Canada gets a variety of tax cuts

Canadian coinsThe Canadian government released a mini-budget this past week that featured serious tax cuts. The GST goes down another point to 5% and the lowest bracket of personal tax is lowered back down to 15%. Corporate taxes continued their downward trajectory.

The CICA focused first on the reduction to corporate taxes:

“The government’s commitment to reduce the general corporate tax to a rate of 15% by 2012 is a positive step toward making Canadian companies more competitive,” said Kevin Dancey, FCA, President and CEO of the CICA.

Their media release about the announcement actually doesn’t even mention the GST or personal tax. That’s a little strange. I hope they’re just working on something really special and it’s taking longer than expected, because they would be remiss to miss out on commenting on these topics as well.

Clearly we as a profession should have something official to say about personal and consumption taxes. I know I do, as an individual member.

The Basic Personal tax credit amount was raised to $9,600 in 2007 and is scheduled to rise further to $10,100 in 2009. This is a positive step and smart policy, as a strong argument can be made to increase the limit to the poverty line. Any increase here is progressive and ought to be well received.

The cut to the GST from 6 to 5% as of January 1, 2008 is essentially regressive and rewards increased consumption. Shifting the savings here to the Basic Personal credit or lowering the general rate on income tax would have been better and greener.

Canada is riding high on a wave of prosperity, the loonie has reached levels not seen since before the 20th century, and unemployment is reaching all-time lows. It is only fitting that the Federal government return some of its surplus to Canadians.


Experts weigh in on interest deductibility issue

The Globe and Mail, a Canadian daily, has a feature on their website today where three tax experts from Couzin Taylor LLP and Ernst & Young LLP answer questions from readers about the interest deductibility “feature” of the Federal government’s budget.

Caribbean beachI’ve blogged about this complicated topic a couple of times now but never really felt I understood the issue as clearly as I could’ve. I think I made that apparent to my readers! The discussion on the Globe really helped me get the gist of this situation better than my rudimentary research before.

Some highlights:

The government has ignored the adverse macroeconomic impact of the proposals. The measure has specifically targeted double-dips that reduce foreign taxes. Reducing foreign taxes increases Canadian wealth and enhances Canadian companies’ ability to compete abroad. There is no benefit to Canada or hard working Canadians from the measure announced today, which increase foreign taxes.

Seems pretty counterproductive to hurt Canadian companies and think this is going to have any kind of positive impact on our country. This will reduce jobs here and abroad in Canadian multinationals and will not increase federal tax revenue here (but it will abroad).

In practice, companies headquartered in countries like the US and UK will have a competitive advantage as they are able to reduce their foreign taxes and thereby reduce their cost of capital, relative to Canadian companies. The budget materials suggest that other countries are considering adopting similar policies, but that remains to be seen. No other country of which we are aware has compromised the international competitiveness of its own multinationals to this extent.

Why are we enhancing the competitive advantage companies already have over our companies? Because those other countries have looked at the same measure in their own tax laws, but have yet to implement them? Sometimes it’s better not to be ahead of the curve.

The proposal as drafted encourages Canadian companies to deduct interest in the highest tax jurisdiction. In this regard, Canada has among the highest marginal tax rates in the industrialized world. In addition, there is often additional complexity and cost associated with obtaining a foreign interest deduction. Most companies will forgo trying to get a foreign interest deduction for these reasons, and will instead just take the Canadian deduction. This will increase foreign tax revenues and reduce Canadian tax revenues.

Wow. I guess a pretty important question is whether there was anyone in the Finance department warning the Minister of these very serious drawbacks to his plan, or whether they were just being ignored. This whole thing is approaching debacle status.


Canadian government backs down on controversial budget move

In late March I talked about the Canadian Federal budget, which had been recently released, and how it included a measure to prevent companies from deducting interest on debt incurred to fund foreign operations. I couldn’t understand the logic of the move.

Canadian ParliamentIt seemed strange for a conservative government normally known to be friendly to business. It also was inconsistent with how interest is generally treated for tax – that is, it is deductible if incurred to earn income both for businesses and individuals.

I wrote the blog post with more than a little trepidation, however, as I couldn’t shake the feeling that I might be missing something. The last thing I wanted was to appear the fool – perhaps the Finance Minister knew something I didn’t.

In the weeks that have passed since then, I have been joined by business leaders throughout the country decrying the move. It’s been sweet vindication reading every article featuring various business groups, executives and financial experts putting forward strong arguments against the now very controversial measure.

Now it appears the government is listening to us. They are “retreating” from the measure, and will continue to allow the deductibility of interest in these cases.

Companies will still be allowed to deduct the interest costs, but only once, Flaherty said Tuesday, claiming the measure was not aimed at eliminating the deduction but at corporations who were using offshore tax havens to claim the deduction twice — in Canada and in a foreign country.

The move was too much of a blunt instrument for the precise target Flaherty’s now claiming for the move.

On top of that, since when is it the Canadian government’s business what companies are deducting in other countries? Shouldn’t the government be focusing on establishing tax treaties with these countries, or at least working with other governments to put more pressure on countries with lax tax law?

Keep in mind I’m in way over my head here on this undoubtedly very complicated international tax issue. But it’s pretty nice finding out my initial thoughts about the move were spot on.

Terence Corcoran of the National Post has some smarter thoughts on the issue than I do:

Something is amiss in the ability of Canadian companies to deduct interest expense on their foreign investment. All serious reviews of the subject have concluded that the strange combination of Canada’s high corporate tax rates, interest-deductibility rules and the dense world of global tax law has produced a great distortionary mess that needs fixing. The question is how and when to fix it. Mr. Flaherty would be wise to announce that, in view of all the serious comment and inherent complexity surrounding deductibility, he will turn the subject over to a panel of experts to get to the bottom of the mess.

Something tells me I won’t be asked to be on the panel!


Budget move likely to discourage global expansion

Yesterday’s Globe and Mail:

The federal Finance Department is acknowledging it could reap a bonanza of additional tax revenue from a controversial budget move to scrap the deductibility of interest that companies incur to fund foreign operations.

I’m trying to understand the logic here but I can’t.

Caribbean beachI know this is money leaving the country, but shouldn’t the law focus on foreign ownership of the overseas operations at least, if that’s what this is about? After all, the money leaving has already been taxed anyway.

As well, this is inconsistent with how interest is generally treated for tax – it’s deductible if used to earn income. It was simpler that way, and when simplicity and consistency intersect within tax law, that’s a good thing.

And this from the CBC’s budget coverage:

The government will crack down on corporations that use tax havens to avoid paying taxes by eliminating the deductibility of interest incurred to invest in business operations abroad, improving information agreements with other countries and providing more resources to the Canada Revenue Agency to strengthen their audit and enforcement activities.

But I think the government could do more to stop this by focusing on the last two points: strengthening information agreements with the countries deemed tax havens, and increasing audits where there is suspected abuse.

Otherwise I expect foreign investment by Canadian firms to decrease sharply. It’s never a good thing when tax influences decisions, but this is going to hurt our global competitiveness too. It sucks when a few bad apples ruin it for everyone.

So it sounds like it’s similar to proposed legislation I blogged about a while ago in the US brought forward by a group which included Barack Obama.


Exxon Mobil’s profits and taxes: both records

Exxon Mobil announced recently the highest annual profits by a US corporation in history. Reaction was predictable – the US Congress was littered with outraged politicians calling for a windfall profits tax. But that would be wrong, and the Tax Foundation can explain why much better than I:

While they were recording record profits last year, they were also writing checks to Uncle Sam to the tune of $100.7 billion — two and a half times what they made in net profit. In fact, previous Tax Foundation research found that from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion.

This is followed by a nice segue into one of my favourite topics – hammering home the point that corporations don’t pay taxes.

Economists across the ideological spectrum agree that individuals bear the burden of business taxes. As stakeholders, we all pay in one of three ways: The first to pay are the employees of oil companies here in the U.S. — people who would make lower wages or perhaps even lose their jobs. Next would be the millions of Americans who have investments in the oil industry — people who would earn lower returns on those investments. And finally, the principal group to pay would be American gasoline customers — the millions of people who would pay more at the pump.

The main reason why the company can boast such a huge net income is simply because it’s so large in general. Formed when Exxon and Mobil merged in 1999, the company is the largest in the world by market value and revenue. It’s (obviously) the largest of the six “supermajor” oil companies. Income as a percentage of revenue is a reasonable 10.5%.