Flaherty Tax Relief Measures A 'Welcome Start', Says CD Howe

by Mike Godfrey, Tax-News.com, Washington

19 December 2007

Canadian Finance Minister Jim Flaherty's business tax relief goals are a welcome start to tax relief, but should be accompanied by a broadening of the corporate tax base to make taxes more neutral and fair and enable future reductions, according to a report from the C.D. Howe Institute.

In the report, entitled 'Flaherty's Missed Opportunity', Duanjie Chen, George Weston Analyst in Tax Policy, suggested that the federal government's Economic Statement made good progress in October by promising a reduction in federal business tax rates by 2012, from 22.1% to 15%.

Even after this reduction, however, the Canadian effective tax rate on most services will still be sixth highest among the 30 member countries of the OECD, he revealed.

More comprehensive tax reform is needed in Canada, Dr. Chen argued, suggesting that the most critical is broadening the corporate tax system to treat taxpayers equally, regardless of industry sector or activity. A big part of the problem, according to the report, is provincial retail sales taxes, which five provinces still have.

If the remaining provincial sales taxes were harmonized with the federal Goods and Services Tax, the overall effective tax rate would, by 2012, drop from 25.2% to 18.6%, C.D. Howe suggested. Such a sweeping sales tax harmonization would place Canada midpoint on the ranking of effective tax rates among the 30 OECD member countries.

The federal government, argued Dr. Chen, missed an opportunity to make important changes to what and how is taxed, not just at what rate. He concluded the report by arguing that future tax initiatives should not repeat the oversight.

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