Canada Urged To Accelerate Pace Of Business Tax Reform

by Mike Godfrey, Tax-News.com, Washington

28 August 2008

Canadian firms will compete more successfully in global markets if governments accelerate the pace of business tax reforms, the Conference Board on Canada has argued in its latest publication on restructuring the tax system.

“Canadian firms are facing two major obstacles in their efforts to compete globally, lagging productivity growth and the strong dollar,” said Glen Hodgson, Senior Vice-President and Chief Economist.

“Broad business tax reform would help Canadian firms invest in productivity-enhancing machinery and equipment, give companies a competitive advantage in global competition, and encourage investment in leading-edge environmental technologies," he observed.

The six elements of business tax reform outlined in the report 'Accelerate Business Tax Reform to Boost Canadian Competitiveness' include:

• Eliminating corporate capital taxes in all jurisdictions as soon as possible — capital taxes are an inefficient form of taxation and they discourage new investment;
• Cutting corporate income tax to put Canada at the low end of the G7 range — the federal government’s target of a combined federal-provincial corporate income tax rate of 25% is a worthy goal, but it needs to be positioned as part of a comprehensive series of actions, including taxing carbon dioxide;
• Smoothing corporate tax rate increases for small businesses — adjustments to tax rates and credits would encourage small businesses to grow;
• Allowing the accelerated capital cost allowance for manufacturers to lapse after three years;
• Introducing an environmental technology investment tax credit; and
• Retaining federal interest deductibility for investments abroad.

In an effort to reduce the corporate tax burden, the Conservative government cut the rate to 19.5% from 21% this year, and also eliminated the corporate surtax. Under prior announcements, the rate is due to fall to 19% in 2009, 18% in 2010, 16.5% in 2011, and 15% in 2012 - measures which have generally been welcomed by business.

However, a recent study by the C.D. Howe Institute, the free market think tank, has also attacked the federal and provincial/territorial governments' corporate tax policies. This report concluded that while business tax reductions at the federal and provincial levels, will reduce the marginal effective tax rate to 25.8% by 2012 from 29.1% in 2008, these efforts are being undermined because some provinces continue to levy high marginal effective tax rates on capital.

The authors of this study also found that in many provinces the variation of tax burdens on business activities is increasing, thereby interfering with boardroom decisions on steering resources to the most profitable opportunities.

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