Canadian businesses will be able to immediately write off capital investments instead of having to write them off during the life of the asset, Finance Minister Bill Morneau announced in his November 21 economic update.
The move is expected to cost about $14 billion over the next five years and will be a contributing factor to future deficits. Morneau estimated that the deficit in the current 2018-19 fiscal year to be $18.1 billion, and the deficit in the 2019-20 fiscal year to be $19.6 billion. Morneau and his Liberal Party campaigned in 2015 on a promise to balance the budget by the end of their first term.
“Our government is confident that if we give Canadian businesses more opportunities to succeed and grow, they will meet and exceed all expectations,” Morneau said.
“To encourage businesses to invest in their own growth and create more good well-paying jobs, our government proposes to allow businesses to immediately write off, for tax purposes, the full cost of machinery and equipment used in the manufacturing and processing of goods.”
He added that the government will also allow businesses to write off the full cost of some clean-energy equipment.
“This will help achieve climate goals and boost Canada’s global competitiveness,” Morneau said.
The federal Liberal government’s moves will lower the effective corporate tax rate that B.C. businesses have to pay and be welcome news given that B.C.’s corporate-tax competitiveness has been on the decline.
B.C. businesses in 2012 enjoyed some of the lowest statutory corporate tax rates in North America.
Gordon Campbell’s Liberal government had lowered B.C.’s corporate tax rate to 10% – the lowest in Canada – after it brought in a revenue-neutral carbon tax in 2008.
When combined with the federal government’s 15% corporate tax rate, B.C. businesses paid a total of 25%.
Since then, however, B.C.’s corporate tax rates have risen while those in the U.S. and other parts of Canada have been on the decline.
Christy Clark’s Liberal government raised B.C.’s corporate tax rate to 11% in 2013 as part of what it called a temporary measure. The current NDP government then raised the rate to 12%.
That pushed B.C.’s corporate-tax rate above the 11.5% corporate tax rate that is in place in Ontario – a rate that Ontario Premier Doug Ford has promised to reduce to 10.5%
The U.S. this year slashed its federal corporate tax rate to 21% from 35%, and most states have corporate tax rates that are less than 10%.
“It’s not that we’re absolutely uncompetitive,” Business Council of British Columbia executive vice-president Jock Finlayson told Business in Vancouver on November 19. “It’s that we’ve lost a big advantage.”
He estimated that the average U.S. combined statutory corporate tax rate is about 26%, with B.C.’s now being 27%.
What has made things worse for B.C.’s competitiveness at attracting businesses, compared with the U.S., is that U.S. businesses are able to write off capital cost outlays immediately.
Morneau's move means that on that front, there will be a level playing field.
“The Americans have always had more attractive CCAs [capital cost allowances] than we’ve had in Canada so they permitted faster write-offs,” Finlayson said. “That’s one of the reasons they were able to survive higher statutory tax rates.”
B.C. has a small business tax rate of 2%, which applies to the first $500,000 in profit. Finlayson called this incentive an “odd” practice because it makes the level of taxation climb by six times once that threshold is reached.
“Canada, and particularly B.C., are jurisdictions where it is very attractive to keep your net income below $500,000 a year,” he said. “That’s a strange signal to send entrepreneurs and companies.”