Canada's 2010 Tax Competitiveness Ranking: Moving to the Average but Biased Against Services

Abstract

For the first time since 1975 (the year Canada’s marginal effective tax rates were first measured), Canada has become the most tax-competitive country among G-7 states with respect to taxation of capital investment. Even more remarkably, Canada accomplished this feat within a mere six years, having previously been the least tax competitive G-7 member. Even in comparison to strongly growing emerging economies, Canada’s 2010 marginal effective tax rate on capital is still above average.The planned reductions in federal and provincial corporate taxes by 2013 will reduce Canada’s effective tax rate on new investments to 18.4 percent, below the Organization for Economic Co-operation and Development (OECD) 2010 average and close to the average of the 50 non-OECD countries studied. This remarkable change in Canada’s tax competitiveness must be maintained in the coming years, as countries are continually reducing their business taxation despite the recent fiscal pressures arising from the 2008-9 downturn in the world economy. Many countries have forged ahead with significant reforms designed to increase tax competitiveness and improve tax neutrality including Greece, Israel, Japan, New Zealand, Taiwan and the United Kingdom.The continuing bias in Canada’s corporate income tax structure favouring manufacturing and processing business warrants close scrutiny. Measured by the difference between the marginal effective tax rate on capital between manufacturing and the broad range of service sectors, Canada has the greatest gap in tax burdens between manufacturing and services among OECD countries. Surprisingly, preferential tax treatment (such as fast write-off and investment tax credits) favouring only manufacturing and processing activities has become the norm in Canada, although it does not exist in most developed economies.