Kim Moody is a director – Canadian Tax Advisory – at Moodys Gartner Tax Law LLP in Calgary
Eleven months after the United States released historic tax reforms, the federal government released its long awaited response on Nov. 21 with its fall economic update. Given that Finance Canada had been saying all along it would not respond to these reforms in “knee-jerk” fashion, one might have expected a thoughtful and measured response to deal with Canadian competitiveness concerns.
Instead, what was delivered by the Finance Minister was essentially self-congratulatory theatre about how great the economy is doing (even as the economic engine of Canada – Alberta – is suffering greatly), along with limited provisions for accelerated depreciation that will have a minimal impact on most private businesses.
What many in the business community were hoping for – the ability to compete with a U.S. package that offered significant corporate and personal tax rate reductions – was glaringly missing. While the immediate expensing of certain manufacturing and processing equipment and limited accelerated first-year depreciation for purchases of other equipment will help some capital-intensive businesses, most private enterprises are in the service business and are not capital intensive. Accordingly, such an “incentive” for these businesses is not really helpful.
While some have lauded the depreciation measures, I would offer a simple counterview:
Talk to the business owners who struggle day-to-day with increased corporate taxes as a result of amendments to the small-business deduction, intercorporate cash movements and other changes.
Talk to them about increased personal taxes – either outright tax hikes or as a result of amendments preventing “income sprinkling” that extend too far, changes to the taxation of “passive income” that can result in a marginal effective tax rate in excess of 125 per cent, and other amendments.
Talk to them about the proliferation of regulatory burdens, increases to provincial minimum wages, etc.
For many businesses, the result of all these burdens has been decreased sales and/or profits lost to the United States (because the U.S. reforms make it easier for Americans to do business at home) or the loss of investment capital in search of greener pastures.
Some apparently believe the piling on of tax increases and regulatory burdens – while our neighbour makes it much easier to do business – will not materially affect business or profits. The truth is it is very difficult to be in business and the average entrepreneur assumes many risks. The continual increase of taxes and other burdens has a material impact on the ability of entrepreneurs to be competitive. For businesses that are mobile, the idea of moving their business stateside is pulling at them like a powerful magnet. For others, the “piling on” simply means decreased profits. Or it means less capital available, since many investors would rather invest in a more friendly environment such as the United States.
Finance Canada’s economic update provided a weak response to competitiveness concerns. It will have an insignificant impact on those businesses that have been struggling to compete in today’s economic environment. What business owners were looking for was a modest decrease in corporate income taxes, a reduction in personal tax rates and indeed a lowering of overall government spending so as to reduce our country’s deficits. With today’s large deficits and high personal and corporate tax rates, what is the plan for our future? No plan is obvious.
Business owners only wanted the force of the magnet pulling at them from the United States to be reduced; eliminating it would be impossible. Unfortunately, any such reduction by the economic update will be very small. Perhaps a knee-jerk response would have been better.