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Think Tank Calls For Canadian Tax Reform

by Mike Godfrey, Tax-News.com, Washington

28 February 2018


Canadian think tank the C D Howe Institute has published its recommendations for Tuesday's Budget, which include measures to compete with the US on tax.

The Institute's "Shadow Budget" argues that the Government should "think longer term," and aim to "reassure Canadians about the sustainability of fiscal policy while responding to sharper competitive pressure on trade and taxation."

According to the Institute, recent reforms to the US corporate tax regime promise "to spur US investments and economic growth, change cross-border tax planning, and potentially damage the competitive landscape for corporate investments in Canada." In particular, the reduction in the US corporate tax rate and the introduction of an immediate tax write-off for certain capital expenses were identified as bolstering the attractiveness of the US.

The Institute recommended two "easy-to-implement" reforms to the Canadian depreciation system as a means of improving the investment climate and short-run competitiveness. It said the Government should eliminate the "half-year rule," to enable businesses to claim in the first year the maximum depreciation deduction otherwise available, as opposed to only one half. In addition, it argued that eliminating the "available for use" requirement would mean that large multi-year projects could start to be written off as cash investments are made.

In the longer term, the Institute suggested that the introduction of an allowance for corporate equity in computing taxable profits that would exempt from taxation returns equal to the opportunity cost of equity financing, so that only profits above that rate of return attract tax. It said that the Government could also broaden the corporate income base by reforming the small business tax deduction and increasing the corporate capital gains inclusion rate.

More broadly, the Shadow Budget recommended a reduction in the base amount for the age credit and the elimination of the credit for investment in labour-sponsored venture capital corporations. It also said that the Excise Tax Act should be amended to apply to businesses that supply digital goods and services for consumption within Canada regardless of where the company is located.

Finance Minister Bill Morneau will deliver the 2018 Budget on February 27.

TAGS: tax | investment | small business | business | tax incentives | fiscal policy | corporation tax | tax thresholds | tax credits | venture capital | tax planning | tax rates | Canada | United States | tax breaks | tax reform | trade | services

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