Corporate rate: Freeland leaves after a meeting with the Prime Minister on Parliament Hill in Ottawa, Ontario. The Canadian Minister of Finance estimates that the tax rate on new business investment will rise to 16.8% by 2028. — Reuters
OTTAWA: Donald Trump’s planned tax cuts would wipe out Canada’s slim corporate tax advantage, likely driving more capital from the northern nation and deepening its productivity crisis.
Canada’s federal corporate income tax rate is 15%, compared with 21% in the United States.
After accounting for provincial and state levies, the two countries are similar, with the corporate rate between 25% and 27% in Canada and about 26% to 27% in the US, said John Oakey, vice-president of taxation with Chartered Professional Accountants Canada.
Trump has proposed slashing the US corporate rate to 15%. He’s also pledged to extend his 2017 tax cuts, many of which are due to expire by the end of 2025, including individual income tax reductions.
While he may face hurdles in Congress, the Republican sweep of both chambers makes it more likely he’ll pull off his agenda.
His election “turns the heat up” on Canadian policymakers, said William Robson, chief executive officer of the C.D. Howe Institute, as the country “ought to be reducing the taxes that are the most punishing on entrepreneurial activity and investment”.
That includes taxes on businesses and high earners.
“We need to break the glass on our tax competitiveness problem,” he said.
Canada’s Finance Minister Chrystia Freeland estimated earlier this year that the tax rate on new business investment would rise to 16.8% by 2028, more than eight points lower than a projected 24.9% in the United States.
Trump’s election upends that expectation. And her government’s decision to raise the capital gains inclusion rate in June to “make Canada’s tax system fairer” drew the ire of many economists and businesses.
Under Prime Minister Justin Trudeau, financial policy has been geared towards redistribution and has recently involved new spending on housing, daycare, dental and drug plans.
That’s increasingly been funded by corporate taxes, which represented 21% of the federal government’s revenues in financial year 2022-23, the highest in data going back to 1966.
“It’s becoming more clear that the US is going in one direction and Canada’s going in the other,” Oakey said.
Trump’s tariff threats aside, Canada is at a disadvantage to the US. The world’s biggest economy has more than eight times Canada’s population.
The US also spends more on research and development as a percentage of its economy – 3.6% in 2022, versus 1.8% for Canada.
When Trump began slashing business taxes in 2017, Trudeau’s government responded by allowing Canadian firms to write off certain assets more quickly, including machinery and equipment. Those tax breaks are set to end this year.
A top priority should be keeping those breaks as part of a “major shift” in Canada’s tax system, said economist Jack Mintz, president’s fellow in the school of public policy at the University of Calgary.
The Business Council of Canada also recommended “a comprehensive review of the tax system to better incentivise private sector investments and boost wages” in a report from September.
Mintz suggested reducing the country’s top personal tax rates, which are above 50% in most jurisdictions and kick in at lower incomes than in other Group of Seven countries such as France and Japan.
Lost revenue could be recouped as businesses expand production or new firms are created, he said.
The country’s parliamentary budget officer, Yves Giroux, has argued that Canada has the space for tax cuts.
High taxes add fuel to concerns about Canada’s productivity problem, which the country’s central bank declared an “emergency” in March and attributed to limited capital investment.
These conditions are prompting some entrepreneurs to consider moving elsewhere. — Bloomberg
