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Canadian competitive edge at risk under current tax system, say experts

International community pushes for Canadian tax reform, threatens loss to economy, amid U.S. corporate tax cuts

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A push for tax reform in Canada is spanning industries and crossing borders, as concerns deepen over our country’s competitiveness from a business, investment and overall economic standpoint.

Canadian flag in front of a business building in Toronto, Ontario, CanadaPredicting a slowdown in economic growth to 2.1 per cent in 2018 and 2.2 per cent in 2019, OECD and IMF recommendations include corporate tax reform to increase efficiencies, raising revenues for public spending, curbing budget deficits, and deregulating some specific industries to attract foreign investment. (BalkansCat/Shuttertsock)

International organizations—Paris-based Organisation for Economic Cooperation and Development (OECD) and Washington-based International Monetary Fund (IMF)— have piped up in recent months warning Canada that reassessing its tax system is a necessity to remain competitive and keep up with shifting global tax systems particularly in the wake of corporate tax cuts introduced in the United States by U.S. President Donald Trump.

“It is time for a careful rethink of corporate taxation to improve efficiency and preserve Canada’s position in a rapidly changing international tax environment,” the IMF said in a recent statement.

Predicting a slowdown in economic growth to 2.1 per cent in 2018 and 2.2 per cent in 2019 (down from 3 per cent in 2017), OECD and IMF recommendations include corporate tax reform to increase efficiencies, raising revenues for public spending, curbing budget deficits, and deregulating some specific industries to attract foreign investment. An unstable trade environment—given the ongoing NAFTA negotiations between the U.S., Mexico and Canada, as well as the tariff disputes between Canada and the U.S.— is also projected to negatively impact, though minimally, our GDP.

“The government should review the tax system to ensure that it remains efficient—raising sufficient revenues to fund public spending without imposing excessive costs on the economy—equitable and supports the competitiveness of the Canadian economy,” said the OECD in its July report.

In the wake of Finance Minister Bill Morneau’s statement last month that the federal government will address the competitiveness issue—including tax, NAFTA and oil pipelines—in the fall fiscal update, CPA Canada continues its advocacy for comprehensive tax reform.

In its pre-budget submission, CPA Canada outlines recommendations—in line with those mentioned above—highlighting key areas including a world-class tax system, regulatory competitiveness and efficiency, innovative skills for work, sustainable economic growth and responsible fiscal management. For taxation, the national organization is calling on the federal government to take a two-pronged approach: first, consider certain measures in response to the immediate concerns around U.S. tax reform; and second, commit to a comprehensive review of Canada’s tax system.

“It is true that competitiveness can be affected by a number of different factors. However, there is no question that the tax system as a whole is fundamental to creating a competitive business environment,” said Bruce Ball, vice president, taxation for CPA Canada, in remarks to the standing senate committee on national finance in May. “And, there can be no doubt that the U.S. tax reform proposals represent a real threat to Canada’s tax advantage.”

Taking into consideration the latest Business Monitor survey results—in which, two-thirds of professional accountants in leadership positions reported Canada as being a less competitive place to invest and do business in versus the U.S., compared to one year ago—CPA Canada wants to see comprehensive review of our tax system, led by an independent expert panel, with broad consultation.

“It will involve looking at the tax system more holistically, not just from the perspective of business competitiveness,” added Ball. “It will lead to a better, more long-term approach to fixing Canada’s tax problems.”

Other business organizations including the Canadian Chamber of Commerce, the Business Council of Canada and the Canadian Manufacturers and Exporters have also weighed in, recommending similar measures, with a focus on business.

“These are exciting times in tax policy around the world…[but] our tax system has lost relative competitiveness recently, over the past few years,” said Trevin Stratton, chief economist with the Canadian Chamber of Commerce, in an interview with CPA Canada. “We would like to see a comprehensive review of our entire tax system…and how tax policy levels can be used to improve the competitiveness of our Canadian businesses.”

FOR MORE

Get an in-depth view of CPA Canada’s pre-budget submission, which includes recommendations for developing a competitive tax system for Canada. If you are looking to sharpen your tax knowledge in advance of the budget, visit CPA Canada’s library of tax conferences, courses and publications.