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Federal and provincial governments in Canada aren’t yet willing to give up the revenue needed to make the tax cuts manufacturers seek, tax policy observers said.
Canada needs to make its tax system more competitive, but the federal and provincial governments show no signs they’ll agree to cut the combined federal and provincial corporate tax rate to 20 percent as urged by the manufacturing sector, Kim Moody, director of U.S. tax advisory with Calgary-based Moodys Gartner Tax Law LLP, said June 18.
Recent U.S. tax reforms are diverting capital that might otherwise have come to Canada, but provinces like Alberta and Ontario are already operating under deficit budgets, and would be hard pressed to absorb the impact of significant tax cuts, Moody told Bloomberg Tax.
“Good luck. The provinces would be forgoing a fair amount of revenue,” Moody said.
The 2017 tax act ( Pub. L. No. 115-97) lowered the corporate rate in the U.S. from 35 percent to 21 percent. Canada is also losing ground to the U.K., which plans to lower its corporate rate to 17 percent from 19 percent by 2020, according to a report prepared by BDO Canada LLP.
Full write-off of capital costs has also been recommended, and might be a good idea, but is “much easier said than done,” particularly given how long it would take to redraft the Income Tax Act and regulations to make the necessary changes, he said.
The U.S. tax act includes full expensing for five years.
Toronto Tax lawyer Michael Colborne June 18 said he’s worried Canada won’t move quickly enough, that politically acceptable changes won’t be enough to reverse the loss of capital flowing into Canada, and that proposals the Department of Finance may ultimately recommend could be too extreme for the current federal government.
“If the recommendation from Finance includes a significant reduction of corporate tax rates and faster depreciation, the government will be unwilling to adopt these because of politics—so-called corporate welfare,” Colborne, a partner with Thorsteinssons LLP, told Bloomberg Tax.
“Coupled with the uncertainty surrounding the North American Free Trade Agreement, this kind of response could mean a long, bumpy road for Canadian business,” he said.
Daniel Lauzon, a spokesman for federal Finance Minister Bill Morneau, said June 20 that the federal government is continuing to review the U.S. tax reforms and how they will affect Canada.
“We will do our homework,” Lauzon told Bloomberg Tax. “We will take our time to fully understand and study the potential impact.”
The government will listen to the business community on how Canada’s competitive environment is evolving, he said. “The minister is embarking on a listening exercise over the coming months, hearing about what businesses need to stay competitive and expanding the conversation well beyond corporate taxes,” he said.
The Canadian Manufacturers and Exporters group has consistently argued for better tax competitiveness, most recently in the BDO report that recommends the maximum 20 percent federal-provincial corporate tax rate and 100 percent write-offs for capital asset purchases.
Canada has lost its tax advantage over the U.S., which traditionally offset its smaller market size and higher business operating costs, Dennis Darby, the lobby group’s president and chief executive, said June 20.
“Canada has been falling behind,” he said.
Bringing capital cost allowances in line with those in the U.S. is particularly important, he said. And now that Canada has free trade deals with the Trans-Pacific Partnership and European Union, the competition for investment extends beyond the U.S., he said.
“We’d better go to the gym and bulk up,” he said.
The BDO report, released June 18, said Canada is bucking a global trend of lower tax rates. Canada’s marginal effective tax rate of 20.2 percent in 2017 was up from 18.3 percent in 2012,
In that time, the Organization for Economic Cooperation and Development average decreased to 17.3 percent from 18.1 percent.
The less competitive Canadian rates have led to Canadian companies under-investing in new facilities, machinery and equipment, and technology, the report said.
Canada is also losing out on new foreign investment, which was down in 2016 by 50 percent from the level before the 2008 recession, despite an increase in total global investment, the report said. Before the recession, Canada attracted about 4.6 percent of global investment, but only 1.9 percent in 2016, while investment flows to the U.S. jumped by 110 percent over that period, it said.
Darby said his group met with Finance Minister Morneau and Navdeep Bains, the nation’s economic development minister, and hopes the government will act on the tax recommendations in its Fall Economic Statement. The statement, usually unveiled in October, can serve as a “mini-budget” to introduce policy and legislative proposals, including taxation changes.
The business sector understands the reluctance of governments to give up tax revenue, but there must be a balance between maintaining revenue and providing incentives for companies and building the economy, which ultimately broadens the tax base, he said.
“We need to do something that signals to the investment community: ‘We want you to grow in Canada’,” he said.
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