Archived - Taxes on business
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A key element of a fair tax system is that corporations should pay their fair share of tax. Some have argued that corporations should not pay taxes at all since, sooner or later, corporate income ends up in the hands of individuals and is taxed under personal income tax. This view is inaccurate and corporations should pay tax for three key reasons. First, businesses benefit from public services in many of the same ways that individuals do. Second, in the absence of tax on corporations, it would be possible for individuals to postpone tax on income or capital gains indefinitely by placing income-producing assets in a corporation and thereby having the income or gains accrue within the corporation. Corporate income tax addresses this problem by imposing a tax on profits and capital gains prior to their distribution to individuals in the form of dividends. Third, corporate taxes allow the taxation of income accruing to foreigners and ensure that foreign-based corporations operating in Canada pay tax on income earned in Canada.
Capital taxes are used by both federal and provincial governments to supplement income tax revenues and to ensure that corporations pay for the public services they use. For example, the federal large corporation tax (LCT) ensures that all large corporations pay tax. Similarly, provincial capital taxes are an important source of revenue in some provinces. Capital taxes can also serve as a form of minimum tax as is the case for the federal capital tax on financial institutions where large banks, trusts and life insurance companies have to pay a minimum amount of tax based on capital which can then be offset by federal income tax. Overall, these capital taxes generated $1.5 billion in federal revenues in 1995.
Corporations pay a variety of other taxes and contributions in addition to income and capital taxes. These include payroll taxes (in respect of employers' contributions to EI, Canada/Quebec Pension Plans (CPP/QPP) and Workers' Compensation), property taxes, and indirect taxes such as sales and excise taxes. Excluding indirect taxes -- for example, fuel taxes -- corporations paid about $57 billion in total taxes and levies to federal, provincial and municipal governments in 1995. Chart 6 illustrates the breakdown of net earnings by corporations and Chart 7 illustrates the breakdown of the federal component of corporate taxes. Over the last three decades, corporations have paid an average of 36 per cent of their pre-tax profits in income and capital tax.
Corporate income tax receipts vary cyclically with the level of profits in the economy. Over the last few years, corporate income taxes have experienced the fastest rate of growth of all federal revenue sources, reflecting their sensitivity to stronger economic growth experienced over this period. Between 1988-89 and 1991-92, federal corporate income and capital taxes declined from $12 billion to less than $10 billion. They have since risen to $16 billion in 1995-96.
Has the tax burden on corporations been reduced in recent years?
Comparison of the ratio of corporate income taxes to total government revenues or to GDP can create the misperception that the total tax burden on corporations is falling. The major reason these ratios fell, particularly in the early 1990s, is that corporate profits have fallen as a percentage of Canada's GDP. In fact, the corporate income and capital tax burden has not declined. It has ranged, on average, between 32 to 41 per cent of pre-tax earnings since 1965.
In addition to corporate income and capital taxes, businesses pay a wide variety of other taxes such as employers' payroll taxes and property taxes. All the direct taxes paid by corporations amounted to more than $57 billion in 1995. Over the years, payroll taxes paid by employers for EI, CPP/QPP, Workers' Compensation and other provincial payroll taxes increased significantly from 1.4 per cent of total payroll in 1961 to 7.8 per cent in 1993.
Are payroll taxes too high in Canada?
The total payroll tax burden in Canada is lower than in other countries, including the U.S. Of the G-7 countries, Canada and the U.K. have the lowest level of payroll taxes as a proportion of GDP. Total payroll taxes paid by employers and employees are lower in Canada than in the U.S. at all levels of employee income. This could be an important factor in a firm's decision to locate its production facilities in Canada or the U.S.
Most studies show that it is not the level of these taxes that has an adverse effect on job creation but rather the increase in the payroll tax rate, particularly during a recession. The government has lowered the tax rate on employees under EI from $3.07 to $2.90 per $100 of their maximum insurable earnings (MIE) and from $4.30 to $4.06 for employers. The decline in MIE itself has also lowered the payroll tax burden. The decline in the payroll tax has not been more rapid because of the constraints imposed by the fiscal situation.
In addition, almost 900,000 firms in Canada will be eligible for EI premium relief under the New Hires program. This means almost all eligible firms will pay virtually no premiums for new employees hired in 1997, and will benefit from a 25-per-cent reduction in premiums for new employees the following year. The maximum benefit per firm will be $10,000 in each year.