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Minister of Finance Jim Flaherty. (Sean Kilpatrick/THE CANADIAN PRESS)
Minister of Finance Jim Flaherty. (Sean Kilpatrick/THE CANADIAN PRESS)

Business needs to spur growth: Flaherty Add to ...

Finance Minister Jim Flaherty is urging corporate Canada to give the economy a boost, arguing that Ottawa has laid the groundwork for new investment by lowering taxes and that it’s time for businesses to invest.

In a direct appeal to Canadian CEOs, Mr. Flaherty’s message follows recent comments from Bank of Canada Governor Mark Carney, who said large cash holdings on the corporate books are essentially “dead money” that should be invested or returned to shareholders.

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Even though the Canadian economy is expected to remain in a prolonged period of weak growth, both federal and provincial governments will be reluctant to stimulate the economy further as they focus on deficit reduction. The central bank’s hands are also largely tied as the main interest rate has been kept at only 1 per cent for the past two years.

That leaves the private sector as the best source for growth.

“We have lowered taxes on income for businesses and individuals. We have encouraged the purchase of new technologies and equipment,” said Mr. Flaherty, in a keynote speech to a Canadian Council of Chief Executives conference in Ottawa.

“But ultimately, it is up to you in the private sector to take advantage of all these strengths and invest, to create jobs and grow our economy.”

Business leaders insist the investment is starting to happen, and it’s big.

John Manley, president of the council that represents 150 of Canada’s biggest companies, said an internal survey of members that received more than 35 responses found those firms alone are in the midst of more than $110-billion in capital expenditures in a three-year period that started last year. That’s almost double the $63.7-billion spent by Ottawa and the provinces during the three years of stimulus spending between 2009 and 2012.

“I think it’s good to remind the government and to remind Canadians that particularly our segment of the business community, which is the large business segment, has been investing and has been creating jobs,” Mr. Manley said in an interview. The spending estimates by the CEO council are based on an internal survey from 2011, but the council says anecdotal evidence is that the private spending will likely be higher than initial estimates.

Canada’s corporate tax rate, which has dropped from 19 per cent in 2009 to 15 per cent this year, has been one of the most hotly debated economic questions. The opposition New Democrat Party strongly opposed the cuts and planned to finance part of its 2011 election platform by reversing them.

The challenge in the debate is there are no simple measures of cause and effect when it comes to corporate tax rates and economic growth, especially given that these latest cuts occurred during a recession.

Still, federal government data does show that corporate tax revenue as a percentage of GDP has largely remained steady over the past 10 years, even as the rate continued to fall.

One of the leading proponents for corporate tax cuts, Jack Mintz of the University of Calgary’s School of Public Policy, co-authored a report earlier this month that generally praised Canada’s business tax policies as a success for encouraging investment with little impact on government revenue.

Mr. Manley said competitive rates clearly influence decisions about where international companies will invest.

“There’s nothing as easily frightened away as a billion dollars, and Canada is not isolated, so we compete for that investment and if it can earn a better return elsewhere, then it’s likely to go ahead and do that,” he said.

The tax burden for businesses in Canada is second lowest among 14 major countries and lowest among developed countries, according to a KPMG survey of international tax competitiveness released Tuesday.

“This helps our attractiveness around the world and helps us compete,” said Elio Luongo, KPMG’s Canadian managing tax partner. “We need this to compensate for other costs.”

Mr. Luongo pointed that while Canadian taxes are low, other costs that governments can’t easily control may hurt competitiveness, such as labour rates, the high dollar, transportation costs and real estate prices.

“The tax system is often what tips the scales [in attracting investment],” Mr. Luongo said. “It’s a delicate ecosystem.”

India had the lowest overall tax levels. China, Mexico and Russia ranged third, fourth and fifth, respectively. Among developed countries, Britain ranked second, followed by the Netherlands, the United States, Germany, Australia and Japan.

With files from reporter Barrie McKenna in Ottawa

Editor's Note: An earlier online version and the original newspaper version of this article misstated how many companies are members of the Canadian Council of Chief Executives and the results of an internal survey on capital expenditure plans. This version has been corrected.

 

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