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OTTAWA—Planned federal and provincial corporate tax cuts will transfer $4-6 billion of annual revenue from Canadian governments to the U.S. treasury, concludes a study released today by the Canadian Centre for Policy Alternatives (CCPA).
The study, by economist and CCPA Research Associate Erin Weir, explains that the U.S. taxes its corporations on a worldwide basis. When an American corporation repatriates profits from Canada to the U.S., it pays the 35% American federal corporate tax rate minus a credit for taxes already paid in Canada. Given a Canadian corporate tax rate below 35%, American corporations will have to pay the rate difference back to Washington.
“For American corporations, the only effect of deep federal and provincial corporate tax cuts will be to transfer some of their tax payments from Canadian governments to the U.S. treasury,” observes Weir. “Canadian governments can ill afford such revenue losses, particularly given concerns about the prospect of ongoing budget deficits.”
Furthermore, cutting corporate taxes is unlikely to attract investment or jobs.
“If American corporations must pay the U.S. federal tax rate on their Canadian profits, a lower Canadian tax rate will not make their existing Canadian assets more lucrative, let alone induce them to invest more in Canada,” Weir says.
The report recommends that Canada enact a combined federal-provincial tax rate of at least 35% to retain revenue that will otherwise be shifted to the U.S. treasury. Canadian corporate taxes would still be lower than the combined U.S. rate because all but three states apply additional corporate taxes over and above the 35% American federal rate.
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