Canada to Respond to US Tax Reform Challenge

Canada’s Liberal government will seek to address competitiveness challenges faced by the nation’s businesses in a budget update later this year amid pressure to respond to US tax reform.

Finance Minister Bill Morneau, in an interview with Bloomberg News in Buenos Aires, said the key themes emerging for his fiscal update—a document the finance department typically releases in October or November—will include business taxation, oil pipelines and the renegotiation of the North American Free Trade Agreement.

 “We’ve pretty clearly telegraphed that we want to be listening to, broadly to Canadians and specifically Canadian businesses, to make sure that we maintain a level of competitiveness, given the sorts of changes we’ve seen in our environment,” said Morneau. “I think those themes will be reinforced in our fall economic statement.”

Business groups have pressured Morneau to cut taxes in Canada after the US cut its corporate tax rate from 35% to 21%, claiming the lost tax competitiveness is diverting investment away from Canada.

A June report from the Canadian Manufacturers & Exporters—an industry advocacy group—recommended the combined federal and provincial corporate tax rate should be cut to 20% from about 28%, and Canada should match US accelerated capital cost allowance provisions to offer “an immediate 100% tax write-off on qualifying capital asset purchases.”

Morneau said he hasn’t come to any conclusions yet but the consultation process will be done ahead of the fiscal update.

He indicated that he’s more focused on lowering the cost of new investment, which he said is the primary concern for businesses, rather than broad-based cuts in the corporate rate.

“People want to make sure that the next investment they’re going to be making is on an advantageous basis,” said Morneau, who was in Argentina to attend a meeting of G-20 finance ministers.

One constraint for the Canadian government is cost. After ramping up spending in recent budgets to finance Prime Minister’s Justin Trudeau’s ambitious social agenda, there is little room for expensive new initiatives for business such as a broad-based tax cut, particularly if the government wants to keep to its promise of limiting the pace of debt accumulation to below the level of GDP growth.