CATA Letter to Minister Flaherty
October 12, 2006


The Hon. Jim Flaherty, P.C., M.P.
Minister of Finance
140 O'Connor St.
Ottawa, ON

Dear Minister Flaherty

Re A Tax Measure for Increased Productivity in Businesses

Canadian Advanced Technology Alliance (CATAAlliance) is an alliance of a wide-ranging membership of entrepreneurial companies in the technology sector. CATAAlliance is committed to growing the global competitiveness of its members, since 80% of them are currently active exporters. In addition, the CATAAlliance membership comprises many small and medium-sized businesses.

With competitiveness and productivity squarely to be addressed in the government economic policy agenda, I am writing to focus on the challenge of SMEs. Specifically, I want to highlight the critical opportunity for Canada to improve its productivity by stimulating investments by businesses in productivity-enhancing technologies and processes.

The positive relationship between investment in ICTs (information and communications technologies) and productivity growth is now internationally accepted among economists. Earlier this year, the Government received the report of the Telecommunications Policy Review Panel which documented the productivity-ICT relationship. About 60% of the Canada-U.S. labour productivity gap is attributable to increased ICT diffusion across the economy in the U.S., according to a study by economists Mel Fuss and Leonard Waverman in 2005. The Panel noted some worrisome, persistent trends in Canadian business investment in ICT and lack of productivity growth, including:

  • the growth rate of ICT investment (as measured in constant dollars) has fallen from 23% annually in 1995-2000 to 4.8% annually in 2000-04
  • the ratio of ICT investment to GDP for Canada's business sector was only 66% of that of the U.S. business sector in 2004, and
  • business sector ICT investment per worker in Canada was only 48% of that of the U.S. in 2004.

The Panel recommended the immediate introduction by government of a tax credit for investment in ICT and related expenses - a tax credit that should be targetted to SMEs. By virtue of establishing a refundable tax credit, SMEs would benefit more from such a policy than by accelerated capital cost allowance on ICT assets.

Equally important is the applicability of a tax credit to expenses related to technology purchases, such as training and business re-engineering, to ensure that businesses can take full advantage of computer hardware and software in their operations.

From the perspective of an alliance that represents SMEs in the technology sector, CATAAlliance respectfully submits that an incentive for productivity growth is the kind of tax policy our businesses need to strengthen and compete internationally with technologically savvy and more productive economies.

I urge you and your government to seriously consider the benefits of stimulating productivity growth in businesses through an incentive of particular benefit to SMEs.

Yours sincerely,
John Reid
President, CATAAlliance