It is the single greatest step the Trudeau government has taken to encourage corporate investment and to boost productivity – and all by letting companies decide on their own where their dollars should best be spent. Called the Accelerated Investment Initiative and launched in late 2018, the policy aimed to bolster capital investment by speeding up how quickly companies could expense the cost of anything from new factory equipment to new computer systems. The result was a wave of corporate investment without the need for any additional administrative apparatus.
Naturally, the Liberals are killing it. The accelerated capital-cost allowance, despite the crying need for such a policy, will be allowed to expire by 2028. University of Calgary economics professor Trevor Tombe rightly pointed out in a recent article on The Hub that the debate over the increase in capital-gains taxation has overshadowed the disappearance of the accelerated capital-cost allowance.
Once 2028 rolls around, the effective tax rate on new investment will jump to 17 per cent from 13.7 per cent. Even worse, the effective tax rate on investment in machinery and equipment, under a related program, will more than double, rising to 14.2 per cent from 5.7 per cent. Canada’s real per capita GDP is in retreat. Capital investment per worker is stalling out. A generational labour shortage is building. Ramping up the tax burden on business investment is precisely the wrong policy response.
Why the Change?
Why might the Liberals be taking such a manifestly obvious, destructive step? One part of the answer lies in why the Trudeau government introduced the tax breaks in the first place. It was not because the Liberals had a sudden burst of enthusiasm for a hands-off approach to economic growth, or were overcome by warm feelings for the private sector.
It was Donald Trump, who as U.S. president pushed through massive tax reform that threatened to pull investment south. The Liberals responded by introducing similar tax breaks – but also timed them to disappear once the U.S. measures expired, after a decade.
The United States can at least blame its byzantine legislative process for snuffing out pro-growth tax policies. Canada has no such excuse.
Instead of extending sector-neutral accelerated capital-cost allowances, the Liberals are redoubling their redistributionist efforts, driving up corporate taxation generally and then handing back some of that largesse to a favoured few industries and companies.
Multibillion-dollar subsidies to electric-vehicle battery plants are just the most obvious example. The Liberals’ April budget has a smorgasbord of tax credits designed to prod the economy in the direction the government deems desirable.
- A clean-hydrogen investment tax credit
- A clean-technology manufacturing investment tax credit
- An EV supply-chain investment tax credit
- $90.9-million for the Canada Revenue Agency to run the whole complex scheme
The Liberal budget did launch a program to encourage capital spending on “productivity enhancing assets.” However, that program is limited to patents and computer equipment and software. Its impact is limited, too. The broad accelerated capital-cost allowances program resulted in a $3.5-billion tax expenditure, in the form of reduced corporate taxes, in the first full year it was in effect (and those were 2019 dollars). The targeted program will have far less impact, with a tax expenditure of only $755-million.
There’s no doubt that information-technology spending can boost productivity. But what about a manufacturing business that wants to retool its production line? Or a construction firm that wants to purchase more modern equipment? Too bad for them – their investments don’t square with the Liberals’ aims.
The Liberals have made it abundantly clear that they have no interest in allowing the private sector to take the lead in making investment decisions. A second Trump presidency, or a Republican-dominated Congress, could once again force their hand in 2025. Perhaps the Trudeau government will, once again, be obliged to adopt good economic policy over their own strenuous objections.
Failing that, an opportunity awaits a future government: Cancel subsidies, erase the targeted breaks and make accelerated capital-cost allowances a permanent feature of the tax code. It could be Canada’s trump card for growth.
