The Liberal government will not announce a wide-ranging review of Canada’s tax system in Tuesday’s budget, as Finance Minister Bill Morneau intends to follow up his business-focused fall update with a pre-election budget aimed at individuals.
Business groups and the Liberal-dominated finance committee had urged the minister to include a tax review in this year’s budget, warning that Canada’s tax code hurts competitiveness and is long overdue for an overhaul.
A senior government official confirmed to The Globe and Mail that the budget will not announce such a review. The official, who was granted anonymity by The Globe because he was not authorized to speak publicly on the matter, said the government’s view is that addressing business concerns was the primary focus of the minister’s fiscal update in November and that the coming budget will be more focused on individuals.
Specifically, new funding for workers to take time off for training is expected to be a key plank in this week’s budget. Mr. Morneau has also said there will be housing-related measures for Canadians, particularly millennials, who are looking to buy their first home, as well as announcements focused on seniors and action to reduce the cost of prescription drugs.
Canada’s largest business groups have called on Mr. Morneau to launch a royal commission or some other form of independent study of the Canadian tax system, to ensure that the mix of taxes and tax rates are competitive internationally and are helping to attract investment.
The Business Council of Canada, chambers of commerce from across the country, The Chartered Professional Accountants of Canada and the House of Commons finance committee are among the many groups that have called on Mr. Morneau to update Canada’s tax code.
Mr. Morneau’s fall update announced billions in tax breaks for business so that new investments can be expensed more quickly through accelerated depreciation allowances. However, the update did not change federal tax rates, nor did it announce any further review of the tax system.
The update followed months of consultations between Mr. Morneau and the business community as the minister asked for feedback on how recent U.S. tax changes were affecting Canadian competitiveness.
The common theme of the budget requests from Canada’s business groups is that Canada’s corporate tax rates and top personal tax rates are higher than those of many of its international peers and should be lowered to boost competitiveness. From a political point of view, however, acting on such advice would run counter to one of the key policy planks of the Liberal Party’s 2015 election platform, which called for higher personal taxes on the top one per cent of income earners in order to reduce taxes for middle-income earners.
Mr. Morneau has also countered calls for corporate tax cuts by pointing out that the same groups calling for lower taxes are also urging him to reduce the deficit, a job that could be more challenging if federal revenues were reduced. Recent tax cuts in the United States have coincided with larger deficits.
Goldy Hyder, the President and chief executive of the Business Council of Canada, said he can understand why a government would focus a pre-election budget on measures aimed at individuals rather than responding to calls from business.
“We’re not surprised. But it doesn’t change the reality that we are competing globally for talent and investment and eventually Canada is going to have to deal with this, because it is key to our economic future," he said.
Mr. Hyder added that Mr. Morneau’s stated plan to focus on skills training in this budget is welcomed by the business community.
When it comes to tax reform, Mr. Morneau has a rocky political history. His 2017 efforts to implement another campaign pledge − to ensure that small-business corporate structures are not used simply as a way for high-income earners to pay less tax − led to months of vocal pushback from small-business owners. The minister ultimately backed down on some of his proposals, but the remaining changes to small-business taxation rules continue to face criticism.
Liberal MP Wayne Easter, who chairs the House of Commons finance committee, said there is “no question” the backlash over the small-business tax changes is a factor that explains why the minister is hesitant to support an even larger overhaul.
“The tax system needs to be reviewed, no question about it,” he said in an interview. However, the veteran MP said the challenge with launching an open-ended review in an election year is that it leaves the governing party vulnerable to unfounded attacks from other parties.
"You get into an all-together different scenario in an election year than you do following an election, in that anything that can give traction to hyperventilated stories − you can’t open up that arena,” he said. “I don’t think the business community will be completely ignored in the budget, either. We’ll have to wait and see.”
In a report released earlier this month by the Business Council of Canada and the Deloitte accounting firm, Canada’s tax system is described as a competitive disadvantage for Canadian companies.
The report noted that tax changes introduced in the United States in 2018 erased Canada’s long-standing corporate tax advantage. The U.S. changes dropped the combined federal and state corporate tax rate from 38.9 per cent to 25.8 per cent, bringing it below Canada’s combined rate of 26.8 per cent.
The business council’s report said the measures in the fall update “are a useful step,” but that “they only address tax competitiveness with respect to new investments made by companies” and that their impact may be limited.
The council report also raised concerns with Canada’s top combined income-tax rate of 53.5 per cent, which was listed as fourth-highest in a ranking of 12 of Canada’s economic peer countries.
“Canada’s persistently high top tax rates may make it less attractive for top earners to settle here,” the report said.