Canada: Canada’s Tax Advantage

Last Updated: December 13 2011
Article by Timothy S. Wach

Forbes magazine recently ranked Canada as the best country in the world in which to do business, up from its fourth place ranking in 2010 (other notables were Denmark ranked fifth, down from first in 2010, Sweden at seventh, and the US at tenth).  A significant contributor to Canada's improved ranking was "substantial improvement" in the competitiveness of Canada's tax system.  Forbes commented that "Canada's standing as a business friendly locale has improved thanks to tax reform over the past two years", particularly a "reformed tax structure with a Harmonized Sales Tax introduced in Ontario and British Columbia in 2010."

Some of that improvement will be reversed with the "de-harmonization" of B.C. from the HST system.  It is difficult to argue that referenda do not serve useful purposes in the democratic process.  However, the recent referendum in B.C., in which the electorate voted to scrap the HST, illustrates how populism doesn't always lead to good public policy, particularly where tax policy is concerned.

Nevertheless, the Canadian tax system, at least as far as business taxation is concerned, has still improved significantly in many respects.  But this has not occurred just over the past two years, as suggested by Forbes, but over the past ten or so years.  These improvements have been slow and incremental, and like the melting of a glacier (it has been said that public policy is made at two speeds, glacial and lightning), they have gone largely unnoticed by many, both within and without the business community.

A general objective of these improvements has been a broadening of the tax base and lowering of tax rates.  Such changes not only make the Canadian system more competitive, but also enhance the economic neutrality of the system.  Economic neutrality, or the minimization of the tax considerations in business and economic decision making, has traditionally been a key component of tax policy making in Canada (recent departures from this, such as the introduction of various tax credits for children's arts or athletics or public transit, have tended to be in the personal tax sphere, where social policy is more apt to trump economic policy, rather than in the business tax sphere).

These improvements include a reduction in the general federal corporate income tax rate from 29.1% in 2000 to 15% in 2012, and the establishment of a 25% target for the combined federal-provincial general corporate income tax rate.  They also include the elimination of the federal capital tax in 2006, and of all provincial general capital taxes by the end of 2012, and the elimination of tariffs on imports of manufacturing inputs and machinery and equipment.  These and other improvements have resulted in Canada having (before de-harmonization of B.C.) the lowest marginal effective tax rate on new investment among G7 countries.

It is not only substantive tax changes that have improved the Canadian tax system.  Improvements in tax administration have reduced the compliance burden imposed on taxpayers in the business sector.  These improvements include, in particular, the recent Canada-Ontario Tax Collection Agreement that provided for the single administration of corporate income tax in Ontario by the Canada Revenue Agency, rather than by separate federal and provincial administration. This, combined with harmonization of the sales tax system in Ontario, has resulted in significant reduced annual compliance costs for taxpayers carrying on businesses in Ontario.  A recent joint study by the World Bank, The International Finance Corporation, and PricewaterhouseCoopers, analyzing the ease of tax compliance in 183 countries, placed Canada in the top 10, the only G20 country to place that high.  It is interesting to note that Denmark, which placed fifth in the Forbes rankings, was 13th in the World Bank – IFC – PwC study.  The US was ranked 62nd in ease of tax compliance. illustrating yet again that while we in Canada must always be aware of tax developments in the US, we shouldn't necessarily look southward for inspiration (our late Prime Minister Pierre Trudeau once said that living next to the US "is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt").

Obviously Canada cannot rest on its laurels. The task of creating and maintaining a competitive tax environment, one that minimizes the drag on business activity that all taxes have, is an on-going one.  And there is still considerable room for improvement in the current system.  For example, we still have an unfortunate "legislative gap" between announced tax changes and the legislative implementation of those changes.  As previously commented upon in these pages, this gap needs to be addressed in order to increase certainty for taxpayers and further reduce compliance and planning costs in Canada. 

The path to a more efficient tax system is not a straight-forward one, as evidenced by the recent events in B.C.  Nevertheless, it is encouraging to see that others such as Forbes, as well as decision makers outside Canada, are noting the significant progress that has been made in Canada in recent years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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