Economists expect a number of tax reforms to be unveiled on Tuesday in Canadian Finance Minister Bill Morneau’s 2018 Budget, as the federal government in Ottawa seeks to maintain Canada’s international competitiveness.
Tax changes seen as likely in the federal budget include changes to Canada’s corporate tax rate. Canada’s average combined federal/provincial corporate tax rate currently stands at 26.7% -- almost three percentage points above the average of the world’s advanced economies. On January 1, U.S. President Donald Trump’s sweeping tax reform package took effect, dramatically changing the corporate tax environment. The U.S. nearly halved its federal corporate tax rate to 21% from 35%, and allowed for the full expensing of investments in machinery and equipment, and introduced international tax rules that bring in a substantially more competitive business environment. Canada is under pressure to keep up with its southern neighbour.
Personal taxes could also be adjusted in the federal budget. The Liberal Government of Prime Minister Justin Trudeau in 2016 cut the tax rate on the middle-income bracket to 20.5% from 22% and introduced a 33% high-income bracket for annual earnings over $205,842. Adding in provincial/territorial taxes and surtaxes puts the statutory tax rate between about 20% and somewhere north of 50%, depending on a person’s income and province of residence. But, again, contrast Canada’s top 2018 tax rates with the new U.S. rates introduced by Trump. The new U.S. federal top rate for 2018 is 37% and is reached only when income tops US$500,000. The Liberals may look to move personal income taxes in Canada more in line with the U.S.
And many economists expect some tax relief for small businesses in the budget. Small business lobby groups have called for action on how a Canadian-controlled private corporation (CCPC) is taxed when it uses a passive investment income earned and retained inside a CCPC. Ottawa had proposed new rules that would tax passive investment income (above the previously announced $50,000 annual threshold in CCPCs at total effective rates as high as 73%. But Minister Morneau may abandon that proposed new tax after pressure from small business groups to drop it.
