Making Canada more competitive

Since the turn of the century, and especially since the Tories took office to 2006, Canada has significantly reduced the tax burden it places on corporations. Low corporate taxes help the economy by attracting international investment, creating jobs and reducing the cost of living. But as other countries continue to reduce their tax burdens on corporate investments, Canadian governments have been falling behind.

In 2000, this country had one of the highest corporate tax burdens in the industrialized world. The Conservatives have reduced the statutory federal corporate tax rate from 22% in 2006 to 15% today. In terms of the marginal effective tax rate (METR) companies face on their capital investments — that is, taking into account all deductions and credits, federal and provincial tax systems combined — the decline has been even greater, from an average rate of 36.2% in 2006 to 17.5% in 2012.

But, according to a newly released report from the University of Calgary’s School of Public Policy, Canada’s tax system is becoming less competitive — not because rates are going up, but because in recent years other countries have reduced corporate taxes even more. Indeed, between 2012 and 2014, Canada’s ranking dropped from the 19th-highest tax jurisdiction among 34 OECD countries, to the 14th highest.

Part of the problem, the authors note, is the wide discrepancies between the various provincial tax regimes. Manitoba, Saskatchewan and B.C. have some of the highest tax rates on capital investments in the world, especially on industries such as construction, transportation and telecommunications. They are also provinces that have not harmonized their sales taxes with the federal GST, meaning companies do not get rebates for the provincial sales tax paid on capital goods, as they do under the GST.

Alberta and the Atlantic provinces lie on the other end of the spectrum. Alberta’s rate is below the OECD average, thanks to relatively low corporate tax rates and the absence of a sales tax. The lowest effective rates in the country are found in Atlantic Canada, largely because of federal and provincial tax credits directed at the forestry and manufacturing sectors.

The study’s authors offer a number of recommendations to maintain Canada’s tax competitiveness. First, they recommend flattening the tax code by getting rid of special tax breaks for certain industries.

“Canada has a tax regime that favours manufacturing to a far greater extent than in any other OECD country,” they write. “Yet the favourable regime towards manufacturing has had little impact in forestalling the same decline of manufacturing as has occurred in most industrialized countries.”

The report also recommends getting rid of some of the special favours governments give to very small businesses, as it creates a disincentive for companies to grow beyond a certain level.

Further, the authors argue that the three Western provinces that have not adopted a Harmonized Sales Tax should do so, or “adopt a quasirefund system under the corporate tax to remove provincial sales taxes on capital inputs.”

These would be a tall order, politically. While the HST is better for the economy than existing provincial sales taxes, it has proven unpopular in many parts of the country. B.C. introduced an HST, only to have voters repeal it not long after it went into effect. And although the report suggests that Alberta should introduce a sales tax, allowing it to reduce personal and corporate taxes, Premier Jim Prentice’s recent trial balloon to that effect found little support in the province. Finally, the report trumpets the idea of creating a uniform corporate tax rate across the country. Good luck with that.

Regardless, it is incumbent upon all levels of government to realize that international tax competitiveness matters. We need a tax regime that not only makes it as easy as possible for Canadians to start new businesses, but doesn’t create a disincentive for foreign companies to invest here.