Finance Minister Jim Flaherty's long-term goal of marketing Canada as a 25-per-cent corporate tax zone appears to be slipping away just as he approaches the finish line.
As recently as his November economic update, Mr. Flaherty was celebrating the fact that his target would soon be in reach. But now growing musings from debt-saddled Ontario suggest the key province may not follow through on its end of the deal.
Ottawa moved on Sunday to implement the final step in its five-year plan to reduce corporate taxes, bringing the federal rate down to 15 per cent. The plan was one of the Conservative government's most controversial moves during its time as a minority government, and remained a central point of division with the opposition during the 2011 federal election that returned the Tories with a majority.
That cleared the path for Mr. Flaherty to finalize the tax plan first announced in 2007, when the federal corporate tax rate stood at 22.1 per cent.
At the time, he urged provinces and territories to reduce their rates as well so that Canada could brand itself abroad as a 25-per-cent tax rate zone in an effort to lure foreign investment and encourage multinational firms to file their taxes here.
Reaching the target of having most corporate income in Canada taxed at 25 per cent would require Ontario to follow through with plans to reduce its own rate from 11.5 per cent to 11 per cent in July of this year, and then a further cut to 10 per cent in 2013.
But with large annual deficits putting Ontario's credit rating at risk, Premier Dalton McGuinty and his Finance Minister, Dwight Duncan, are increasingly sending out hints that those cuts may be an unaffordable luxury.
Further, Mr. McGuinty now faces the same minority politics that once dogged federal Conservative Leader Stephen Harper. Ontario's NDP Leader, Andrea Horwath, is campaigning publicly for the Liberals to at least put the corporate tax cuts on hold.
"I think this is a big step backwards for them," said University of Calgary tax expert Jack Mintz, one of the country's leading advocates for lower corporate taxes.
However, Ontario may win some sympathy from the corporate world, Dr. Mintz said, provided a change in tax policy is billed as part of a serious effort to reduce the deficit.
"It won't be the end of the world," he said.
To the political left, corporate tax cuts are a dubious form of financial stimulus that rewards the rich and fails to help struggling businesses that are not posting profits.
Advocates of the policy say it broadens Canada's tax base and encourages foreign investment. Canada's lower corporate tax rates have attracted attention south of the border, where Republican presidential candidates frequently cite Canada while criticizing the comparatively high corporate tax rates in the United States.
The federal government has lost revenue during its rate-cutting phase, but it is hard to know how much of that is tied to the slowdown in the economy. For instance, Ottawa took in $40.6-billion in corporate tax revenue in 2007-08, but only $30-billion in 2010-11.
Economist Dale Orr said it would be hard for Mr. Duncan, Ontario's Finance Minister, to follow through with further corporate tax cuts given the state of the province's finances.
"To carry forward on corporate income taxes, that's a tough one," he said. "I think he should pull out all the stops to try to move forward the situation on deficit elimination."
Corporate tax rate by province
B.C. 10 per cent
Alberta 10 per cent
Saskatchewan 12 per cent
Manitoba 12 per cent
Ontario 11.5 per cent
Quebec 11.9 per cent
New Brunswick 10 per cent
Nova Scotia 16 per cent
PEI 16 per cent
Newfoundland and Labrador 14 per cent
Source: Canada Revenue Agency and the governments of Alberta and Quebec.