Canada to Respond to U.S. Tax Reform Challenge in Fiscal Update
Canada’s Liberal government will seek to address competitiveness challenges faced by the nation’s businesses in a budget update later this year amid pressure to respond to U.S. tax reform.
Finance Minister Bill Morneau, in an interview with Bloomberg News in Buenos Aires on Saturday, said the key themes emerging for his fiscal update—a document the finance department typically releases in October or November—will include business taxation, oil pipelines and the renegotiation of the North American Free Trade Agreement.
“We’ve pretty clearly telegraphed that we want to be listening to, broadly to Canadians and specifically Canadian businesses, to make sure that we maintain a level of competitiveness, given the sorts of change changes we’ve seen in our environment,” said Morneau. “I think those themes will be reinforced in our fall economic statement.”
Business groups have pressured Morneau to cut taxes in Canada after the U.S. cut its corporate tax rate from 35 percent to 21 percent, claiming the lost tax competitiveness is diverting investment away from Canada.
A June report from the Canadian Manufacturers & Exporters—an industry advocacy group—recommended the combined federal and provincial corporate tax rate should be cut to 20 percent from about 28 percent, and Canada should match U.S. accelerated capital cost allowance provisions to offer “an immediate 100 per cent tax write-off on qualifying capital asset purchases.”
Morneau said he hasn’t come to any conclusions yet but the consultation process will be done ahead of the fiscal update.
Morneau indicated he’s more focused on lowering the cost of new investment, which he said is the primary concern for businesses, rather than broad-based cuts in the corporate rate.
“People want to make sure that the next investment they’re going to be making is on an advantageous basis,” said Morneau, who was in Argentina to attend a meeting of G-20 finance ministers. “That’s a much more common refrain than someone coming in and saying, ‘You know, I really think you should really cut rates.”’
One constraint for the Canadian government is cost. After ramping up spending in recent budgets to finance Prime Minister’s Justin Trudeau’s ambitious social agenda, there is little room for expensive new initiatives for business such as a broad-based tax cut, particularly if the government wants to keep to its promise of limiting the pace of debt accumulation to below the level of GDP growth.
Morneau said his February fiscal plan—which anticipates a gradual reduction of deficit spending over the next six years—will benefit from a recent pick up in oil prices but the windfalls aren’t significant enough to alter the fiscal outlook, which he said is largely in line with what was projected in his February budget.
“I don’t think we should get ahead of ourselves in assuming that that’s actually going to have an enormous change in terms of our projections,” Morneau said.
- Uncertainty over the fate of Nafta have added to the challenges for the nation’s business and Morneau said his government is still working hard on getting a deal done. Morneau said he hopes the election of a new president in Mexico will return a “sense of urgency” to the negotiations.
- “Getting us back to where we were, you know, maybe a month or so ago, and that opportunity is going to emerge now,” said Morneau, who will be traveling to Mexico this week with Foreign Affairs Minister Chrystia Freeland and Trade Minister Jim Carr to hold talks with the incoming Mexican government.
- Morneau said that some of the biggest issues in renegotiating Nafta are actually between Mexico and the U.S. He’s optimistic there is a “reasonable path” toward resolving some of the sticking points for Canada—the country rejects a U.S. demand to include a sunset clause into the deal and insists the pact include a dispute resolution system.
- Another major file on Morneau’s desk in recent months has been the government’s C$4.5 billion ($3.4 billion) acquisition of the Kinder Morgan Canada Ltd.’s Trans Mountain oil pipeline, which Morneau said should be finalized within the next two months. The government had an option to find another private buyer for the pipeline by July 22 before nationalizing it, but a quick sale won’t happen, Morneau said.
- “Our conclusion is that we have to think about what’s our first objective and our first objective is to get the pipeline built and that objective is thwarted if there’s uncertainty in terms of the ability to actually get the pipeline laid down,” Morneau said. “So it’s just not plausible for us to do it in that timeframe.”