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August 2003

The Canadian Tax Advantage

Summary

Large- and medium-sized businesses:	The average corporate tax rate in Canada is now below the average U.S. tax rate, and will be more than 6 percentage points lower by 2008.
Small businesses:	Significantly lower corporate tax rates in Canada than in the U.S. on annual income above C$75,000. Similar corporate tax rates in Canada and the U.S. on income below C$75,000.
Capital gains:	A $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 that has no equivalent in the U.S.

Background

In Budget 2003 the Government of Canada announced measures to strengthen the Canadian tax advantage. These measures build on the Five-Year Tax Reduction Plan introduced in 2000—the largest tax cut in the country’s history. The plan reduced personal income tax rates at all income levels and introduced a number of tax measures to promote investment and entrepreneurship in Canada.

Lower Corporate Taxes

Large and Medium-Sized Businesses

The average (federal-provincial) Canadian corporate tax rate, including capital taxes, is now lower than that of the U.S.

In the 2003 budget the Government announced the elimination of the federal capital tax over five years. The tax will be completely eliminated for medium-sized corporations as early as 2004.

By 2008, taking into account announced reductions in provincial tax rates, the average Canadian corporate tax rate will be more than 6 percentage points below the average U.S. rate (see table at the end of document).

Small Businesses

Although average corporate tax rates in Canada and the U.S. are similar on annual income up to C$75,000, they are significantly lower in Canada on income above that amount. In the 2003 budget the Government added to this advantage by announcing that the annual amount of income eligible for the low small business tax rate of 12 per cent would be increased from $200,000 to $300,000 over four years.

Start-up companies and entrepreneurs in Canada can already benefit from several tax provisions that are more advantageous than what is available in other countries. These provisions include a $500,000 lifetime capital gains exemption, tax-free rollovers, and generous R&D tax credits.

Resource Sector

The Government is improving the taxation of the resource sector in Canada, comprising the mining and oil and gas industries, by reducing the corporate tax rate for resource income from 28 to 21 per cent over five years while making improvements to the tax structure.

Research and Development

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

Eligible R&D expenditures qualify for a 20-per-cent R&D credit, while smaller Canadian-controlled private corporations benefit from a 35-per-cent refundable tax credit on eligible R&D expenditures.

Canada-U.S. Corporate Tax Rate Comparisons - Current and Proposed

	2003	2008
	(%)
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	33.8
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	-6.2
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 The 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.