Business Tax Reform: More Progress Needed

In the past 10 years, federal, provincial and territorial governments have adopted several policies to reform business taxation in Canada. Their 2006 budgets have continued in the direction of improving business tax competitiveness, with the most significant rate reductions at the federal level and in the provinces of New Brunswick and Saskatchewan. Such steps are laudable: We can expect a much-needed increase in business investment in coming years as a result. Overall, Canada’s investment in capital stock — non-residential structures and machinery — will be boosted within five years by $45 billion, due to the 2006 changes. There could be a further boost of $90 billion if governments fully implement proposed tax reductions by 2010.1 Given Canada’s poor productivity performance and low capital investment rates, these policy changes are welcome indeed, as they will improve Canadians ’ standard of living. Base-broadening measures that would contribute to a more neutral and efficient business tax regime have been slow to come at both federal and provincial-territorial levels. Quebec has become the most egregious case by re-introducing many targeted regional and industrial credits of questionable effectiveness. Other provinces, such as Ontario, have also been generally using targeted preferences and subsidies rather than looking at broad-based relief. This e-brief documents the historical evolution of business tax policies in Canada since 1997, showing that some good progress has been made at the federal level. Meanwhile, some provinces and territories, especially Ontario, have shown little interest in improving business tax competitiveness. While federal tax cuts boost investment in the provinces, action is required by them as well. Those provinces that have shifted tax structures from investment to other revenue source