Canada’s Finance Minister Threads the Needle in His Most Recent Policy Statement

Ever since the U.S. Congress passed the huge corporate tax cut earlier this year, segments of the Canadian business community have urged the Canadian government to do something along similar lines to make Canada more competitive. Canada has wisely resisted going down the route of cutting the corporate tax rate to remain competitive. The evidence is mounting that the U.S. tax cuts are doing nothing to encourage business investment. The tax savings are finding their way to the shareholders through share buybacks and raised dividends, rather than through corporate expansion. These developments were not lost on the Canadian government.

So, yesterday the Finance Minister, Bill Morneau responded with a tax incentive that featured an accelerated full cost allowance for capital investment. Canadian corporations could immediately deduct the full cost of any capital investment in new plant and equipment in the manufacturing and clean technology sectors. The revenue lost related to the tax change will increase the budget deficit by C$14.4 billion; other tax incentives will add another C$ 3.2 billion to the overall deficit.

Overall, the impact of these budgetary measures will be relatively small and the budget deficit is expected to come in at 0.8% of GDP for each of the next three years. American readers should note that, by contrast, the US government deficit expected to reach 4% of GDP next year.

Economists have long preferred such tax incentives to outright tax cuts as the least costly means --- in terms of loss of revenues/rising deficits------ to encourage business expansion. It appears that the younger Trudeau took a page out of his father’s playbook when the latter’s government of the 1970s it introduced a similar tax incentive to spur with business investment during those years of sluggish growth.