Pressure is building on Finance Minister Bill Morneau ahead of the Liberal government’s fall fiscal update to include tax breaks to boost Canada’s competitiveness.
Reports from the C.D. Howe Institute and the Fraser Institute released Thursday recommend lowering and restructuring taxes to encourage capital investment and improve the country’s competitiveness, while another from PwC warned about the effect of U.S. tax reforms.
The overall growth of capital investment in Canada has reached a 40-year low, the Fraser Institute report says, while business investment in Canada has fallen since 2014 compared to the U.S. and the outlook for 2018 is poor, the C.D. Howe Institute says in its study.
Both reports highlight diminishing investment in categories that improve productivity and future wages, such as machinery, equipment and intellectual property.
“More competitive tax rates, including quicker capital-equipment write-offs, regulatory measures that cut red tape, internal and international trade liberalization and removing frictions that impede the raising of capital can all help Canadian businesses better equip their workers,” said William Robson, one of the authors of the C.D. Howe study, in a release.
A study released Wednesday by PwC warned the American tax reforms will have a major, negative impact on Canada. They will shift investment to the U.S. and hurt economic activity in Canada, it said.
Various business groups have called for tax changes to address the impact of the sweeping U.S. tax reform that passed Congress late last year.
The PwC analysis said the U.S. changes threaten 635,000 Canadian jobs, which represents about 3.4% of all workers, and could lower Canada’s gross domestic product by 4.9%. The report said $20 billion worth of government revenue could also be at risk.
The study was commissioned by the Business Council of Canada, which has been pushing for lower corporate taxes.
“Canada’s relatively favourable corporate tax environment was a major advantage in terms of attracting new investment,” said the report, which recommends federal and provincial tax reductions among its policy options.
“Due to the U.S. tax reform, this advantage has now disappeared.”
The assessment paints a far bleaker picture than estimates released last spring by the Bank of Canada.
The central bank figured the U.S. reforms could lower business investment by about 3% from 2017 to the end of 2020. The bank said this would shave the level of economic growth by about 0.2% by the end of 2020.
CIBC CEO Victor Dodig addressed foreign investment earlier this week in a speech to the Empire Club of Canada.
Canada could be more globally competitive if the government clarified foreign investment rules to match the U.S. policy that allows companies to immediately write off the full cost of capital investments, he said.
Dodig also called on the federal government to allow companies to expense capital investments within a one-year period, which is allowed in the U.S.
Government considering targeted measures
Sources say Morneau is looking at targeted measures rather than broad-based corporate tax cuts, the Canadian Press reported.
Morneau told reporters this week that he hadn’t ruled anything out when specifically asked whether tax cuts would be part of his competitiveness plan.
Industry stakeholders have been calling for lower taxes—but a cut to the federal corporate rate would come at a cost. A tool on the parliamentary budget officer’s website estimates that a one-percentage-point reduction to the business tax rate would trim about $1.7 billion per year from federal revenues.
There are, however, also recommendations that Morneau consider a cheaper option: allowing all companies to immediately write off new equipment purchases.
The finance minister has been analyzing the impacts of the U.S. changes and has spent the summer on a “listening tour” to get feedback from the Canadian business community.
Morneau faced criticism from the business community after his February budget lacked specific steps to address their competitiveness concerns.
The finance minister wanted more time to assess the situation and his office has insisted he would avoid any “knee-jerk reactions.”
Read the Fraser Institute report here.
Read the C.D Howe study here.