How Much Lower are Canada's Business Taxes?

August 26, 2014

Burger King’s announcement that it will move its headquarters to Canada has put the spotlight on Canada’s tax system. Just what are the tax benefits of doing business in Canada versus the U.S.?

First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent.

Second, Canada has a territorial tax system, meaning there is no additional repatriation tax on foreign profits. The U.S. has a worldwide tax system, which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent.

Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada integrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent.

Perhaps less important to Burger King are sales taxes and property taxes, but they still matter to some extent. Canada has a superior sales tax system that largely exempts business inputs. Most U.S. states apply their sales taxes to capital goods.

Canada has a superior property tax system that largely exempts business inputs. In contrast, state and local U.S. property taxes often apply to machinery and equipment and in some states to inventory. Some states also have capital taxes.

Putting the domestic tax factors together, Jack Mintz and Duanjie Chen of the University of Calgary found that the U.S. Marginal Effective Tax Rate (METR) on Capital Investment is the highest in the developed world, at 35.3 percent. In contrast, Canada’s METR is about half that, at 18.6 percent. By this measure, Canada has the lowest business tax burden in the G7.

In short, in terms of doing business, the U.S. has the least attractive tax regime of any developed country. That is what is causing the corporate inversions. The solution is tax reform, particularly corporate tax reform.

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