Opposition Threat To Canada's Corporate Tax Cuts

by Mike Godfrey, Tax-News.com, Washington

03 February 2011

There is currently in Canada a debate over the future of the country’s corporate tax rate, and commentators have predicted that it could cause an early general election if the government is not able to gain support for its tax plans and pass the national budget, which is scheduled to be released in March.

The Conservatives will need the support of at least one of the three major opposition parties. If none of the three parties support the budget, an election has to be called.

Last week Conservative cabinet ministers made appearances across the country to defend their plan. Finance Minister Jim Flaherty said during a press conference: “If we want more jobs, higher wages, an improved standard of living for all of us, Canada needs to be an attractive place for job-creators to do business and invest”.

The government’s message got a boost from business groups including the Canadian Chamber of Commerce which said that the opposition’s plan to roll back recent corporate tax cuts would deliver a “blind side hit” to the economy.

Parliament has already approved a plan to drop next year’s corporate tax rate to 15% from the current 16.5%. The Liberals however argue that the extra reduction is unaffordable and promise to revert to the 2010 level of 18%.

“The Liberal Party believes that Canadian families – not large corporations – need a break right now,” said Liberal Deputy Leader Ralph Goodale. “Our large corporations are doing just fine – they already benefit from the one of the lowest tax rates in the G7.

“It’s the Canadian family who needs help right now. Families are being squeezed by record personal debt, paying for tuition, taking care of sick family members and trying to save for retirement. That’s why we’re committed to investing in the Canadian family instead.”

While in office the Liberals actually dropped the rate from 28 to 21% between 2000 and 2004, and so opposing corporate tax rates is a new position for the party. Skeptics have suggested that the about-turn is because if the Liberals formed a new government they would need more tax revenues to fund their spending pledges. By rolling back the tax cuts this year and next, the Liberals would retain roughly CAD6bn (USD6bn) in government revenue.

The NDP opposed corporate cuts under both the Liberals and Conservatives, and has ridiculed the Liberals’ recent conversion. However the NDP has shown the most willingness among the opposition parties to work with the Conservatives.

There is also escalating disagreement in the policy community as well. The majority of business groups and conservative economists are advocating lower corporate tax rates as the way forward for creating jobs, however labour economists are disputing this theory, arguing that spending on infrastructure and the unemployed is the direction to go.

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