Canada Plans Competitiveness Boost But No Broad Tax Cut
(Bloomberg) -- Canada’s government is planning targeted measures to boost competitiveness rather than a broad, across-the-board cut to the nation’s benchmark corporate tax rate, according to an official familiar with the plans.
Finance Minister Bill Morneau intends to address business concerns around competitiveness in his fall economic update. He downplayed the likelihood of a tax cut earlier this summer, before saying Tuesday he hasn’t “ruled anything in or anything out.”
His comment comes as pressure mounts on Prime Minister Justin Trudeau’s government to respond to the Trump administration’s cut to U.S. corporate taxes, which a major business group argues could take a greater toll on Canada’s economy than the potential termination of the North American Free Trade Agreement. Major economies around the world have been cutting corporate taxes in a bid to spur investment.
The government is eyeing more targeted measures instead of a cut to the federal corporate tax rate of 15 percent, the official said Wednesday, speaking on condition of anonymity as preparations continue for the fall economic statement, expected in coming weeks. The official cited previous comments from Morneau saying changes to capital cost allowances are among the measures being considered.
A spokesman for Morneau didn’t immediately respond to a request for comment.
The Business Council of Canada warned Wednesday that economic losses from U.S. tax reform could be 10 times greater than from the termination of Nafta. The group, which represents the chief executives of some of Canada’s biggest companies, released a study by PwC Canada that said lower American taxes threaten to reduce Canadian output by C$85 billion ($65 billion) a year, or 4.9 percent of gross domestic product, and put about 635,000 jobs at risk.
Canada’s combined federal and provincial corporate tax rate remains about 27 percent while in the U.S. it fell to 21 percent from 35 percent, according to the study. The government should consider cutting corporate taxes to 20 percent and mirroring an American move allowing companies to immediately take a full tax deduction for spending on capital projects, PwC said in the report.
Industries with large capital budgets are the most at risk, including makers of chemicals, machinery and plastic. “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,” John Manley, president of the Business Council, said in a statement.
‘Difficult to Compete’
The head of Canada’s fifth-largest lender also spoke out on the issue this week. Victor Dodig, chief executive officer of the Canadian Imperial Bank of Commerce, told a business luncheon Tuesday that the government needs to address competitiveness -- but he stopped short in the speech of calling for a cut to the corporate tax rate.
Allowing for the expensing of capital investments within a one-year period “would spur immediate capital investment and help ensure that our businesses keep pace with their international competitors,” Dodig said at the Empire Club in Toronto. “Given the current climate south of the border, it’s difficult to compete with them on corporate taxes. Changing the rules around the capital cost allowance would help level the playing field.”
In a July interview in Buenos Aires, Morneau downplayed the likelihood of any rate cut. The government will “make sure that our approach to taxation in the business sector remains competitive,” he said. “We’ve been pretty clear in elaborating on that goal and from the starting point of recognizing that from a rate standpoint, from a pure rate standpoint, we are competitive.”
The minister said business leaders have been asking for changes such as accelerating how quickly people can write-off a capital investment, the deductibility of interest payments and other more targeted measures. “That’s a much more common refrain than someone coming in and saying, you know, I really think you should really cut rates,” Morneau said in July.
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