Canada has options to bolster competitiveness without corporate tax cuts

OTTAWA — In its search for ways to blunt threats to Canadian competitiveness, the federal government could avoid the pricey move of cutting corporate taxes by turning to an increasingly discussed option: allowing all companies to immediately write off new equipment purchases.

For months, the Liberal government has been under pressure from corporate Canada to respond to a U.S. tax overhaul that many fear will lure business investment south of the border.

The Trump administration’s changes include loosening regulations and significant tax reductions for businesses, which have created fears Canada has lost some of its advantages as an investment destination.

Many stakeholders in the Canadian business community have been vocal about the need for Finance Minister Bill Morneau to introduce corporate tax cuts of his own as a way to maintain the country’s edge.

There are, however, also recommendations Morneau take a close look at a change in the recent U.S. tax package that will enable American companies to immediately write off the full cost of new machinery and equipment. Canada already offers this provision for its manufacturing sector and there are calls for it to be broadened to cover all industries.

Business leaders, including RBC president and CEO Dave McKay, have suggested replicating this change in Canada would be a good way to help keep investment dollars from flowing south of the border. McKay has insisted that investment has already started to leave Canada.

Some experts believe this kind of measure should be coupled with cuts to business taxes.

But others think tax reductions may not be necessary at all, so long as the government addresses other competitiveness issues.

Matching the accelerated capital deduction is one way to keep up with the U.S., said Bruce Ball, vice-president of taxation for Chartered Professional Accountants Canada.

In fact, Ball argued that many of Canada’s options aren’t actually tax related, or could perhaps only include a small tax reduction.

Moves like this could also help the government avoid absorbing what would likely be the far greater revenue hit of lowering corporate taxes.

“The problem is you always want to be making sure what you give up, potentially, in revenue is actually going to change behaviour,” Ball said.

“In other words, you’re not going to give a tax break to someone who’s going to do what they’re going to do anyway.”

The business community will likely have to wait several months before the government announces any decision on how it intends to support competitiveness.

The Finance Department says it will continue with its “detailed analytical work” over the coming months to better understand the impacts of the complex U.S. reforms, which it notes are still being drafted. The minister will continue discussing the issue with business leaders and the public before making a decision how to respond, his spokeswoman, Chloe Luciani-Girouard, wrote in an email.

Royce Mendes, director and senior economist for CIBC World Markets, said given the fact it’s still early for the impacts of the reforms to appear in the economic data, he sees some merit in Ottawa’s wait-and-see approach as a way to avoid immediately following the U.S. “down the rabbit hole of tax cuts.”

Mendes also pointed to the less aggressive step of allowing accelerated depreciation for eligible capital expenditures, similar to the U.S. change, as a way of inducing capital spending.

Support, Mendes added, could also come from the Bank of Canada in the form of lower interest rates, which would help encourage more corporate borrowing and maintain a weaker exchange rate that by itself can help raise the country’s competitiveness.

Last month, the Bank of Canada estimated the U.S. reforms could lower business investment by about three per cent from 2017 to the end of 2020. The bank said this would drop the level of economic growth by about 0.2 per cent by the end of 2020.

But when it comes to the accelerated depreciation option on its own, there are worries it wouldn’t do enough to help Canadian competitiveness.

Jack Mintz, a University of Calgary tax-policy expert, said the incentive would only help certain types of businesses, while companies in a loss position wouldn’t be able to take full advantage of it.

Canada, he said, offered accelerated depreciation for all sectors for many years, up until the mid-1980s.

“We really need to remember our lessons from many years ago that accelerated depreciation works, but it’s limited in its impact and it also creates a lot of problems for the system when it becomes very commonly used,” Mintz said.

“The best response to (the U.S. changes) is lowering your corporate rate a bit to take some of the pressure off.”

Morneau himself has been criticized for not including specific measures in his February budget to help offset the U.S. changes. He’s under pressure to move quickly.

“We do believe that Canada’s competitive,” Morneau said Thursday during an appearance before a parliamentary committee.

“We do know, however, that there’s always more work to be done… We do see competitiveness as much more than trade, and that’s very important, (and) much more than taxes, although that’s very important.”

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