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Archived - Chapter 5
Freeing Businesses to Grow and Succeed

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A Competitive, Dynamic, Business Environment

Advantage Canada will create the conditions for our businesses to invest in equipment, innovation and training. This will help Canadian businesses make our country the base from where they succeed globally. To improve the business environment, Advantage Canada will lower business taxes, reduce regulatory and administrative burdens, enhance competition, ensure our capital markets are globally competitive and encourage free trade and foreign investment. These measures will also help small businesses to grow and create jobs in communities across the country.

Reducing Taxes on Business Investment

Business investment is critical to our long-term prosperity. It yields innovation and growth, with more jobs and higher wages for Canadian workers. High business taxes are harmful because they reduce the returns from investment, thereby reducing the amount of investment that takes place in Canada. With increasingly mobile capital, Canada needs a business tax advantage to encourage businesses to invest in Canada instead of other countries.

Many other countries have also recognized that an internationally competitive business tax system is important. The trend among industrialized countries has been to reduce statutory corporate income tax rates (Chart 5.1). These countries include Canada, all other G7 countries as well as smaller countries with generous social benefit systems, such as Sweden and Finland.

Currently, Canada has a statutory tax rate advantage over the United States of 3.8 percentage points. However, the United States is in the process of phasing in a 3.15-percentage-point reduction in its tax rate on manufacturing income by 2010. The Government's business tax relief plan announced in Budget 2006 will ensure Canada keeps its statutory corporate tax rate advantage over the United States for manufacturing income by 2010, and will increase our advantage for general corporate income. Budget 2006 also supported the growth of small businesses by increasing the income threshold for the small business tax rate to $400,000 from $300,000 in 2007, and reducing the small business income tax rate to 11.5 per cent in 2008 and 11 per cent in 2009. The Tax Fairness Plan will further enhance Canada's advantage by reducing the general corporate income tax rate by a half percentage point to 18.5 per cent in 2011.

Chart 5.1 - Internationally, Corporate Income Tax Rates Are Trending Downward

The overall impact of the business tax system on investment can be measured by the marginal effective tax rate (METR).="" ="" [1] With already announced tax reductions, Canada will have a meaningful METR advantage over the United States by 2011. The Advantage Canada plan will further improve Canada's business tax competitiveness by establishing the lowest METR in the G7.

Improved competitiveness can be achieved not only by reducing tax rates but also by improving the structure of the tax system. Harmonizing provincial retail sales taxes with the GST is an example of a structural change that would improve competitiveness (see next subsection).

Ensuring that the capital cost allowance (CCA) rate for an asset is in line with the useful life of that asset is also important. Where a CCA rate is too low to reflect an asset's useful life, an increase to that CCA rate can reduce the tax burden on investment and increase the efficiency of the tax system. The Government will continue to review CCA rates to ensure that they reflect the useful life of assets and will explore other opportunities to improve competitiveness, encourage investment and promote the neutrality of the tax system.

We need to make the tax system simpler and fairer. Simplifying Canada's tax system helps reduce the compliance and administrative burden on businesses, thereby reducing their costs. Fairness in our tax system means establishing a level playing field so all taxpayers pay their fair share of taxes on income earned in Canada or abroad. Fairness is also enhanced by making the tax system more neutral across firm size, business structures and sectors. This will help ensure that investment choices are not distorted but are instead directed towards the most productive projects.

Advantage Canada is about making Canada a world leader for today and future generations. As such, this plan will require government to make bold, sometimes difficult, decisions. One such decision was part of the Government's Tax Fairness Plan-which restored balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations. This was the right thing to do for Canadian competitiveness over the long term, and the right thing to do given the risk that potential future income trust conversions were posing to Canada's tax base.

Working With Provinces to Build a More Competitive National Tax System

Provincial governments have an important role to play in improving our national tax competitiveness. Already, nine provinces and the three territories have entered into tax collection agreements with the federal government. These agreements make the tax system more effective by streamlining the tax process and generating compliance savings for taxpayers. Tax harmonization not only results in administrative efficiencies for governments but, more importantly, makes tax payments simpler by allowing businesses to file only one return, which reduces their costs.

The recently concluded Canada-Ontario Memorandum of Agreement on corporate tax collection provides a positive background for further consultations with provinces on improving the efficiency and effectiveness of tax systems. Building on this effective partnership, the Government would encourage provinces to work towards a more competitive business tax system by:

  • Harmonizing their retail sales taxes with the GST, effectively eliminating retail sales taxes on business inputs and capital goods. This would reduce the cost of new investment, help simplify the tax system for consumers and businesses, and streamline government administration. For example, if Ontario were to replace its retail sales tax with a value-added tax, or harmonize with the GST, its METR would be 9 percentage points lower (Chart 5.2).
  • Eliminating their capital taxes, which are a direct tax on productive investment: they tax firms even when these firms fail to make a profit.

Chart 5.2 - Harmonizing With the GST and Eliminating Capital Taxes Would Substantially Reduce Taxes on Investment in Many Provinces

Canada's New Government has reduced the GST rate from 7 to 6 per cent and is committed to reduce it further to 5 per cent. This reduction in the GST provides provinces with an opportunity to improve the competitiveness and efficiency of their own sales tax systems. In that context, the OECD recommended:

.replacing provincial retail sales taxes with value added tax structures harmonised with the GST. Doing so would provide a more productivity-friendly environment for business, without necessarily increasing the overall tax burden on consumers.="" ="" [2]

Newfoundland and Labrador, New Brunswick and Nova Scotia harmonized their retail sales taxes with the GST in 1997 and Quebec adopted a value-added tax in 1991. If all provinces were to eliminate their captital taxes and harmonize their retail sales taxes with the GST or adopt a value-added tax, Canada would have the lowest tax rate on new business investment among the G7 countries by 2011 (Chart 5.3).

Chart 5.3 - Provincial Tax Reform Has the Potential to Significantly Reduce Taxation of Investment

Policy Commitment

Advantage Canada proposes to establish the lowest tax rate on new business investment (METR) in the G7 by:

  • Making further progress on aligning capital cost allowances for business investment with useful life.
  • Considering opportunities to reduce tax distortions in areas where the tax system is favouring or impeding particular sectors and business structures or size.
  • Encouraging harmonization of the remaining provincial retail sales taxes with the GST, which would substantially reduce the rate of taxation on new investments.

Improving Canada's Regulatory Framework

Regulation is an important tool for protecting the health and safety of Canadians, preserving the environment and securing the conditions for an innovative and prosperous economy. In Canada, we must ensure that we have strong and effective regulations to protect people and enhance our quality of life, while minimizing regulations that are unnecessary or that put Canada at a significant competitive disadvantage.

The External Advisory Committee on Smart Regulation has reported that the federal government could use regulation more efficiently. It has recommended that action be taken to:

  • Increase cooperation and coordination between federal government departments and among federal, provincial and territorial governments.
  • Promote better international regulatory cooperation with key trading partners.
  • Improve cost-effectiveness and timeliness of the regulatory process.
  • Strengthen performance and accountability measurement.

Principles and processes have been identified that will help Canada to achieve higher levels of regulatory efficiency. Action-including the use of legislation-should be taken to help Canada's regulatory bodies be more efficient and effective through:

  • The adoption and mutual recognition of international standards.
  • The enforcement of regulations of another order of government; or alternatively,
  • The delegation of federal enforcement to the provinces.

Canada's New Government will also work with the provinces to address specific regulatory issues, such as the responsiveness of the current environmental assessment process. Internationally, Canada is working with the United States and Mexico on the regulatory aspects of the Security and Prosperity Partnership of North America to eliminate redundant testing and certification requirements when it is beneficial to Canadians.

Policy Commitment

Canada's New Government will improve Canada's regulatory framework by:

  • Moving to finalize a new modern approach to smart regulation.
  • Considering a principle-based legislative framework to guide federal regulatory departments and agencies in measuring the impact of their regulations and developing plans to improve their efficiency.
  • Working with the United States and Mexico through the Security and Prosperity Partnership of North America to improve regulatory coordination and cooperation.

Reducing the Paper Burden by 20 Per Cent

Reducing the administrative and paper burden on Canadian businesses can improve our national competitiveness-especially for our small businesses, which are important to our economy. A 2001 OECD study shows that government paper burden has a disproportionate impact on small businesses: costs per worker are about five times higher for firms employing fewer than 20 employees than for those employing 50 or more.="" ="" [3]

Canada's New Government has been working to improve the administrative efficiency of regulations in Canada. Collaborating with groups such as the Canadian Federation of Independent Business (CFIB) and the provinces, through the Advisory Committee on Paperwork Burden Reduction and the Canada Revenue Agency's Action Task Force on Small Business Issues, several practical initiatives are being developed:

  • In 2006 the Committee released a report calling for a long-term, sustained approach to reducing the paperwork burden. The report calls for the measurement of administrative burden across government, a 20-per-cent reduction in the burden on business, and the development of an inventory of information obligations imposed on small businesses.
  • Statistics Canada's Survey of Regulatory Compliance Costs is measuring the cost and time burdens imposed by regulation on small business, and will identify areas that require action.
  • Budget 2006 recognized the importance of reducing paper burden for small business by expanding the BizPaL (Business Permits & Licences) initiative. It brings together the federal, provincial-territorial and municipal governments to streamline and harmonize permit and licence requirements to reduce the time and cost burdens imposed on businesses.
  • Within two years, businesses throughout Ontario will benefit from one tax return, one set of rules and one point of contact as a result of a corporate income tax collection agreement signed on October 6, 2006, by the federal and Ontario governments.

Policy Commitment

Canada's New Government will reduce the administrative burden on business by:

  • Reducing paper burden by 20 per cent by working with the CFIB, through the Advisory Committee on Paperwork Burden Reduction to implement the recommendations in its report.
  • Measuring the compliance burden and identifying targeted cost and compliance action priorities from Statistics Canada's Survey of Regulatory Compliance Costs on the impact of paperwork burden on small business.
  • Targeting areas that are of most importance to small business, such as expanding the rollout of BizPaL.

Improving the Framework for Competition

Competition drives firms to become more efficient, invest in new technologies and introduce new products and services that benefit consumers. A highly competitive and open national economy also helps our companies and organizations to be more successful when competing in global markets-which means more and better jobs in Canada.

Government has a role to play in creating the ground rules for competition in Canada. Consistent with the overall purpose and principles of the Advantage Canada plan, Canada's framework for competition will:

  • Create competitive marketplaces that serve both individual and business consumers with low prices, choice, quality and service.
  • Drive and foster innovation, investment and efficiency that grow productivity and competitiveness.
  • Promote a more resilient, adaptable economy.

Competitive telecommunications markets are vital to a strong economy, especially given the rapid changes in information technologies that are transforming how businesses operate and how individuals communicate and gather information. The Government has begun to update the regulatory and policy regime for the Internet age by tabling a proposed policy that instructs the Canadian Radio-television and Telecommunications Commission to regulate in a way that relies on market forces to the maximum extent feasible.

Policy Commitment

Canada's New Government will:

  • Review its competition policies to ensure that they provide competitive marketplaces.
  • Take further steps to ensure that Canadians can benefit more fully from increased competition in the telecommunications sector, while preserving safeguards against anti-competitive behaviour that could hurt consumers.

A Leading-Edge Financial System

A strong economy must be supported by a financial system that instills confidence and efficiently provides a wide range of financial services to households and businesses. Canada has a strong and sound financial system that serves Canadians well. It is an asset unto itself, providing high-end, knowledge-based and well-paying jobs for Canadians.

In the coming years, Canada's financial system will need to adapt to the evolving needs of households and businesses, the increasing technology intensity of financial service delivery, global developments such as consolidation of institutions and exchanges, and the increasing participation of households in the management of their own financial affairs.

Keeping Canada's financial institutions and markets innovative and competitive, with a flexible regulatory framework founded on sound principles, will ensure that they continue to meet the needs of our growing economy.

A Dynamic and Globally Competitive Financial Services Industry

The financial services industry contributes 6 per cent to Canada's GDP and accounts for around 700,000 jobs, or 4 per cent of employment nationally. Building on a strong domestic base, Canadian banks and insurance companies are also among the most international companies in our economy. Thanks to their global knowledge and reach, they also support the development of globally oriented Canadian businesses in other sectors.

Canada has the opportunity to build upon this strength. A vibrant financial services industry will be founded on vigorous domestic competition that will deliver the best services to consumers at the best price. This will be facilitated by a regulatory framework that promotes access and opportunity for a wide range of providers, from global firms to credit unions and caisses populaires. Regular reviews of financial institution statutes will contribute to creating this environment, as will reduced barriers to international capital flows, as may be achieved, for example, by updating the Canada-U.S. Tax Treaty.

The policy framework must also support the global development of our financial services industry so that it may realize fully its potential and maximize its contribution to the Canadian economy. For example, the Government is proposing to allow Canadian financial institutions to add more foreign experts to their boards, so long as the majority of directors remain Canadian residents.

A Competitive Advantage in Global Capital Markets

Many Canadians have large portions of their savings in stocks, bonds and other financial products such as mutual funds. Our personal prosperity, the prosperity of our businesses and the prosperity of Canada depend on strong and efficient capital markets.

Capital market rules, currently established under 13 separate jurisdictions and applied by separate regulators, raise the cost of financing and reduce the attractiveness of Canada as a place to invest. Canada needs a more efficient capital market regulatory system that ensures principles and rules are applied and enforced consistently across the country.

Progress on improving our capital market regulation is being made. Through "passport" and other initiatives led by the Council of Ministers of Securities Regulation and the Canadian Securities Administrators, Canada's capital markets and securities framework is slowly being harmonized and streamlined.

But more needs to be done. Canada could achieve a competitive advantage through a less complicated system of regulation, founded on principles that recognize the different needs and capacities of small and large businesses. Canada can draw lessons from the experience of the United Kingdom, which has distinguished itself internationally and attracted a large share of international business to London through pragmatic, principle-based regulation. The British example-and the strength of its financial services industry as a source of wealth and prestige-shows how an economy can benefit from a competitive regulatory environment.

Canadians would best be served by a common securities regulator that would:

  • Administer a single code anchored in sound principles.[4]
  • Have a governance structure with equal participation of all governments involved.
  • Be responsive to regional needs.

Benefits of having a common securities regulator would include:

  • Providing clearer accountability and more responsive decision making in a rapidly evolving capital market.
  • Strengthening enforcement and the fight against white-collar crime.
  • Providing Canadian retail investors with wider access to investment products such as "Maple bonds," which are issued in Canadian dollars by foreign borrowers but which are not currently available to Canadian retail investors.
  • Making it easier and less costly for Canadian entrepreneurs and businesses to access money from investors across Canada and the world.
  • Strengthening Canada's capacity to work with international partners to improve the efficiency of global capital markets for the benefit of Canadian investors and businesses.

A Secure Financial System

In an increasingly connected world, terrorists and criminal organizations are becoming more sophisticated in their attempts to move, conceal and launder funds. Canada is currently chairing the Financial Action Task Force, the international standard-setting body for the fight against money laundering and terrorist financing. Toronto has been chosen to become the permanent home for the Egmont secretariat of financial intelligence units from around the world. At home, the Government has tabled legislative proposals to toughen Canada's anti-money laundering and anti-terrorist financing framework in line with international standards and domestic needs.

Policy Commitment

To help foster a leading-edge financial system, Canada's New Government will:

  • Ensure that the regulatory framework remains responsive to domestic and global developments, and maintain the regular practice of five-year reviews of the financial institution statutes.
  • Work with the U.S. to conclude the Canada-U.S. Tax Treaty, which would facilitate cross-border capital flows.
  • Allow Canadian financial institutions to add more foreign experts to their boards, so long as the majority of directors remain Canadian residents.
  • Work with provinces to create a common securities regulator and advance an approach to regulation founded on principles, with strong enforcement.
  • Continue to act decisively in combatting money laundering and terrorist financing and protecting the integrity of the financial system.

Openness to Trade and Foreign Investment

Canada's openness to international markets provides substantial benefits for Canadians. For Canadian workers, international trade and investment bring better, more rewarding jobs and higher living standards. For consumers, trade provides a greater variety of goods and services at lower prices. Foreign firms investing in Canada bring expertise and innovation, and encourage Canadian firms to emulate best practices. Through increased competition, trade provides more incentives for firms to become more productive. Trade and investments abroad give Canadian firms access to foreign know-how and greater opportunities to reap rewards from their investments and innovations.

Trade

The signing of the Canada-U.S. Free Trade Agreement in 1988 and the North American Free Trade Agreement (NAFTA) in 1992, and the completion of the Uruguay Round in 1994, dramatically increased our openness to trade. However, recent difficulties in concluding the Doha round of multilateral trade negotiations have led many countries-including our NAFTA partners-to pursue bilateral or regional negotiations to capture the benefits of freer trade. Canada has lagged behind its NAFTA partners on this front. Canada can and should do more to pursue bilateral trade agreements because our prosperity is dependent on our ability to export to the world.

Canada has what it takes to compete successfully in world markets, and it is in our national interest to be open to free trade opportunities. More trade agreements will help our economy to be even stronger and more successful within the rapidly changing global economy.

Canada's tax treaties are also an important part of the global environment for businesses operating in Canada, with the Canada-U.S. Tax Treaty having a particular significance. Negotiations to update the treaty are ongoing and have progressed very well. The new treaty would have important benefits, including reducing borrowing costs for business and reducing barriers to cross-border trade and mobility.

The Importance of Trade Liberalization for Canada's Investment Performance

The fragmentation of the global value chain means that firms increasingly locate production of different components of a product across several countries, based on those countries' comparative advantage. When firms make these decisions on where to invest, they must be assured that the goods and services produced in each part of the global chain can be combined seamlessly and sold to markets around the world. To be a part of this chain, countries must not only be open to foreign investment, but also ensure that the goods and services produced get easy access to other markets. Improved access to foreign markets encourages firms, through strategic investments, to locate the skill-intensive activities of their global chains in Canada.

In that context, the fact that our NAFTA partners have developed broad networks of trade agreements, while Canada has not, has potential negative implications for Canada's investment prospects. It is in Canada's best interest to engage in trade agreements to utilize a full suite of trade and investment policy instruments and improve access to foreign markets.

 

Policy Commitment

To ensure that Canadian businesses can fully participate in global market opportunities, Canada's New Government will develop a new approach to international trade policy through a comprehensive Global Commerce Strategy that will:

  • Build on our NAFTA advantage through improved border efficiency and increased regulatory convergence through the Security and Prosperity Partnership of North America initiative and in consultation with the North American Competitiveness Council and other stakeholders.
  • Pursue regional and bilateral trade, investment and science and technology agreements, ideally together with our NAFTA partners.

The Government will also work with the U.S. to conclude the Canada-U.S. Tax Treaty, which would lower borrowing costs for businesses and reduce cross-border barriers to trade and labour mobility.

Foreign Investment

Both inward and outward foreign direct investment bring substantial benefits to Canada. Foreign direct investment provides additional capital to fuel firms' growth and exposes domestic firms to new technologies, innovative ways of doing business and healthy competition. Foreign direct investment abroad allows Canadian firms to be integrated into global supply chains, be more productive and competitive, and ultimately create more and better jobs here in Canada.

While Canadian firms are investing more abroad and becoming more diversified by reaching out to new investment opportunities, Canada's share of total inward foreign investment directed to the G7 and OECD countries has been failing. No other country in the G7 comes close to matching Canada's decline, and firms from other G7 countries have reduced their overall relative presence in Canada.

Policy restrictions on foreign investment in Canada have contributed to our economy's relative decline in foreign direct investment flows. According to the OECD, Canada has the highest level of explicit restrictions on foreign-equity ownership in the G7-primarily in the transportation and telecommunications sectors.[5]

Foreign investment restrictions also include screening procedures under the Investment Canada Act, and business operations restrictions such as restrictions on length of stay for non-resident executives. Residency requirements for boards of directors may also impede global investment. These measures can limit opportunities for Canadian firms competing in a global economy to attract expertise, strengthen their networks and pursue new business opportunities. These policies may contribute to perceptions that Canada is not fully open to foreign investment, and these perceptions matter. In that regard, a survey of global executives ranked Canada as the least attractive country to invest in the G7.[6]

However, it should be acknowledged that there may be rare occasions where a particular foreign investment might damage Canada's long-term interests. For example, foreign investment by large state-owned enterprises with non-commercial objectives and unclear corporate governance and reporting may not be beneficial to Canadians. While such cases are very much the exception rather than the rule, the Government needs a principle-based approach to address these situations.

Since Advantage Canada is designed to position Canada as a destination of choice for people and investors, we need to ensure that our approach to foreign direct investment is modern and in line with best practices around the world. The Investment Canada Act has not been amended significantly since its introduction in 1985, during which time there have been dramatic changes in the world economy.

Policy Commitment

The Government will work to increase foreign investment in Canada by:

  • Reviewing its foreign investment policy framework, including the Investment Canada Act, with the aim of maximizing the benefits of foreign investment for Canadians, while retaining our ability to protect national interests.
  • Allowing Canadian financial institutions to add more foreign experts to their boards, as long as the majority of directors remain Canadian residents, to enhance their capacity to be competitive in foreign markets.

 

Canada's Entrepreneurial Advantage

Creating a Business Environment That Unlocks Private Investment by Reducing Taxes, Unnecessary Regulation and Red Tape

A competitive business climate is essential for a vibrant and healthy private sector. The performance of the Canadian private sector is currently good. It must become great. Businesses must respond by investing more in training, equipment and innovation. To trigger that leap, Canada's New Government will take steps to create a competitive business environment that encourages entrepreneurship by:

  • Reducing taxes on business investment.
  • Improving Canada's regulatory framework.
  • Reducing the paper burden on business.
  • Improving the framework for competition.
  • Building on a leading-edge financial system.
  • Increasing the country's openness to trade and investment.

1 METRs are comprehensive indicators of the impact of the tax system on new investment. The methodology underlying the calculation of METRs is described in the evaluation report "Marginal Effective Tax Rates on Business Investment: Methodology and Estimates for Canadian and US Jurisdictions" in the 2005 edition of Tax Expenditures and Evaluations (Department of Finance). This analysis has been updated and extended to include 34 other countries, and results will be included in the forthcoming 2006 edition of Tax Expenditures and Evaluations.[Return]

2 OECD, Economic Survey of Canada, Paris: OECD (2006), p. 12.[Return]

3 OECD, Businesses' Views on Red Tape, Paris: OECD (2001).[Return]

4 Constructive proposals to this end were put forward in June 2006 by a panel of distinguished Canadians headed by Purdy Crawford.[Return]

5 Golub, Stephen S., "Measures of Restrictions on Inward Foreign Direct Investment for OECD countries," OECD Economic Studies No. 36 (2003), p. 85-116.[Return]

6 A.T. Kearney, FDI Confidence Index (2005).[Return]

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