Canada losing ground on tax competitiveness

Canada suffers in the eyes of investors for being relatively small, far from large export destinations, cold and vast — thus raising business costs. But Canada has overcome its disadvantages in recent years by being competitive on business taxes.

Read: Canada is the most tax competitive country for biz

Unfortunately, the tendency of Canadian provincial and federal governments to raise taxes erases that advantage, says a new report by co-authors Philip Bazel and Jack Mintz of The School of Public Policy at the University of Calgary.

Denmark, Japan, France, Portugal, Switzerland and the U.K. have all taken steps to reduce their corporate tax load, says Mintz, president’s fellow at The School of Public Policy, in the report. “As a result of their cuts, and because of changes to policies in Canada that have increased METRs [marginal effective tax rates] here, Canada has sunk from having the 16th-highest burden on capital in the OECD (which was at least in the middle of the pack) to having the 13th highest. We now have the sixth-highest rather than lowest METR in the G7.”

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In recent years, governments in Newfoundland and Labrador, New Brunswick, Alberta and B.C. have all raised business taxes (Alberta now has a higher corporate income tax than B.C., Ontario or Quebec). Quebec scaled back incentives for investors, Manitoba increased its sales tax and B.C. eliminated the HST (economists largely see an HST as positive due to input tax credits for small business).

With both U.S. president-elect Donald Trump and the U.K. prime minister pledging to reduce corporate taxes, the pressure is on Canada to keep up.

Read: Trump’s tax plan favours the wealthy: Tax Policy Center

According to Bazel and Mintz, Canada can regain competitiveness without drastic tax reform by:

• establishing greater tax neutrality among economic sectors;
• improving provincial retail tax by moving to the HST;
• reviewing federal subsidies and other tax expenditures that create an unlevel playing field; and
• forgoing large planned federal expenditures in favour of corporate cuts to stimulate more investment and real economic growth. With some savings, Canada can afford to cut the federal corporate tax from 15% to 13%, which would increase competitiveness and broaden the tax base.

Read the full report here.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.