Canada needs to move beyond traditional manufacturing and position itself at the leading edge of high-end, said the head of a major Canadian think-tank today. And tax changes are a key to making that happen, he added.

“Our job in Canada is to move up in terms of value-added,” said Bill Robson, president and CEO of the C.D. Howe Institute, at a financial services luncheon for members of the Toronto Board of Trade. “We’re not going to compete in the old metal-bashing the way we once did.”

As Finance Minister Jim Flaherty sets to bring down the government’s 2008 budget tomorrow, Robson outlined some key tax changes he says would ensure Canadians invest their money domestically. First and most simply, he says, are the benefits of lowering taxes on Canadians who are saving money. “If you have lower taxes on capital incomes it’s going to boost the rewards of investment,” he says.

Also on the taxation front, Robson says there should be dividend tax credits for pension savers. According to the C.D. Howe economist, who replaced Jack Mintz as president and CEO of the institute in 2006, Canada’s tax treatment of preferred savings is flawed. “If you tax business income at both the business level and then at the personal level, you’re double taxing,” he said. “It makes the equity support of public companies less attractive because the dividend payments are going to be taxed twice. A key vehicle for the ordinary saver to participate in economic success is handicapped in that way.”

When it comes to institutional investors and sovereign wealth funds, Robson says focus should be on transparency and conduct for both domestic and international funds. “All institutional investors should be held to the same high and rising standards that we apply to our best run public institutions and listed companies,” he said, noting that this includes transparent governance, no arbitrary state-overrides, up-to-standard financial reporting and disclosure of related-party transactions.

Robson emphasizes the need to foster the development of new Canadian enterprises. He says that despite increasing globalization Canadians have a “home bias” when it comes to buying equities, which makes investors want to put their money in familiar businesses that are close to home. In terms of fostering financial markets, he says investors are looking for people who work for firms they can trust in a legal environment that they understand. “Every policy step we take that makes Canada a favourite place for banks, insurers, investment dealers and exchanges to operate will help Canadians put there savings into Canadian champions.”

Robson said he feels the pain of Canada’s manufacturing sector. He calls the high dollar a “sideshow” and blames the rough period on the terms of trade agreement. “For manufacturers this is a very, very bad time in the cycle,” he said. “But its not because of the Bank of Canada’s interest rate policy, it’s because that’s what the world has served up for us.”

The best option for Canada going forward, according to Robson, is to gather all the fear and anxiety about corporate hollowing out and foreign takeovers and channel it into creating constructive change in Canadian industry.

“A vision that really makes sense is to think about Canada as the world’s premier location for talent, investment and innovation,” he concludes. “Our job is to martial our resources to stay on the high-end edge. And we’re actually doing that quite well.”