April 16, 2020 – Now is not the time to consider capping interest deductions for business taxes, says a new report from the C.D. Howe Institute.
In “Adjusting to Reality: As Proposed, Restricting Corporate Interest Deductibility is Ill-Advised,” authors Jack Mintz and V. Balaji Venkatachalam note that the proposal, the implementation of which is currently under serious consideration in Ottawa, would have added $1.45B to Canada’s 2019 corporate tax bill.
“The proposal in its current form is ill-advised, especially as it comes just as companies are piling on more debt due to the economic fallout of the current crisis,” said Mintz.
As proposed by the Liberals in the 2019 election, the rule would cap net interest expense tax deductions at no more than 30 percent of the corporation’s earnings before the deduction of interest, taxes, depreciation and amortization (EBITDA), with some exemptions.
The US and EU countries already have their versions of such a rule, in keeping with a recommendation of the OECD, as a way to fight the advantageous shifting of taxes and profits between countries. However, this does not mean a similar proposal is a good idea for a cyclically based economy like Canada, warns the report.
The government’s initial broad proposal based on 30 percent of EBITDA would have raised $1.45 billion in 2019 federal and provincial corporate tax revenue. This results in an increase in the average corporate income tax rate of 0.9 percentage points. The authors suggest, to keep the effect neutral, a reduction in the corporate income tax rate by 1 point would be needed, similar to recent reforms in Europe.
The report concludes that a broad interest limitation rule should not be applied to all domestic and multinational companies. The authors warn such a policy would lead to double taxation of bond-financed capital investment, be distortionary across sectors and assets, as well as discourage investment.
For more information contact: Jack Mintz, President’s Fellow, The School of Public Policy, University of Calgary; V. Balaji Venkatachalam Research Associate, The School of Public Policy, University of Calgary; or David Blackwood, Communications Officer, the C.D. Howe Institute, 416-873-6168, email email@example.com.
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.