Liberals not cutting corporate tax, instead reveal $16B plan to boost competitiveness with U.S.

There will be no corporate tax cuts in Canada akin to the package introduced by Donald Trump’s administration earlier this year.

Instead, Finance Minister Bill Morneau introduced on Wednesday a package of tax write-offs and investments that the government says will effectively reduce the corporate tax rate in Canada from 17 per cent to 13.8 per cent.

Liberals say it’s a $16-billion answer to Canada’s competitiveness concerns.

Those measures come after U.S. President Donald Trump brought in a package of tax reforms in 2017 to slash the corporate tax rate there from 29.8 per cent to 18.7 per cent at an added cost to the U.S. deficit of roughly $1.5 trillion over the next decade.

“The U.S federal tax reform has significantly reduced the overall tax advantage that Canada has built over the years, posing important challenges that, if left unaddressed, could have significant impacts on investment, jobs and the economic prospects of middle class Canadians,” the fiscal outlook states.

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As a result of that risk, the package of tax write-offs proposed by the government will do three things.

First, manufacturers and processors that acquire new machinery and equipment after Nov. 20, 2018, will immediately be eligible to write-off the full cost in their tax returns for the year that new equipment is put into use.

Second, businesses buying certain kinds of clean energy equipment after Nov. 20, 2018, will also be eligible to fully write off those costs as part of a push to get more businesses investing in clean technology.

Both write-offs will be phased out starting in 2024 and will no longer be available after 2027.

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Third, the plan will also triple the amount companies can deduct from their tax returns for capital investments in their first year of use through what will be known as the Accelerated Investment Incentive.

Those measures account for $4.9 billion of what is projected to be a $5.3 billion price tag for the proposals dealing specifically with investment innovation next year, when the government will have to answer to voters over whether it has done enough to keep Canada a competitive place to do business.

Some business groups have suggested in recent months the government should match Trump’s tactics and cut the corporate tax rate directly.

Instead, Morneau said the measures proposed by the government achieve the same result without adding billions to the deficit, already at $19.9 billion.

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“If we were to do that, it would add tens of billions in new debt,” said Morneau in reading his fiscal outlook to the House of Commons on Wednesday afternoon.

“And so we choose a different path – one that is targeted, measured and fiscally responsible.”

Conservative Leader Andrew Scheer criticized the government for not focusing on cutting the deficit.

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In addition, Conservative finance critic Pierre Poilievre argued that not cutting the corporate tax rate directly was going to result in jobs heading to the U.S.

The Canadian Taxpayers Federation also offered critical words.

“The government notes that the Canadian economy is strong, but the obvious question is: if they can’t even balance the budget in these good times, when will they ever be able to?” said Aaron Wudrick, federal director of the organization.

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“There are a few small measures in this update that will help mitigate some of the competitiveness issues caused by tax cuts south of the border, but the big picture remains unchanged. For governments, spending is easy and restraint is hard. This government needs to grow a spine and start making tough choices rather than saddling our children and grandchildren with billions in new debt.”

The spectre of global economic uncertainty hung over the fiscal outlook, which otherwise focused on steady economic growth in Canada over recent years and low unemployment.

But finance officials said the fiscal outlook hedges on fears that the U.S. economy could overheat as a result of the tax cuts introduced by Trump last year and that the growth there is unsustainable.

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As a result, officials suggested the federal government sees a more cautious approach as a wiser course while still giving them wiggle room to adjust in the event of moves to cool down the American economy such as if the U.S. Federal Reserve hikes interest rates.