The latest issue of the Canadian Tax Foundation’s newsletter, Perspectives on Tax Law and Policy, examines from different perspectives whether Canadian corporate tax rates are too high, too low, or just right.
My contribution to the newsletter is linked below. It comes from my perspective that incentives matter very much – we need to design our tax system with careful attention to the incentives it gives to taxpayers. For corporate taxation in Canada, with our country having a relatively open economy competing with other countries for highly mobile flows of capital, I argue we need to keep our general corporate tax rate in step with, and ideally somewhat lower than, those of the U.S. and other OECD countries. The purpose of keeping our statutory corporate rate competitive with other countries is to retain and attract as much business investment as possible, and thus boost productivity, employment and ultimately our Canadian living standards.
But my article goes further, in ways that will be familiar to former students in our Osgoode corporate tax class. Because an evaluation of our corporate tax rates is incomplete without also considering our special treatment for Canadian-controlled private corporations (CCPCs).
So the article also discusses Canada’s small business deduction for CCPCs, and explains why, in my view, it is no longer achieving its policy objectives. The small business deduction is politically popular and entrenched, but I suggest that it is a poorly targeted incentive to assist Canada’s small business sector. For example, the lower tax rate only assists small businesses if they are profitable and have tax payable – so it does nothing to support startup businesses or established small businesses in times like now when so many are incurring losses due to the lockdown. So as many others before me have also done, the article proposes a re-examination of the small business deduction and a possible shift to better targeted support for our small businesses that really need it.
Finally, the article discusses some flaws in our refundable tax system for taxing investment income of private corporations and CCPCs. Our integration system is imperfect as it applies to this type of income, and it is possible to avoid the application of these refundable taxes altogether by using a foreign-incorporated entity resident in Canada under the common-law test of corporate residence – which clearly should be fixed.
Click here to access my article; and from there you can also read the other interesting contributions to this debate.