Letter to the Finance Minister regarding U.S. tax reform
Dear Minister Morneau,
For decades, successive federal governments have recognized the need to ensure that Canada’s business tax burden is competitive by international standards, particularly with respect to the rates imposed by our major trading partners. By definition, this requires that governments carefully monitor and respond to shifting international norms, so as to avoid the loss of jobs, investment and tax revenues to other jurisdictions. This policy has served Canada well. While rates have gradually come down, revenues from corporate taxation have gone up and the ratio of corporate taxable income to gross domestic product (GDP) has remained stable.
The recent adoption of a sweeping tax reform package in the United States – easily the most significant change in international business taxation in decades – therefore presents an obvious challenge. In our view, Canada must move quickly to shore up its business tax competitiveness. The only question is how.
Late last year, in a letter setting out recommendations for your upcoming budget, I encouraged you to act on the advice of the federal Advisory Council on Economic Growth, which in its final report called for a review of the tax system by an independent panel of experts. In the Advisory Council’s own words, such a panel should “consider changes to corporate and personal tax rates, the balance between types of taxes, and the use of tax instruments designed to support investment.”
When that report was written in the autumn of 2017, the outcome of U.S. tax reform deliberations was still up in the air. Clearly, the Advisory Council’s call for a wide-ranging review is even more pertinent now that the United States has slashed its federal corporate income tax rate from 35 per cent to 21 per cent, allowed for full expensing of investments in machinery and equipment, and introduced new international tax rules resulting in a dramatically more competitive business environment.
Minister, to imagine that these measures will not seriously impact future business investment in Canada would be reckless in the extreme. If Canada’s business tax structure was internationally competitive prior to U.S. tax reform – a point with which most experts would concur – it most certainly is not now. On the contrary, Canada’s average combined federal/provincial corporate tax rate of 26.7 per cent now sits almost three percentage points above the average of the world’s advanced economies. And the United States is not alone in reforming its business tax system. The United Kingdom is scheduled to cut its corporate tax rate to 17 per cent by 2020, while France plans to lower its rate to 25 per cent by 2022. Other countries with which we compete are almost certain to follow suit.
Even more concerning than Canada’s comparatively high statutory rates is the marginal effective tax rate (METR) on new business investment. For more than a decade, Canada’s METR has been well below that of the United States, a factor that has encouraged companies to invest and create jobs in Canada rather than across the border. With the adoption of the tax reform bill, however, the United States’ METR has plummeted from 34.6 per cent to just 18.8 per cent, undercutting Canada’s METR of 20.3 per cent. Overnight, our country’s business tax advantage over the United States has been wiped out, leaving Canada as the more costly country in which to invest.
Minister, in Davos last month you told Bloomberg Television that your department is taking a close look at the impact of U.S. corporate tax changes and that Canada “intend[s] on staying competitive”. We take you at your word, recognizing as you do that Canada – a small, open economy, heavily dependent on exports to the United States – realistically has no other option. No government committed to the long-term health of the Canadian economy and the growth of the middle class could choose to do otherwise.
The point we would emphasize is that Canada must respond now. Across North America and around the world, companies in every sector are assessing the impact of U.S. tax changes and making decisions that will have lasting consequences for employees and the communities in which they live and work. Although we remain convinced of the need for a comprehensive review of Canada’s tax system, we also know that such a review would take months if not years to complete.
For that reason, we urge you to take decisive action now to bolster private-sector confidence in the Canadian economy, discourage capital flight and increase the incentives for new business investment. The most direct way to accomplish this would be to include in Budget 2018 a temporary tax measure allowing companies to immediately deduct the full amount of capital expenditures rather than amortizing those expenses over several years. Other options to consider include:
1. Announcing an immediate cut to the corporate tax rate coupled with a
commitment to ensuring that Canada’s average combined statutory rate
falls below the OECD average over the medium term;
2. Eliminating the so-called “available-for-use” requirement so as to allow
companies to deduct the cost of investments as the money is spent rather
than being forced to wait until projects are complete;
3. Delaying the implementation of new rules on passive investments held by
private corporations, to allow for a detailed economic analysis of the impact
on business investment and growth.
In closing, let me assure you that the members of the Business Council of Canada are strongly committed to Canada’s success in the global economy and to the creation of new and better opportunities for all of our country’s citizens. We are grateful for your leadership and would welcome an opportunity to discuss these recommendations with you at your earliest opportunity.
Sincerely,
John Manley
