2018 Manufacturing Outlook

January 16, 2018

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Opportunities, risks, and planning considerations for Canadian manufacturers

Although Canadian manufacturing sales are set to hit a record high in 2017, the industry is still facing a number of serious issues. There’s cross-border trade (CETA, TPP, and now NAFTA), the federal government’s efforts to close loopholes for Canadian private corporations and retool the innovation and government incentive programs, minimum wage increases in Ontario and Alberta, rising hydro prices, and U.S. tax reform. With all these issues to deal with, business leaders need to keep their eye on the ball.

BDO and Canadian Manufacturers & Exporters (CME) have worked closely with manufacturing businesses and delved deeper into the significant opportunities and challenges that lay ahead. Recently, BDO and CME held a webinar to discuss these matters.
 

Watch the On-Demand Webinar
 

Government incentives

The good news for the manufacturing industry is the Scientific Research and Experimental Development (SR&ED) program isn’t going anywhere, says David Douglas, BDO's Central Region Government Incentives Leader. The bad news is the federal government is budgeting $2.6 billion for SR&ED in 2018, a reduction from the $3.5 billion spent in 2016.

However, the CME’s SMART Green Program will remain open throughout 2018. It helps small- and medium-sized manufacturers in Ontario reduce greenhouse gas emissions by offering non-repayable grants of 50% of eligible costs up to $500,000 for the purchase of emissions-reducing equipment.

Also, the federal government is trying to introduce small businesses into the procurement process, says Douglas. The Innovative Solutions Program is modelled after the Small Business Innovation Research program in the United States, which he says has been very successful.

Paul Boucher, BDO’s Advisory Services Manufacturing Leader, notes that the government is working on many initiatives to support manufacturing. One is the Strategic Innovation Fund (SIF), which is open to firms in the industrial and technology sectors.

SIF has four funding streams to spur innovation throughout the entire Technology Readiness scale each stream having its own objective. The first stream encourages research and development, the second stream facilitates the growth and expansion of Canadian companies, the third stream aims to attract and retain large-scale investments, and the fourth stream’s purpose is to advance technology development through collaborative initiatives. 

The fund also supports late-stage commercialization projects, a significant improvement in government perspective because one of the biggest challenges in Canadian funding programs was the lack of support for the commercialization phase, says Boucher.

For the first three streams, businesses can get up to 50% funding in the form of a grant, repayable loan, or non-repayable loan, or any combination of those. For the fourth stream, collaboration applicants including post-secondary institutions, for-profit corporations (including small- and medium-sized manufacturers), research institutes, and not-for-profit entities can receive 50% to 100% in funding.

Eligible costs include direct labour, overhead, subcontracts and consultants, materials and equipment, land and buildings, and other direct costs.

Private corporation tax changes

There were a significant number of tax-related announcements affecting private corporations in 2017, but some of the original proposals made by the federal government were changed in October, says Sandy Hale-Malhinha, BDO’s National Manufacturing Tax Lead.

For example, the most significant changes limiting access to the Lifetime Capital Gains Exemption and targeting conversion of income to capital gains will no longer be implemented.

In addition, the government has proposed that passive income measures will be limited to new investments and will only apply to passive income of more than $50,000 annually. Existing investments will be grandfathered. The proposals are just that, but she expects draft legislation to be released with the 2018 federal budget.
The government also announced in October that the small business tax rate will fall to 10% in 2018 and 9% in 2019.

See Our Private Corporation Tax Changes Round-up

Read further insights related to the implications of the U.S. Tax Reform on Canadian manufacturers

NAFTA renegotiations

Although there has been some fairly substantial progress in a number of areas that matter to business in the NAFTA talks, there are a few problem areas, says Mathew Wilson, CME’s Senior Vice President.

The United States has made a number of proposals that Canada and Mexico have both opposed. For example, it wants automobiles to have 85% North American content (up from 62.5%) and 50% American content, a so-called sunset clause that would end the agreement after five years unless all three countries agree to an extension, an elimination of the dispute resolution clause, and capping the value of U.S. government procurement contracts for Canadian and Mexican companies. The U.S. could also suspend talks and trigger a withdrawal clause.

Canada’s economy is very dependent on NAFTA, with 75% of our exports going to the U.S. and Mexico. “The real problem in all of this is business uncertainty,” he notes, adding that business investment in Canada is already weak and companies will continue to delay investment decisions as long as uncertainty remains.

While some things are changing, some things stay the same, says BDO’s Manufacturing Industry Leader Mike Gillespie. The need for, and opportunities relating to, innovation have never been greater.  Canadian manufacturers continue to become more global in their supplier and customer bases and operations. We continue to see consolidation in the market, as greater economies of scale are required to make the necessary investments to compete on the global stage in a cost-effective manner.

For years now, attracting and retaining skilled labour has been the number one issue industry leaders are concerned about. Finally, the value of the Canadian dollar can significantly impact the profitability of Canadian importers and exporters. Canadian manufacturing is succeeding in spite of the headwinds that have presented themselves — we at BDO are proud to support those successful efforts. In a recent BDO survey, most Canadian business owners had no contingency plans for their businesses after the North American Free Trade Agreement (NAFTA) renegotiation, despite concerns regarding the potential termination of the trade pact between Canada, Mexico, and the United States.

At BDO, we will continue to provide summaries of the renegotiation process. To receive updates, click here.

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Michael Gillespie

Partner, National Manufacturing Leader
CPA, CA; CPA (Illinois)