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Navigating the Change: Business Location and Economic Development in Canada

De-globalization, supply chain disruptions, an evolving tax landscape, tight labor markets, and the continued rise of ESG are among the issues manufacturers are facing.

Location Canada 2022
Organizations have faced many challenges over the last two years that have impacted them in various ways, including how business location decisions are made. Disrupting trends include supply chain challenges, COVID restrictions, currency volatility, political tensions and instability, ESG (environmental, social, and governance) legislation changes, and many others that are making manufacturers rethink the locations of their production and distribution facilities.

At EY, we support clients globally in site selection decisions, and we’re witnessing trends previously seen in Europe and Asia now impacting the Canadian market.

Key issues most manufacturers across various sectors face this year include:

• Economic security (de-globalization): The 2020s will look different than the past three decades, which saw the rise of globalization. We expect the post-pandemic political climate will see countries looking to ensure capacity is available at home.

Today we’re seeing rising oil and gas prices and anticipate continued shortages of critical materials. Countries and companies are increasingly focusing on becoming more self-sustainable. As such, there is a need for land availability to accommodate these facilities — a situation that offers Canadian jurisdictions a unique opportunity to compete.

We already see early results of the increase in competition. Canadian jurisdictions at all levels are ramping up their capabilities in attracting foreign direct investment and economic development.

Just 5 to 10 years back, economic development departments in municipalities and provincial ministries were fairly small and mostly focused on marketing activities. Today there is a clear evolution of economic development departments. Organizations are targeting to better understand investors’ needs and the competitive market and are collaborating with investors for smooth and seamless localization experiences. Invest Ontario is a great example of the evolving role economic development agencies will play in Canada. Ontario is already a top-tier destination for investment and strategic business growth. The new agency will drive greater economic growth, support strategic domestic firms, and attract business from around the world. Invest Ontario is focusing on three strategic sectors where the province has a global competitive advantage — advanced manufacturing, life sciences, and technology — all while moving at the speed of business. Similar organizations are already established in other provinces — including Québec, British Columbia, and Alberta — as well as in some regions and municipalities.

We expect the post-pandemic political climate will see countries looking to ensure capacity is available at home. • Supply chain disruptions: Supply chain issues daunted North American producers over the last two years. To mitigate the risk of future supply chain concerns from overseas locations, organizations are looking to reshore/near-shore some services in North America to secure a more consistent supply closer to home.

Warehouse and industrial supply are at record lows as companies increase their inventory holdings. More companies are now considering decentralized and regional strategies to be more responsive to future supply chain shocks. Specific actions result in expanding companies’ footprints by buying or leasing additional land for storage facilities or potential production expansion. We’re witnessing similar activities across different sectors, including agricultural, food production, battery supply, and others.

• Tax and incentives trends:
The tax landscape keeps evolving. As government incentives and spending from the pandemic wind down, companies will need to consider how these changes — along with changes in tax legislation, the deductibility of certain expenditures, and taxes on greenhouse gas emissions — will impact how they are investing in their businesses.

Corporate tax rates, as well as the availability of tax incentives to encourage investment in different regions and in new, efficient, and clean technology will impact where and how companies will invest in their facilities. Low- or zero-interest loan incentives and cash grants, in particular, will play an increasingly important role in improving cash flow and business growth given the increased cost of borrowing.

At the federal level, several measures have been introduced to encourage investment in clean technology, particularly in the manufacturing space, to help the government meet its clean-energy objectives. Some recent examples include:
  • Amendments to the clean energy equipment capital cost allowance classes;
  • The introduction of an investment tax credit for carbon capture, utilization, and storage;
  • The proposed introduction of a new Critical Mineral Exploration tax credit for materials used for the production of batteries and permanent magnets in zero-emission vehicles; and
  • The introduction of the Clean Fuels Fund and the Low Carbon Economy Fund

  • At the provincial level, we observe continued competition for capital through incentives. Some examples include an extension to the enhanced rate for the Québec Investment and Innovation Tax Credit (C3i), along with tax credits to encourage investment in manufacturing and processing, which are available in Saskatchewan, Manitoba, and the Atlantic provinces.

    In addition to tax credits, provinces continue to introduce discretionary incentives designed to encourage investment in areas such as clean technology and infrastructure to increase capacity for food production.

    • Tight labor market: All companies are currently adapting to changing workforce expectations. In Canada, employment growth continues to outpace population growth, and we’re currently experiencing the lowest unemployment rate since data became available in 1976. The United States is experiencing similar record-breaking low unemployment rates, creating strong competition for talent.

    More companies are now considering decentralized and regional strategies to be more responsive to future supply chain shocks. A very tight labor market, in addition to rapidly rising inflation rates, may result in challenges in hiring skilled labor and increased compensation expectations. Much of the workforce will also expect to have continued access to hybrid work environments for the long term. These changing expectations will continue to impact businesses’ site selection process.

    Another challenge resulting from the labor shortage is the cost and timing required for construction of a production or storage facility and the availability of contractors. This recently became a criterion that manufacturers consider as one of the key risks when making their investment decisions.

    • Continued rise of ESG: Across industries, ESG continues to gain prominence and should play an increasingly important role in organizations’ site selection process. Reshoring, for example, provides companies with the opportunity to reduce their supply chain and positively impact ESG ratings.

    In Canada, the government has set a target for 100 percent of light-duty cars and passenger truck sales to be zero emission by 2035. This target and changing consumer demands have stimulated the advancement of the electronic mobility sector, resulting in increasing demand for manufacturing spaces. This is just one example of how the rapid growth in the development and adoption of green technologies will make up a larger piece of the site selection market.

    In Canada, employment growth continues to outpace population growth, and we’re currently experiencing the lowest unemployment rate since data became available in 1976. To meet these targets, the government continues to introduce incentives, such as the temporary reduction to the corporate income tax rate for qualifying zero-emission manufacturers, which would include companies that manufacture battery or fuel cell technology.

    In Sum
    As a result of these trends, North American manufacturers are rethinking their location criteria, reversing decades of globalization through repatriation back to the Americas. The vast majority are considering the U.S., but Canadian jurisdictions can also compete thanks to a lower cost base together with skilled labor and no language barrier. Therefore, we expect to see growing interest from various manufacturers — both those repatriating to North America and those expanding internationally — in entering the Canadian market or expanding their current facilities in the country.

    Tips for a Canadian Location Search

    If you or your business partners are considering Canada as a potential jurisdiction for doing business, consider these helpful tips:

    Culture of doing business — be aware. Canada’s business culture is open and built on trust and long-lasting business relationships. At the same time, it may be different from other jurisdictions, so it’s critical to understand nuances before diving into negotiations. Different provinces, regions, and municipalities may have differing approaches and processes as well as priorities and KPIs, and your entry point, negotiation process, permits applications, and level of support may differ by jurisdiction.

    Levels of government and support — get your project sponsor. Canada has three levels of government, and depending on your sector, the size of your investment, or your desired location, you may be dealing with one or more levels. Though generally all jurisdictions are welcoming new investors, their approaches and maturity levels may differ. A critical success factor — especially for large-scale investments — is to secure a project sponsor at the early stages to provide the necessary support throughout the project.

    Incentives are important but consider other criteria. Canadian jurisdictions are substantially different from the U.S. in land availability and costs, road density, labor availability and cost, supplier networks, and other factors. Therefore, comparing jurisdictions just by tax incentives may mislead your decision-makers. To make a well-informed decision, you should engage in a multi-criteria analysis.

    Private vs. public land — ask for the full picture. Sometimes investors may not get the full picture on available land plots due to competing interests of brokers who may be trying to offer what is available on their list first. Holistic analysis of the availability of both private and public land and getting unbiased advice on the options may help you get a better deal.

    Your local partners — define who will support you in Canada. As a large investor, you most likely would have preferred partners — including contractors, suppliers, and a logistic services provider — and some of them may not be available and may not be operating at full capacity or may not meet your cost/quality expectations in Canada. It is worth checking what alternatives may be in the local market and consider that in the multi-criteria model for a better-informed decision.

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