2017 NAICS Adjusts Industrial Classifications

Tax advisors must select industry classifications as they prepare tax returns for their business-owner clients. They will be interested to know that the North American Industry Classification System (NAICS), around since 1997, is updated every five years, and the most recent update was just released September 29, 2016.

The NAICS framework is based upon a supply-based, or production-oriented, economic concept. It produces data that allows analysts to measure important economic factors, including human productivity, labour costs, and the cost of capital used for production purposes. This has been a unique initiative for Canada, the United States and Mexico, to have a common industry classification system.

The challenge for the design of this framework is to continue to reflect a global economy in which the balance of trade is changing: from the flow of products to the trade of services. This is an important trend to watch and there are some interesting changes to digest.

According to last week’s news release issued by Statistics Canada, NAICS divides the economy into twenty sectors, with each industry in the sector grouped according to production criteria. It is interesting to note that there are four goods-producing sectors; however, there are now sixteen service-producing industries.

A unique feature of the classification system is that it provides a way to categorize industries engaged in activities that come together to produce and distribute products subject to copyrights. This is quite fascinating: sectors that transform information into the production and distribution of a commodity include telecommunications, broadcasting, all forms of publishing, library and information services. These industries are at the heart of innovative new economic trends that affect everything within the supply chain.

NAICS also categorizes enterprises in which the primary output is human capital: professional services, such as legal or engineering services and advertising agencies, are included here and categorized by expertise and training. The health care and social services sectors now include family planning centres, community elder care, outpatient mental health and substance abuse centres.

There has been huge growth in the electronics industry and NAICS reflects similarities and convergence in its categories. Notably, the production of software appears here, rather than in the services sectors. The reason? “The reproduction of packaged software is a manufacturing process,” is the explanation, “and the product moves through the wholesale and retail distribution systems like any other manufactured product.”

NAICS acknowledges the rapid growth of these industries over the past several years and the likelihood that they will, in the future, become even more important.

That brings us down to the classification for financial and non-financial investments: real estate, and finance and insurance. Full comparability between the three countries is difficult here because of various differences in their economies. As a result, further consultation will be ongoing between the three countries to improve NAICS.

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