Higher Taxes Might Not Be the Solution for Canada and its Provinces

August 7, 2020

As Canadian provinces increased their spending due to Covid-19 measures ranging from 0.2 percent of GDP in New Brunswick up to 6.5 percent of GDP in Quebec, their budget deficits ballooned. The economic and health crisis comes at a difficult moment for Canadian provinces as their pre-pandemic budgets were already running deficits. In early February, the Parliamentary Budget Officer estimated that the provinces would need tax increases or spending cuts worth C$6 billion (US $4.5 billion) to balance their budgets.

This month, provinces are presenting their 2020-21 fiscal update (the fiscal year in Canada runs from April 1 to March 31) that reflects the anticipated impact of revenue loss and increased spending, as governments work to prepare next year’s budgets. Provincial governments might also use the fiscal updates to unveil next year’s taxation plans and debate spending cuts or tax reforms.

Although cutting spending has fewer economic costs, many economists warn that governments may need to raise taxes in the near future in order to cut their budget deficits. 

No Room for Tax Hikes

Newfoundland and Labrador’s budget deficit has more than doubled during the current fiscal year as offshore oil revenue shrank. Nevertheless, in 2016 the province already had increased sales and gas taxes, leaving little room for new tax hikes when compared to other Canadian provinces. Quebec, the province with the highest taxes in the country and one of the highest-taxed jurisdictions in North America, has no plans to raise consumption or income taxes either, as it might scare off investment.

The Canadian Centre for Policy Alternatives has suggested that Ontario revert the corporate tax cut that took place over the past 10 years from 14 percent in 2010 to 11.5 percent in 2020. However, such a change would risk a negative impact on business investment and hiring.

Tax Cuts Welcomed in Alberta

Alberta, one of the least financially sustainable provinces prior to the pandemic, responded with more tax cuts, hoping to drive economic recovery. Already in 2019, the Government of Alberta had approved the “Job Creation Tax Cut” bill to reduce Alberta’s corporate rate gradually from 12 percent to 8 percent on January 1, 2022. However, in June 2020, the provincial government introduced Alberta’s Recovery Plan, which accelerated the scheduled reductions by a year and a half. This translated to the reduction of Alberta’s general corporate income tax rate from 10 percent directly to 8 percent, effective from July 1, 2020. As a result, Alberta’s combined federal-provincial general corporate tax dropped from 25 percent to 23 percent, the lowest general corporate tax rate in Canada and lower than that of 44 U.S. states. With this measure, Alberta’s government hopes to increase investment and boost job creation.

Table 1. Corporate Tax Rates in Canada’s Provinces and Territories
Province Current Provincial Rate Current Combined Federal-Provincial Rate

Alberta

8% 23%

Ontario

11.5% 26.5%

Quebec

11.6% 26.5%

Northwest Territories

11.5% 26.5%

British Columbia

12% 27%

Manitoba

12% 27%

Nunavut

12% 27%

Saskatchewan

12% 27%

Yukon

12% 27%

New Brunswick

14% 29%

New Scotia

14% 29%

Newfoundland & Labrador

15% 30%

Prince Edward Island

16% 31%

Source: Jared A. Mackey, “Alberta Advantage: Reduced Corporate Tax Rate Effective July 1, 2020,” Bennett Jones, June 30, 2020, https://www.bennettjones.com/Blogs-Section/Alberta-Advantage-Reduced-Corporate-Tax-Rate-Effective-July-1#:~:text=On%20June%2029%2C%202020%2C%20the,%2C%20effective%20July%201%2C%202020.; and Alberta’s Government website.

New Federal Taxes Considered

As announced in mid-July, Canada’s fiscal budget deficit for 2021 is expected to reach C$343.2 billion ($252.4 billion), a budget gap that is up tenfold from the previous fiscal year.

Like some of the Canadian provinces that are looking to grow their revenues, Canada’s Prime Minister revealed the “government was interested in taxing big tech companies” and the Finance Ministry recalled that Canada plans “to continue to work with its international partners on the issue of digital taxation.” While business groups are asking for tax cuts and tax holidays to provide liquidity and spur growth, the Trudeau government would rather raise the sales tax or impose a new wealth tax on Canadians. Nevertheless, it will be difficult for such policies to pass the parliamentary vote as the Liberal Party lost its majority during the past elections.

Conclusion

The coronavirus pandemic affects almost every source of revenue, and with the duration unknown, predicting economic outcomes will be difficult.

First, the introduction of the wealth tax would significantly impact international capital flows and cause large economic dislocations in the short term. Second, provinces that are looking at raising their corporate tax rates might hinder capital attraction, growth, and economic recovery.

Canada and Canadian provinces are rightfully focused on economic and budgetary stability in the face of this public health crisis. However, the implementation of new taxes and tax hikes appears to run counter to that goal.

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A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

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