Canada shouldn’t ‘jump in the lake’ on tax reforms

OTTAWA Canada should not “jump in the lake” with the U.S. on recent tax reforms, one expert warned Thursday, rejecting calls to improve Canadian competitiveness by introducing accelerated tax write-offs for businesses.

“I would not call the expensing provisions in the U.S. a great way of doing tax policy,” Jack Mintz, fellow at the University of Calgary’s School of Public Policy, said in Senate committee hearings Thursday. “I think it was a mistake, frankly.”

His comments came in response to sweeping tax reforms introduced by U.S. President Donald Trump last year, which included a provision that allows companies to immediately write off investments in machinery, equipment and other assets. Those reforms prompted renewed calls by the business community to make similar adjustments in Canada.

Canadian companies have said their competitive advantage over U.S. firms has been gradually eroding, and have been pressuring Finance Minister Bill Morneau to introduce new tax incentives this fall that would reduce their overall tax burden. Morneau has declined to provide details on potential changes, telling reporters he has not “ruled anything in or anything out.”

Mintz argues faster write-offs for capital costs would be a misplaced effort, however. “I’m very disappointed in the business community now starting to push (accelerated expensing) — that somehow we should jump in the lake with the Americans on this,” said Mintz

Mintz said that Canadian firms have indeed lost their competitive edge over the U.S. after Trump’s tax reforms, which cut federal corporate tax levels from 35 per cent to 21 per cent. Rather than introducing quicker tax write-offs for businesses, he suggested on Thursday a broader tax reform that creates better incentives for companies while potentially lowering corporate tax rates to boost economic output.

Such accelerated capital expensing already exists in Canada, though only for manufacturers. The Ottawa-based Business Council of Canada, among other business groups, has repeatedly called for that provision to be expanded to all industries, and to include nontangible investments like patents.

“First and foremost you have to respond to U.S. reform by putting capital-intensive sectors in Canada on the same footing,” said Business Council vice-president Brian Kingston.

The group has also called for a “comprehensive review” and broader reform of Canada’s tax regime.

Canada introduced accelerated capital cost allowances in the 1980s as part of a larger effort to stimulate the economy. Mintz said those efforts failed, in part because the policy skews incentives for businesses, sometimes prompting them to intentionally run taxable losses.

The experts who appeared before the Senate Committee on Banking, Trade and Commerce on Thursday said foreign investment in Canada has waned as a result of competitiveness concerns.

“I’ve heard from many companies that do presentations in the United States that the U.S. investors have written off Canada as too politically risky now,” Mintz said.

Those concerns have been worsened by regulatory concerns around building major Canadian energy projects like pipelines.

John Mercury, a partner and vice chair of Bennett Jones LLP, said a recent setback on the Trans Mountain pipeline expansion following a Federal Court of Appeal decision has badly undermined investor confidence in Canada.