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Restoring Canada’s Advantage: A Need for Tax Reform

A competitive business environment is critical to the long-term success of the Canadian economy. Good tax and regulatory policy encourages capital spending, attracts foreign direct investment, and drives export growth.

However, Canada’s business environment has been gradually deteriorating in recent years. A wide range of tax and regulatory measures are adding to the cost and uncertainty of doing business here at home. Meanwhile, tax reform south of the border has eliminated Canada’s previous tax advantage over the US and is threatening our competitiveness even further.

That tax advantage was critical for Canada because it helped to compensate for the fact that we are a smaller, less attractive market; and that the non-tax cost of doing business here is higher. Our one advantage is now gone.

CANADA IS FALLING BEHIND

Even when Canada did have a tax advantage over the US, it was clearly not enough to offset those other cost gaps. Our businesses have been struggling to compete globally and foreign investment is passing us by:

  • Capital investment growth in Canada since 2011 is two and a half times lower than the OECD average and more than three times slower than in the US.
  • FDI flows into Canada in 2016 were down by 50 per cent compared to the prerecession average in 2005-2007. Meanwhile global investment flows increased by 20 per cent and investment in the US was up more
    than 110 per cent.
  • Canada’s manufactured goods exports are growing at less than the rate of inflation and our trade deficit in manufacturing has ballooned to a record $136 billion.
  • In 2013, US businesses invested $40.6 billion in Canada, while $25.7 billion of Canadian capital flowed south. By 2017, US investment in Canada had dropped by nearly half, while Canadian investment in the US has more than tripled.

These trends will only get worse unless Canada takes immediate steps to restore its tax advantage over the US.

RECOMMENDATIONS

Recommendation 1: The federal and provincial combined corporate tax rates should be immediately lowered from about 28 per cent to 20 per cent. The reduction should be evenly split between the two levels of government; and

Recommendation 2: The Government of Canada match the accelerated capital cost allowance provisions now in place in the United States, giving businesses an immediate 100 per cent tax write-off on qualifying capital asset purchases.These immediate steps will help buy Canada the time it needs to pursue more fundamental tax reforms. Canada needs to reshape its entire tax system to focus on encouraging investment, innovation and growth.

Doing so requires developing a tax structure that:

  • Encourages investment in productivity enhancing machinery, equipment, software and technology;
  • Attracts foreign direct investment to Canada;
  • Encourages innovation and entrepreneurship;
  • Rewards companies for growing, not for being small;
  • Supports workplace training and upskilling; and
  • Enables exports.

However, such a tax system cannot be developed overnight. It requires thorough analysis, extensive consultations and meticulous planning and design. For this reason, CME recommends that:

Recommendation 3: The Government of Canada should appoint a Royal Commission on Taxation chaired and staffed by tax and economic policy experts to review Canada’s tax system. The Commission should be tasked with making wholesale reforms that modernize and simplify Canada’s tax code. The overarching goal of these reforms should be to create a tax system that encourages innovation, investment and economic growth.

CME firmly believes that Canada can once again become an attractive place in which to do business. However, doing so requires bold thinking and conviction. Our future prosperity depends on getting this right.

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