Canadian businesses want tax system to drive investment, economic resilience

As the focus on building a stronger Canada dominates the national agenda, tax reform has emerged as an imperative for Canadian business leaders, with nine in 10 (91 per cent) saying it’s time to simplify the tax system and cut the investment tax rate to grow the economy, finds a new KPMG in Canada survey.

The survey of 250 business leaders identified comprehensive tax reform as a top three priority for the federal government to increase business competitiveness. Nearly six in 10 (58 per cent), named it a priority, second only to removing interprovincial trade barriers (64 per cent).

“In this period of nation-building, we have an historic opportunity to overcome years of complacency and build a competitive tax system that responds to today’s challenges of sluggish productivity and slowing business investment in Canada,” says Lucy Iacovelli, Canadian Managing Partner, Tax and Legal, KPMG in Canada. “It will take bold leadership to streamline complex taxes and regulations that are a growing burden on business and optimize the tax system. Corporate tax policies should incentivize businesses to put investment capital to work and make our industries and people more productive. This goes to the very heart of a resilient economy and our standard of living as Canadians.”

KPMG’s poll revealed that nearly three quarters (72 per cent) of business leaders believe current Canadian tax policies are not providing enough of an inducement to invest; 91 per cent believe governments need to implement tax and regulatory policies that encourage greater investment and accelerate the adoption of technologies, such as artificial intelligence (AI).

“Canada’s business community and governments need to align on more favourable corporate tax policies that will help to blunt the impact of disruptive U.S. trade and retaliatory tax policy,” adds Ms. Iacovelli.

Key survey findings:

• 91 per cent say Canada must simplify the corporate income tax system
• 90 per cent agree that Canada needs to eliminate barriers to investment
• 90 per cent say Canada must reduce tax rates on investment to stimulate economic growth 
• 91 per cent believe governments need to implement tax and regulatory policies that encourage greater investment and accelerate technology adoption
• 88 per cent believe Canada needs a complete overhaul of its economic and industrial policies
• 57 per cent say they have been investing in their business but the current trade war makes it difficult to tap into the markets

A more competitive tax system

Tax measures proposed by the new federal government include: expanding flow-through shares beyond the mining sector to Canadian startups that allow investors to deduct eligible R&D expenses; a 20 per cent AI adoption tax credit for certain small- and mid-sized businesses; enhancing the Scientific Research & Economic Development (SR&ED) program and a patent box regime that lowers tax rates on intellectual property (IP) income to enable more Canadian companies to own and commercialize their ideas within Canada.

“While these targeted measures are a start, the federal government needs to reaffirm its commitment to ambitious, broad-based corporate tax reforms that apply to businesses of all types and sizes,” says Ms. Iacovelli. “Tax changes should ease access to domestic and foreign capital and reward productivity-enhancing investments, including AI adoption.”

U.S. tax bill to affect Canada

Following dramatic cuts in U.S. corporate tax rates and the introduction of other significant tax incentives in 2017, the Canadian government responded with temporary measures that provided faster write-offs for a wide range of depreciable property (the “Accelerated Investment Incentive”), along with immediate expensing for certain manufacturing equipment and clean technology assets.

“Current tax legislation before Congress would make permanent many of the 2017 U.S. tax incentives, which puts pressure on Canada to continue our own incentives that allow for faster business write-offs that free up capital to reinvest,” says Brian Ernewein, Senior Advisor, KPMG in Canada’s National Tax Centre. “Simply matching the U.S. on these tax incentives would not restore Canada’s competitive corporate tax advantage. Actions – federally and provincially – to reduce the top corporate income tax rate in Canada would be a powerful response to these pending U.S. tax changes and, more generally, to the greater uncertainty of the current U.S. trade and investment environment.”

The bill also targets countries that impose what the U.S. administration considers “discriminatory or extraterritorial taxes”. “This retaliatory U.S. legislation has the potential to significantly increase the tax rate applying to U.S income generated by Canadian businesses and investors and could make such investments economically unviable,” adds Mr. Ernewein. “It’s critical that this legislation, if enacted, not apply to Canada.”

Attracting more capital investment to Canada

• According to the survey, nearly nine in ten (88 per cent) business leaders believe a preferential capital gains tax rate for private capital investment would encourage long-term investment into Canadian startups, small-and-mid-sized businesses and scaleups.
• “In a global economy, capital is mobile,” says Johanna Gerrie, National M&A Tax Leader, KPMG in Canada. “For Canada to remain a destination of choice for investment, we must ensure our tax system is efficient, stable and aligned with the realities of international competition. We face stiff competition from the U.S. and other countries in attracting large-scale investment from institutional investors, venture capital and pension funds. These sources of capital can unlock growth and accelerate technology and infrastructure development to support nation-building projects.”
• Additional poll findings:
• 60 per cent say limited access to capital impedes or hinders their ability to invest in their operations, move forward with expansion plans, or invest in technology. 
• 53 per cent say their company is exploring tapping the private capital markets to help drive growth, expand into new markets and provide business acumen and expertise.

KPMG ideas to improve the corporate tax system

• Be ambitious: Given current economic conditions, evaluate new approaches, including a possible reduction to the top corporate tax rate, in conjunction with fiscally responsible government spending.
• Make the tax system simpler and easier: Reduce complexity through greater rationalization as it applies to large and small businesses, review tax rates, credits and deductions, and eliminate tax measures that are overly complex to administer.
• Enable faster investment write-offs: Further accelerate tax deductions for the cost of new investments in order to maximize the incentive for businesses to enhance productivity.
  Speed-up R&D incentives. Fast-track enhancements to SR&ED and the creation of a Canadian “patent box”, which are positive, productivity-enhancing initiatives.
• Provide adequate R&D incentives to large companies: Currently, SR&ED tax credits generated by larger firms – Canadian or foreign-owned – can only be applied against tax otherwise payable and are not refundable. This undercuts the value of this incentive for some of the biggest firms carrying out these activities in Canada.
• Simplify provincial sales tax collection for business: Retail sales taxes, in provinces that continue to impose them, are a significant added business expense. Both the monetary cost of retail sales taxes and the cost of complying with two systems impose a substantial additional tax and compliance burden, in contrast to a harmonized value-added tax or provincial HST.
• Reduce the reporting burden: Evaluate business tax reporting requirements to determine whether they are worthwhile given the costs, and if various reporting obligations can be rationalized or their objectives achieved more efficiently through other means.
• Review business penalties: Determine the number and level of potential penalties businesses may be exposed to currently, in conjunction with the government’s plan to impose stricter enforcement, with an additional $3.75 billion in fines and penalties over the next few years.

About the KPMG in Canada Productivity Survey