Billions of dollars in new automotive investment are bypassing Canada in favour of the United States and Mexico, putting the long-term future of the industry in Canada in jeopardy unless governments improve their investment incentives and help auto makers cut costs.
Those are the major conclusions of an examination of the auto industry in Canada undertaken by the Canadian Automotive Partnership Council (CAPC), an organization established more than a decade ago to advise the federal, Quebec and Ontario governments on what actions are needed to maintain the country as an auto making powerhouse.
The report is a stark warning that the landscape has changed in the past decade for an industry that provides direct jobs for more than 100,000 people – and hundreds of thousands more in spinoff jobs – accounted for 15 per cent of Canadian exports last year and contributes hundreds of millions of dollars in taxes to government treasuries.
"When global decision makers look to invest in North America, they always consider the biggest market – the U.S. – first," the report says. "What has changed is that their second choice is now Mexico, not Canada."
The report was given to federal Industry Minister James Moore and his Ontario and Quebec counterparts at a meeting in Ottawa on Tuesday.
The report praises such government actions as persuading the U.S. government to agree to a new bridge at the clogged Windsor-Detroit border and incentives offered through the federal Automotive Investment Fund and various Ontario government programs. The federal fund is a five-year, $250-million program.
But a problem with the federal fund makes it difficult for executives here to make a favourable case for investment in Canada when they make pitches at their head offices, according to the report and interviews with several industry sources on Wednesday.
The loans from the fund are repayable, but the Canada Revenue Agency also treats them as revenue in the year they're received and is forcing auto makers to pay income tax on the loans, a development that shocked officials at several companies.
"In the highly competitive area for automotive investment, a package that contains an expectation of eventual repayment and which is taxed as income in the year it is received, is not very persuasive," the report points out.
Toyota Motor Manufacturing Canada Inc. received $70.84-million from the federal fund for projects at plants in Cambridge, Ont., and Woodstock, Ont. Ford Motor of Canada Ltd. will receive a $71.6-million federal loan to help retool its Oakville, Ont., assembly plant.
The companies may grudgingly accept the federal terms because the Ontario government usually comes through with grants that are not taxable, but aren't available unless the federal government participates, one industry source said. The federal government should join Ontario and offer cash grants, the report says.
The federal loans also compare with cash grants or tax rebate programs offered by U.S. states and Mexico, which are transparent, easy to understand, sometimes cover as much as 60 per cent of a project's cost versus 20 to 25 per cent in Canada and are much easier to sell at head offices, other sources said.
"It is an issue for any company looking at investment in Canada, especially when other jurisdictions are not applying such tax treatment to loans or grants offered in those jurisdictions," one industry source said.
The report notes that governments can trim labour costs in the auto industry by reducing the costs that companies face from employment insurance, workers compensation premiums and employer health taxes, as well as changing statutory holidays in Canada.