US President Donald Trump’s proposal of lowering federal corporate tax from 35% to 20% could send Canada’s tax competitiveness stuck in the doldrums.
According to Montreal Economic Institute (MEI), Ottawa should consider adopting a proportional tax rate of 10.5% for all corporate earnings to keep up with its neighbour instead of entertaining the proposal of Canadian Finance Minister Bill Morneau to raise taxes on entrepreneurs.
Economist Mathieu Bédard said should the US push forward with the reduced corporate tax, Canada’s tax competitiveness would be substantially reduced. To recall, the highest combined marginal corporate tax rate in Canada is 31%.
“If Trump goes ahead with this reform, and Ottawa sits on its hands, there will be serious consequences for Canada’s corporations, and especially for its workers, who would suffer a large part of the negative effects since investment and the demand for labour in Canada would decrease,” he explained.
In essence, a modest slashing of tax rates in the US could generate an effect similar to increasing tax rates in Canada, since this would boost its relative tax burden.
Bédard noted that in order to shield workers, Ottawa could revoke it stop income tax rate of 15% and maintain only the lower rate of 10.5%. This currently applies only to small firms. Doing such would help preserve Canada’s competitiveness. More so, he said Ottawa actually has the intent to take the lead and adopt such measure, regardless of what happens withAmerican tax reform. The introduction of this proportional corporate tax, he argued, will promote business growth, which multiple rates of taxation tend to discourage.