Business Tax Reform Recommendations of Conference Board of Canada August 27, 2008

Conference Board of Canada Recommends the Reduction in Canadian Corporate Income Tax Rates

Federal and provincial governments are making progress in lowering corporate income tax (CIT) rates to improve the international competitiveness of all Canadian businesses. Yet, Canadian corporate income taxes on business income are still discouragingly high.

Within a North American context, the effective Canadian tax rate on corporations compares surprisingly well with the effective U.S. rate, which is estimated at 37.8 per cent. When the cost of health insurance for American corporations is added in, it would not take large cuts in the corporate income tax rate for Canadian firms to gain a significant competitive advantage vis-à-vis their American counterparts.

However, the concern is not just about a level playing field for business taxation within North America. The central question is whether Canadian companies should have an even larger competitive advantage in corporate taxation to offset the scale advantages offered by the home markets of competitors from the United States, the European Union, and Asia. Although tariff barriers have largely been eliminated in North America, significant non-tariff barriers remain in place, which impede the ability of Canadian companies to access and serve the entire North American market. The degree and pace of appreciation of the Canadian dollar against the greenback has put Canadian exporters under added stress.

There is thus a strong case for a business tax environment that offers a competitive advantage to Canadian businesses by introducing lower marginal rates of corporate income taxation that are at least comparable to those in comparator markets.

Current Status

The October 2007 economic statement by the federal government announced a five-year plan to accelerate the reduction in the general federal CIT rate, from the 2007 rate of 22.12 per cent to 15 per cent by 2012. The first step is a reduction to 19.5 per cent in 2008 (including elimination of the 1.12 per cent corporate surtax). The federal government proposed a target rate of 25 per cent, which is the sum of the target 15 per cent federal rate and the desired weighted average of provincial rates.