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Cablegate: Canadian Auto Strategy

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)

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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

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