“Both lower rates and a more neutral tax system contribute to better growth, as taxes interfere less with business decisions on how to allocate resources to their best economic use,” commented Dr Jack Mintz, a member of the Tax Competitiveness Council at the C.D. Howe Institute, following the publication of a new report.
Although Canada, overall, has made progress by reducing the tax 'bite' on capital investment from 28.9% in 2008 to 28.0% in 2009, Mintz and fellow author Duanjie Chen, in their newly-released study entitled 'The Path to Prosperity: Internationally Competitive Rates and a Level Playing Field', identify an “eye-popping” divergence in approach across the provinces of Canada.
A "leader on the path to prosperity", the study notes, is New Brunswick, which is pursuing broad structural reforms to its personal and business tax structures to improve simplicity and efficiency. Ontario and British Columbia will also adopt a more efficient and fair sales tax structure by harmonizing their individual sales tax regimes with the federal GST.
Ontario will eliminate its dual corporate income tax rate for large companies (12% for manufacturing and resource income and 14% for other companies) to a single rate of 10%, the study further reveals.
On the other end of the spectrum, however, the study shows that several provinces have failed to improve their tax structures. Prince Edward Island is cited as retaining the most outdated structure, with high tax rates on corporate income and retail sales. Quebec, while moving to abolish its capital tax, is raising its corporation income tax rate from 11.4 to 11.9% rather than moving to a more neutral tax base by reducing its complex regime of targeted incentives, the report's authors observed.
Mintz and Chen calculate the marginal effective tax rate (METR) on capital investment in each jurisdiction, (a measure which includes the annualized value of corporate income tax, capital tax and sales tax paid on capital purchases), allowing them to calculate how much of a bite taxes take out of return on investment.
The good news, according to the study, is that Canada’s METR has fallen to 28.0% in 2009 and is set to fall further. With the tax changes planned in the current and previous federal and provincial budgets for later years, the marginal effective tax rate will fall to 18.9% by 2013.
However the study suggests that the tax changes might still only place Canada among the average of 80 countries worldwide.
In 2009, the Atlantic Provinces, except for Prince Edward Island, taxed capital investment the least, followed by Quebec and Alberta. Among this group of provinces, Alberta’s low marginal effective tax rate is directly associated with its low statutory income tax rate and the absence of capital and sales taxes.
The study shows Ontario as the highest-taxed province in 2009, but argues that this is rapidly changing. Prince Edward Island will become the highest-taxed province in 2013 at 29.2%, after Ontario and British Columbia implement their sales tax harmonization and Ontario reduces its corporate income tax rate to 10%. Manitoba will be second-highest taxed at 27.0%, followed by Saskatchewan at 24.9%.
The study attributes this, at least in part, to their antiquated sales tax regimes, which apply high taxes on intermediate and capital inputs.
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