Canadian Government Warned Over Capital Taxes

by Jason Gorringe, Tax-News.com, London

09 July 2001

A Department of Finance review has warned the Canadian government that capital taxes, which are levied against the assets of large firms and financial institutions, will blunt the country's competitive edge by increasing the cost of new projects and therefore reducing investment, it was revealed recently.

The Federal tax, which adds the equivalent of 3.6% to the tax rate of all large companies, applies to the shareholders' equity and debt - generally the more a firm invests, the more they pay. It was introduced in 1989 to fight the deficit, but many are arguing that it should be removed in a time of surplus. 'Capital taxes are a tax on innovation, productivity, on investment and, ultimately, on jobs,' explained Maurizio Bevilacqua, the chairman of the House of Commons finance committee.

The Liberal MP said that a major reduction of the tax would require the support and cooperation of the provinces, but this may take some doing. Ottawa presently collects $1.3 billion per year in capital taxes, and Quebec and Ontario each collect more than $1 billion per year, to name but three. Although Ontario has said that it plans eventually to eliminate its capital tax altogether, no concrete plans have yet been laid out.

The Canadian finance minister, Paul Martin, has said that the corporate income tax cuts introduced in his fiscal update last autumn will reduce the taxes faced by Canadian business to a level below that of the USA by 2005, but there are fears that the persistant capital taxes will take the edge off these cuts, leaving Canada with higher effective tax rates in key areas such as manufacturing. 'I think beyond any shadow of a doubt that capital taxes are the worst of any taxes we've got,' said Don Drummond, former associate minister of finance. 'We directly and heavily tax one of our few sources of growth- capital.'

The Canadian Chamber of Commerce has joined in the chorus of voices calling for the reduction and ultimate removal of the stifling capital taxes, and has said that the issue will be a priority item in their submission to Mr Martin in his next round of pre-budget consultations.

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