Ottawa to deliver competitive boost for Canadian companies

Ottawa to deliver competitive boost for Canadian companies

OTTAWA—The federal government will roll out measures to improve the competitiveness of Canadian companies but will stop short of matching U.S. corporate tax cuts in the fall economic update due to the eye-popping price tag.

Finance Minister Bill Morneau’s department has calculated it would cost up to $70 billion over five years in lost revenue if Ottawa tried to match two tax measures that business leaders in Canada say put this country at a competitive disadvantage, according to a senior government official.

U.S President Donald Trump cut the American corporate tax rate last January from 35 per cent to 21 per cent, essentially erasing a tax advantage Canada had with its combined federal-provincial corporate rate standing at about 28 per cent.

Trump also allowed companies to immediately deduct the full cost of capital purchases.

But Canadian finance officials calculate a similar broad-based corporate tax cut would mean forgone tax revenues of $40 billion over five years.

And to allow businesses to write off 100 per cent of their capital spending immediately, instead of spreading the deductions over several years or the useful life of an asset, would cost $30 billion over five years.

On top of that, a senior government official said when Canada did have a corporate tax advantage over the U.S. it didn’t result in more investment by business, rather in more dividends for shareholders.

Federal officials are mum on what measures the Nov. 21 fall economic statement — sometimes called a mini-budget — will contain, but they cast it as an ambitious update admittedly aided by a strong economy.

“Canada’s economy is exceeding forecasts and doing quite well,” said a source, who spoke on the condition of anonymity.

“We’re taking measures in a balanced way being fiscally responsible to ensure confidence continues in our economy and good jobs are being created for the middle class.”

Morneau met Friday with leading private sector economists, as is custom, to gather their perspectives and expectations for the Canadian and global economies in the months ahead.

Among them was CIBC’s chief economist, Avery Shenfield. Before the meeting, Shenfield published an analysis of which way the fiscal winds are blowing, and said afterwards his views hadn’t changed.

He said soft oil prices have created a “new headwind” for the Canadian economy.

Markets, he said, are watching closely for Morneau’s response “to the competitive challenges posed by last year’s U.S. tax reforms,” particularly a made-in-Canada capital investment boost.

“If Morneau delivers on that hope, some will see it as a new tailwind for a Canadian economy that has not fared well in attracting business capital spending.”

Shenfield said past updates and budgets show the federal government “is lagging behind its plans to spend on infrastructure projects across the country.”

“In trying to spend wisely, and in concert with other levels of government, it’s taking longer to get the funds out the door and the shovels into the ground. We might see more of the same in the week ahead update.”

Add to that, Shenfield said, the Liberals have an incentive in the short term to “keep their powder dry, saving fiscal room against their deficit targets for announcements close to next fall’s election.”

For his part, Morneau is talking only in generalities.

“By investing in the things that matter to Canadians while maintaining a clear focus on fiscal responsibility, our government is helping to build a strong middle class, and helping to make life more affordable for Canadian families,” he said in a statement.

Nevertheless, the Wednesday update is expected to contain measures aimed at showing the Liberal government of Justin Trudeau is serious about diversifying Canada’s international trade.

It could mean new trade promotion offices opening abroad. It will certainly mean more emphasis on new markets.

Morneau, fresh off a visit to China last week, said Canada is looking to pursue sector-by-sector agreements with Beijing, emphasizing trade in agriculture and energy, in the hope that agreements reached in the short term could become the building blocks for an eventual long-term deal.

Finally, the update will also emphasize the Trudeau government’s drive to lower and eliminate domestic barriers to internal free trade, an issue Trudeau wants to make a dominant theme at the first ministers’ meeting in early December in Montreal.

But any new significant measures to deal with skilled labour challenges in Canada will likely wait for a spring budget or even the Liberal government’s fall election platform.

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