Ottawa, November 9, 2017—Amid the shadow of tax reform legislation in the United States and the need to boost business investment at home, Canada should look to reduce the tax burden on businesses of all sizes, according to a new Conference Board of Canada report.
“Canada’s tax policies as they pertain to business are coming under the microscope, and the pressure will get even more intense if the United States is able to reduce corporate and personal tax rates,” said Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.
- Canada is becoming less competitive in business taxation compared to other developed countries, and is likely to face additional pressure if the U.S. successfully lowers tax rates.
- Business investment in Canada has been poor for several years, and taxation policies are viewed as one of the factors affecting investment decisions.
- A number of approaches could be taken including: a reduction in the general corporate income tax rate, targeted changes that would improve business investment, fully harmonizing provincial and federal sales taxes, greater emphasis on carbon taxation and less emphasis on payroll taxes.
Canadian governments have significantly lowered corporate income tax rates since 2000, but combined federal-provincial rates are still above the average of 35 Organisation for Economic Cooperation and Development countries. The U.S. currently has a higher federal corporate income tax rate, but Canada will be hard-pressed to maintain competitiveness with the U.S. if the Trump Administration and Congress settle on a reform package.
Canada’s business investment has been weak for a number of years, and Conference Board research regularly finds that tax policies are a factor in investment decisions. Without a substantial improvement in business investment, the Canadian economy is unlikely to see annual growth above 2 per cent throughout the medium term.
The report, The Trump Shadow: The New Urgency of Business Tax Reform in Canada, summarizes approaches to lower the business tax burden in Canada. Governments can:
- Lower corporate income tax rates and reduce the gap between the general corporate income tax and the small business income tax, while trimming the number of tax expenditures permitted;
- Continue to implement carbon taxes and use the revenue to reduce other taxes that directly affect investment decisions;
- Limit the use of payroll taxes to raise government revenues, since payroll taxes increase the cost of employing workers;
- Harmonize provincial retail sales taxes with the federal Goods and Services Tax in jurisdictions that have not already done so;
- Reform specific tax measures that influence business investment decisions, including: increasing the capital cost allowance rate for investment in capital; reforming or eliminating the dividend withholding tax; and making the scientific research and experimental development (SR&ED) tax credit refundable for firms of all sizes.
Policy-makers can consider these potential changes individually or as a combination of measures in a broader package.