The $5-million Electro-Motive subsidy that wasn't

Special to The Globe and Mail

Prime Minister Stephen Harper waves from the cabin of an engine at Electro-Motive Diesel in London, Ont., on March 19, 2008. (Frank Gunn/THE CANADIAN PRESS)

There has been a lot of talk that the recently closed Electro-Motive Diesel plant in London, Ont., received a $5-million subsidy or tax cut from the federal government. A recent Toronto Star column is one such example:

“In shutting down EMD, Cat didn’t tender the customary warning to the union or to local government, Queen’s Park or Ottawa – from which a Cat-owned EMD only last year received a $5-million federal subsidy hand-delivered by Stephen Harper during a factory visit.”

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I did not know all the particulars of this subsidy, so I decided to do a little research.

Stephen Harper did visit the Electro-Motive plant, but it was not “only last year,” rather it was on March 19, 2008. He did give a speech that day, but it was at Cleardale Public School on the topic of MedicAlert bracelets. The only source I can find that mentions Electro-Motive and taxes is a London Free Press story that states: “[Harper]also toured the Electro-Motive Diesel plant on Oxford Street where he met many of the firm’s 900 employees.

“Harper said his visit to the rail locomotive plant was intended to highlight tax measures from his government aimed at keeping manufacturers competitive.”

So what exactly were these measures? They can be found on page 84 of the government’s 2008 budget: “Budget 2008 proposes to increase the CCA rate for railway locomotives to 30 per cent from 15 per cent. This change will ensure that the CCA rate for railway locomotives better reflects the useful life of these assets. It will also encourage rail operators to acquire a newer, more fuel-efficient fleet of locomotives (e.g. hybrid locomotives), which provide a more environmentally-friendly mode of transportation.

“This change is effective for new locomotives acquired on or after February 26, 2008, as well as for reconditioning and refurbishing costs incurred on or after February 26, 2008. It is expected to reduce federal revenues by a small amount in 2008–09 and by $5-million in 2009–10.”

The CCA referred to above is the “capital cost allowance,” which Revenue Canada defines as: “You cannot deduct the cost of a property, such as a vehicle or musical instrument that you use to earn your income. However, you can deduct a percentage of the property’s cost. The part of the cost you can deduct or claim is called depreciation or, for income tax purposes, capital cost allowance (CCA).”

Statistics Canada estimates the depreciation rate of various kinds of equipment, which is then incorporated into the tax code. All else being equal, companies prefer a higher CCA figure, for tax purposes, as it reduces their tax liability.

In a 2007 study, Statistics Canada found the depreciation rate of “Locomotives, Rolling Stock, Street/Subway Cars, Other Rapid Transit and Major Parts” to be 15.3 per cent per year. Changing the CCA rate from 15 to 30 per cent does seem more of a subsidy for “rail operators to acquire a newer, more fuel-efficient fleet of locomotives” rather than reflecting “the useful life of these assets.”

If this $5-million is seen as a subsidy, we should not see it as one that went to Electro-Motive Diesel, for two reasons:

1. The benefits of the $5-million were split between the purchasers of locomotives and the manufacturers.

2. The benefits that went to manufacturers went to all manufacturers, regardless of their location. If a Canadian company bought a locomotive from the GE plant in Erie, Pa., they were eligible for the higher CCA rate. Much of this subsidy, in fact, would have gone to locomotives produced outside of Canada, as Electro-Motive has only a 30 per cent North American market share in diesel locomotives.

The notion that Electro-Motive was given a $5-million tax break or subsidy to create jobs in Canada simply does not hold up to scrutiny. We need to put this myth to rest.

(With assistance from Dan Herman, Stephen Gordon, Andrew Coyne, Nicki Doyle, Aaron Wherry and Mike Hensen)

Mike Moffatt is a chemical industry consultant and a lecturer in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business.

Follow on Twitter: @mikepmoffatt