Finance Minister Bill Morneau hinted Wednesday that the federal government is considering making changes to how businesses can deduct capital investments as part of a response to U.S. tax cuts.
But Mr. Morneau again played down the prospect for a similar corporate tax rate cut in Canada. He said it has become clear that the issues around new business-investment incentives are "more consequential” than the actual reduction in the U.S. tax rate that came into effect this year.
Speaking at the Fortune magazine economic forum in Toronto, Mr. Morneau made reference to the U.S. changes that accelerate the expensing of business-investment costs – things such as new facilities and equipment – against a company’s tax bill. In Canada, such investments are depreciated against earnings over many years, which presents less up-front incentive to invest.
“That creates an unequal playing field. If you think if you’re a manufacturer in Montreal and Montana, obviously now if you’re making a new investment, you can accelerate that depreciation more rapidly in the United States,” he said. “Many Canadian businesses aren’t in that situation, but for those [that are], we need to look at it. Those are issues that we’re looking at really carefully.”
Canadian business groups have been calling on the federal government to respond to the U.S. tax changes, which many economic observers said dealt a blow to Canada’s ability to compete for business investment.
The government is widely expected to introduce legislation to change the tax code in the coming weeks after the Finance Minister spent the summer consulting with business leaders. While Mr. Morneau did not lay out a timetable for the possible changes, it now seems likely to be included in the government’s fall budget update, which is expected around early November.
Speaking with reporters following the conference, Mr. Morneau declined to say what specifically would be included as part of his competitiveness plan.
“We’re not ready yet to announce what’s going to be in our fall economic statement,” he said, an indication the competitiveness package will be part of the fall update. “What’s clear is we need to think about how we assure Canadians that Canadian businesses, and international businesses thinking about investing Canada, can do so in a way that gives them confidence that they have a good opportunity here.”
Mr. Morneau has previously played down hopes that the package will include tax cuts, and his comments at Wednesday’s conference gave similar indications.
“The difference in tax rates [between Canada and the United States] do not put us in a significantly different position than the United States,” Mr. Morneau said. “What we’re trying to achieve is to make sure that Canadian businesses have the opportunity to invest in a way that is competitive with their potential investments in the United States.”
But speaking with reporters after the conference discussion, Mr. Morneau did suggest Ottawa may be considering some sort of tax relief for Canadians to help ease the impact of the government’s planned federal carbon tax, which it has pledged to impose in provinces without an emissions-pricing plan in place as of Jan. 1, 2019.
“I think having a long-term focus is important, [but] we also need to think about the short-term positive impact on people,” he said, adding that the government wants to “create economic incentive” in addition to imposing a tax.
The minister’s comments come after the Senate banking committee released a report on Tuesday recommending, among other things, the government include immediate tax cuts for businesses in its competitiveness plan, and that it should strike a royal commission on taxation to look at a broad range of competitive changes in Canada’s tax system. Canada hasn’t held a royal commission on its tax system since 1962. Mr. Morneau was non-committal to the idea when asked about it on Wednesday.
“I think we need to be considering the U.S. changes, and the impact on Canadian businesses as they think about their cross-border opportunities,” he told reporters. “The broader question is always important – we need to keep our tax code competitive. That’s a continuing agenda.”