Corporate Canada is mounting a last-minute push urging Ottawa to abandon plans for further changes to small-business taxes and to reduce Canadian taxes in response to major cuts in the United States.
Canada's leading business groups sent letters to Finance Minister Bill Morneau this week stressing their concern about competitiveness, which they say is a more urgent now that U.S. President Donald Trump and his Republican allies in Congress have reduced business taxes and cut regulations.
Mr. Morneau will meet private-sector economists on Friday in Toronto as he prepares to table the 2018 budget, his third, on Feb. 27.
Mr. Morneau spent much of the past year on the defensive over a package of proposed changes to small-business taxation that he introduced in July. Some of the measures were withdrawn or scaled back in the fall, while others related to distributing income among family members in a business took effect on Jan. 1. A key piece is still to come: The government said in the fall that the 2018 budget would include details of the government's plan to restrict the use of incorporated small businesses as a vehicle for making passive investments.
Business Council of Canada CEO John Manley said the changes south of the border come at a time of continued uncertainty over the North American free-trade agreement, and require a Canadian response.
"I think the 'Make America Great' philosophy that is reflected in making NAFTA shaky and building a significant business tax advantage in the United States can't be ignored by us," he said in an interview. "This is our next-door neighbour, where we do most of our business."
The Business Council of Canada's letter calls for an immediate cut to Canada's corporate tax rate, increased incentives for business investments and a delay in the implementation of the provisions on passive investments. A coalition of 75 organizations opposed to the changes for small-business taxes also wrote to Mr. Morneau this week asking for the passive-investment plans to be shelved.
"When I talk to our members across the country, they're concerned that Canada is already a very high-cost jurisdiction," Perrin Beatty, president of the Canadian Chamber of Commerce, said in an interview. The chamber is part of the Coalition for Small Business Tax Fairness, which wrote to the minister this week.
"At the same time as the Americans are undertaking the most massive tax and regulatory reform in our lifetimes, the Canadian governments are continuing to go in the opposite direction and are piling on fees and regulations, taxes, costs and other uncompetitive elements," Mr. Beatty said.
The U.S. tax reforms erased Canada's corporate tax advantage. Analysts say U.S. rates are now slightly lower than Canada's on average, but direct comparisons are affected by tax rates imposed by state and provincial governments.
A report this week by TD Economics concluded, however, that "a tit-for-tat reduction in tax rates" is not necessary in the 2018 budget.
The bank economists warned that immediate tax cuts could cause revenue shortfalls for Canadian governments and overheat the economy. Instead, they recommend long-term, revenue-neutral tax reform as a more effective response.
The business groups calling for immediate action are also among the many voices that agree a major review of Canada's tax mix is in order. Mr. Morneau's own economic advisory panel has also called for an independent review of Canada's tax mix.
Yet, after Mr. Morneau had to spend so much of the past year defending his small-business changes, many observers question whether he will have the stomach for another round of debate over tax reform.
"Once bitten, you're going to be twice shy, and he's had a rough ride," said Mr. Manley, who was finance minister from June, 2002, to December, 2003. "I don't think I ever had to go through anything like that in my time as finance minister. I think the [small-business] proposals were ill-conceived, and undoubtedly it's been a learning exercise for the minister and his team. But that being said, we've got a longer-term issue to deal with here, which is how to make sure Canada is competitive in the long term."