Spring is a time of year when new life starts to grow not just for plants but for companies and governments alike. Whether it is the hiring of new employees or an annual federal budget, spring brings out a wide variety of change. This rings true for the Canadian manufacturing industry which has seen its fair share of ups and downs over the years but things are on the rise for the moment. The RBC Canadian Manufacturing Purchasing Managers’ Index was at 50.1 last month after adjusting for seasonal variation, up from 49.3 in March. A reading above 50 represents growth, while a number below means contraction. This expansion is most likely a result of greater demand from the United States, Japan and China. Inventories of finished goods have increased for the first time in 2013.

RBC’s chief economist, Craig Wright,  stated that “while the overall gains made in April were tepid, we expect manufacturing output to pick up, augmenting export activity and supporting Canada’s growth prospects.” So while this growth is indeed small, it’s a sign that things are improving for Canada’s manufacturing industry. Although there are many variables that are out of manufacturer’s hands, one aspect they can control is taking advantage of Canada’s funding programs such as SR&ED or Export Market Access (EMA). If you aren’t already taking advantage of these lucrative programs, contact us for a free, no-obligation consultation.

The recent federal budget of 2013 highlighted several initiatives aimed at strengthening the competitiveness of the manufacturing sector. New sources of Canadian business funding and renewal of previous initiatives provides extra incentives for manufacturers to advance their business to the next level. One initiative that is especially beneficial for manufacturers is the renewal of the accelerated capital cost allowance (ACCA) for new investment in machinery and equipment. The initiative was renewed for additional 2 years and will run until 2017-2018, providing an estimated total of $1.4 billion in tax relief for Canada’s manufacturing and processing sector.

ACCA allows companies that purchase new machinery or equipment to depreciate the asset at 50% using the straight line method. In the absence of ACCA, the machinery would be depreciated at 30% declining-balance rate, which will result in lower annual deductions from income over a much longer period of time. Let’s take the example that a manufacturer purchases new machinery for $10,000 that has zero salvage value.  See the below table which compares the two depreciation methods:

As illustrated, straight line depreciation allows for a faster write-off of machinery and equipment. The declining balance depreciation results in lower annual deductions from income over a longer period of time.  In the above example, it would take nine taxation years to deduct 95% of the value of the machine. By allowing for a faster depreciation through the straight line method, ACCA provides support to the manufacturing sector to help them be competitive with the global economy.

Rising US demand has generated an increase in Canadian exports, allowing for the first trade surplus in a year.  Statistics Canada reported a 5.1 % increase in exports in March 2013 to $40.5 billion, with only a 1.7% increase in imports to $40.4 billion.  Exports to the United States were responsible for three-quarters of the story, rising four per cent to $29.5 billion.

“The trade picture in the first quarter of 2013 certainly paints the story of an economy moving away from domestic demand driven growth, to one where the economic engines are being fuelled by trade,” said TD Bank economist Diana Petramala.

With increasing demand in the US, it vital for Canadian manufacturers to take advantage of export opportunities south of the border. The Government of Canada has facilitated this through Canadian business funding such as the Ontario Exporters Fund (OEF) and Export Market Access (EMA).

• OEF allows companies to become export-ready through the hiring of an export manager. The grant provides funding up to $40,000 a year for two years, covering a maximum of 50% of the salary.
• EMA is designed to provide companies easier access to foreign markets. Manufacturers can receive 50% of eligible costs up to $100000. Eligible categories include direct contacts, tradeshow expenditures and market research. If your company has plans for expansion, the government has programs in place to encourage you to increase your sales outside of Canada.

A recent press release by the Professional Engineers Ontario (PEO) indicated that the Government of Ontario has approved a change to the Professional Engineers Act that will remove the so-called industrial exception starting on March 1, 2013. This means that professional engineering work on equipment or machinery used to produce end products must now be performed by an individual that is licensed by Professional Engineers Ontario (PEO). The Professional Engineers Act has defined professional engineering work as work that meets the following three criteria:

1. Requires the application of engineering principles.
2. Concerns the safeguarding of economic interests, public welfare, the environment.
3. Any act of planning, designing, composing, measuring, evaluating, inspecting, advising, reporting, directing or supervising, or managing any of the activities that comply with (1) and (2).

The change follows the repeal of Section 12(3)(a) of the Act.  Prior to the repeal, 12(3)(a) allowed non-licensed individuals to conduct engineering work when it related to production machinery or production processes in manufacturing — as long as the individual was the manufacturer’s employee.  After the repeal, if you are upgrading or modifying an existing piece of production equipment, and the work qualifies as professional engineering work, then you will require the services of a professional engineer.

The government has made these steps because they want to increase public and workers safety, as well as help decrease businesses costs. They are hoping that with this change will decrease workplace injury/illnesses and minimize downtime and replacement of machinery. It is expected that this change will effect over 1000 companies in Ontario.

PEO is the licensing regulating body for engineering in the province of Ontario with over 80,000 license holders.  NorthBridge Consultants is authorized by PEO to offer professional engineering services in Ontario.

A recent survey completed by StatsCan indicated a 3.1% decline in sales for the manufacturing industry in the month of December 2012. The total manufacturing sales in December was $48 billion. The chart below illustrates Canadian manufacturing sales since 2007 in current dollars.

The transportation equipment industry suffered the highest percentage decrease in sales compared to other manufacturing sectors. Sales fell by 9.1% in the transportation equipment sector for December, which represented the largest percentage decrease since February 2011. However, this decrease can be attributed to a 15.4% decline in motor vehicle assembly, which is expected given that assembly plants are normally closed for a portion of the month in December. Other sectors that experienced decline include chemical manufacturing, petroleum and coal products and the fabricated metal industry.

The total decline in Canadian manufacturing sales was concentrated within Ontario, which contributed to more than 2/3 of the total national decline. Ontario sales fell by 4.6% while Alberta faced a decline of 4.5%, representing a third consecutive monthly decrease for the province. Overall for 2012, the Canadian manufacturing industry as a whole had a 3.4% increase in total sales compared to 2011 sales numbers. However this increase is less than half the rate of growth in sales for 2011 and 2010, which was 7.8% and 8.9% respectively and can be accredited to a slowdown in growth in the manufacturing industry as a whole for 2012.

To stay competitive, manufacturers are encouraged to take advantage of Canadian business funding programs.  In Ontario, there are numerous programs that fund research and development (SR&ED and IRAP), equipment purchases (CME Smart Prosperity Now), and export market development (Export Market Access).