The federal government’s fall economic update is likely to include targeted tax measures to boost the country’s competitiveness instead of a cut to the country’s corporate tax rate, according to a senior government official familiar with the Department of Finance’s work on the issue.
The Liberal government has been under pressure from business groups to address Canada’s tax competitiveness ever since U.S. President Donald Trump slashed his country’s federal statutory corporate income tax rate from 35 to 21 per cent at the beginning of this year.
Canada’s corporate tax rate of 15 per cent, combined with provincial tax rates, comes out to an average of 27 per cent.
Since February’s federal budget, Finance Minister Bill Morneau has been on what he’s called a “listening tour” of Canadian businesses.
He’s asking business leaders whether the Trump administration’s efforts to repatriate investment back to the U.S. are working — drawing investment away from Canadian businesses as a result — and what should be done about it.
“From what the minister heard, he is more interested in a targeted measure rather than a scattergun-like approach,” said the senior official who spoke on background. “He’s less inclined toward a corporate tax rate cut.”
And he’s more inclined to match the U.S. on giving companies the ability to write off their capital investments against their taxes more quickly.
Faster write-offs for capital investments?
“We’re doing the analysis. We’re pricing it out. There are different scenarios of how you do it,” said the official, offering as an example the idea of accelerating the capital cost allowance to somewhere between one and five years. Right now, Canadian businesses can only write off some of their capital investments over the lifetime of the asset.
Whatever Morneau ends up doing, Canadian businesses want him to do it soon.
The Business Council of Canada released Wednesday a report it commissioned from PricewaterhouseCoopers that found the negative impact of U.S. tax reform on Canada’s economy could be 10 times greater than the potential fallout from the termination of NAFTA.
“This report underlines the need for the federal government to respond to U.S. tax reform with a comprehensive plan to strengthen Canada’s economic competitiveness,” said Business Council President and CEO John Manley in a statement.
“Failing to respond to U.S. tax reform puts Canadian jobs and prosperity at risk at a time when Canada is already wrestling with rising protectionism.”
This report follows on another report released in June by the Canadian Manufacturers and Exporters, which represents 2,500 companies. It showed an alarming decline in business investment in Canada.
But from the beginning, Morneau has downplayed the need to match the new U.S. corporate tax rate, arguing Canada remains competitive on that front. Finance officials have pointed out that Canada’s rate was well below that of the U.S. for years, and that gap did not spur major investment in Canada.
A deep corporate tax cut here would also increase Canada’s budget deficit.
Those were arguments the minister laid out at his pre-budget meeting with private sector economists earlier this year, the senior official told CBC.
Reaching out to the ‘fence-sitters’
But one economist at that meeting went against the chorus of calls for a lower corporate tax rate and suggested something more targeted. That idea took hold.
The hope for an accelerated capital cost allowance is that it would increase investment and create jobs, which in theory would lead to both higher income tax and corporate tax revenues.
“In our analysis, we are asking who are the fence-sitters who are not investing and will they invest if we do this,” said the official.
Morneau’s consultations have revealed that Canada’s competitiveness problem varies by region and sector.
“I’m hearing different things from different business leaders across the country,” said Morneau Tuesday at the Liberal caucus meeting in Saskatoon. “If you’re a business that’s investing on both sides of the border, obviously it’s different than if you’re largely investing just in Canada.”
The fall economic statement, expected in late October or early November, likely will address those issues that vary in importance from region to region and sector to sector: trade diversification, internal trade barriers and the need to increase access to markets for natural resources.
“So it’s not a uniform voice from business across the country,” said Morneau. “I do hear, though, from many business leaders the importance of ensuring that we can continue to invest in a competitive way.”