The main issue is that Canada has for a long time had a more favorable combined provincial-federal corporate tax rate across almost the entire country. Through the North American Free Trade Agreement (NAFTA), corporations would establish their headquarters in Canada while the bulk of their operations remained in the United States. A good example is Restaurant Brands International, which owns and operates Tim Hortons, Burger King and Popeyes chains across the continent and is based in Oakville, Ontario. Oakville is a small city situated west of Toronto, with a population of just under 200,000 residents. Many can guess that the sole reason for this giant multinational to be based there is because of the favorable tax rates.
With this key competitive edge taken away by the tax changes passed in the United States, provincial governments and the federal government have been scrambling to find an adequate response. While corporate tax rate cuts would go against the Federal Liberal brand, provincial governments may be looking at ways they can lower their rates without losing vast amounts of revenue. The Minister of Finance stated in early 2018 that his No. 1 job now is to find ways to keep Canada competitive with the United States and developing markets.
One clear way that the federal government could instantly spur economic activity is by getting Canadian depreciation rates closer to those in the United States that companies take full advantage of. Prior to the Tax Cuts and Jobs Act, American companies could depreciate an asset fully within a five-year period. In Canada, however, for the exact same asset, a company could only depreciate it to 1 percent within 13 years. Statistics show that when a contractor is able to depreciate an asset faster, they are more likely to purchase the newest and latest sooner. For example, a mechanical contractor in Canada who owns a bulldozer from 2017 will most likely keep it until the late 2020s, while in the United States, the same bulldozer is more likely to be replaced sooner.
Accelerating depreciation rates in Canada would have many benefits that would be in line with the federal government’s objectives. First, it would spur economic activity by having companies across the country update their fleets with newer products. Second, updated vehicles are able to be more efficient at accomplishing tasks, and therefore it would support the government’s infrastructure spending plan. Third, more efficient vehicles will have less of an environmental impact than their predecessors, as newer engines consume fuel more efficiently overall.
It has been nearly a year since the American government passed legislation that has clearly made the United States more globally competitive. Without targeted policy changes in Canada, it is very likely that the economy will continue to lag behind, both in attracting investments and in encouraging growth. As Minister of Finance Bill Morneau continues to consider actions to take to make the playing field more even again, he must consider accelerated depreciation as a key way to spur economic activity across the country. Only a suite of strategic policy changes will allow Canada to remain globally competitive.