Impending Tax Changes to Impact Canadian Business Investments
Amidst discussions of generational fairness and capital gains taxes, a less conspicuous but significant tax change is poised to affect the Canadian economy. This modification pertains to the taxation of new business investments and is expected to be the most substantial tax increase that has largely gone unnoticed. The core of the issue lies in the alteration of how companies can write off capital investments, a shift that could dampen investment and productivity at a time when Canada is in dire need of both.
The roots of this change trace back to the corporate tax adjustments made in 2018, which are now being gradually phased out. To put this into perspective, the U.S. tax reforms in 2017 saw a reduction in corporate tax rates and allowed immediate full deductions for certain capital expenditures. This move significantly lowered the marginal effective tax rate (METR) on investment, thereby incentivizing businesses to invest more, potentially boosting the U.S. economy significantly.
In response, Canada introduced faster write-offs for new investments to maintain competitiveness. However, these measures were temporary and are set to phase out starting in 2024, culminating in their complete removal by 2027. The result is an anticipated increase in the effective tax rate on new investment, with some investment types being affected more than others. For instance, the tax on machinery and equipment investment is expected to more than double, which could have a profound impact on labour productivity growth.
The repercussions of these tax changes are not just theoretical. Research indicates that even a 1 percent increase in the METR could lead to a corresponding decrease in investment levels. With Canada’s productivity growth heavily reliant on capital accumulation, the upcoming federal tax changes seem counterproductive.
Experts suggest that instead of retracting the 2018 tax incentives, it would be beneficial for the government to expand them. Both federal and provincial governments have roles to play in this, including reevaluating corporate taxes and sales taxes that affect returns on different investments. As Canada grapples with stagnant growth in living standards and real incomes, it becomes imperative to reassess the entire tax system to foster an environment conducive to investment and productivity.
While much attention has been given to capital gains in recent budget discussions, it is crucial for policymakers and stakeholders to consider the broader implications of tax policies on investment options and investment products. The upcoming changes underscore the need for a comprehensive review of how public funds are raised in Canada, with a focus on enhancing business investment types and incentives.
