9.1 Concepts and definitions

9.4 Defining capital and capital expenditure is increasingly challenging, given the changing nature of production. Recently, the investment boundary has shifted, resulting in the re-classification of certain types of current expenditure to capital expenditure (e.g., software). In the simplest terms, any expenditure that gives rise to an asset could be considered investment; or, spending on an item whose expected life equals or exceeds one year could be considered investment. However, investment spending must be linked to future use in production.¹

9.5 Fixed capital covers tangible or intangible assets which are produced as outputs from production processes and which are themselves used repeatedly or continuously in other production processes for more than one year. Fixed assets exclude, by definition, certain non-produced intangible assets, such as non-cultivated biological resources (e.g., virgin forests).²

9.6 Generally speaking, capital formation refers to additions to the stock of the nation's non-financial assets resulting from investment activities. The scope of this investment is described in detail in the capital account chapter of the System of National Accounts 1993 (SNA 1993). The IEA closely follows this international standard, with a few exceptions, as noted in this chapter.

9.7 Gross fixed capital formation³ is the total value of acquisitions, less disposals, of fixed assets during the reference period, plus the activity related to certain additions to the value of non-produced assets (such as mineral deposits or major improvements to the quantity, quality or productivity of land)⁴ owing to the productive activity of institutional units. The word gross preceding the term fixed capital formation denotes that investment is measured before deduction of capital consumption allowances. Fixed capital formation includes many types of investment.

9.8 According to the SNA 1993, fixed capital formation includes:

1. acquisitions, less disposals, of new or existing tangible fixed assets, sub-divided by type of asset into:
   • dwellings;
   • other buildings and structures;
   • machinery and equipment; and
   • cultivated assets – trees and livestock – that are used repeatedly or continuously to obtain products such as fruit, rubber, milk, etc.
2. acquisitions, less disposals, of new or existing intangible fixed assets, sub-divided by type of asset into:
   • mineral exploration;
   • software;
   • entertainment, literary or artistic originals; and
   • other intangible fixed assets.
3. major improvements to non-produced tangible assets, including land; and
4. costs of transfers of ownership of non-produced assets.

9.9 It is recognized that the above list is not exhaustive and that capital assets should ideally include explicitly (under paragraph 9.8b) other research and development expenditure and goodwill and marketing assets, which have taken on increased importance in the modern economy. In the ongoing revision to the SNA 1993, it is proposed that the definition of non-financial assets or investment be expanded to include these increasingly important forms of intangible capital. In anticipation of this proposed change, estimates of research and development investment flows and stocks are currently under development for Canada.

9.10 Business and government gross fixed capital formation in the IEA encompasses most of the SNA 1993 recommended items. Investment in residential structures includes dwellings, structure and land improvements, as well as costs of ownership transfers. Investment in non-residential structures covers buildings and structures, mineral exploration, structure and land improvements, as well as costs of ownership transfers. Investment in machinery and equipment also covers software. Cultivated assets are largely excluded as are entertainment, literary or artistic originals which are considered negligible. Notably, the breakdown between tangible and intangible assets is not drawn in the estimates for Canada, though this distinction will likely be incorporated at the time of the next historical revision.

9.11 According to the SNA 1993 gross fixed capital formation is recorded when the ownership of a fixed asset is transferred to the institutional units that will use them, except for own-account capital formation. Canada does not always practice this convention, as with investment in residential structures. In the case of financial leasing, the SNA 1993 says that a change of ownership is imputed.

9.12 In the IEA, gross fixed capital formation is presented first as part of expenditure-based gross domestic product (GDP) and then again in the institutional sector accounts. It should be noted that, in the measurement of expenditure-based GDP, business gross fixed capital formation is the sum of investment spending for the persons and unincorporated businesses sector and the corporate and government business enterprises sector.

9.13 Illustrated in Table 9.1 and Table 9.2 are the gross fixed capital formation by component and by sector.

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• 9.2 Gross fixed capital formation in residential structures

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• 9 Gross fixed capital formation

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Notes

1. It is on this basis that expenditure on consumer durable goods is excluded from investment in the national accounts.

2. However the value of major improvements to such assets is included.

3. Correspond to paragraphs 10.33 and 10.34 of the System of National Accounts 1993.

4. Improvements to land consists of the following kinds of activities: reclamation of land from the sea by the construction of dykes, sea walls or dams for this purpose; clearance of forests, rocks, etc., to enable land to be used in production for the first time; draining of marshes or the irrigation of deserts by the construction of dykes, ditches or irrigation channels; prevention of flooding or erosion by the sea or by rivers, by construction of breakwaters, sea walls or flood barriers. Paragraphs 10.51 to 10.54 of the System of National Accounts 1993 (SNA 1993).