Capital taxes stifle Canada’s innovation strategy: CATA to HRDC

On May 9, Industry Canada minister Allan Rock put out a call to Canadian citizens and companies to submit their input on Canada’s Innovation Strategy in advance of in-depth discussions. A series of meetings has been announced that will culminate in a summit this November. Following is a letter submitted as a part of that process to HRDC minister Jane Stewart by CATAAlliance president John Reid, warning that innovation will be hampered by Canada’s corporate capital tax. June 6, 2002Dear Ms. Stewart: Your colleague, the Honourable Allan Rock, wrote to the Canadian Advanced Technology Alliance recently inviting us to participate in the refinement and implementation of Canada’s Innovation Strategy. We will be submitting our contribution shortly. At this time I would like to draw your attention to the initiative which we believe should be the first item on the Innovation Strategy, abolition of capital taxes. The personal and corporate income tax cuts announced in the October 2000 mini-budget placed Canadian tax rates on a competitive level with rates then in force in the United States. They answered most of CATAAlliance’s tax recommendations to the federal government. There remains one significant tax problem, the corporate capital tax. There is no shortage of evidence on the negative impact of capital taxes. A Department of Finance study in the 1996-7 OECD Economic Survey of Canada said that capital taxes cost $7 in output for every $1 collected, due to their effect on innovation and investment. Another Finance study, in 2001, warned the government that capital taxes discourage the behaviour that the government is trying to encourage in order to stimulate innovation and productivity. There is scarcely an economist in the country who does not recommend they be eliminated. The House of Commons Standing Committee on Finance, in its November 2001 report Securing Our Future, recommended their elimination. There has been some progress on the capital tax at the provincial level. Alberta eliminated its capital tax in 2001, and British Columbia will do the same this year. Quebec will halve its rate by 2007. Ontario has promised to eliminate its capital levy, beginning by raising the threshold at which it applies. Saskatchewan has raised its threshold this year, in an effort to attract investment. CATAAlliance is urging the provinces which still impose capital taxes to eliminate them on an urgent basis. CATAAlliance recommends that abolition of federal capital taxes be the first item on Canada’s Innovation Strategy. Capital taxes are diametrically opposed to every aspect of innovation strategy. They discourage innovation, the investment in the new technologies, processes, and equipment which must take place if Canada is to grow. There are no budgetary reasons to delay. There is no existing or potential new government program under the Innovation Strategy which will have such an immediate positive impact on innovation, investment, productivity, jobs and economic growth in Canada. CATAAlliance is urging (Finance) Minister Manley to abolish capital taxes at the earliest opportunity. We look forward to working with you and your colleagues to achieve this objective. Yours sincerely,John Reid,President

Capital taxes stifle Canada’s innovation strategy: CATA to HRDC

News | 07/10/2002 4:00 am EDT

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