Since 2005, Canada’s marginal effective tax rate on capital investment has nearly halved, dropping from 39 per cent to 20.5 percent last year, compared to the G7 average of 28.2 per cent.
“Canada has gone from being the least tax-competitive G7 member to now surpassing even emerging economies,” says Jack Mintz, director of the School of Public Policy and the paper’s co-author.
The paper analyzed 83 other developed and developing nations’ tax regimes and found Canada now ranks somewhere in the middle.
Mintz says Canada’s improved business tax climate, proximity to the U.S., and wealth of natural resources, could make it a “northern tiger” in the global economy.
But he cautions that the U.S., which landed 23 spots behind Canada on the list, must improve its tax regime.
“If we don’t get the U.S. on board, it could hurt Canadian trade and foreign investments both ways across the border.”
Ongoing political debate over corporate taxes is another threat, the paper said.
The government recently decided to cut Canada’s corporate tax rate from 18 per cent to 16.5 per cent with a further reduction of 15 per cent planned for next year.
Opposition parties could decide to challenge that decision in the upcoming budget, which would send “uncompetitive signals” to global businesses, the paper warned.
It’s not the first paper to come out this year urging Canada to keep lowering its tax rate.
It calculated Canada’s GDP would climb 3.2 per cent, unemployment would fall by 0.52 per cent, and the country would see a net gain of 98,800 jobs.
Businesses would also benefit, says Jean-Michel Laurin, CME’s vice-president of global business policy.
“The more money you leave in the hands of companies, the more they invest, the more productive they are and the more competitive they become,” he said.
But if those companies aren’t making money, corporate tax rates aren’t going to help, argues David Macdonald, a research associate with the Canadian Centre for Policy Alternatives, an Ottawa-based think-tank.
“The ones profiting from corporate tax cuts are the companies that are getting the biggest cheques not manufacturers who have taken a big hit in recent years,” he says.
Macdonald also notes that the gains forecasted in Mintz’s paper wouldn’t come into effect for another seven years.
“Manufacturing would better off if the government used targeted measures such as accelerated tax-write offs on capital costs or science and technology grants for companies that are just scraping by.”
The CME, too, is calling on the federal government to extend the accelerated capital cost allowance for investments in manufacturing and processing equipment for another five years.
Mintz’s paper, however, says it’s time to sharing that tax relief with other industries.
Write-offs and other incentives have long been narrowed at businesses in manufacturing and resource, leaving those in the service industry out in the cold, it says.
“This imbalance made sense 50 years ago, but Canada’s service sector is now a bigger part of the economy and a lot more subject to international competition than it was before,” Mintz says, adding a more “neutral” solution would be to lower overall corporate tax rates.
It’ll take a lot more than that, according to CME’s Laurin, who says the so-called manufacturing-biased incentives must stay in place.
“I don’t know of any other sector in Canada besides manufacturing that is so open to global competition, also very capital intensive, and that sells the majority of what it produces outside of the country” Laurin says.
“We need targeted incentives to drive investment where it counts—new machinery and equipment, workplace skills and training, and innovation.”