LisLud/iStockPhoto / Getty Images
Canada needs a broad overhaul of its tax system to shake off years of lacklustre economic growth and respond to mounting trade pressures from the U.S., according to a new report by Chartered Professional Accountants of Ontario.
The paper’s recommendations include boosting tax incentives that support research and development, lowering personal and corporate taxes while raising sales taxes and simplifying the tax code. It was published on Tuesday, just weeks ahead of the federal budget expected on Nov. 4.
Tax reform should be a key part of Ottawa’s strategy to tackle both long-standing internal challenges, such as lagging productivity and stagnating per capita economic growth, and external headwinds from shifting U.S. trade policy, said Carol Wilding, president and chief executive of CPA Ontario, in an interview.
“It isn’t a silver bullet to fix the full Canadian economy, but it’s a very strong lever, and we need to make some bold decisions.”
She said one of the top, short-term priorities for Ottawa should be simplifying access to the Scientific Research and Experimental Development, or SR&ED, tax credit, which annually provides billions in tax incentives to businesses that conduct research and development in Canada.
Currently, SR&ED applications are so complex that companies often spend the equivalent of 15 per cent to 30 per cent of the amount they receive in tax credits on consultants who help them navigate the process, according to Ms. Wilding.
Tax Matters: Canada needs tax reform, not a patchwork quilt of tax measures
The federal government should also swiftly deliver on commitments to establish a preferential corporate tax rate on income generated from intellectual property developed in Canada, the report argues.
The goal is to attract and retain tech talent and investment in Canada at a time of intense international competition over artificial intelligence, Ms. Wilding said.
Tech startup founders are leaving Canada at accelerating rates, a recent survey by venture-capital firm Leaders Fund found.
More broadly, the report suggests, Canada should reduce the portion of revenue it raises from personal and corporate income taxes and increase consumption taxes such as federal and provincial sales taxes.
The recommendation echoes a long-standing critique by some tax experts and economists that the country relies too heavily on income taxes, which they say discourage work and disincentivize individuals and companies from saving and investing.
Critics of sales taxes argue they can be financially punishing for lower-income households, who spend a larger share of their income on consumption.
Ms. Wilding said sales-tax hikes could be implemented “thoughtfully,” by also rolling out more generous credits or transfers to lower earners, for example.
Canada should form a royal commission to conduct a wholesale review of its tax system, the report says – an exercise the country hasn’t engaged in since the Carter Commission created under prime minister John Diefenbaker in 1962.
The Income Tax Act has since grown to around 3,700 pages. Simplifying the tax code is essential to boosting productivity and jump-starting the economy, Ms. Wilding said.
