Ottawa should consider a two per cent reduction in corporate income tax and double the top personal income tax threshold in the federal budget this year to counter Canada’s lack of competitiveness and headwinds such as COVID-19 and blockades, according to C.D. Howe Institute.
The Toronto-based think tank is recommending lowering the corporate income tax rate to 13 per cent from the current 15 per cent, to regain its competitive edge and attract investors.
While the cuts would reduce federal revenues by $3.8 billion annually initially, authors William Robson and Alexandre Laurin noted that, “as investors and business managers responded positively, however, the base for the corporate income tax would expand, reducing the impact over time.”
The suggestion to double the top personal income tax threshold would reduce the number of people being taxed the highest rate, doubling the threshold from the current $214,368 to $428,736.
The report also proposed a general sales tax increase of 10 per cent on transportation fuels in the next fiscal year. The goal is to move up to 15 per cent in the 2023-2024 year in order to discourage CO2 emissions.
The C.D. Howe report said the current national carbon price, scheduled to rise $10 per tonne of CO2 equivalent from its current level of $20 to $50 by 2022, won’t hit Canada’s 2030 emission targets, but raises pressure on Canadian businesses whose international competitors don’t pay an equivalent levy. While a transportation fuel tax lessens the incentive to reduce emissions on intermediate activities, the report said the tax will protect Canada’s international advantage.
Mike Moffat, senior director of policy and innovation at the Smart Prosperity Institute, said he isn’t enthusiastic about the proposed reduction to corporate income tax or the tax cuts for those above $200,000 in personal income. “I don’t really see what they’re meant to accomplish, or much evidence that they’d do anything beyond costing the government money,” he wrote in an email.
Moffat was more enthusiastic, however, about suggestions to raise the tax on transportation fuels.
“We need to redesign our taxation system to simultaneously promote economic growth and reduce environmental harms,” Moffat said. The emissions reductions through high tax on fossil fuels will likely be small, but overall it’s a step in the right direction to “use the tax system to reduce environmental ‘bads,’” he said.
Robson and Laurin also suggested the elimination of all of Canada’s remaining tariffs on imports, pointing to additional benefits to Canadian consumers and businesses, which would boost GDP by one per cent.
The report also included some suggested changes to personal finance, including an age increase on when Canadians must stop contributing to tax-deferred savings, such as registered retirement savings plan, or an RRSP, from 71 to 72. They also propose an increase in tax-deferred saving limits, raising the limit three percentage points of income per year over four years.
For tax-free savings accounts, or TFSAs, C.D. Howe suggests making buying life annuities within them possible, as is allowed in RRSPs. Annuities offer a monthly stream of income for a pre-determined period or for life.
“But TFSA holders cannot buy annuities inside their TFSAs, which means that they end up paying tax on money that should have been tax-free. This difference disadvantages people who would be better off saving in TFSAs, and discourages a much-needed expansion of the market for annuities in Canada,” the authors argued.
With a file from Colin McClelland
Financial Post
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