There’s been a lot of talk from Ottawa about a so-called just transition to a greener economy, as energy demand shifts from fossil fuels and the expense of carbon pollution is increasingly integrated into the cost of doing business.
A lot of that talk has centred on how to retrain workers for a greener economy that makes, for instance, batteries for electric vehicles rather than turning bitumen into crude oil. But a new study from the Canadian Chamber of Commerce released last week highlights an inconvenient truth about that hoped-for transition: Canada has at best a negligible advantage over the United States in some key areas, and badly lags in at least one.
The study, by PricewaterhouseCoopers LLP, focused on three key sectors: advanced manufacturing, health and biosciences, and natural resources. All of those line up with stated priorities from the federal government. For each sector, PwC tallied up the tax burden, calculated as a marginal effective tax rate, or METR, for a hypothetical project looking to locate either in Canada or in the United States.
The federal Department of Finance defines the METR as “an estimate of the level of taxation on a new business investment” that takes into account not just statutory corporate income tax rates, but other things such as investment tax credits, capital taxes and unrecoverable sales taxes. Broadly, that measure assesses the all-in tax burden that a company would weigh in making an investment decision.
For advanced manufacturing, the consultancy costed out an electric-vehicle battery plant to be located either in Windsor, Ont., or Detroit. For health and biosciences, it was a vaccine production plant, with possible sites in Quebec or North Carolina. And for natural resources (yes, even a green economy that has been built back better needs those), PwC looked at a copper mine that could be opened in either Arizona or British Columbia.
The conclusions are sobering. Canada eked out a small tax advantage for the battery factory, and the vaccine plant. But the margin of victory is small. A Canadian battery plant would face a METR of 19.9 per cent while its U.S. counterpart would have an METR of 20.4 per cent.
This country had a slightly bigger advantage for the hypothetical vaccine plant, with an METR of 16.2 per cent for a Quebec facility versus 21.4 per cent in North Carolina.
Canada, however, was a markedly less friendly venue for the copper mine, with the Arizona site sporting an METR of 22 per cent, far lower than the 29.2 per cent for the B.C. equivalent.
A small change in the relative rate of U.S. and Canadian corporate tax rates could tilt the table southward for the battery and vaccine facilities, the study noted. For the battery plant, an increase of just a quarter percentage point would be enough to erase Canada’s narrow advantage. For the vaccine plant, an increase of 1.4 percentage points would close the gap.
Even that is understating the fragility of Canada’s position. The PwC analysis did not assume any taxes would rise in future years, even though Ottawa has made it clear that its carbon pricing will increase each year. A company evaluating a multidecade investment would most certainly build in that additional cost into its assessment.
And the analysis did not (and could not) capture the risk associated with the Buy America sentiment that continues to gather strength. Faced with two investments with similar costs, any prudent business would have to think hard about locating outside the United States.
Patrick Gill, senior director of tax and financial policy at the chamber, said the results underscore that Canada needs to take a serious look at its tax system, including statutory rates, as competition heats up for green-economy investments. “It’s going to be a fierce fight,” he says.
Taxing questions
Responding to last week’s newsletter item on real estate taxation, Ed Andrews of Edmonton said he believes that gains on the sales of homes should be taxed at a rate that diminishes over time, with the tax disappearing if the seller has lived in the house for at least 10 years. “Are you aware of any similar sort of taxation proposals that have been floated?” he asks.
There have been a number of proposals that drift in that direction, starting with a plan by the federal Liberals to introduce a new tax for those who sell a principal residence within a year of purchase, and don’t have an officially sanctioned reason (such as a change in employment) for doing so. In the United States, home sellers are allowed to exclude up to US$500,000 in capital gains, for a married couple, if they have lived in their primary residence for at least two years.
Back in Canada, there have been proposals for a sliding-scale tax to discourage flipping and speculation, including from Bank of Montreal, which sketched out an idea for a special capital gains tax, where the rate would decline each year after purchase and fall to zero after the fifth anniversary of purchase.
Interestingly, none of the so-called “speculation taxes” introduced recently by governments in Canada work that way. British Columbia’s version, for instance, is levied on the basis of who owns the property, not how long they have owned it. Indeed, since it’s an annual charge, it encourages quicker sales, if anything.
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Unbelievable untruths still costly: The Federal Court of Appeal has upheld a 2017 Tax Court of Canada ruling that penalties for making false statements on tax returns apply – even if the Canada Revenue Agency never believed the lie. The appellant did not dispute that he had falsely claimed loss carrybacks for a non-existent business in 2009 in order to reduce his tax bill in prior years. But he argued that since the CRA never gave credence to that claim and allowed the carrybacks, he should not be subject to penalties. The Tax Court rejected that argument, as did the appeals court, with the unanimous appeals decision stating that the key question is ”... the difference between what should have been reported in the return and what was reported in the return. What the minister accepts or assesses is irrelevant.”
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