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"...authors Robin Boadway and Jean-François Tremblay put forward bold recommendations to increase the efficiency and fairness of corporate tax in Canada."

May 31, 2016 – The Canadian corporate income tax system has a number of problems that call for fundamental reforms, starting with rethinking the main role of the system, according to a report from the C.D. Howe Institute. In “Modernizing Business Taxation,” authors Robin Boadway and Jean-François Tremblay put forward bold recommendations to increase the efficiency and fairness of corporate taxation in Canada.

“The corporate tax is designed to prevent shareholders from sheltering income from the personal income tax,” commented Boadway. “The problem is most capital income can be sheltered and therefore the system is not meeting its intended goal.” Tremblay added: “The current system also places most of the tax burden on labour and distorts firms’ investment decisions, financing decisions, risk-taking and innovation efforts. The system desperately needs reform.”

The authors recommend changing the tax base from shareholder income to above-normal profits, or revenues above the normal costs of doing business. More specifically, they urge the government to make the following, relatively straightforward changes:

  1. Adopt the allowance for corporate equity (ACE) tax system, which allows firms to deduct from taxable income the cost of equity financing, in addition to deducting interests on debt;
  2. Apply this tax base to both incorporated and unincorporated businesses;
  3. Eliminate the dividend-tax credit and the partial tax-exemption of capital gains to ensure the change is revenue neutral;
  4. Use the territorial approach for taxing international active business income;
  5. Allow firms to carry forward and backward tax losses at the risk-free interest rate, which would encourage risk-taking and innovation;
  6. Maintain the small business deduction to compensate for the non-refundability of losses, which are more prevalent among small businesses; and
  7. To promote innovation, consider introducing a preferential tax rate for patent income, as well as extending flow-through share financing to investment in small innovative firms.

The authors conclude: “These modern proposals address some of the most important concerns arising from a corporate tax system that was designed for a bygone era.”

Click here for the full report. 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

For more information contact: Robin Boadway, Emeritus Professor of Economics, Queen’s University; Jean-François Tremblay, Associate Professor of Economics, University of Ottawa: 416-865-1904 or email: kmurphy@cdhowe.org.