‘ Burdensome climate for investment’
CORPORAT E RAT E S Canada’s rates rank second- highest among industrialized countries
OTTAWA • Taxes on business investment in Canada are secondhighest among 36 industrialized nations and that poses the greatest threat to this country’s future prosperity, says a report on taxation from the C.D. Howe Institute, an influential think-tank.
The report indicates Canada has moved from third-highest to second in the span of a year, data collected by the institute showed. It warned unless Ottawa and the provinces act, the country stands to lose billions in investments and to fail in efforts to reverse a drop in Canada’s standard of living.
“Canada has a significant problem with international competitiveness for … capital investments, with unneeded differences in tax burdens on business investments,” the institute warned in a report released yesterday.
“Despite the past and planned cuts in corporate rates, Canada will retain a burdensome tax climate for investment, undermining its prospects for robust economic growth — unless governments act.”
This review of corporate taxation follows on the heels of a policy paper from the country’s largest business group, the Canadian Chamber of Commerce, that demanded $3-billion in tax cuts, starting next year.
The tax relief is required, the chamber argued, to encourage businesses to invest in technology that would help boost productivity rates — which are key to ensuring economic growth.
The Liberal government’s commitment to competitive business taxes has been under attack after it removed close to $4-billion in relief from its last budget at the behest of the left-leaning NDP. It was part of a budget deal to ensure NDP votes in the House of Commons that would keep the minority Liberal government alive. The Liberals have said those corporate tax cuts will be reinstated.
Both the Prime Minister and Finance Minister have argued the country’s corporate tax rate is competitive compared with nearby countries, most notably the United States. In fact, the general corporate income tax rate in Canada, at 34.3%, is indeed less that the 39.2% charged by Washington — but remains the sixthhighest among industrialized countries surveyed.
For its study, the C.D. Howe looked beyond the corporate income tax rate, and incorporated capital taxes, sales taxes on business inputs, such as machinery and other capital-related charges in 36 countries.
As a result, Canada’s effective tax rate on business is 39% compared with 37.7% in the United States.
Only communist China has a higher effective business tax rate than Canada, at 45.8%.
“We can’t say we are competitive. We have some serious issues we need to deal with,” Jack Mintz, president of the C.D. Howe Institute, said in an interview. “I find it very disappointing that people would still say that we are competitive only because our corporate income tax rate is lower. It is sort of like looking at a body with heart disease and saying it is healthy because the arms and hands are fine.”
Saskatchewan and Ontario have the highest effective rates of business taxes among the provinces, at 44.1% and 43.5% respectively. Even though they have tax cuts planned, the two provinces will continue to have the highest business rates by the end of the decade, the report said. (Newfoundland, New Brunswick and Nova Scotia vie for the lowest, all of which have rates in the 20s.)
The institute outlines a number of recommendations for governments to follow in order to restructure the business tax regime. Among them:
Lower the corporate income tax rate to 25%. This will spur investment by reducing the cost of financing for business and discourage companies from moving to other jurisdictions.
Kill taxes on capital. To date, the federal government, Alberta and British Columbia have moved to remove these levies.
And raise the rates by which companies can write off older equipment. This is crucial, the institute argues, as old technology needs to be replaced with more productivity-enhancing machinery.