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September 2002

The Canadian Tax Advantage

Summary

Large- and medium-sized businesses:	Average corporate tax rate in Canada falls below the average U.S. tax rate in 2003.
	Five percentage points lower average corporate tax rate in Canada than in the U.S. by 2006.
Small businesses:	Significantly lower corporate tax rates in Canada on income above C$75,000.
Capital gains:	Two percentage points lower average top tax rate in Canada than the typical top capital gains tax rate in the U.S.
	A C$500,000 lifetime capital gains exemption for small business shares that has no equivalent in the U.S.
Research and development:	A 20-per-cent research and development (R&D) tax credit in Canada for all R&D expenditures compared to the U.S. 20-per-cent credit for incremental R&D.
	A 35-per-cent refundable tax credit available to smaller Canadian-controlled private corporations; no equivalent in the U.S.

Background

In 2000 the Government of Canada introduced a Five-Year Tax Reduction Plan – the largest tax cut in the country’s history. Under this plan, personal income tax rates were reduced at all income levels and a number of tax measures were introduced to create a tax advantage for investment and entrepreneurship in Canada.

Lower Corporate Taxes

Large- and Medium-Sized Businesses

By 2003, the average Canadian corporate tax rate, including capital taxes, will be lower than that of the U.S. By 2006, this rate will be a full 5 percentage points below the average U.S. rate (see table below).

Small Businesses

Although average corporate tax rates in Canada and the U.S. are similar on income up to C$75,000, they are significantly lower in Canada on income above C$75,000.

Start-up high technology companies in Canada can already benefit from several tax provisions that are more advantageous than what is available in other countries. These provisions include a C$500,000 lifetime capital gains exemption, low tax rates on small business income, and generous tax credits for research and development.

Greater Access to Capital

Capital Gains Tax Advantage

In 2000 the capital gains inclusion rate – i.e. the portion of a capital gain that is subject to income tax – was reduced to one-half. This adds to the Canadian tax advantage, especially for start-up companies. Businesses in Canada now have greater opportunities to raise financing.

The lower inclusion rate for capital gains makes investment and risk-taking more rewarding by allowing investors to retain more of their gains. As a result of this tax change, the typical top tax rate on capital gains is now lower in Canada than in the U.S. This makes it more attractive for individuals to make such investments in Canada.

Research and Development

Eligible expenditures in research and development (R&D) qualify for a 20-per-cent R&D credit, while smaller Canadian-controlled private corporations benefit from a 35-per-cent refundable tax credit.

As a result, Canada offers one of the most generous scientific research and experimental development tax incentive regimes in the world.

Current and Proposed Corporate Tax Rate Comparisons – Canada vs. the United States

	2003	2006
	(per cent)
Canada
Federal income tax rate
General rate	23.00	21.001
Surtax2	1.12	1.12
	24.12	22.12
Provincial average income tax rate3	12.0	9.8
Federal-provincial income tax rate	36.1	31.9
Federal-provincial corporate tax rate (including capital taxes)4	39.4	35.0
United States
Federal income tax rate	35.0	35.0
Average state income tax rate5	4.0	4.0
Federal-state income tax rate	39.0	39.0
Federal-state corporate tax rate (including capital taxes)	40.0	40.0
Difference between Canada and United States
Income tax rate	-2.9	-7.1
Corporate tax rate (including capital taxes)	-0.6	-5.0
1 The federal tax rate will drop to this level in 2004. 2 The federal surtax remains at 1.12 per cent (i.e. 4 per cent of the 28-per-cent rate). 3 Provincial average income tax rate is a weighted average. 4 The income tax rate equivalent of capital taxes has been included. 5 The state income tax rate is the effective rate after taking into account the deductibility of state taxes for federal tax purposes.