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Business Commentary For Corporate Canada, Ontario’s NDP is one more thing to worry about

For months now, Corporate Canada has been begging federal Finance Minister Bill Morneau to do something about the competitive threat posed by sharply lower U.S. business taxes.

The latest polls suggest that the business community might want to shift its attention to Ontario NDP Leader Andrea Horwath and her plan to take a much larger corporate tax bite in the province.

Ontario NDP Leader Andrea Horwath connects two pieces of steel with a wrench as she makes a campaign stop to meet with apprentices and journeymen at the Ironworkers Local 721 office in Toronto on Tuesday, May 22, 2018.

Nathan Denette/The Canadian Press

A majority government in the June 7 provincial election is suddenly within the NDP’s grasp, according to a Forum Research poll released Friday. The survey gives the NDP 47 per cent of decided or leaning respondents, 33 per cent for Doug Ford’s Progressive Conservatives and 14 per cent for Kathleen Wynne’s Liberals – the first poll to show the NDP with a significant lead.

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The prospect of an NDP government spells bad news for Ontario businesses, who are already grappling with rising electricity rates and a higher minimum wage.

The NDP’s “Change for the Better” platform is pretty clear about where it intends to get the money to finance nearly $16-billion a year in proposed new spending. It plans to borrow more, while raising taxes on corporations and wealthier individuals. The NDP plan would bring in an additional $3.5-billion a year from businesses, highlighted by a hike in the tax rate on profits to 13 per cent from 11.5 per cent. Roughly 60 per cent of projected new revenues would come from businesses.

The NDP justifies its approach by pointing out that companies would benefit from all the new public spending their government would make on such things as schools and health care.

“We will ensure the wealthiest people and most profitable businesses pay their fair share for the services that make their success possible,” the platform states.

Ms. Horwath deserves credit for releasing a detailed and mostly costed election platform. That’s a step ahead of PC Leader Doug Ford, who has promised something by election day. The Liberals are running on their most recent budget.

The problem with the NDP platform is that Ontario’s economy – more than any other in Canada – depends on staying competitive with the United States. And the party’s plan would significantly widen a gap that has opened up between Canadian and U.S. tax rates.

The NDP is correct that companies in Ontario are better off because of what the government invests in schools, hospitals and roads. But companies don’t operate in an economic vacuum. They compete mainly with rivals in the United States, not Sweden and Germany – the apparent government models for the NDP.

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The average effective corporate income-tax rate is now higher in Canada than the United States, according to a report by PricewaterhouseCoopers LLP for the Business Council of Canada being released Monday.

“Combined with other U.S. tax-reform measures encouraging business investment in the U.S., there is considerable concern that Canada’s corporate tax system has lost its competitive edge,” the report’s authors conclude.

The total corporate tax bite in Canada reached 36.3 per cent in 2016, up from 33.4 per cent in 2012, according to the report, based on tax data compiled from 87 of the country’s largest companies .

For years, Canada enjoyed a corporate tax advantage over the United States. And it ranked about middle of the pack compared with other developed countries.

Unfortunately, Canadian businesses have generally failed to fully exploit that competitive edge, points out economist Don Drummond, a former senior federal finance official and onetime Toronto-Dominion Bank chief economist.

But that doesn’t justify swinging the pendulum in the other direction. Fostering strong companies means creating a competitive playing field with rivals in other countries, Mr. Drummond says.

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“I am disappointed that the Canadian corporate sector did not take further advantage of the relatively good tax position and invest more,” he remarked. “However, the answer is definitely not to put Canadian corporations at a disadvantage. That will cut investment, exports, jobs and pay.”

That message is apparently getting through in Ottawa. Mr. Morneau said recently that addressing Canada’s competitive challenge is now “job No. 1.”

But Corporate Canada has a new foe to deal with in Ms. Horwath and the Ontario NDP.

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