There’s the mega deduction, the super deduction, the bet-on-Canada proposal, and a slew of lobbying for delaying taxes on capital gains — an eclectic array of measures that proponents say would give investment a boost.
They have one key thing in common.
The central mechanism is a tax deferral — allowing money-makers to act now but pay tax later. In some cases, much, much later.
Do tax deferrals actually work? They cost our society billions of dollars in forgone tax revenue. And so they’d better work — really well.
The Canadian Tax Observatory has set up a system to analyze when taxpayers are allowed to hit snooze on the tax bill, under what conditions, and what happens to the economy as a result.
The goal is to figure out whether the stack of deferrals on display is pushing our economy in a more productive direction that serves the Canadian public — or not. Because some deferrals make passive investment more lucrative, and that’s the last thing we need right now.
Inside Ottawa’s $36-billion mega deduction
The newest example of a deferral is the Productivity Mega Deduction, which is indeed quite “mega” because it fundamentally changes the way many sectors and companies pay tax on capital investments, like new machinery and equipment.
Companies will be able to write off their purchases immediately and count them against their tax bill, instead of writing them off gradually over the life of the investment. It’s meant to boost the buying of machinery, equipment and other investments right now — part of the federal government’s plan to improve productivity and diversify the Canadian economy.
It sounds like a good idea in principle because the writeoff is contingent on capital investment, something that can push the economy in a direction that could lead to more jobs, more growth and perhaps even less dependence on the United States.
But it’s going to cost $36 billion over five years in terms of forgone tax revenue. In her new fiscal projection, Parliamentary Budget Officer Annette Ryan points out that the mega deduction is the single biggest reason Prime Minister Mark Carney has already spent any windfall coming from higher oil prices, and then some.
Is the measure worth $36 billion? Perhaps, if it does indeed drive productivity-enhancing growth that benefits many Canadians. But we’ll need a lot more data and modelling from Finance Canada to even begin to answer that question.
It may well turn out that big, established companies involved in natural resource extraction and manufacturing are able to use the new writeoff system the most, while companies without regular profits — such as technology-oriented startups — may not benefit as much.
What Canadian startups want from tax policy
The other new idea in the lucrative world of deferrals comes from a large group of mainly high-growth startup companies. Earlier this month, they lobbied for two separate tax measures in the name of sparking more investment and better access to venture capital.
They want lower capital gains tax for startups, allowing up to $15 million to be exempt from tax each time they engage in a sale.
And they want to broaden the existing capital gains rollover so more entrepreneurs and investors, including corporations or funds, can defer capital gains tax when they sell a stake in a startup and reinvest in another Canada-based company.
If we were to run those proposals through our “hitting snooze” framework, we would be left with some big questions.
The questions these proposals can’t answer
Would the $15-million cap be available every time a startup sold off a piece of equity, enabling founders or others to claim it repeatedly, and maintain an effective low tax rate indefinitely? To what end?
Would the deferral of capital gains tax be contingent on reinvesting in a productive company that is growing and hiring and expanding Canada’s GDP? Or would the deferral encourage any type of investment in Canada? Would the big investment funds and corporations profit more for doing what they would have done anyway?
Not all investment is created equal, and simply assuming there’s a trickle-down effect through the economy stemming from tax breaks has proven to be folly in the past.
Corporate tax revenue is the second-largest source of funds for the federal government, accounting for 19 per cent of the budget — money that funds social programs, defence and services our debt.
Before the mega deduction came on the scene, the Parliamentary Budget Office projected that amount would rise by $4.6 billion a year on average, reflecting bigger corporate profits and high oil prices. That completely disappears, and then some, with the mega deduction alone.
To date, very few have projected a business investment bonanza as a result of these measures.
The mega deduction is expected to boost economic growth by about 0.3 per cent a year for the first few years, which certainly isn’t nothing. But we don’t know what it means for business investment and productivity per se, and that’s the perpetual weak spot in Canada’s economy.
Former prime minister Justin Trudeau withstood years of ridicule for arguing that the budget balances itself — presumably trying to say that deficits would be modest and social programs sustained if the government used its balance sheet to spur economic growth.
Then, as now, it would be better to have some guarantees.
