From: AlanBaggett@volcanomail.com   
      
   Why Canada needs a comprehensive tax review :CRA SOTW   
      
   FRED O’RIORDAN    
   Contributed to The Globe and Mail    
   Published January 8, 2018      
      
   Fred O'Riordan is national leader, tax policy, Ernst & Young LLP.   
      
   Last month, the United States enacted the most sweeping package of legislative   
   changes to its tax code in more than 25 years. How these changes on balance   
   will impact the U.S. is subject to debate. What is less debatable, however, is   
   the impact they will    
   have on Canada.   
      
   The most notable element of the new U.S. tax law is a reduction in both   
   corporate and personal tax rates – the former on a permanent basis and the   
   latter temporarily through 2025. Many expect the changes will have a   
   stimulative effect on U.S. economic    
   growth, inbound investment and job creation. Others express concern about   
   their effect on federal deficits, the national debt and the after-tax   
   distribution of personal income.   
      
   To the extent that the changes spur the U.S. economy, Canada will share some   
   of the benefit through increased exports owing to the integrated nature of the   
   two economies and access to the large U.S. market through the North American   
   free-trade agreement.    
   This access remains threatened by stalled NAFTA renegotiations. But elements   
   of the U.S. tax reform may actually pose a more significant economic threat to   
   Canada's tax competitiveness.   
      
   A company's decision to invest is very sensitive to the rate of return on   
   capital. Other things equal, capital flows into jurisdictions where its rate   
   of return is highest. Taxes imposed on businesses reduce the rate of return   
   and affect both the amount    
   and location of investment undertaken. Since 2000, Canadian federal and   
   provincial governments have gradually reduced business taxes to attract   
   investment, primarily by implementing staged reductions in corporate tax   
   rates, eliminating taxes on capital    
   and reducing taxes on business inputs. A measure of the effectiveness of this   
   tax-policy strategy is that, in spite of the rate reductions, corporate-tax   
   revenues continued to increase and the ratio of corporate taxable income to   
   gross domestic product (   
   GDP) remained stable. Canada is not unique in regard to this policy direction.   
   It is consistent with a global trend among many Organization for Economic   
   Co-operation and Development and G7 countries, the most notable exception   
   being the United States.    
   Until now, that is.   
      
   The U.S. federal corporate income tax rate has now fallen from 35 per cent to   
   21 per cent, compared with the Canadian federal rate of 15 per cent. More   
   importantly, the average combined federal/state corporate rate in the United   
   States has fallen from 39.   
   1 per cent to 26 per cent and is now below the average combined Canadian   
   federal/provincial rate of 26.7 per cent – completely eliminating Canada's   
   competitive tax advantage.   
      
   A useful measure of this erosion in Canada's competitive position, more   
   informative than a simple statutory-rate comparison, is a comparison of the   
   marginal effective tax rate (METR) on new business investment between the   
   countries.   
      
   The METR, which was developed by Phil Bazel and Jack Mintz of the University   
   of Calgary's School of Public Policy, includes not only the corporate tax rate   
   but also deductions and credits associated with purchasing capital goods and   
   other taxes paid by    
   the corporation. The METR measures the extra return on investment necessary to   
   pay these taxes and maintain the same total return or, put differently, the   
   share of the gross-of-tax rate of return on a marginal unit of capital needed   
   to pay the business    
   taxes on that capital.   
      
   Canada's METR has been lower than the United States' since 2006. This has been   
   tremendously beneficial to Canada, influencing not only where businesses   
   choose to locate but, for those multinational firms with significant   
   cross-border operations and    
   activity, where to place their highest-value functions and thereby report and   
   pay the associated proportion of their corporate taxes in the lower tax   
   jurisdiction.   
      
   U.S. tax reform has sharply reduced the country's METR from 34.6 per cent to   
   only 18.8 per cent compared with Canada's 20.3 per cent. Disaggregated by   
   industry, Canada's relative tax-competitive advantage has been completely   
   reversed in favour of the    
   United States in all but two sectors.   
      
   Although labour is less mobile than capital, the impact of U.S. personal tax   
   reform is as threatening to Canada's competitiveness as corporate tax reform.   
      
   To illustrate, Ontario's top combined federal/provincial marginal tax rate of   
   53.53 per cent applies on employment income above $220,000. At the equivalent   
   employment income level of $176,000 (U.S.), California's combined individual   
   federal/state    
   marginal rate for a single filer is only 41.3 per cent, making Ontario's rate   
   almost 30 per cent higher. California's top combined marginal rate of 50.3 per   
   cent is also lower than Ontario's and it only kicks in for income over   
   $1-million (about $1.25-   
   million Canadian). The comparison is even worse at the $100,000 (Canadian)   
   income level, where Ontario's combined rate of 43.41 per cent is 12 percentage   
   points or 38 per cent higher than California's combined individual rate of   
   31.3 per cent on a single    
   filer.   
      
   Retaining and attracting the best and brightest talent is a top priority for   
   Canadian companies to maintain their competitiveness. As part of its Economic   
   and Innovation Strategy, the federal government launched a Global Skills   
   Strategy in June, 2017, to    
   streamline entry requirements and help Canadian firms source international   
   talent in a more timely and efficient manner.   
      
   Whatever its merits, streamlined entry isn't likely to persuade top Silicon   
   Valley talent to pull up stakes and move to Ontario, where the mercury dips   
   below freezing much of the year and where the government takes more of your   
   salary over $220,000 than    
   you get to keep for yourself. The gravitational pull for this scarce talent is   
   very much in the opposite direction. Furthermore, it is being pushed there in   
   part by our tax policy running counter to the objectives of our immigration   
   policy instead of    
   being aligned with them.   
      
   As in the United States, it has been more than a quarter of a century since   
   the last major tax review and overhaul took place here in Canada. The time has   
   come for an appropriate policy rethink and response here to events there.   
      
      
      
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