OTTAWA MUST GO ‘ALL THE WAY’ TO MATCH U.S. TAX REFORM.
BUSINESS URGES OTTAWA TO GO ‘ALL THE WAY’ IN ECONOMIC STATEMENT TO MATCH U.S. TAX REFORM
Business groups are urging finance minister Bill Morneau to fully match U.S. tax reforms in his fall economic statement Wednesday, saying that a failure to maximize capital cost write-offs will leave Canadian firms at a profound disadvantage to their rivals.
“We’d be disappointed if they don’t go all the way,” Dennis Darby, head of the Canadian Manufacturers & Exporters Association, said of the potential for Ottawa to expand accelerated capital cost allowances on Wednesday.
His comments come after a senior finance department official told the National Post that Morneau is likely to extend immediate writeoffs to 75 per cent of capital investments, up from 50 per cent currently. That would only go part way toward matching the 100-per-cent deductions introduced under U.S. President Donald Trump’s sweeping tax reforms last year.
Accelerated capital cost allowances effectively allow companies to immediately write off investments in assets like machinery and equipment. In Canada such write-offs are currently spread out over several years.
For months, business groups have been calling on Ottawa to introduce some form of tax relief in its fall economic update, arguing that Canadian companies are increasingly at a disadvantage to U.S. firms. They say Canada’s overly burdensome tax system and confusing regulatory regime have led to waning investment levels in the country, and have called for a number of broad overhauls to correct the imbalance.
“In the event government does not introduce 100-per-cent deductibility, then they need to make that up in other areas,” said Ben Brunnen, a vice-president at the Canadian Association of Petroleum Producers.
THERE’S A PACKAGE OF REFORMS THAT NEED TO OCCUR TO MAKE OILSANDS AND CONVENTIONAL OIL AND GAS COMPETITIVE IN CANADA.
IN THE EVENT GOVERNMENT DOES NOT INTRODUCE 100-PER-CENT DEDUCTIBILITY, THEN THEY NEED TO MAKE THAT UP IN OTHER AREAS.
CAPP said those secondary measures could include certain shelters from carbon taxes, better market access for oil and gas producers, clearer regulatory guidelines and lower corporate tax rates, among other things.
“There’s a package of reforms that need to occur to make oilsands and conventional oil and gas competitive in Canada,” Brunnen said.
Dan Kelly, head of the Canadian Federation of Independent Business, which represents over 100,000 small and medium-sized companies, is hoping Ottawa will introduce a long-term plan to match U.S. tax reforms. He said the business community does not expect Morneau to immediately match the U.S. on accelerated capital cost allowances, but said even a gradual shift would placate business owners.
“There would be disappointment if there was just a one-time increase in the rate,” he said. “However, I do think the business community would be quite patient if there was a multiyear plan to get to where they are in the U.S.”
The senior finance official, who spoke to the Post on the condition of not being named, said the department estimates increasing capital expensing to 100 per cent of investments would cost Ottawa roughly $30 billion over five years. That would still be lower than the roughly $40-billion cost, spread over five years, of lowering acrossthe-board corporate tax rates.
Wednesday’s fall economic statement comes amid waning business investment levels in Canada. Canadian investment in machinery and equipment fell 4.7 per cent between 2012 and 2017, according to the Fraser Institute, while investment in intellectual property plummeted 14.8 per cent over the same period. That has come alongside a wider drop in business investment by Canadian firms so far this year, down to 11.6 per cent of GDP compared to 13.5 per cent in 2017. Business investment by U.S. firms, meanwhile, has remained around 13.6 per cent of GDP between 2014 and 2018.
Foreign direct investment in Canada also slumped between 2013 and 2017, according to Statistics Canada.
“Unfortunately, we’re witnessing this flight of capital out of Canada on many different fronts,” Fraser Institute president Niels Veldhuis said in a statement Monday.
Kevin Milligan, professor of economics at the University of British Columbia, said extending capital expensing would incentivize managers to invest back into their companies, prompting them to replace aging truck fleets or restore manufacturing equipment.
“It would be a step in the right direction,” he said, adding the deductions should be spread evenly across asset categories.
Meanwhile, Jack Mintz, a fellow at the University of Calgary’s School of Public Policy, has warned against expanding capital-cost allowances. He called the U.S. policy a “mistake” in a Senate committee hearing in September, saying that expanded capital-cost allowances only hide the deeper inefficiencies in Canada’s tax system. Mintz has long called for sweeping reforms to simplify Canada’s weighty tax code.
“I’m very disappointed in the business community now starting to push (accelerated expensing),” he said in September. He said Canada should not “jump in the lake” with the U.S.
The Business Council of Canada, which represents 150 large companies, has also been calling for a comprehensive overhaul that would lower the corporate tax burden in Canada and streamline its complicated regulatory regime.
“We also need to bear in mind that, while accelerated expensing for capital investments will help, no single measure is going to solve Canada’s competitiveness challenges,” Ross Laver, spokesperson for the Business Council of Canada, said in a statement.