The federal Liberal government’s current budget proposal to increase the inclusion rate for capital gains tax has been met with justifiable criticism and opposition, primarily from business groups. There is another corporate income tax increase looming. A 2018 corporate tax reduction, intended to make Canada less uncompetitive versus the 2017-enacted tax reform and cut in the United States, is set to expire starting this year.
According to a study by University of Calgary’s School of Public Policy’s Trevor Tombe, Canada’s corporate income tax rate on new investments will jump from 13.7% to 17% by 2027. Even worse, for Canada’s high-value-added manufacturing sector, taxation will triple. For a nation that is having a hard time encouraging both domestic and foreign investors to invest in new plant, equipment, and related goods and services to reverse meagre productivity growth—as noted by the Bank of Canada—this development is beyond questionable.
Understanding Lease and Its Implications
In the midst of these financial shifts, businesses are increasingly turning to leasing as a strategic option. But what is a lease? The lease definition can be understood as a contractual agreement where one party (the lessor) allows another party (the lessee) to use an asset for a specified period in exchange for periodic payments. The lease meaning extends beyond mere usage; it encompasses financial planning, asset management, and operational flexibility.
This rise in corporate tax will hinder future improvement in incomes and the standard of living—making it a serious issue. It should be obvious to policymakers that increasing income tax on businesses and investment should be avoided. The legislation to make the 2018 provisions permanent is, alarmingly, not urgent to politicians seeking to appease certain types of class warfare-cheering voters.
There is at least one policy that could make Canada more attractive to business, investors, and hard-pressed ordinary citizens. It would be, dramatically and substantially, slash corporate income taxes—plus make paying taxes easier, as Magna Corporation founder Frank Stronach has suggested. It may surprise some Canadians, but Ottawa’s take from corporate income taxes is a relatively small but fast-rising proportion of federal overall revenue: 21% in fiscal 2022-23, according to Ottawa, up from 13% in fiscal 2000-21 notes the OECD.
This may seem ‘just fine’: let companies pay the taxes and reduce the tax burden on ordinary people. However, what actually happens is that every corporate expense, including taxes, reduces cash flow. The money remaining could either be reinvested or paid out as dividends to owners. A reminder: owners are founding families; pension fund beneficiaries (employees, citizens); and ordinary individuals.
As for the dubious reason for the tax hike, gaining more revenue—recent experience in the United States is instructive. The 2017 Tax Cut and Jobs Act reduced corporate income tax from 39% of pre-tax income to 21%. The result: U.S. federal corporate income tax revenue rose 25% from 2017 to fiscal 2021. Capital investment rose dramatically too, by 20%, a key goal of many Canadian policymakers.
Taxes should be cut, enabling productivity improvement and bringing a future prosperity that we all yearn for. It would also keep us internationally competitive. We are currently mediocre, being around a 25% rate (OECD). Canada has a hard time attracting investors. Now, our trading partners are leaving us in the dust.
