the fact that innovation in the aerospace industry has a ripple effect in such areas as agriculture, forestry, telecommunications, health care, and security systems. Today, success and market strength alone are insufficient to guarantee our leadership tomorrow.

The industry's recent strong performance, however, masks vulnerabilities that threaten the future competitive advantage of the Canadian aerospace industry. Rapid industry growth has not been accompanied by the commensurate increase in R and D spending that is necessary to sustain this growth. As a result, our innovation performance has fallen behind that of our principal competitors'. There are systemic problems with the mechanisms used to fund aerospace R and D, and we are prepared to help find solutions to those problems, but public investment in aerospace R and D is a critical lever to private sector investment. We cannot forget that.

The numbers will tell the story. The success of the aerospace industry from a sales perspective in 1990 was $8.8 billion, and R and D intensity represented about 10% of that figure at that date. The year 2000 saw $20 billion in sales. Unfortunately, the R and D intensity represents only 5%.

Declining R and D intensity mirrors the decrease in federal aerospace R and D investment. The chart in front of you will show the difference in the funding levels from $600 million down to $300 million over that same period of time. The following chart will indicate an increase in investment by industry to the tune of about $2.5 billion this year. The unfortunate part about this is that a lot has been invested in capital plant and equipment, and less and less is being spent on R and D simply because of the instruments that are not available within the federal government to stimulate the leveraging of R and D funding.

Unfortunately, when you take a look at our competitors, it would appear from the chart that follows that the governments are making significant investments. The government investments lever aggressive private sector investment, as I mentioned, but when you take a look at the United States, the government's share of aerospace R and D is 66%, Europe 50%, and Canada 25%. The industry R and D intensity in that respective group of countries is 10% for the United States, 14% for Europe, and 5% for Canada.

Beyond insufficient overall investment, there are other problems the industry has recognized and is accountable for. There's insufficient focus on early stage research and pre-competitive technology development. There are too few Canadian companies pursuing innovation and performing R and D. R and D efforts are fragmented, collaborative efforts are rarely pursued, universities are underutilized, international R and D linkages are weak, our international intellectual capital is threatened, and the R and D infrastructure is losing its effectiveness.

• 0945

There is indeed urgent action to increase investment, and we need to be sure that there is a renewed, coordinated, and cohesive partnership between the government and the private sector to double Canada's annual aerospace R and D investment by 2005, and thereafter sustain an annual investment level of at least 10% of sales. Aerospace must be a priority for the new federal investments that will be aimed at making Canada one of the top five countries in the world in R and D performance.

Restructuring the R and D investment framework must accompany the new funding. Current mechanisms do not provide comprehensive coverage across the spectrum of R and D activities. Terms and conditions are often unsuited to the purpose of this mechanism. Too often investment opportunities are lost and scarce resources are wasted. The magnitude of the problem demands a major rethink. Tinkering will not always be the answer.

SMEs face a unique challenge that demands unique solutions, yet all too often there's a perception that one size fits all.

Mr. Chairman, I simply want to indicate that we have prepared this paper as a basis for the dialogue that we hope will occur over the next few months to try to address those short-term problems we are facing today. The long-term solutions we feel are achievable. To help in this regard, the Aerospace Industries Association of Canada is prepared to recommend to the industry minister that a very high level industry-government oversight group for aerospace research be formed. We will staff it from the industry side from experts who have been either recently retired or are currently working, to provide the advice and assistance to the Government of Canada so that they can come up with a comprehensive aerospace innovation, investment, and restructuring plan.

We feel the status quo is no longer an option. The time to act is now. For Canada there is much to gain and much to lose.

Thank you.

The Chair: Thank you very much, Mr. Smith.

We will now hear from the Canadian Employee Relocation Council, Bruce Atyeo and Jacques Prévost.

[Translation]

Mr. Jacques Prévost (Co-Chair, Government Relations Committee, Canadian Employee Relocation Council): Mr. Chairman, members of the Standing Committee on Finance, I want to thank you for this opportunity to share with you our views on a matter that is very close to our hearts.

The Canadian Employee Relocation Council represents over 540 Canadian businesses and organizations administering and/or servicing employee relocation. There are approximately 40,000 employer-initiated moves in Canada each year. At an average cost of $50,000 for each move, relocation injects about $2 billion directly into the Canadian economy.

[English]

My colleague Bruce Atyeo, co-chairman of the Canadian Employee Relocation Council government relations committee, will speak directly to the issues we would like the House of Commons Standing Committee on Finance to consider.

Bruce.

Mr. Bruce Atyeo (Co-Chair, Government Relations Committee, Canadian Employee Relocation Council): Mr. Chairman and members of the committee, I intend to speak briefly to some of the highlights of the written brief that was submitted to the committee recently.

Given the broad geographic and cultural nature of our country, employee relocation is an important and expensive strategic and operational necessity for the Canadian business community. The recent globalization of business also dictates active participation by Canadian companies outside our border. As a result, international assignments are increasing. They present employers and transferred employees with different and even more challenging dynamics.

In addition to the positive economic impact mentioned by my colleague, employee relocation provides an opportunity for employers to invest in the development of Canadian human resources by providing Canadian employees with the chance to broaden their knowledge base and job skills. They also gain an enhanced appreciation for the regional differences of Canada, both from an economic and a cultural perspective.

Relocation has many other benefits, some of which can help Canada move closer to its economic goals. For example, Canadian businesses continue to struggle with a productivity disadvantage against that of their global competitors. In a global economy where productivity is the key to competitive survival, a mobile workforce is essential.

• 0950

Relocating Canadian workers to other countries provides them with first-hand exposure to best practices in terms of efficient technology and process design. Clearly, employee relocation, both domestic and international, is an important and necessary activity for the Canadian economy and Canada as a whole.

Increasingly, however, employee relocation has become even more challenging for employers. In addition to the high costs associated with this activity, employers must also now deal with the many modern lifestyle issues that affect employees today. For example, the significant increase in dual-income families has made it difficult for many employees to accept transfers without sacrificing a significant portion of family income.

CERC believes that the government should be adopting policies and practices that facilitate mobility within the Canadian workforce, including the adoption of tax treatments that will ease some of the difficult financial and administrative burdens associated with this important activity. The current tax rules on relocation create some counterproductive financial and administrative burdens on relocated individuals, on Canadian employers, and on the Canadian Customs and Revenue Agency. Specifically, there are two tax issues that could easily be addressed in the next budget with a negligible impact on government revenues.

The first issue deals with the tax treatment of interest-free home relocation loans. In 1985 the federal budget included tax relief on up to $25,000 of an employer-provided interest-free home relocation loan. Since that time house prices in virtually all Canadian cities have risen dramatically. I refer you to the table included on page 3 of our brief to examine that situation.

In many important Canadian business centres the increased cost of comparable housing exceeds the $25,000 exemption by a significant margin. As a result, many transferred employees are not able to find comparable housing in high-cost centres within the limits imposed by the current tax treatment of this reimbursement. Employees who accept a transfer to a higher-housing-cost location must shoulder a disproportionate share of the cost just to maintain their current standard of housing. Employees who turn down transfers for these reasons create an unproductive exercise for both employee and employer, and another lost opportunity for Canada to achieve its goals.

CERC asks the committee to recommend that the limitation on interest-free home relocation loans be increased from $25,000 to $75,000 in the next budget. We estimate that this action will cost the government approximately a mere $2.4 million.

The second issue deals with the tax treatment of equity loss reimbursement. The 1998 budget imposed a tax when an employer reimburses a transferred employee for a loss of home equity. This tax is imposed on 50% of the reimbursement in excess of $15,000. While this tax may have had some relevance as housing prices declined through most of the 1990s, it is now largely irrelevant. Most housing markets in urban centres have regained levels that are at least on par with the peak prices of the late 1980s.

Based on an informal survey of our members, the number of employees who experience a loss of equity today is negligible, and the number of losses that exceed the $15,000 limit is less than 30% of those. This means we are literally taxing a very small number of Canadian taxpayers. The amount of tax collected for this type of reimbursement does not justify the administrative burden imposed on the employer and on the transferred employee, and it cannot be cost-effective for Canada Customs and Revenue Agency.

In addition, government has always encouraged home ownership for Canadians, and the tax-free status of accumulated equity in a personal residence is considered to be sacred by Canadian homeowners. Taxing a reimbursement of an equity loss for a Canadian worker who is moving for the benefit of the Canadian economy at large has the taint of taxing equity in a personal residence and is regularly met with indignation by our members and by taxpayers at large. As a result, we ask that the committee recommend the elimination of this tax on equity loss reimbursement, and at the very least the exemption limit should be indexed to reflect the current realities of Canadian residential real estate markets.

• 0955

We project that this change will have such an insignificant cost and impact on the government that it's almost immeasurable.

Together, these changes will have a positive impact within the relocation industry, thereby encouraging and facilitating mobility within the Canadian workforce. They will also bring government actions in line with its stated objectives to ensure that Canada remains a major player in the new economy, to provide Canadians with equal opportunity to succeed, and to create a socio-economic environment where Canadians can enjoy the best quality of life and standard of living. There are also many other benefits that line up directly with those goals of Human Resources Development Canada, as well as Industry Canada.

Thank you very much for your time.

The Chair: Thank you very much.

We'll now proceed to the Ottawa Centre for Research and Innovation, Wes Biggs and Mike Darch. Welcome.

Mr. Mike Darch (Special Adviser to the President, Ottawa Economic Development, Division of OCRI, Ottawa Centre for Research and Innovation): Good morning, ladies and gentlemen. My name is Michael Darch. I'm a special adviser to Ottawa Economic Development, a division of OCRI. With me is Wes Biggs, CEO and president of Edgeflow.

We are part of a coalition of leading businesses, universities, photonics associations, and government agencies that want to ensure that Canada takes steps to nurture and grow one of our leading strategic industries: photonics. We are here today to seek your support and your recommendation to the Minister of Finance for the creation of a Canadian photonics fabrication centre, CPFC, in Ottawa. By investing in this centre, the government will ensure the continued growth of the photonics industry, not only in Ottawa but in all of Canada.

The National Research Council has proposed establishing the CPFC as part of its industrial cluster strategy. It will specialize in research, development, and training in the field of photonics. The NRC has estimated the cost of the facility at $45 million if built here in Ottawa. It is the council's number one priority for the province of Ontario.

What is photonics? Photonics is technology that deals with the manipulation and application of light. It has a wide range of applications and is a crucial strategic technology that is an enabler for telecommunications, manufacturing, environmental monitoring, biotechnology, health, transportation, and indeed the aerospace industry. Canada's leadership in photonics makes this an ideal target sector for strategic investment to encourage future growth.

Ottawa is home to the largest and most successful photonics cluster in Canada. Why Ottawa? Ottawa has an impressive track record in innovative research and world-class companies in the photonics sector. Ottawa is home to Canada's largest concentration of private sector companies dealing in photonics, which includes multinationals and many small and medium-sized enterprises. Statistics released yesterday by the Canadian Photonics Council indicate that 77% of the companies in Canada are located in Ontario and 33% of the companies are located here in Ottawa.

It employs an estimated 13,500 people here in Ottawa. It generates close to $5 billion worth of goods and services, of which approximately 90% are exported. Local photonics start-ups have attracted $750 million in private sector investment over the last 18 months, most of which has come from offshore. Our companies are supported by the academic and research excellence of Université d'Ottawa, Carleton University, Algonquin College, and la Cité Collégiale. The Communications Research Centre and National Research Council also maintain four institutes here, which together do significant research in the area of photonics.

Our economic impact study, which has been given to the clerk, shows that an initial $45-million government investment would create 11 times the benefit in net present value over the next 10 years. Existing infrastructure on the NRC campus in Ottawa reduces the investment required by one-third and the time to operation by one-half.

• 1000

To discuss the business case for the CPFC, I would now like to turn it over the Wes Biggs. Wes may be modest, so I'll add that in these troubled times Edgeflow announced $29 million in new venture funding on Monday, again, most of which was from offshore.

Mr. Wes Biggs (President, Edgeflow; Ottawa Centre for Research and Innovation): Thanks very much, Mike. As I was telling Mike today, we're actually going to be able to build a few offices for our people.

I'd like to begin by telling you a bit about Edgeflow. We're located in the west end of Ottawa, in Kanata, Canada's business heartland for the photonics industry. Edgeflow was established in April of last year and currently employs 90 very highly trained individuals. We are a one hundred percent privately funded company. We've been able to continuously grow even during this economic slowdown, and we intend to keep growing.

In recent weeks some of the high-tech companies have closed down or have been laying off employees. This is because of market saturation. We don't see that it is because of any slowdown in the technology we're taking to the market. Companies like ours continue to grow and continue to track American venture capital firms to invest in our people and our technology.

As a producer of optical networking equipment, we're at the top end of the optical technology spectrum. To sustain production of the best and most cost-effective products, we need access to the best and most advanced and economical optical components. This is only possible if there is a vibrant optical components industry here in Canada. Such a vibrant industry can exist and maximum benefit can occur if this fabrication centre is built right here in Ottawa. By assisting with the development and testing of new components and products, more start-ups like ours will make it through the first difficult stages of growth that lead to real success and real revenue.

Photonics is an intensely competitive business sector. Most of Canada's photonics expertise is right here in Ottawa. We need the government to engage in activities and pursue investments that keep these bright individuals right here in Ottawa. If they leave, these individuals will not be going to another centre in Canada; they'll go somewhere else in the world, where they are offered the opportunity to grow, experiment, learn, and earn.

Building a fabrication centre in Ottawa will be a major step towards ensuring the Canadian expertise and know-how remains here. It will ensure that photonics businesses in Canada are sustainable in a global marketplace. It will ensure that Canada continues to be a real player in the new economy.

In conclusion, the Canadian photonics fabrication centre results from a shared vision, designed around what photonics enterprises, large and small, have told the National Research Council they need. Ottawa is the right place for Canada's investment in a photonics cluster and it will contribute greatly to the growth of this very innovative sector.

We hope we can count on the committee to support the creation of a Canadian photonics fabrication centre in Ottawa, and that financing for it will be one of your recommendations to the Minister of Finance.

I thank you very much for listening to us.

The Chair: Thank you very much, Mr. Biggs, Mr. Darch.

We'll now hear from the president of Pratt & Whitney Canada International Inc., Mr. Gilles Ouimet. Welcome.

[Translation]

Mr. Gilles Ouimet (President, Pratt & Whitney Canada): Mr. Speaker, ladies and gentlemen, as CEO of Pratt & Whitney Canada, I am delighted to have this opportunity to share with the committee our views on the budgetary approach Canada should take to ensure the country's economic prosperity.

A positive financial and fiscal framework is vital to maintaining the competitive position of Canadian companies on global markets. This is equally true for businesses such as mine.

Obviously, the tragic events of September 11 have changed the world in which we live and work, especially for people in the airline and aerospace industries. The airline industry was already struggling as a result of the downturn in the US economy and according to our estimates, these attacks will result in significant job losses in this and in other related sectors such as major equipment and engine supplies, etc. Worldwide, some 200,000 jobs could be lost. In the months ahead, the climate within the industry will be fraught with change and uncertainty.

• 1005

Let me begin by telling you a little about the company that I have the great privilege of overseeing. Pratt & Whitney Canada was founded in Longueuil in 1928 and continues to maintain its headquarters and major facilities in that community. Our company is a world leader in the design, development and manufacturing of small turboprop engines for small regional airplanes, business aircraft, helicopters, training and commercial aircraft.

Over 30 years ago, our parent company, United Technologies assigned to us global responsibility for supplying this range of products, which means that we develop strategies, conduct R & D and provide manufacturing and support services for Pratt & Whitney Canada around the world.

Last year, Pratt & Whitney posted sales of over $2.4 billion, 85 per cent of which was generated by the export market.

[English]

We employ more than 9,000 people in our worldwide activities, with approximately 7,000 based in Canada. We have major facilities in four provinces, and we rank as the second largest research and development investor in Canada, with R and D investment totalling $400 million this year.

We purchase over $520 million from our Canadian supplier base of over 2,700 companies—most of whom, by the way, are SMEs, small and medium enterprises. We also perform research and development in partnership with 15 Canadian universities as well as the National Research Council.

I would like now to cover a few issues that I believe are crucial to the future of my company and our industry in Canada and to Canada in general.

The national debt and the attainment of a competitive tax regime, both corporate and personal, are in my mind the two most important issues with respect to strengthening Canada's economy. We are very pleased that the government has turned a continued deficit a few years ago into a significant annual surplus, which has provided additional funding for debt reduction and other programs. We would like to congratulate the Canadian government leadership for taking such a successful route.

This surplus has contributed to a more dynamic Canadian business climate, but we still need to continue in that direction to be internationally competitive. We maintain that the government must implement long-term strategies that will essentially eliminate the possibility of future deficits and also accelerate the debt reduction.

[Translation]

Most people misunderstand productivity and how it affects the competitive position of Canadian industries. Taxation issues and other government imposed restrictions profoundly affect productivity.

On the positive side, federal R&D support programs significantly help to enhance productivity. Many Canadian firms seem to ignore the important role R&D plays in improving productivity, this despite excellent government support programs.

It is critical, therefore, that SMEs integrate R&D into their fundamental strategy and partnerships with clients. We have stimulated R&D in Canada by finding was to encourage companies, in particular SMEs, to invest in this area and to create a fiscal climate conducive to such investment, for instance, by countering the negative cash flow associated with R&D programs, particularly in SMEs' first years of operation.

[English]

The government has a number of programs that stimulate R and D investment, including Technology Partnerships Canada, the Canada Foundation for Innovation, the Natural Sciences and Engineering Research Council of Canada, and obviously scientific research and engineering development tax credits. All are excellent programs in their own right, but we must ensure that these programs are competitive with what is available in other countries. For instance, the TPC, the technology partnerships program, of which my company is a major user, is a risk-sharing, royalty-repayable, investment program. The TPC process helps us compete to a degree with our major European and American competitors by providing for specific technology development, with up to 33% repayable support. Yet, as Mr. Peter Smith mentioned in his presentation a few minutes ago, our competitors receive 50% to 75%, and in many cases even more, for specific programs—50% to 75% R and D support from their indigenous governments to develop their turbine engines. In a lot of cases, this support is non-repayable defence-related R and D that our competitors incorporate into their commercial products with little or no R and D cost.

• 1010

In fact, today, in 2001, most of the engines we compete with around the world are direct derivatives of engines designed, developed, and paid for either by Uncle Sam through U.S. DOD programs or by European military programs. To counter this, we must ensure that the available funding through TPC keeps pace with demands from the continually growing aerospace industry and that it is reasonably competitive with other countries' funding policies.

In this context, and obviously notwithstanding the near-term impact of last week's tragedy on the potential near-term growth, we project that over the mid term to long term, the Canadian aerospace industry will continue to grow at a fair clip, and the experts are looking at probably in the range of 5%.

The amount of funding from TPC must grow to meet this demand to ensure that the Canadian aerospace industry maintains its position as fourth in the world after the U.S., France, and the U.K. Also, the structure of this funding process must provide the flexibility to cater for changing needs of the industry and for the different size of players, ranging from SMEs to multi-thousand-employee companies such as Bombardier and Pratt & Whitney.

[Translation]

Canada enjoys a generous R&D tax credit regime of which Pratt & Whitney Canada is a significant beneficiary. Nevertheless, we do have some concerns with this program, not with its intent as such but more with the process. Specifically, we are concerned that the tax credit application guidelines change from year to year.

Putting things into perspective, unlike other sectors that operate according to a relatively short profit horizon, typically, we must set the prices of the products we develop about ten years ahead of any profit expectation. Thus, if the tax credit program changes from year to year, then the rules of the game change as well. It is extremely difficult for us to establish commercial parameters that are as competitive as we would like them to be.

Finally, we are also concerned about the fact that the tax credit program fails to take into account the international side of development projects. The legislation should be amended to make room for tax credits for projects carried out in Canada as well as abroad, provided the resulting intellectual property remains in Canada.

Moreover, federal and provincial taxes levied on tax credits as well as unwieldy associated audit and management loads imposed on firms are often disincentives, particularly to SMEs.

[English]

I would also like to address the issue of corporate and individual taxes, an issue that I'm sure you have heard and will continue to hear about in your deliberations.

Payroll taxes include the Canada Pension Plan, employment insurance premiums, and medicare levies. These taxes have increased substantially over the years and they hinder the creation of new jobs. We recommend that these taxes be, in total, reduced to a more acceptable level.

Capital taxes represent a tax on innovation, productivity, and on investments. They are applied to companies even when a firm suffers a loss. We also recommend that the federal government, together with the provinces, abolish this regressive burden on businesses.

• 1015

[Translation]

Finally, there should be just one form of corporate taxation. Th resulting rate should be based on the competitive rates of our major competitors worldwide. Canada would thus be in a better position to attract investors. If we look at Ireland, it's clear that an aggressive corporate taxation system can quickly bring about long-term benefits.

In addition, Ottawa and certain provinces have announced cuts to personal income taxes. We congratulate you on taking this lead and encourage you to keep up the efforts in this area.

According to a recent survey, over 65 per cent of Canadian high tech companies believe that high personal income taxes are partly to blame for their inability to attract and retain a highly skilled workforce.

Even Pratt & Whitney has had problems in recent years as a result of high taxation levels. And while the current economic downturn has improved the situation to some extent, changes to personal income taxes must continue to be monitored.

We also support the government's position on global free trade and we urge it to continue seeking ways of promoting international trade and of working to eliminate tariff and non-tariff barriers to trade, particularly with EU commercial partners.

[English]

In conclusion, for Canada to remain a world player in strategic advanced technology fields such as aerospace, the government must address the issue of maintaining a viable climate for R and D investment through the enhancement of programs such as TPC and others that support industrial research. Canada must also address the issue of Canada versus U.S. productivity and the role that taxation plays in this mix.

[Translation]

Canada is exceptionally well positioned to take part in globalization. It is home to some of the best companies in the world in the aerospace, biotechnology, telecommunications and transportation industries, for example. In order for our businesses to continue to grow, Canada itself must become a leader and modify its tax system, rather than simply react to tax reforms initiated by other countries.

In conclusion, Mr. Chairman, thank you for this opportunity to make these observations and to share with members my views and those of my company on the challenges that our country must surmount in order to continue on the path of growth. Thank you.

The Chair: Thank you, Mr. Ouimet.

[English]

We'll now proceed to the question and answer session. Mr. Kenney.

Mr. Jason Kenney (Calgary Southeast, Canadian Alliance): Thank you, Mr. Chairman. Thank you to all the panellists for your helpful presentations.

I just have a couple of brief initial questions for Mr. Ouimet regarding Pratt & Whitney. Are most of your products sold for civilian aerospace purposes or for defence procurement purposes?

Mr. Gilles Ouimet: Pratt & Whitney Canada has evolved over the last 25 years with a product line that is essentially destined for commercial aviation. Currently our proportion of military business is less than 10%. It varies, but it probably averages 5% to 7%.

Mr. Jason Kenney: In that case, perhaps I could have both Mr. Ouimet and Mr. Smith comment more fully than they were able to in their presentations on what the initial views are in the aerospace industry of the impact of this past week's crisis. Obviously North American Airlines, and perhaps airlines internationally, are going to be cutting capacity dramatically.

I understand there are some projections that this will not just be a phenomenon for the short term but the medium and perhaps the long term as well. Clearly this will have some sort of an impact downstream in terms of orders for new equipment from the aerospace industry.

I'm wondering if the two of you could comment on your views about the impact of the crisis on the airline industry, on the aerospace manufacturers, that's now coming to light.

Mr. Gilles Ouimet: Do you want to kick it off?

Mr. Peter Smith: Perhaps I can start. Certainly last week we began to see problems associated with the tragedy in that the borders immediately closed. With just-in-time arrangements for plants, obviously there was idle time on the shop floor, and a cascading effect effect occurred.

• 1020

At this moment in time, I have not, as recently as yesterday, heard of one order being cancelled. There is a lot of speculation with respect to the options in the sense that when airline companies make purchases, many of them are split between confirmed and option.

I want to make it clear that in the Canadian aerospace industry, our expertise, as I mentioned in the presentation, relates to niche markets. You had mentioned the distinction between military and civilian. The overall output of Canadian aerospace industry is about 80% civilian and 20% military. Within that civilian range, we have expertise, as one can readily recognize, in the 100-seater and below, particularly in the regional jet and the commercial jet. When you take a look at the retiring of the aircraft that have just been part of the 20% reduction south of the border, which you've read about in the paper, most of them are large aircraft at this time, more than likely the older types of aircraft that would make it less cost-effective for the airline companies to continue to operate.

There is no question that there's going to be a tremendously negative impact on the aerospace industry in Canada. It is very soon to try to assess that for the simple reason that once we begin to see the ripple effect, we're hoping that with the increase in security.... It's almost like a catch-22 situation. You have to build up the confidence of the passenger, and make sure that everything possible is done to improve on the security and give the confidence that is necessary.

That creates, obviously, a critical situation with respect to the time delays. Hence, you begin to see such things as corporations putting embargos on commercial air travel for security, time, and cost purposes, but you can also see a tendency toward their using corporate jets to get their executives around. We happen to be also in the business of building corporate jets.

Similarly, if you assume, for instance, that the larger aircraft are less economical to run because they're operating at 40% to 50% capacity, one would also assume that there might be newer and smaller aircraft, once again the regional type of aircraft, one with a limited distance in the sense of comfort but with two- to three-hour twinning of cities. That too could be the silver lining.

In the short term, however, there is going to be carnage, there is no question about it. The cashflow situation is going to be a critical indicator. Boeing, as you heard yesterday, was laying off close to 30,000 people. That, however, is staged over a period of 12 to 18 months. The reason I'm so confident that we will be able to obtain our numbers this year is that they are reducing from 538 aircraft—produced, I believe, or delivered—to 530. Next year, however, they expect to go from about 510 to 400. That's a big number.

In Canada's situation, of the $23 billion we produce in aircraft parts and aircraft themselves, Boeing represents about $1.7 billion to $1.8 billion. It's not insignificant. It will require adjustments throughout the entire industry.

Gilles can certainly talk very authoritatively about the propulsion side. He indicated before the meeting that as far as he is concerned, there may not necessarily be as silver a lining as perhaps is being portrayed in the sense of the regional jet market only because of the fact that people will begin to take a look at other modes of transportation if they have to wait for two hours to take a half-hour to an hour flight.

So these things I think we have to work out, but to me there is no question that initially the biggest damage to the aerospace industry will be to the small- and medium-sized enterprises. They just will not be able to sustain the cashflow required to sustain their overheads if in fact there are disruptions in the deliveries to larger companies.

• 1025

The Chair: Mr. Ouimet.

Mr. Gilles Ouimet: I would simply add that although some people see that it may be an overreaction, the airlines have announced a 20% average reduction in flights, but many are in the range of 30% to 35% at this stage, with a total reduction, as I said, of probably 200,000 by the time it's all said and done.

Certainly there will be some correction, but coupled with the U.S. economic slowdown, which was having an impact on several segments, including the airline segment in the U.S., which was predicting already, before the events, a $3 billion collective loss this year—coupled with that impact, the tragic events will impact dramatically on the activities, and, unfortunately, in a lot of cases, the employment, across not only the air transport network but also the major suppliers of the air transport network, including Canada's aerospace industry over time.

We live in uncharted water to a large extent. I can assure you that we'll try to make the decisions in the context of ensuring not only short-term survival but continued mid- to long-term growth of our companies and of the industry in general.

The Chair: Thank you very much. Thank you, Mr. Kenney.

Monsieur Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Thank you, Mr. Chairman.

Welcome to the Finance Committee. I am delighted to see you here. I have a question, as well as a comment. I have to say that I am flabbergasted by some of your comments and a little surprised by some of the contradictory analyses I have heard.

On the one hand, you maintain, and Mr. Smith and Mr. Ouimet concur, that the federal government must vigorously pursue a course of debt reduction and perhaps even step up the pace. On the other hand, you are asking the federal government to intervene in the short term to counter or even soften the effects of the last week's tragic events in the United States.

It is difficult for the federal governments to pay down the debt more quickly than it is doing at the present time, given that it assigned its entire surplus of the last fiscal year, a total of $17 billion, to debt reduction. If you want the government at least to continue paying down the debt, where is it going to come up with the funds to help the industry weather the slowdown? How can you help us convince the Finance Minister that it would perhaps be a good idea to move as early as this fall to ease in some way your hardship as well as that of workers who have been laid off, or who are likely to be, as a result of last week's tragic events?

First of all, do you want the government to bring in special measures? Will such measures really be required? In my view, I think they will. How can you help us convince the Finance Minister that these measures are needed, if you claim that he must stay the course of debt reduction, that is keep annual surpluses to a minimum and use any accumulated surplus to pay down the debt, meaning that it has no funds in reserve to handle priorities and emergencies like the ones we are grappling with today?

Mr. Gilles Ouimet: Thank you for your question. When Mr. Smith and I talked about the need for ongoing change and for increasing funding to the aerospace industry, we were certainly thinking not only about current requirements, but primarily about requirements over the short and medium term. At no time have we called for any kind of short-term bailout of the industry.

Clearly, the industry will have some decisions to make should there be some kind of drastic change in the volume of business. It would be unfortunate if this leads to job losses in some businesses and in some sectors, but I believe there are already government programs in place to deal with this kind of problem.

• 1030

However, to my mind, what's most important for the industry is that over the medium and long term, provision be made for risk sharing and technology funding, so that we can be reasonably competitive with the US and with Europe...

Mr. Yvan Loubier: However, I'm talking to you about the situation today. Mr. Ouimet and Mr. Smith, are you prepared to state, on behalf of your industry and your company, that the tragic events of nine days ago will have a minimal impact on your industry and that, if called upon, you would not support our possibly asking the Finance Minister to look into the situation and, over the course of the coming weeks, bring in special budgetary measures to assist you? Is this in fact what you're telling us, or are you only looking at the medium and long term?

It's the short term situation that gives us cause for concern today. Your people are telling anyone willing to listen that they are incurring staggering loses in the area of shipments. Goods are piling up at border crossings. Current inspection procedures are such that the industry is collapsing under the burden. Will you support us if we ask the Finance Minister to take special steps to help your industry, or is it that you don't really need such measures because you are capable of weathering this crisis?

Mr. Gilles Ouimet: I think we need to make a distinction here. We're really talking about two different industries: on the one hand, the airline industry which clearly has taken a direct, massive hit. The largest number of layoffs announced have been in the airline industry. On the other hand, we have equipment suppliers, airline services and other aviation sectors. The Canadian aerospace industry which Peter represents and to which we belong is part of this second group. I think the demands for help and for a bailout are coming from the airline industry, which has been very hard hit.

Mr. Yvan Loubier: Yes, but you have an immediate interest in seeing to it that this industry runs smoothly, because this ties in with your future orders. Would you back us if we called upon the Finance Minister to free up some funds as quickly as possible, to adopt special budgetary measures to assist all industries affected by the tragic events? We would appreciate an answer.

Mr. Gilles Ouimet: Any measure aimed at helping the airline industry weather this downturn will benefit the aerospace industry in general, both in the medium and long terms.

Mr. Yvan Loubier: Mr. Smith.

[English]

Mr. Peter Smith: I would just like to reinforce the comments made by my colleague Mr. Ouimet, that we are not here today to request any bailouts. We're not here to request any subsidies. We're here to talk about the longer term in the sense of a risk-sharing partnership for the aerospace industry for the future.

To comment on whether we support or otherwise the requests that have been made I believe now by Air Canada and Canada 3000 for immediate assistance, as Mr. Ouimet said, this is the airline industry; we are representing the aircraft manufacturing and component side.

In the sense of immediate actions that are required for the short term, I think there are a number that come to mind with respect to such things as the potential opportunity for the government to accelerate the procurement of the shipborne helicopter program, which would certainly provide work for the Canadian aerospace industry in immediate offsets.

There are such things as advancement of the support services contracting by the Department of National Defence in the Aurora program, the Hercules program, and a number of other program fleets that they have ready for operational purposes. We would probably be talking to the Export Development Corporation to see whether there's some flexibility to provide financial assistance to carriers that are offshore to allow for the cashflow to occur.

Finally, talking to a number of our members yesterday, they are loath to lay off people, and we may want to take a look at Human Resources Development Canada simply for relief in the sense that this down time can be used constructively in sending crews from various companies in Canada to Boeing and to Airbus to learn the technologies of the new aircraft, so that if there's some offsetting way in which we can ensure the continuation of their salaries and training, this can be done to rectify the situation.

• 1035

So I simply want to indicate that the reason we had chosen this particular approach this morning is that we are very, very concerned about the immediate future, but we're equally concerned about the long- and mid-term futures, in the sense that there cannot afford to be any disruption in research and development because we're going to pay the price eventually down the way.

[Translation]

The Chair: Mr. Laframboise.

Mr. Mario Laframboise (Argenteuil—Papineau—Mirabel, BQ): We have to understand one another. We're trying to help you. As you know, the federal government has decided to allocate all surplus funds to debt reduction. My colleague is saying that we sympathize with your industry's plight. For example, the government once covered 45 per cent of all R&D costs, but today that figure has fallen to 25 per cent. You have experienced a drop in funding as a result of the government's decision to restrict its operations and use any surplus to pay down the debt.

The provinces encountered a similar situation on the health care front. Health transfer payments dropped from 18 per cent to 14 per cent. The federal government found the money it needed somewhere.

Today, you're here asking for assistance and we are willing to help you. However, the government needs to review its strategy. It cannot apply all surplus funds to the debt in an attempt to prove that it is managing the public purse well, and at the same time, take money out of other people's pockets.

We're willing to back your requests as far as R&D is concerned. We're willing to meet any extraordinary requests that may arise as a result of an emergency. However, the government will need to revise its government spending strategy.

Somehow the government needs to find some room to maneuver, some way to help you so that we can help you. That's how we feel and that's how we're prepared to support you. Since your industry's annual sales are in the $22 to $23 billion range, you surely pay substantial taxes. No doubt you contribute in a major way to the process of eliminating Canada's debt.

You need to focus more on what your industry represents, on what you contribute in tax revenues to the government and on what you're asking for here today. In so far as R&D is concerned, your demands are justified, but you must be logical. You can't ask the government to apply the full amount of the surplus to debt reduction, as is currently the case. The government must leave itself some room to maneuver so that it can help you and still have funds available when emergencies arise.

[English]

The Chair: Mr. Smith.

Mr. Peter Smith: To clarify, if the member is referring to the suggestion of increased funding for research and development, what the Aerospace Industries Association of Canada was attempting to illustrate was not an immediate injection of cash but a doubling over a period of 10 years. So there's a smoothing here, in the sense of what is required. We're suggesting right now that over the last decade, the federal contribution to research and development of the aerospace industry went from $600 million down to $300 million. We're suggesting it should go back up to $600 million, in the sense of doubling, to the year 2005, and by 2010 we expect that it should represent 10% of sales of the aerospace industry.

The Chair: Thank you, Mr. Laframboise.

Mr. Cullen, followed by Ms. Leung.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, gentlemen, for your presentations. I have a question of Mr. Smith, and

[Translation]

perhaps for Mr. Ouimet as well.

[English]

I have a general question, Peter, and then a more specific question.

The aerospace industry in Canada strikes me as being a huge success story in Canada. Your industry has become an international player. In my riding, when I get questions about Technology Partnerships Canada investments in aerospace, Bombardier, Pratt & Whitney, Allied Signal, and now Honeywell—whatever—I'm proud to say this is the way the industry works. To be competitive internationally, we have to be in the game or our industry will lose its competitive positioning.

But the picture you paint here is a little sombre, given the huge success of the past. Now, we always need to be pushing and stretching, and in fact our government has set some stretch targets in terms of R and D, but are you seeing something on the horizon that means there are greater challenges ahead, that we need to be more aggressive? Could you put it in context, from an industry that seems to me to be moving ahead very, very well, based on your own expertise and your own work, and with some support from the government? Moving forward, are you seeing some new challenges or some new initiatives on the horizon that we need to be conscious of?

• 1040

Mr. Peter Smith: Yes, I do. If you take a look at the performance over the last decade, we are, and should be, very proud to see a product release, almost on a yearly basis, of a new aircraft by Bombardier, and new engines and derivative engines by Pratt & Whitney and all of the other original equipment manufacturers, which basically has been as a result of the investments that have been made by both government and industry over the last decade or two. The issue we're trying to address today is that continuation of product development must not be interrupted because the challenges today are going to be for quieter, safer, more environmentally friendly products. Smaller, faster still is.... Take a look at the debate that's going on between Airbus and Boeing, for instance: large aircraft versus smaller subsonic cruisers. The airlines are taking a look at the challenges put to them by the customer. We as a manufacturer are trying to enhance the solution by research and development to the particular vendors or buyers of those products.

Mr. Chairman, what I am trying to say is that we've gone through an unprecedented decade of product release. The funnel is getting smaller and smaller, hence the alarm bells are going off to say that we're at I think a minimum today of contribution. It needs to be doubled if we're going to remain competitive with other countries who take pride in their aerospace industries today.

Gilles.

Mr. Gilles Ouimet: If I may just add, maybe from the general to the very specific, in the last decade, since the Berlin Wall went down, what we have seen—as I said earlier, we operate essentially in the commercial world, almost 95%—is a lot of top, very capable competitors that were earning a decent living, thank you, from Uncle Sam or their local military programs that have gradually reoriented their big cannons toward the commercial segment because of the gradual reduction in military program volume that happened in the nineties. So the intensity of the competition in our segment has simply dramatically changed in the last several years.

You're asking how we see the world evolving. In many countries we see the focus on government-funded technology development not abating but strengthening. In the U.S., for instance, I think the total funding of RDT&E, the military research and development money, is something like $10 billion, which is huge. This is what you have to put in comparison to the $300 million in the TPC fund we have.

This is the concern mid to long term, that unless we keep our place under the sun, we'll gradually see the R and D going to areas by default that fund the R and D in a large scale.

The Chair: Thank you, Mr. Cullen.

Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.

I want to thank you all for your very informative presentations. I have a question for CERC. You talk about requesting tax treatment for interest-free loans. You'd like an increase from $25,000 to $75,000—that's almost three times. When I review your chart, of course, it's an increase in the expenses. But how would you justify such a high increase? In the meantime, when a person requests reallocation, there must be some financial gain, sometimes for many various reasons. I just find it difficult for you to ask the government to put up another $2.4 million for this.

That's one part. I have a follow-up on my colleague's question on the aerospace question. I understand the TPC program and the R and D tax credit are excellent. Why are we underperforming in the area of R and D? Maybe I shouldn't say “underperforming”. Can we develop more competitive research in the industry? Another question, how competitive are we in the Canadian aerospace industry? Mr. Atyeo, first.

• 1045

Mr. Bruce Atyeo: Thank you for your question.

First of all, I should clarify that in most instances, when an employer is asking an employee to relocate they are doing so primarily for the benefit of the employer. There are always some benefits to the employee, of course, and we talked about some of those. It's good from an experience point of view, it broadens their skill base—and those benefits certainly fall out of relocation. But primarily the driver behind relocating an employee is because an employer has a need for a specific skill set, or talent, or knowledge base in a location that exists somewhere else.

They tend to want to keep the employee whole when they relocate. Clearly, the large benefit goes to the employer, so they tend to want to pay the costs of relocation for the employee and the family so that the employee is not out of pocket as a result of that.

In the case of relocating an employee from one city to a city where housing costs are significantly higher—and I think what you need to do is look at the differential between the cities on our chart—you will see that in many instances the differential far exceeds even the $75,000 exemption we're proposing. Where an employee is limited to being reimbursed on the cost of borrowing the additional amount of money to $25,000, it means they are actually having to bear the cost of borrowing the additional funds themselves out of pocket. There can be no tax relief there.

We are simply stating that times have changed since 1985. If you look at the differential between the cities mentioned here, you will see that in very few cases is an employee going to be relocated to a higher-cost centre where they're not going to be out of pocket quite dramatically, and employers would like to help their employees adjust to the new reality.

Most of these programs take the effect of a subsidy program that allows an employee to phase their spending patterns into the reality of their new location over a period of say five to ten years. It's not an outright gift or grant, or whatever. The employee does have to assume that debt obligation at some point in time.

I think the reality of the real estate market is what is really driving this request. It imposes a significant financial burden on many employees who accept these transfers.

In terms of the $2.4 million, I think we spoke to the benefit that a mobile Canadian workforce has in terms of the Canadian economy in general and also in terms of keeping Canada up with many of our international countries, who are, from this point of view, competitors. I think that $2.4 million would very quickly be recovered, not only as a general benefit to the economy but in the country itself being able to attain some of the goals it has stated, particularly with respect to human resources development in Canada.

The Chair: Mr. Smith.

Mr. Peter Smith: With respect to the competitive element, I simply want to indicate that some of the niche markets that Canada has developed expertise in, such as regional jets, business aircraft, commercial helicopters, small gas turbines, flight simulators, landing gear, and space applications—all of these that I have mentioned are 50% global market share or more. That will give you some indication that we do have a competitive product. We do have very capable employees.

We also have a very significant cash advantage in many respects because of the exchange rate, because we trade in U.S. dollars, and that in part masks productivity and/or the competitiveness in some respects. We can't hide behind that exchange rate. We have to ensure that our plants are introducing, on a constant basis, lean manufacturing and process improvements.

• 1050

With respect to your first comment vis-à-vis the tax credit and TPC, there is no question Canada and the members of the Aerospace Industries Association take full advantage of the very attractive tax credits that have been created by the federal government in this regard. However, on the TPC issue, TPC only represents $300 million today, of which only two-thirds is accessible by the aerospace industry.

So if you take a look at the two-thirds of TPC in comparison to what is available, as Mr. Ouimet mentioned, on research and development programs in the United States—for instance, to support the military programs—or, alternatively, in Europe, these just don't match in comparison.

So we are being realistic in the sense of the size of Canada, we're being realistic in the affordability of the federal government to support research and development, but we are suggesting that here is an industry that has a very impressive track record over the last decade of contributing back to Canada. We're so export oriented, with export surpluses to Canada, taxes both corporate and personal, and we're saying it may be worth an investment to continue that particular success. We were just simply commenting on the ability to ensure the competitiveness of the Canadian aerospace industry, which is totally dependent on product development.

The Chair: Thank you.

We have three final questioners: Mr. Lastewka, Mr. Nystrom, and Mr. Brison.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Mr. Chair.

Mr. Smith, you talked a little bit about requiring more flexibility in the EDC program, but you didn't elaborate at all. I wonder if you could just elaborate on what you meant by more flexibility.

Mr. Peter Smith: Generally, the Export Development Corporation has been quite successful as an instrument in the sense of product sales to foreign nations, in the sense of the financing.

I'm suggesting to you that Canada has a very reputable, cost-effective, and very fast-growing third-party maintenance capability. We have seen the tragedies associated with the cutbacks in the United States. We are suggesting that we might want to explore with the Export Development Corporation their capability of providing financial assistance for the repair and overhaul as opposed to the acquisition of new aircraft, in that it's a service. They have to do the risk assessment in the sense of the airlines, but it's something they don't normally get into. I think in the short term it would be very cost-effective to continue the work we have now, but it has been discontinued as a result of the reduction in the numbers of aircraft. If you assume that the companies that are affected will not be acquiring new aircraft, they certainly have to maintain them for safe use.

We are suggesting that they are strapped from a cashflow point of view, and all the EDC could be is an instrument in providing that cash, smoothing out over a longer period of time.

Mr. Walt Lastewka: Have you made representation to EDC on this?

Mr. Peter Smith: These particular problems have only come up over the last day or two in talking to companies. I know one of our firms basically completed two aircraft for two different companies, both in the United States, and they were told that there were no other aircraft coming in. They expected three a week and no others were coming in. They were suggesting that perhaps there were ways and means, and I intend to follow this up with EDC.

Mr. Walt Lastewka: Thank you.

In your presentation you mentioned a number of times the lack of linkage between the aerospace industry and universities. What's the problem? I don't understand why there's a lack of linkage.

Mr. Peter Smith: It's sporadic only. If you take a look at the remarks Mr. Ouimet made, they have tremendous facility to work with universities. The concern I think we have is that there are only a handful of companies that have that capability of so doing. The concern is that it is not a normal phenomenon for small and medium-sized companies in the aerospace industry in Canada to work in a collaborative way and to work with universities. We're trying to encourage this more and more. That was simply a comment that we feel we are not maximizing the capability that is in our Canadian universities today and we need to do so.

• 1055

Mr. Walt Lastewka: Can I summarize that by saying that the SME clusters are not there to work with universities. If they were there, they would be able to tap into the CFI funds.

Mr. Peter Smith: There's a tremendous problem that Canada faces structurally in the aerospace industry at the tier three and four levels. We do not have what is called the systems integration capability in those clusters, what you're referring to, and that is something we are working on at a very high priority.

Mr. Walt Lastewka: Mr. Atyeo, I have one question, as someone who has, in his previous life, moved around a lot. Your chart shows the price of a home in 1985, not the value of the home in 2001. Do you have that respective chart? The chart you referred to Ms. Leung shows the 1985 price.

Mr. Bruce Atyeo: Correct.

Mr. Walt Lastewka: It doesn't show the 2001 value.

Mr. Bruce Atyeo: Yes.

Mr. Walt Lastewka: A person who is moving now is selling in 2001.

Mr. Bruce Atyeo: The chart actually is useful for both of the points we're talking to. In the case of the interest-free home relocation loan, the relevant information to be taken from this chart is the differential between various cities. For example, if you were to move an employee from Edmonton to Calgary, they would have to either come up with an additional $50,000 in cash or take on a mortgage that is $50,000 higher just to maintain the standard of housing they had in Edmonton.

Under current tax rules the employer would be able to help the employee adjust to that additional interest expense by subsidizing the interest on that additional $50,000. But all of the interest that is subsidized over and above $25,000 is a taxable benefit to the employee. We're simply saying it would be in the government's best interest, and in Canada's best interest, for that amount to not generate a taxable benefit. In fact, in instances where you're moving and it's up to $75,000, we think that is a reasonable amount for the government to establish for employers to be able to subsidize the additional cost of buying comparable housing in their new location.

If you've been transferred on numerous occasions, I'm sure you appreciate the importance of getting your family into housing they feel comfortable in.

The Chair: Thank you, Mr. Lastewka.

Mr. Nystrom, then Mr. Brison.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I'd like to ask a general question, in welcoming all of the witnesses this morning. A lot of things changed on Tuesday. One thing that changed is that we have President Bush now talking about a great stimulus to the American economy, injecting a lot of capital into the economy. A large part, of course, is going to the military side, but also the non-military side as well, to stimulate the economy.

In this country we have a tremendous slowdown, and we had a slowdown of course before this all happened, but now it's going to be an even greater slowdown. I wonder if you can comment on whether or not we should have a major stimulus package. We've had no budget now since February of 2000. Mr. Martin is preparing an economic statement probably for November. What is your advice in terms of an economic stimulus package, in terms of more money in infrastructure, the airline industry, the farm crisis, housing, etc.?

Mr. Mike Darch: If I could address it from our viewpoint of the photonics industry, first of all, out of tragedy often comes opportunity. The imaging equipment that's going to go into upgrading security at airports is all photonics and optics related. Already you've seen a significant slowdown in air travel. That's being picked up by a significant increase in videoconferencing. Most of the videoconference activity raises the requirement for the type of equipment that Wes' company is supplying.

From our perspective, the American stimulus package is in fact going to help bring the photonics industry more to the fore, and hopefully we can assist in the problems related to security. In the future, there is videoconferencing and high band width use in that area.

Wes.

• 1100

Mr. Wes Biggs: I echo your sentiments exactly, Mike, with not too much to add. Again, we do not see a slowdown generally in the sector we're addressing. The photonics industry is very healthy, and communications continues to be healthy. People will always need communications. Fibre is the conduit of the future, and if anything, spending will just accelerate the deployment of more advanced networks.

Mr. Peter Smith: If I might, in part I believe the press have highly exaggerated the amount of assistance that's going to be provided, certainly to the airline industry south of the border. My understanding is that legislation is being contemplated that would provide probably in the vicinity of $5 billion as opposed to the quoted $24 billion or $25 billion.

The reason is that I guess the airlines in their entirety in the United States have felt that the disruption that was created as a result of the closures of the airports in Washington and New York was such that perhaps there's a compensation required because of that particular situation. What they are looking for in the cumulative total of $24 billion is some cash relief that would form the basis of holidays, if you will, with respect to fuel taxes, ticket taxes, and things of that kind, to smooth out the cashflow.

I guess I'm waiting to see Air Canada and Canada 3000 provide the same kind of evidence that is required, and certainly this would have to be taken into consideration by all parties in the Canadian government as to whether that particular justification is there and whether there are justifications for the relief of other sectors.

Mr. Bruce Atyeo: Mr. Nystrom, we've already spoken at length about how a mobile workforce has many benefits to Canada, economically and in every other way. In that regard, probably when you say “I'll move from here to there”, it sounds simple. You sell your house and get a moving van and away you go, but it creates an incredible amount of stress on most families. It's been ranked up there with death and divorce and passing age 50.

To an employee who is being relocated, clearly the biggest ticket item is real estate. Housing is very important to most Canadians, and so affordability is really the issue that is probably most important to us from a tax point of view. Continued interest rate policies that help housing affordability would be important to us and also personal tax rates. A continuation of downward pressure on personal tax rates obviously is going to benefit employees who, notwithstanding what the government does, still end up with taxable benefits that fall out of relocation, and of course that speaks directly to personal tax rates. Relief in both interest rates and personal tax rates is very important to our industry.

Mr. Lorne Nystrom: A question to Mr. Smith. Regardless of what the size of the American package is to the American airline industry, if we don't have a comparative package in this country, which might be fuel tax relief, tax relief, financial restructuring, grants, or whatever it is, in terms of the size of our industry, what impact will that have on the airline and aerospace industry in this country in terms of job losses, in terms of some of these companies surviving?

The other question I have, as time is running out here, is this. Do you have any advice to us as to whether or not the government should now seek responsibility for airport security rather than what we've gone to in the last 10 or 15 years?

Those are my two questions to you. If we don't have an aid package in this country comparative to the American size in relation to our problems compared to theirs, what happens to your industry and the airline industry in general? I'm talking about job losses, companies surviving, security.

Mr. Peter Smith: Those are two very difficult questions to answer in a very short period of time. All I know about Air Canada's plans at this moment in time is that they're cutting 20% because of the reduction in flights between Canada and the United States. I think if any government assistance is going to occur, it's going to have to occur based on a very detailed analysis of what their current plans are and what their future plans are that are not driven specifically by the tragedy but by the economic viability of Canada's national airline today.

• 1105

The second issue is what impact it would have in relation to the Canadian aerospace industry. Obviously Air Canada is a large buyer, if you will, of Canadian aerospace products, such as regional jets, Dash 8s. They are also an equally large buyer of airbus aircraft in the sense of their larger aircraft.

So whatever their determined future will be, in the sense of what size they will have to become to be cost effective, will obviously have a negative impact on the Canadian aerospace industry, either in the form of surplus aircraft being put on the block or in respect of the evaporation, if you will, of plans to renew aircraft, particularly the 100-seater and below.

I couldn't even hazard a guess as to what potential impact that would have, both employment or dollars, at this stage because I have to see what Air Canada is going to unfold in the days and weeks ahead.

Mr. Lorne Nystrom: The other one, of course, was airport security.

While you're answering that one, Monsieur Ouimet has said there's now been a reduction of around 30% to 35% I think in passenger load or in flights in Canada. What projections do you have in terms of that returning to what might be a more normal load over the next weeks or months or years ahead?

Mr. Gilles Ouimet: Let me answer that second question. The 35% was related to the North American system, primarily driven by the U.S. system. It's difficult to see how it will evolve and get back to normal, particularly if there's a large-scale military operation starting, with the psychological impact this would have. So I could not offer a good guess.

Mr. Lorne Nystrom: And the security issue?

Mr. Peter Smith: My understanding is that for the most part your question relates to whether it would be better for the government to now take over the security of airports as opposed to it being privatized. What I understand of that particular system is that most of the privatized companies that have taken over security had assumed the employees that were already in place.

It's not an issue of the confidence of employees; it's an issue I think where we have to ensure that they have the appropriate training to deal with the sophistication of terrorism today. I know that an awful lot of news broadcasts were reporting on the incidents of the ability to pass certain offensive weapons through the security system. If I recall, it was about a 20% failure rate. The issue I think is in relation to what I understand to be the inability to train these people in sufficient enough time to cope with this.

I don't feel that it's going to be more or less effective under government authority. I think the issue is the training and paying the employees in a very responsible job to ensure the safety and security of all those concerned.

The Chair: Thank you, Mr. Smith. Thank you, Mr. Nystrom.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC/DR): Thank you. Thank you to all of you for your interventions this morning.

My first question is for the representatives of the photonics industry. Where in the U.S. is there a cluster of critical mass of activities within photonics that would compare with what exists in Ottawa?

Mr. Mike Darch: Wes can correct me if I'm wrong, but I think we're looking at Boston; New Jersey; Phoenix and Tucson in Arizona; and San Jose.

Mr. Scott Brison: How do they compare in size in terms of, say, Boston, if that's the one with the greatest level of critical mass of activity?

Mr. Wes Biggs: On the networking side, and I'll speak explicitly to the industry I'm most familiar with, we use photonic components to build our systems. Our biggest competitor is in San Jose. San Jose is where we tend to compete for talent.

Mr. Mike Darch: But in general, photonics is an emerging technology, and we are arguably number one in the world. We're in the top three somewhere. The Americans I think would argue very strenuously that we're not, but we're certainly near the top.

Being an embryonic industry, it's extremely competitive, and a lot counts on your ability, first of all, to move the technology out of the universities and into the commercial marketplace. I think one advantage we have here in Ottawa is we have the full range, from the performing companies, such as Nortel and JDS, right down to the research.

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Mr. Wes Biggs: If I can complement that, again, we're a privately funded company. One of the key attributes of the company and one of the key attributes that actually attracted outside venture capital was the ability of this company to very quickly build a team, a very highly skilled team, and to leverage our knowledge, which is actually system knowledge, networking knowledge, to build an optical product. That's a key advantage. What I'm trying to stress is that the real advantage of this region is the technology and the talent that goes with it.

Mr. Scott Brison: Is there an example you can point to of a photonic fabrication centre in the U.S. where the government has played that sort of role in terms of providing that sort of impetus?

Mr. Mike Darch: The way the government is operating in the U.S., it is doing it through its various research programs that support universities. Certainly examples at the moment that would be closest to what we're trying to achieve in Canada would be Boston University and the University of Arizona and in California.

Mr. Scott Brison: Okay.

Mr. Mike Darch: Also, the U.K. is supporting a similar effort.

Mr. Scott Brison: Mr. Biggs, your recent experience with the capital market has been a fairly positive experience, given the circumstances. You would have an appreciation for this. Given the breadth and depth of the U.S. capital market, it has traditionally been very difficult for Canadian companies to attract the level of venture capital interest that has been available to U.S. companies.

I'd be interested in some of your suggestions as to public policy initiatives we should be considering. There may be some interest from others of you on the general issue of tax reform, for instance, addressing issues like high personal marginal rates, capital taxes, corporate taxes, and a shift to somewhat of a consumption base, but tax reform as a major initiative to try to improve the abilities to finance and to develop indigenously a lot of the technologies that are emerging in Canada.

Mr. Mike Darch: I'll respond to the policy in a minute, but I'll let Wes reply on the ability to attract foreign capital.

Mr. Wes Biggs: Actually, over the last while Canada has attracted a significant amount of foreign capital. Investors—and I can speak specifically to our company—were quite impressed with our ability to pull together a very experienced team in a very short period of time. Two of our major investors are California-based, where venture capital is at its pre-eminence. That's where venture capital started. They compare Ottawa more than favourably, with the type of talent we can bring to the table and how quickly we can assemble a team.

Our $29 million that just came in I would like to see as a further injection of foreign capital into the area. As a local resident, I welcome that, even if it brings competitive elements. Competition is good, and it's exploiting the talents that are here.

Mr. Mike Darch: If I could address the policy issues, I think that first of all, being in let's call it emerging strategic technologies, the most important element is our ability to produce manpower, therefore our ability to find the training grounds such as in Canada, NRC, as well as the CFI activity. That leads to us being able to get the type of people who will be able to fuel the future.

I think the other thing is that in Ottawa we've been fortunate in being able to concentrate expertise. Certainly if we look at the NRC game plan at the moment, it's not spreading the clusters across the country; it's supporting the individual cluster in an individual part of the country. Certainly we will not maintain our competitive advantage if policy spreads the cluster across the country. That will be difficult to keep up.

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From the point of view of personal income tax, we keep talking about tragedy leading to opportunity. The meltdown in Silicon Valley has brought home to a lot of expatriate Canadians the effect of moving to the U.S. If you have a $600,000 mortgage and you lose your $300,000 job, your $300,000 salary goes away and your $600,000 mortgage stays.

We have a recruiting mission going down to Silicon Valley in October, so I think right at the moment we are increasingly moving forward in those areas. The more help we get—not on the corporate side, but on the personal side—and certainly efforts to ease immigration coming into the country.... Given our natural birth rates, there is no way we'll be able to sustain the types of human resource requirements we'll have in the next few years.

If I were looking at policy, it certainly would be selective immigration policy. There is a lot of opportunity of repatriating Canadians who have gone to the U.S. for experience, and getting that experience back here. And certainly from the personal income tax side it would be policy to make us just a little more competitive in those areas.

The Chair: Thank you, Mr. Brison.

On behalf of the committee, I thank you very much.

Mr. Smith, you raised an interesting point, in the sense that although the September 11 tragedy of course will have an impact on the economy, there were some challenges that the North American air transportation system was facing, and when dealing with this issue that should of course be factored in, as we see airlines requesting funding from the government. I think that is wise counsel as we deal with that issue.

Of course we all know in this committee that the aerospace industry is extremely important. It's an industry that is not only a national leader, but indeed an international leader. We'll continue to work together to achieve the type of pro-growth strategy in Canada that you have spoken so eloquently on.

On behalf of the committee, I would like to express to the panellists our sincerest gratitude for the input you have given us. Thank you.

Mr. Ken Epp (Elk Island, Canadian Alliance): Mr. Chairman, I have a motion to make.

The Chair: We can't deal with the motion.

Mr. Ken Epp: Yes, we can. We have ten.

The Chair: No, we don't.

Mr. Ken Epp: Yes, we do.

The Chair: I see eight. You don't have ten.

Mr. Ken Epp: I want to make a couple of motions to call to this committee the ministers—

The Chair: I can't accept the motion because we can't deal with the motion. It's all redundant.

Mr. Ken Epp: There are members of the committee. We should have eight Liberals here. All of the opposition guys are here, and we should be able to call for the ministers. The Prime Minister himself said that we would be able to talk to—

The Chair: Absolutely. You shouldn't take from what I am saying.... I'm not implying that we won't be calling them in. We'll be dealing with this issue on Tuesday, the next time we meet.

Mr. Ken Epp: It looks to me, based on the fact that the Liberals have vacated their chairs, that there is a move to block this. Can you give me assurance that on Tuesday, when we meet next—

The Chair: You have my 100% assurance. If there were anything above and beyond that that I could give you, I probably would give it to you.

Mr. Ken Epp: And you'll have your members here so that we can call these ministers, because this is urgent.

The Chair: The Liberals will have their members. I'm an independent chair.

[Laughter]

The Chair: The meeting is adjourned.