Will the federal government lower corporate tax rates?

If you did not associate the buzz words “competitive advantage” with the federal government and tax policy before, it is hard to ignore now. It all started when the U.S. government implemented the United States Tax Cuts and Jobs Act (“US tax reform”), providing significant domestic tax advantages with accelerated write-offs and a lower corporate tax rate. Since then, it seems a significant number of people and organizations have been calling on the Canadian government to implement various tax policies, in an attempt to regain our competitive advantage.

Announced Nov. 21, the 2018 fall economic update was the Finance Department’s first attempt to address this feedback. Minister Morneau announced earlier the government did not want to rush into any hasty decisions, resulting in limited changes to the Income Tax Act. These changes saw an acceleration of capital cost allowance for acquired business assets but did not reduce the corporate tax rates.

Heading into the 2019 federal budget, we are left to ponder if the Liberal government will modify its platform and try to find a way to restore the corporate tax advantage Canada once had.

The Liberal government is already facing continued deficit financing into 2024 with the following projected annual budgetary deficits (Fall Economic Statement – Nov. 21, 2018):

Deficit financing makes it difficult to cut tax rates because the revenue, based on the existing tax base, would be decreased further, exacerbating the projected deficits. Some hope this loss of revenue would be replaced with an increase in the tax base, resulting from new investment into Canada’s economy. Historical information allows fairly accurate calculations of lost revenue brought about by a tax rate reduction, but it does not lend itself to reliable data measuring revenue generation brought about by an increase in tax base. 

The office of the Parliamentary Budget Officer estimated the annual fiscal cost of gradually reducing the federal corporate income tax (CIT) rate by one percentage point each year over six years. Starting with an average combined rate of 26.8 per cent in 2018, this leads to a combined federal-provincial statutory rate of 20.8 per cent in 2024. The net cost of a one per cent decrease in the corporate income rate is approximately $1.6 billion in 2019. At a six per cent decrease in the federal rate, this leads to a net cost of $11.1 billion per year in 2024.

The government may not be excited to play the tax rate reduction game when it is easy to calculate the revenue reduction, but a leap of faith on revenue generation may be required. Even though corporate taxes amount to only 14 per cent of total government revenue, the Finance Department projects GDP growth to slow down to 1.8 per cent in 2024 from 2 per cent in 2018.  With an undetermined “back to balance” timeframe for the federal government, it is unlikely they will entertain the possibility of corporate tax cuts.