Sunday, July 5, 2009

Canada to Attract More Business with Lower Corporate Taxes

A few days ago Tim Hortons Inc. announced that it was changing its corporate registration from the United States to Canada in order to take advantage of better tax rates in Canada.
Economist Douglas Porter of Bank of Montreal saw this step as confirming the Canadian government's decision to lower corporate income tax. As he notes, reductions in tax rates invite more businesses to base themselves in Canada and pay taxes here instead of somewhere more costly.

Porter believes that Tim Hortons decision will start a trend for businesses to switch their registration to Canada. As the United States is running into huge fiscal deficits, the tax rates are expected to continue to hike there. But the Canadian public sector's better position should allow tax rates to keep decreasing in relation to U.S. Taxes.

As far as we see, they are. The Federal corporate tax rate in Canada is now 19%, down from 22.1% in 2007. The rate is forecasted to keep falling, to 18% in 2010, 16.5% in 2011 and 15 per cent in 2012. The provinces are seeing parallel cuts too. The Ontario government plans to lower its general corporate income tax rate from 14% to 10% by 2013.

As these trends continue, the economy should be looking forward to more jobs and capital as well as higher revenues for government programs. And the lower rates will likely be offset by more stimulus for investment and production and more tax money pumped into the economy by more businesses being attracted to open up shop in Canada.

Maybe Canada is figuring out at long last that higher tax rates don’t always translate to high tax revenue. A classic case is tobacco taxes, where tax rate hikes often lead to greater black-market activity, smuggling and lower tax receipts. According to a Montreal Economic Institute study, in Quebec receipts from tobacco taxes went down more than 25% from 2002 to 2007,
Canadians would do well to rein in the stimulus packages that the federal and provincial governments have announced in response to the global economic recession. Without all that spending, Canadian taxes would be more likely to keep on their downward trend versus other countries and be able to generate some real growth by encouraging more businesses to operate here.

When countries like the U.S. and China administer massive stimulus packages to their economies, their effects will soon run off into Canada. And we even see it happening now. As China stockpiles raw materials, commodity prices are on the upswing. As the U.S. economy shows some recovery, it too should start bidding on natural resources and other exports from Canada.

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