Canada In A Tax Quandary

By Global Tax Weekly

Canada has been studying the US tax reforms and their potential impact on the Canadian business environment, economy, and investment since the start of the year. This indicates that it is clearly worried about the possible erosive effect they will have on Canada’s competitiveness.

However, while it was never likely that a Canadian Government that has accorded a high priority to tax fairness was going to match the US corporate tax cut dollar for dollar, business will be forgiven for not getting very excited about the outcome of the Finance Department’s review: new write-off incentives and an investment incentive.

Under the proposals, the Government will allow the full cost of machinery and equipment used in the manufacturing and processing of goods to be written off immediately for tax purposes. Immediate expensing will apply to qualifying assets acquired after November 20, 2018. It will be gradually phased out starting in 2024, and will no longer be in effect for investments put in use after 2027.

The Canadian Government has claimed that this measure “will fuel new investments and support adoption of advanced technology and processes by this highly mobile sector of the economy.” Hmm – possibly. But I’m not sure President Donald Trump and Republicans in Congress will be losing any sleep over this, put it that way.

Nevertheless, these new tax breaks are still quite significant. However, as Business Council of Canada President and Chief Executive Goldy Hyder suggested, they have the appearance of a sticking plaster when some comprehensive surgery is actually required to ensure the patient’s long-term health. “Canada’s competitiveness challenges go much deeper than any single tax measure,” he observed.

The problem for Canada, and other economies that compete with the US, is a lack of resources to respond to TCJA in a meaningful way without doing away with budgetary controls. As much as some in government would love to go slashing taxes, tax cuts of a substantial nature represent a significant investment which must be paid for by cutting expenditure, or offsetting them with revenue raisers elsewhere in the budget. In other words, when ideals come up against cold, hard, fiscal reality, it’s usually the latter force that wins out.

Put simply, Canada cannot afford a corporate tax cut of the magnitude that would restore its former tax advantage. This also rather begs the question of how the US Government could afford the TCJA. But that’s a very sore point on the Hill, so let’s not go there.

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