By: Nick Pantaleo
We are almost through the late winter / early spring ritual of federal and provincial governments bringing down their annual budgets – actually, Quebec’s budget was in November following the election of the PQ minority government – except for Ontario, which will be releasing their budget on May 2nd.
With the governments contending with a still fragile global economy, slow economic growth and generally high deficits, many weren’t expecting to receive a lot of goodies – and they weren’t disappointed.
What PwC said and what governments did
PwC’s federal budget submission cautioned about relying on measures governments have typically relied on in the past to raise revenue; namely, increasing corporate and personal income, capital and payroll-type taxes, all of which have a negative impact on economic growth and job creation. The federal government listened to that message and did not raise income tax rates.
We also recommended that the government work with the provinces to re-evaluate the efficiency and sustainability of the current mix of revenue generating measures, including conducting a review of the personal income tax and GST/HST systems (in particular, the inefficiency of the myriad of tax expenditures embedded in the system), to improve the way Canada raises tax revenue while protecting those who are most vulnerable. Unfortunately, they have not heard that message – at least not yet.
As for the provincial budgets, most continue to break ranks around rates.
Personal tax rates were raised for high income earners in B.C. - the NDP promises to impose a further increase if they win next month’s election - and Quebec and across all tax brackets in New Brunswick.
As for corporate tax rates, New Brunswick raised the main rate by 2 percent to 12 percent – disheartening because they have been one of the provincial champions of low corporate tax rates. New Brunswick made no mention of its 2011 promise to lower the small business (SB) rate to 2.5% by 2015, while Nova Scotia decreased its SB rate to 3% and PEI increased its rate to 4.5%. Meanwhile, B.C. stepped up its 1% corporate tax increase by one year with the NDP promising another 1 percent increase and the reinstatement of a capital tax on financial institutions if they win the next provincial election. Saskatchewan has deferred further corporate tax decreases, no longer committing to a 2015 implementation date and Manitoba will raise the capital tax rate on financial institutions from 4 to 5 percent. Ontario is the last big province to be heard from but its fiscal situation remains dire – it has a new Premier and a minority government that has already promised to defer further reductions, so all bets are off.
The upshot of all this, as shown in the table below, is that we are not close to seeing that uniform, across-the-country general corporate tax rate drop to 25%, something federal Finance Minister Jim Flaherty was seeking. If anything, the gap will widen.
Of course, not shown in the table are the many tax credits provinces have to entice businesses to set up shop in their province. It all makes for a confusing and pretty inefficient corporate tax structure for Canada with each of the provinces doing what they think they must and because they can. On the other hand, it also means continued opportunities for provincial tax planning.
Many businesses were hoping that the government’s initiative to consider a formal system of group taxation would help make the tax system more efficient for corporate groups. However, the federal government announced in their budget that “feedback from the consultation exercise and discussions with provincial and territorial officials have not produced a consensus regarding how the Government could move forward in a way that would improve the tax system………[hence t]he Government has determined that moving to a formal system of corporate group taxation is not a priority at this time.”
Cynics will see this as another example of the federal and provincial governments’ failure to steer the boat in a single direction for the good of the country. Regardless, businesses have a right to be disappointed with this decision.
Two years have passed since a number of companies and business organizations made submissions to the government (see PwC’s submission), all mostly in favour of a formal system. Moreover, while the budget papers noted the provincial and territories’ concerns over the potential of reduced revenues and the likely upfront costs for all governments, as PwC noted in our budget submission, this was something that many businesses were sensitive to and were prepared to help the government resolve.
One of the lessons learned from the consultation process is that the provinces and territories are not happy with the current “informal” system of group taxation because they do not know what it is costing them. The government promises to work with them on that – hopefully with the input from businesses. Hopefully, as well, provinces will not take unilateral action in the meantime.
No easy answer. Corporate tax is an enigma.
It has the highest marginal cost in terms of raising government funds and its burden for the most part fall ultimately on labour. It isn’t an insignificant part of a province’s total tax revenue stream, but it is the most volatile, other than perhaps resource royalties. For example, Ontario’s corporate tax revenue prior to the financial crisis in 2007-8 was about $13 billion (19% of total tax revenue) and immediately dropped to under $6.7 billion the year after. What government can tolerate such a decrease in one year?
In many respects, the corporate tax challenge we face in Canada is similar to that being experienced globally, most recently manifested in the OECD’s report on Base Erosion and Profit Shifting, except ours is self-inflicted.
Makes one wonder why the provinces are in the corporate tax game. Wouldn’t they be better off leaving that to feds in exchange for a greater share of GST/HST revenue? It would also make life easier for corporations carrying on business in different provinces.
Maybe in a perfect world that would happen, but as a former colleague told me early in my career, “it’s not a perfect world”.