Corporate Tax Changes To Foster Economic Growth
Brian Kingston, Vice President—Policy, International and Fiscal, Business Council of Canada
The COVID-19 pandemic has had a devastating impact on economies around
the world. Unemployment has soared, while trade has slowed and
investment has plummeted. As economies slowly begin to reopen and put in
place recovery plans, the focus of governments will turn to job
creation and attracting investment.
Further complicating the economic environment is a rise in
protectionism, with countries re-examining global supply chains and
implementing beggar-thy-neighbour policies in an attempt to protect and
create jobs at home. Canada must be prepared for this new global
economic reality and have a plan in place to fight for job-creating
While there is little Canada can do to combat protectionism, we have the
ability to create a more competitive investment environment. One of the
keys to achieving this is to review and then redesign the tax system in
a way that emphasizes attracting investment.
Calls for a review of the tax system were growing loud well before the
pandemic. The Standing Senate Committee on National Finance recommended
that Canada undertake a comprehensive independent review of the tax
system, with the goal of reducing complexity, ensuring economic
competitiveness, and enhancing overall fairness. In light of the
economic devastation wrought by COVID-19, we have little choice but to
act on this recommendation, with a focus on re-evaluating Canada's
global tax competitiveness.
The Great Lockdown
Prior to COVID-19, advanced countries around the world faced the
prospect of slower growth, a result of demographic forces and weak
productivity growth. In addition to these challenges, the Canadian
economy faced heightened trade uncertainty, ongoing tensions with China,
crippling rail blockades, and a deteriorating investment climate caused
by regulatory uncertainty.
According to the Parliamentary Budget Officer
the Canadian economy is now expected to shrink by a previously
unthinkable 12 percent in 2020. Facing this extremely dire outlook,
Canada must find new ways to compete on the world stage, grow the
economy, and create jobs. Attracting global investment to Canada through
a more competitive tax environment is one important way to achieve
Canada's Investment Record
While global foreign direct investment (FDI) stocks have increased
dramatically over the past 25 years, Canada's share of global investment
has been declining (see figure 1). In 2018, Canada's share of total
world inward investment stocks fell to 2.8 percent, the lowest level in
nearly 20 years. Meanwhile, countries with more competitive corporate
tax systems, such as Ireland and Switzerland, have witnessed an
increasing share of global inward investment stocks.
Of the world's 500 largest companies, only 13 are headquartered in Canada, according to Fortune 500
In 2019, Canada ranked ninth as a location for the global headquarters
of the world's largest corporations, behind China, the United States,
Japan, France, Germany, the United Kingdom, South Korea, and
Comparing Canada with the top 10 Global 500 company locations on the
basis of GDP tells a similar story (see figure 2). Canada has 7.6
Global 500 company headquarters per trillion dollars of GDP, a lower
ratio than in smaller economies with more competitive corporate tax
systems, including Switzerland and the Netherlands.
The United Nations Conference on Trade and Development (UNCTAD)
identifies the main determinants of head-office location as
international accessibility; a skilled workforce; a high quality of life
with which to attract international staff; low corporate and personal
taxes; excellent information and communication technology
infrastructure; well-developed business support services (legal,
accounting, and public relations); low risk (with respect to crime,
exchange rates, and regulatory and tax changes); and proximity to
Canada excels in many of these areas and has a natural geographic
advantage, given its proximity to the United States. But we could do
better in our efforts to achieve a more efficient tax regime. In fact,
tax rates and the complexity of tax regulations are routinely cited by
the World Economic Forum
as among the most problematic factors when it comes to doing business in Canada.
In a rapidly shifting global economic environment, Canada must explore
tax changes that would attract investment. A competitive tax regime,
combined with Canada's existing advantages (for example, trade
agreements, time zones, business culture, language, immigration policy,
proximity to the United States, and public health care), could make
Canada the premier location for global headquarters.
Attracting more large companies and more global headquarters would
create significant benefits for Canadians. Large companies typically
employ highly skilled and well-paid employees. According to the Business
Council of Canada's Sixth Annual Canadian Total Tax Contribution Survey
which surveys the tax contributions of Canada's largest companies, the
average wage paid by survey participants is $67,000, 32 percent higher
than the national average.
In addition, large companies support an ecosystem of businesses in the
communities where they are located. They purchase high-value services
from consultants, lawyers, financial services providers, and information
technology companies. They also support small and medium-sized
enterprises (SMEs) that form an integral part of the corporate supply
On the basis of data collected from 50 of Canada's largest businesses, a study
by the Centre for Digital Entrepreneurship and Economic Performance
found that these large companies often serve as crucial "anchor
customers" for SMEs, relying on Canadian SMEs, on average, for more than
one-third of their input purchases. Collectively, the 50 companies that
took part in the study purchase $37 billion in goods and services
annually from 158,550 SMEs across the country.
If the purchasing behaviour of those 50 companies reflects the behaviour
of the broader population of 350 large Canadian firms (those with at
least $1 billion in revenues), it would suggest that large companies in
Canada buy more than $260 billion in inputs each year from more than
1 million SMEs.
Restoring Canada's Corporate Tax Advantage
Canada has made significant progress in lowering its statutory CIT rate
without significant negative implications for revenue generation. Since
the 1970s, when the federal CIT rate was nearly 40 percent, steady
reductions in the rate have had virtually no impact on federal CIT
revenue as a share of GDP (see figure 3). As companies have found it
more attractive to earn profits in Canada because of the lower rate, the
rate reduction has been offset by an expanding tax base.
Despite lowering the federal CIT to 15 percent, Canada still lags behind
its competitors in terms of tax competitiveness. Canada has the
10th-highest combined federal-provincial CIT rate in the OECD, with a
combined rate of 26 percent, well above the OECD average of 23 percent,
according to OECD data
(see figure 4). When dividend withholding tax is taken into account,
Canada's combined CIT rate is among the highest in the OECD.
As a result of other countries' efforts to attract global investment
(such as the UK announcement that it would reduce its CIT rate to
19 percent and the US move to reduce its federal CIT rate to
21 percent), the gap between Canada's CIT rate and our competitors'
rates is growing (see figure 5).
The COVID-19 pandemic and the ensuing lockdown have had a dire impact on
the Canadian economy and government balance sheets. The fiscal impact
of the pandemic has been devastating; the federal deficit is expected to
reach $252.1 billion in 2020-21. The federal debt could approach
$1 trillion if the pandemic lasts longer than anticipated and support
programs need to be extended.
Austerity measures will not be sufficient to lower the deficit and
return to a pre-crisis debt-to-GDP ratio of 30 percent. The best way to
unwind the extraordinary support programs and repair the federal balance
sheet is to grow the economy. This can be achieved only through
aggressive efforts to attract and encourage job-creating investment.
Restoring our corporate tax advantage over the United States would be a good start. A 2018 study
by PwC Canada found that US tax reform eliminated one of Canada's main
competitive advantages and had a significant negative impact on
capital-intensive sectors in Canada.
The introduction of the accelerated investment incentive in the 2018
fall economic statement was a helpful step, but Canada needs to do more
to remain competitive with the United States. This effort could include
gradually reducing the combined federal-provincial statutory CIT rate to
20 percent, enhancing Canada's system of tax credits for business
spending on research and development, and introducing a patent box for
innovative companies that locate their research and development
operations in Canada.
Canada will not be alone in trying to attract investment and spur
growth. We must be prepared to compete with other jurisdictions around
the world. If our natural advantages as a location for business
investment are combined with a world-class corporate tax regime, Canada
could become the premier destination in the world for investment,
headquarter locations, and, ultimately, job creation.