May 16, 1978 (30th Parliament, 3rd Session)


Alan Gray Martin (Parliamentary Secretary to the Minister of Consumer and Corporate Affairs)


Hon. Martin O'Connell (Scarborough East):

Mr. Speaker, the importance of small business in the Canadian economy can be doubted by no one, not only in terms of the number of firms that are small business firms- something like 90 per cent of all the firms in Canada-but also in terms of the employment created by those firms. Well over one third of all the members of the work force are in small business firms and at least one fifth of all the value of goods and services produced in Canada is in small business firms.
We cannot doubt the importance of policies to foster the viability and success of these firms, nor can we hide from ourselves the fact that small firms in many Canadian small towns across the country are in a state of difficulty. This difficulty arises from erosion of their position. In some cases they are simply manufacturing goods of a standard technological character and are faced by competition coming over the horizon from the third world countries where there has been a transfer of technology, a transfer of industry. We support that, but we also have to take special measures now because small industry in our country is threatened.
Small Business
Just think of some of the small companies in many towns manufacturing, for instance, bicycles or textiles or chainsaws or auto parts. Sometimes they provide income and support for the whole community. Therefore, support for small industry is important. It is important socially and economically to maintain small communities. It is important from the point of view of regional balance in Canada. How much of industry is concentrated in the central provinces and how great a sense of unfairness can develop across the country if there is not a fair share of industry in the towns and cities in parts other than central Canada? Policies have to take account of that concern too.
Small industry is more than a romantic ideology. It is possible economically with today's technology to have a thriving and decentralized economy with small industry, and many countries demonstrate that, as does ours to some extent. It is not only possible but it is good social and regional policy as well. So I would like to congratulate the mover of the motion for bringing it forward and giving us this opportunity to make some remarks by way of proposing a network of supporting policies. I say network because what I want to stress, as indeed the motion does, is that there is needed not one given policy but a whole network of policies.
Let us look first at the question of taxation. Too often we think of taxation as the only way to approach the problems of industry, particularly small industry. Already major steps have been taken, inadequate as I suggest they still are, but we should at least recognize that the government has, in effect, rolled up its sleeves with respect to the problems of small industry. It is moving, not only by the creation of a special secretariat in the Department of Industry, Trade and Commerce and a special minister, but also by a whole host of provisions, including tax provisions.
Let us review some of them to see what has been done. There is a special low rate of tax on the profits of small companies. It amounts to 25 per cent compared with the 46 per cent maximum rate of tax on larger companies. There are rebates and tax incentives for investment in research and development. Most recently in the budget, two tax measures were brought forward. There is the proposal for tax credits of 5 per cent, ranging up to 10 per cent in slow growth areas, for new investment in industry and for research and development.
Then, in the most recent budget, there was a special measure to increase the write-off for new research and development over a certain base period. This added budget measure will allow small and large companies to deduct from their income 50 per cent of the costs of increased R&D activities, a very important measure for small business. This would raise the total immediate write-off to one and a half times the amount spent on new R&D. For example, if a company spent $100 on new R&D, it could write off $150 against the taxable income.
This is of considerable help to small business. What would be the savings to a small business? These tax savings would amount to about $16 in every $100 of new expenditure on

May 16, 1978
Small Business
research and development. Instead of the net cost of R&D after tax being $75, the net cost would be approximately $59 in Ontario and $55 in the slow growth regions of Canada.
I should like to suggest an improvement over even this salutary measure which I hope the Minister of Finance (Mr. Chretien) will take into account. It would be an improvement on behalf of small business not granted to large business with respect to these R&D tax incentives. The point is that small businesses pay a low rate of corporation tax on their profits. When that low rate is applied in the R&D context, it means that small businesses receive, in effect, a lesser advantage than that gained by corporations paying at higher rates of taxation. I would like the minister to consider whether it would be possible to expand the tax credit in the case of small businesses.
What are the objectives of R&D? I think we should be clear on what they are because the network of support policies have to focus very strongly in this area. The objects of R&D are to help a company to be technically advanced in its processes, in the methods it uses, in innovating new products and in modifying a product which it has in order to expand its market-in effect, to be aggressive in the entrepreneurial sense, to be right at the leading edge of change in the market.
In the face of these needs, Canada has one of the poorest performances in R&D among the western industrial countries and its performance has actually deteriorated in recent years. Does anyone really believe that this poor performance in R&D is related mainly to the tax environment? I do not think so, and I do not think the situation can be corrected by simply applying tax incentives and tax measures.
The tax environment can help, but there are other aspects that I think are more important. One of them is the relationship between and within firms that exists in a country like ours because of the high degree of foreign control and ownership in the economy. I do not say this in an aggressive sense but I wish it to be recognized that it is the practice for companies to do their main R&D at their head offices where their main market is and where their main corporate strength is. That means that Canada gets R&D transferred to it after new technology, new processes and new products have been developed elsewhere. This lag is important because it puts us behind in getting into new markets. We come in late.
We should recognize at the same time that many subsidiaries of foreign corporations do significant R&D in Canada. The picture is a mixed one. For example, Ortho Pharmaceutical, which is a wholly-owned subsidiary of Johnson, and Johnson, a huge multinational company, has one of the few research and development laboratories in this industry with 40 scientists who have developed worldwide products in certain fields. That is the kind of autonomy and relationship that we need, but all subsidiary firms do not have it. Canadian General Electric has it to a limited extent, so does Eli Lilly and so does Hewlett Packard, DuPont and others; but in the main our branch plant economy lags in R&D because of that parent subsidiary relationship. We have it in our own case where Northern Telecom, a Canadian multinational, does its R&D in Canada.

What we need to do is to examine the relationship which is dragging R&D down in Canada. I think we can do that in the 23 task forces which have been set up a month or so ago and which are due to report for the first time in six weeks. They are developing action plans in 23 sectors, such as in plastics, in the auto industry, in pulp and paper, in mining, and in other manufacturing sectors. They can examine the impact on R&D of the high degree of foreign ownership and control which exists in Canada. We should not rely simply on changing the tax environment, because it will not change fundamentally the underlying patterns which are well entrenched.
I should like to suggest further in this connection that perhaps we should be considering a Canadian institute for intermediate scale technology. There is, however, a bias against new agencies and new initiatives of this kind. Nonetheless, it will work against our interests if we allow that bias to proceed too far. Why do I suggest a Canadian institute for smaller scale technology? In the first place, small businesses to succeed, certainly in manufacturing, have to be discontented with simply being a manufacturing firm manufacturing products on behalf of some other firm which has done all the design, all the research, all the development, and then says: "Bid on this contract. If you succeed fine, if you do not, we will go elsewhere". They must have independent, autonomous sources of product improvement and process improvement. Given the fact that we are on the lagging end because of the ownership and control situation, perhaps we do need research into intermediate scale technology to help Canadian businesses benefit from those improvements by developing them, and ensuring those improvements get into their operations.
As many hon. members have mentioned, perhaps we also need export consortia to help small firms grow out beyond their regional and domestic market. Because they are small and do not have a marketing organization to sustain the penetration of foreign markets, it would be an advantage for government to assist in the formation of export consortia. Let us not be driven off from such proposals by the argument that yet another government bureaucracy is being formed.
My main point in all this is that tax incentives are the easy way out. They will not do the whole job because of the particular problems we are faced with. I am referring to problems with the third world, the industrialized world and the scattered character of the Canadian economy. One aspect of the motion I should like to support was proposed and passed at the Liberal party national convention. I am referring to an amendment to the Income Tax Act which would suspend the operation of capital gains tax when small businesses pass within families or indeed to employees of firms.

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