Fix tax rate or risk business exodus, trade association warns (Report)

Another of Canada’s largest business groups is warning that Ottawa needs to act now to lower corporate taxes or risk a continued exodus of investment and jobs to the United States.

The Canadian Manufacturers and Exporters, which represents 2,500 companies, released a report this week that paints a bleak picture of the business landscape in this country: declining investment in new equipment and technology, a sharp drop in foreign investment in Canada.

At the same time, investment in the U.S. is booming, fuelled in part by the uncertainty President Donald Trump is creating over the future of the North American Free Trade Agreement — and in part by his tax plan, released in December, that cuts the top corporate tax rate from 35 per cent to 20 per cent beginning this year.

It’s all part of the Make America Great Again campaign, which Trump claims will bring manufacturing jobs back to the United States.

“A tax advantage is critical for Canada,” said Dennis Darby, president of Canadian Manufacturers and Exporters, in an interview for the Wednesday podcast edition of CBC’s The House. “We are a smaller and less attractive market than the U.S. and we have many non-tax costs of doing business through regulatory red tape.”

The report, entitled Restoring Canada’s Tax Advantage: A Need for Tax Reform, says U.S. investment in Canada in 2017 was nearly half of the $40.6 billion recorded just four years earlier.

Over the same period, Canadian investment south of the border more than tripled.

“One of the things we really were struck by is that our exports of manufacturing goods (have) grown at less than the rate of inflation,” Darby said.

The CME isn’t the first business group to urge Finance Minister Bill Morneau to act.

No change for Finance department

The Canadian Chamber of Commerce and the National Business Council already have called on Morneau to lower tax rates and increase investment incentives.

Morneau has resisted those calls, saying his department won’t react impulsively to the Trump tax plan and will study the impact on Canada’s business climate.

His department said this week that nothing has changed.

“We believe Canadians are competitive. And we know there are both short term and longer-term challenges facing our economy,” a finance department statement said.
 
“But we know there are more immediate challenges, including tax reform and uncertainty south of the border. To address these challenges properly, we will do our homework … and will take our time to fully understand and study the potential impact.”

Darby acknowledged that much of the challenge has been created by Trump himself — the uncertainty his pronouncements have generated regarding the future of NAFTA and his decision to impose tariffs on Canadian softwood lumber, steel and aluminum.

But he said the solution is to match the U.S. by immediately lowering the combined federal and provincial corporate tax rates and by allowing companies to deduct 100 per cent of their investments in new machinery, technology and other capital assets.

“We’re fine with the government saying it won’t act impulsively. But we think six months later, it’s time to have that conversation,” Darby said.

But the government continues to insist it will not be rushed.

‘We just can’t react to everything’

Liberal MP Wayne Easter chairs the Commons finance committee. He said the committee’s study this fall will focus on the overall competitiveness of Canadian businesses.

“On the corporate side our tax rates are similar,” he said in an interview Wednesday, conceding that Canada’s current rule allowing companies to deduct 50 per cent of their capital investments is far less attractive than the total write-off allowed under the Trump tax program.

But Easter said the biggest concern for him is the level of uncertainty being created by Trump’s other actions: his demands for a substantial rewrite of NAFTA in the Americans’ favour, his decision to impose tariffs on Canadian steel and aluminum using a seldom-cited national security — and now, the threat of more tariffs on vehicles imported from Canada.

“As a government we just can’t react to everything. But we have to be willing to make the changes to ensure our business community is cost-effective and competitive.”

Darby said Canada can’t wait for a more level playing field because companies are increasingly looking to other countries for expansion and investment.

“This is not easy to do but it’s certainly what we believe needs to happen to restore our competitiveness.”