Canada Slashes Business Levies

Commentary, Role of Government, Frontier Centre

Canada is poised to cut its corporate-tax rate to 16.5% on Jan. 1, part of a decade-long campaign that some experts say is making the country one of the most cost-effective places to do business in the developed world.

Canada’s government says the cuts and other business-attracting measures should bring more investment to the country. Economists say it’s tough to figure out what the actual effects of such moves are, though some companies say Canada’s relatively low taxes and stable financial and regulatory environment swayed their decisions to move operations and capital north.

Skeptics point out that because of Canada’s relatively small market—the nation’s population and economy are roughly a tenth the size of those in the U.S.—attracting investments could still be a hard sell.

The latest tax cut is Canada’s fourth in as many years and will lower its federal corporate income-tax rate from the current 18% to less than half of the U.S.’s 35%, at a time when economists and government officials fret that high U.S. taxes could be discouraging investment south of the border.

In 2012, Canada plans to cut its corporate taxes further, to 15%, bringing combined provincial and federal taxes to about 25%, from a combined average of 42.6% in 2000.

The Canadian government says those cuts will give Canada the lowest overall tax rate on business investment in the Group of Seven Industrialized Nations when deductions and credits are factored in.

The cuts have been accompanied by other business-friendly policies in the past few years, from removing corporate surtaxes and levies on capital to a promotional blitz by Canadian politicians and business leaders bent on taking advantage of the country’s relatively strong standing after the recession.

"We have our deficit and debt situations under control,” said Finance Minister Jim Flaherty, in an interview earlier this month. "Our financial sector is solid so people don’t need to be concerned about dealing with Canadian banks.”

Some legislators worry that continued corporate tax cuts will curtail revenue, a particularly sensitive topic now that Canada is running a federal deficit of about 55.6 billion Canadian dollars ($55.6 billion).

The opposition Liberal party estimates the planned corporate tax cuts will add another C$6 billion to the country’s debt.

But others say the moves are having a positive impact.

Canadian Manufacturers & Exporters, a business lobbying group, estimates that after-tax profits for businesses during the first three quarters of 2010 were C$17 billion higher than they would have been if corporate tax rates had remained at their 2000 levels.

Accounting firm KPMG this year said Canada led other developed nations as a cost-effective place to put businesses, in its biennial comparison of global locales that includes effective tax rates as well as other factors, such as the cost of labor and utilities.

Since 2008, KPMG has been moving internal marketing, technology and finance services to Toronto from London and other locations. Toronto is now KPMG’s biggest global support center with more than 200 staffers.

Gregory Ebel, chief executive of Spectra Energy Corp., Houston, Texas, said Canada’s tax advantages are a big reason the company plans to invest more than $2 billion there in the next two years on infrastructure projects, particularly in natural-gas facilities in British Columbia.

The combined federal and provincial tax rate for the gas pipeline operator comes to roughly 25% in Canada, versus around 40% in the U.S., according to Mr. Ebel.

"Boy, that drives investment decisions,” Mr. Ebel said. "The current environment in Canada looks better from a tax and fiscal perspective than the U.S.”

The Citco Group of Companies, a financial group that specializes in serving hedge funds, looked at the stability of Canada’s regulatory system when it decided to put its only North American bank in Toronto, said Scott Case, Citco Bank Canada’s managing director.

The bank joined a securities-processing arm—one of two globally—that Citco opened in Toronto in 2008, as well as a large, 20-year-old fund-services branch. Between the three, Citco now employs nearly 800 people in Toronto.

Citco’s bet on Canada looked particularly good after the financial crisis crippled many of New York’s big financial players, Mr. Case said. "The market here has been very stable,” he said.

M&T Bank, based in Buffalo, N.Y., was following its customers when it decided a few years ago to open a branch in Toronto, said John MacLeod, the principal officer for the branch. The bank, which offers loans and lines of credit to firms that trade across the U.S.-Canada border, found that "increasingly our U.S. clients were looking to do more business in Canada,” he said.

M&T’s decision was helped along by a regulatory change that made it possible for U.S. banks to open Canadian branches rather than just subsidiaries, said Mr. MacLeod.