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### Viewing cable 03OTTAWA1140, CANADIAN AUTO STRATEGY

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
03OTTAWA1140 | 2003-04-23 15:40 | 2011-04-28 00:00 | UNCLASSIFIED | Embassy Ottawa

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 03 OTTAWA 001140

    SIPDIS

    STATE FOR WHA/CAN (NORMAN) EB/TPP/BTA/EWH (SHEEHAN)

    STATE PASS USTR FOR SAGE CHANDLER

    USDOC/IA/KIMBERLEY BULKLEY

    USDOC FOR 4320/OFFICE OF NAFTA; 3134/OIO/WESTERN
    HEMISPHERE

    E.O. 12958: N/A
    TAGS: ETRD EFIN ELAB ELTN CA
    SUBJECT: CANADIAN AUTO STRATEGY

    REF: (A) USDOC 01384
         (B) 2002 Toronto 1916 (Auto Strategy)
         (C) Toronto 0985 (Ontario Budget cable)
         (D) Toronto 0246 (Capital Tax)

    -------
    Summary
    -------

    ¶1. An alliance of the Canadian federal government,
    Ontario provincial government, automotive sector
    manufacturers and labor unions are working to define
    and implement a long-term strategy to keep the Canadian
    automotive sector competitive (Ref B).  At least one
    element of the multi-prong strategy, the elimination of
    the federal and provincial capital tax, has already
    been embarked upon.  Implementation of the new strategy
    is expected to be a multi-year process with no firm
    timeline.  It is, however, very clear from statements
    given by both the manufacturing sector and government
    that all elements of the nascent auto strategy will
    scrupulously comply with WTO and NAFTA ground rules.
    End summary.

    --------------------------------------
    Scale of Automotive Industry in Canada
    --------------------------------------

    ¶2. The importance of the automotive industry to the
    Canadian economy cannot be overstated.  It is a major
    contributor to the Canadian economy, creating more than
    550,000 jobs, and generates approximately 12 per cent
    of the manufacturing sector's contribution to Canada's
    Gross Domestic Product.  The automotive sector also has
    seen the highest capital investment of all
    manufacturing industries.  Between 1991 and 2001,
    capital investment averaged C$2.9 billion per year.
    The Canadian automotive industry is fully integrated
    into the North American market.  In 2001, the
    automotive industry produced C$95 billion worth of
    motor vehicles - 90 per cent of which were exported,
    primarily to the United States.

    --------------------------------------------
    New Policy to strengthen automotive industry
    --------------------------------------------

    ¶3. The maintenance of this vital industrial sector is
    important to the federal government and to the Ontario
    provincial government, where most of the manufacturing
    capacity is located.  It is, however, a collection of
    government, labor, and corporate interests that
    comprises the Canadian Automotive Partnership Council
    (CAPC) that is in the process of developing a long-term
    strategic vision for the industry to ensure its growth
    and vitality.  Its membership includes the presidents
    of Canada's automotive assembly companies; senior
    executives from the parts, aftermarket, dealership and
    academic sectors; the president of the Canadian Auto
    Workers Union (Buzz Hargrove); and ministers of
    industry and/or economic development for the federal,
    Ontario and Quebec governments.  The Council is co-
    chaired by Michael Grimaldi, President of General
    Motors of Canada, and Don Walker, President of Intier
    Automotive, one of Canada's most significant automotive
    components manufacturers.

    ¶4. CAPC members met in Toronto in mid-December 2002 and
    reviewed a series of papers drafted by working groups
    that address five key dimensions of the nascent
    strategy: human resources; innovation; trade
    infrastructure; fiscal and investment measures; and
    regulatory harmonization.  These draft papers, and more
    about CAPC are available at the following URL:

    http://www.strategis.ic.gc.ca/SSG/am01451e.ht ml

    ¶5. The key questions raised in Ref A focus on fiscal
    and investment measures, the relevant CAPC proposals in
    this domain are outlined below.

    ----------------------------------------
    CAPC Fiscal & Investment Recommendations
    ----------------------------------------

    ¶6.  The CAPC Fiscal and Investment Policy Work Group
    recommends that the federal and provincial governments:

    -- Eliminate the federal Large Corporations Tax (a.k.a.
    the Capital Tax) and provincial capital taxes to remove
    a key impediment (see paragraph 9).

    -- Establish an Investment Tax Credit to encourage
    investment in new manufacturing machinery and
    equipment.

    -- Continue and expand the Manufacturing & Processing
    (M&P) deduction (a 7% deduction exclusive to M&P
    profits which the GoC is considering abolishing) to
    reduce the effective federal and provincial rates to
    gain a competitive tax advantage in NAFTA.

    ¶7. The CAPC group makes clear that any effort to
    provide an investment incentive must be transparent,
    available to all on equal footing (unlike the exclusive
    "Autopact" arrangements) and consistent with WTO and
    NAFTA rules.

    -----------------------------------------
    What is the timetable for implementation?
    -----------------------------------------

    ¶8. On the question of a timetable, the message we
    received from Guy Leclaire, Director of Automotive
    Policy at the Department of Industry (Industry Canada)
    is that the Canadian Automotive Strategy is a work in
    progress and that there is no firm timetable for
    implementation.

    ¶9. Nevertheless, one major element has been embarked
    upon.  The elimination of the federal capital tax
    proposed in the federal budget of February 18, 2003
    implements a principal recommendation of the CAPC.

    ¶10. Both the federal and provincial governments in
    Canada levy taxes on the capital of corporations.
    Unlike income taxes, which are paid when a corporation
    has taxable income, capital taxes must be paid
    regardless of whether a corporation is profitable.  The
    federal capital tax is levied on all corporations with
    more than $10 million of capital used in Canada; it is
    reduced by the income surtax paid by the corporation
    (Ref D).

    ¶11. The February 2003 federal budget proposed to
    eliminate the federal capital tax, as follows: - First,
    the capital threshold at which the tax applies will be
    raised, from $10 million to $50 million effective 2004.
    As of 2004 medium-sized businesses under the $50-
    million threshold will no longer have to pay the tax.
    Second, the rate of the tax will be reduced in stages
    over a period of five years so that by 2008, the tax
    will be completely eliminated.

    ¶12. At the provincial level, Ontario's 2003 budget
    (delivered in late March) also promised to eliminate
    the capital tax, though a 10% cut in 2004 and complete
    phasing out by 2008, in line with the federal
    government's plans (ref C).  Ontario's decision to
    start phasing out capital taxes follows similar
    decisions in Alberta and the three Territories, where
    capital taxes already have been eliminated, as well as
    in British Columbia and Quebec, where concrete cuts
    have been announced in recent budgets (Ref D).

    ¶13. According to the GoC the elimination of the capital
    tax over five years will be fully legislated in order
    to provide businesses and investors with the certainty
    needed to factor the tax reduction into their business
    decisions.  The GoC budget documents also allege that
    when the federal capital tax is eliminated in 2008, the
    average combined federal and provincial corporate tax
    rate in Canada will be 6.6 percentage points lower than
    in the U.S

    -------
    Comment
    -------

    ¶14. Leclaire emphasized that the Auto Strategy is
    intended to be more than simply a wish list for
    handouts from the government to industry.  Rather,
    Leclaire expects it will be an effort largely to match,
    or refine, existing government efforts (provincial and
    federal) with industry requirements.  For example,
    suggestions include eliminating regulatory impediments
    to investment (such as different manufacturing
    standards in USA and Canada); targeting more R&D funds
    to the automotive sector and making more auto R&D
    eligible for R&D tax credits; and providing more
    targeted investment in technical education to provide
    the workforce of the future.

    ¶15. Most significantly, there is no proposal for a
    local content requirement in any of the elements of the
    CAPC proposals.  The musings of CAW chief Buzz Hargrove
    (Refs A,B) in this respect are not indicative of the
    eventual GoC policy direction, nor industry intentions.
    And although the CAPC does recommend an Investment Tax
    Credit to entice investment in physical plant, it
    remains simply a recommendation whose form is not
    elaborated and one that has not yet been seized upon by
    government.

    ¶16. The clear message we have received from GoC
    interlocutors, one which is reiterated by CAPC, is that
    whatever the eventual size and shape of the Canadian
    Auto Strategy it will comply scrupulously with WTO and
    NAFTA strictures.

    Cellucci

`