With light at the end of the pandemic tunnel in sight, now’s the time for a “big bang” in corporate tax reform, says Jack Mintz, one of Canada’s foremost tax and public policy experts.
His plan aims to make Canada a more attractive destination for business investment, allocate capital to the best economic uses, and reduce the complexity and distortions in the corporate income tax system.
Mintz, president’s fellow at the University of Calgary’s School of Public Policy, proposes exempting from taxation any profits that are reinvested in the business, and only taxing profits that are distributed to investors, such as in the form of dividends or share buybacks.
“It’s basically the idea that if you take the money and you invest it, you won’t have to pay tax. And you have to be investing it into new things. And you don’t have to pay tax on profits at that point,” Mintz told The Epoch Times.
He outlined his idea in a report for the University of Calgary titled “A Proposal for a ‘Big Bang’ Corporate Tax Reform,” released Feb. 10. “Canada’s corporate income tax is a mess” and is restricting economic growth, the report says. It notes that the combined federal and provincial tax rate of 26 percent is raising little more revenue than 19 percent of corporate profits.
Business investment plays a key role in increasing productivity and contributing to economic growth without inflation, said Bank of Canada governor Tiff Macklem in a Feb. 9 virtual speech given to the Canadian Chamber of Commerce.
“In the years ahead, business investment decisions will determine the path of Canada’s productivity growth. And productivity growth is vital to non-inflationary growth and rising standards of living. At a time when inflation is already well above our target, this is more vital than ever,” Macklem said. Annual inflation for January stands at 5.1 percent.
The governor also pointed out that U.S. businesses have long been investing in more capital per worker than Canadian businesses have, with the gap having widened over the past decade.
In his report, Mintz provided the change in Estonia’s corporate income tax approach, adopted in 2000, as an example of his recommendation and its benefits. Since 2015, the small European country has seen a notable increase in business investment, with its stock of fixed capital equal to 27 percent of GDP compared to Canada’s 23 percent.
Simpler System, Less Distortion
Importantly, Mintz calculates that his proposal is revenue-neutral for the government—it wouldn’t lower corporate taxable income much since it would also eliminate various tax incentives and credits. Based on his analysis, the new corporate tax rate on distributed profits would be an estimated 16 percent at the federal level with an average provincial rate of 11.2 percent for the 2022–23 fiscal year.
“A fundamental tax reform could help tilt the playing field towards Canada to boost investment, reduce tax distortions, and simplify administration and compliance, without a loss in revenue. I call this a big-bang reform,” Mintz said in the report.
Distortions refer to undesirable outcomes such as capital being allocated to business activities with lower economic returns in order to take advantage of favourable tax treatment. Various distortions relating to imports and exports and foreign investment come about due to Canada’s tax system and are not just caused by higher tax rates.
“My argument is that the system is getting increasingly complex and distortionary. It undermines productivity and economic growth because you end up getting people investing in particular activities for tax reasons, as opposed to getting good economic returns from investment,” Mintz said.
His proposal would remove about 95 percent of special incentives—investment tax credits, clean tech credits, accelerated depreciation, etc.—from the tax system.
Seeking Greener Pastures
Companies want to operate and make investments in jurisdictions with lower taxes, and higher-tax countries like Canada end up losing income and employment.
“A high corporate income tax incents companies to shift profits to low-tax jurisdictions by booking expenses in Canada and under-pricing goods and services sold to foreign affiliates,” according to the report.
A recent International Monetary Fund (IMF) analysis of the recipients of foreign direct investment showed that Canada ranked 10th in 2009 but has since dropped out of the top 10. The United States is the largest recipient, but the IMF also noted that “low-tax jurisdictions” like the Netherlands, Luxembourg, and Ireland, among a handful of others, stayed among the top direct investors and recipient economies.
The Mintz report notes that it’s an international competition, where countries have been reducing taxes on businesses in order to attract investment and keep profits in their own jurisdictions. Canada cut its combined federal and corporate income tax rate from 43 percent in 2000 to 26 percent by 2012, while curbing to some degree various tax incentives.
But the report also warns that if the corporate tax rate falls below the top personal income tax rate, then a portion of the personal income tax base would shift to the business sector.
Mintz says his proposal is not a perfect solution as some investors will be able to defer paying taxes by leaving profits in the company instead of distributing them.
Also, the political appetite for such reforms has its challenges, Mintz says.
“Politicians may not like it because they like incentives. They like having complex taxes,” Mintz said. “They'd like to be able to favour certain types of industries, regions of the country, and things like that.”
He added that provinces like Alberta and Quebec could be test cases since they collect their own corporate income tax.
Mintz says something that moves the needle needs to be done as the economy fully reopens and also to compensate for some of the unique challenges a country like Canada faces.
“Canada has to create policy advantages to get over having a small population, insufficient economies of scale, cold weather, and on top of it, we’re starting to move into a very expensive energy transition that’s going to require a lot of investment.
“If we don’t provide incentives for investment, then basically businesses will go elsewhere.”
