Canada gets more tax-friendly for business

A special KPMG report shows Canada has done well in reducing both federal and provincial corporate tax rates

By Greg Wiebe

*This is an expanded version of a summary that originally appeared in the August 2010 issue of CAmagazine.

Canada has the second lowest tax cost for businesses among 10 countries studied by KPMG for a special report on tax in Competitive Alternatives 2010, the firm’s guide to international business location.

This ranking reflects a story that’s often untold outside the tax and accounting world — Canada’s trend toward corporate tax cuts over the past few years. These include recent cuts to both federal and provincial corporate tax rates, the elimination of capital taxes and some payroll taxes, plus the new Harmonized Sales Tax (HST) in Ontario and BC, another business-friendly tax change. Tax incentives such as R&D credits also help to boost Canada’s ranking in the report.

KPMG’s overall Competitive Alternatives study for 2010 compares business costs in 10 countries by measuring 26 significant cost components that are most likely to vary by location, including taxes, labour, real estate and utilities, as they apply to 17 business operations over a 10-year planning horizon, as well as a range of non-cost competitiveness factors.

Canada ranks second behind Mexico in this comprehensive study as well. The results show that Canada holds a 5% business cost advantage over the US — an improvement over the virtual break-even position reported in the previous edition of the study in 2008.

The Competitive Alternatives study’s Special Report: Focus on Tax assesses the general tax competitiveness of 95 cities in 10 countries, focusing on 41 major cities with populations greater than 2 million, and compares the total tax burden faced by companies, including income tax, capital tax, sales tax, property tax, miscellaneous local business taxes, and statutory labour costs.

Mexico came in first in the country rankings, with Canada second and the Netherlands third, followed by Australia, the United Kingdom, the United States, Germany, Italy, Japan, and France. Canada has moved up from third place in 2008’s special report on tax. In fact, Canada’s business taxes are now the lowest among the G7 countries.

The report also ranks 41 major international cities for tax competitiveness, with Vancouver ranking first, Montreal fourth, and Toronto fifth. The second- and third-ranked cities are located in Mexico.

The report compares the total tax cost between countries and cities using a Total Tax Index score for each location expressed as a percentage of total taxes paid by corporations in the U.S. A lower score is better since it means lower tax costs for businesses.

By this measure, Vancouver, with a score of 50.5, compares favourably with Seattle, its natural U.S. counterpart, scored at 92.1.

A similar advantage is shown for Toronto (67.6) and Montreal (60.3) compared to cities in the U.S. eastern corridor, such as New York City (101.9) and Philadelphia (88.9).

Although not included on the 41 large international cities list, other Canadian cities such as Halifax (55.2) also compare favourably with their U.S. counterparts, such as Boston (87.9).

The report also compares tax costs between industries, which vary widely. In a breakdown by business sectors, Canada comes second in manufacturing, scoring well at 67.7 compared to 100 for the US, with Vancouver, Toronto and Montreal placing in the top five cities. For the services business sector, Canada ranks second behind Mexico and, again, the three major Canadian cities studied place in the top five.

Industry tax costs in the R&D industries vary significantly from other sectors and the overall results due to the impact of tax incentives targeted to foster R&D activity In this industry, Canada ranks second after Australia, and Montreal, Vancouver, and Toronto rank second, fourth, and seventh among the 41 large international cities.

Reducing the corporate tax burden has helped make Canada competitive in the global environment, as the study shows. The advantage is clear — attracting business fuels our economy. To maintain or even increase Canada’s competitiveness, our governments will need to stay committed to business-friendly tax regimes.

KPMG’s Competitive Alternatives 2010 report and its Special Report: Focus on Tax are both available at www.competitivealternatives.com/download

Other key findings from KPMG’s Special Report:
Focus on Tax

In addition to its findings regarding the overall tax costs of specific business locations, KPMG’s analysis also led to some general observations.

Tax policy varies widely by country. There is no standard approach to setting tax policy among the countries studied. While the types of taxes are more or less the same, they are weighted and applied very differently; for example, some countries focus on delivering a low corporate income tax rate to attract businesses.

Differences in how taxes are weighted and applied create complexity. Companies often use a country’s effective corporate income tax rate as a proxy for overall tax costs in a location. But this rate does not tell the whole story. For example, France and Mexico rate No. 4 and No. 6 for their rates of effective corporate income tax. When other taxes and statutory labour costs are considered, however, Mexico’s rank rises to No. 1 while France’s falls to No. 10, largely owing to its heavier reliance on payroll and other taxes.

Tax costs vary widely by industry. Companies in the services industry tend to have higher salary costs, so the impact of statutory labour costs on these companies is more of an issue than it is for, say, companies in the manufacturing sector. R&D operations show the most extreme variation in tax costs among countries due to intense competition among some countries to attract more R&D businesses by offering more generous tax incentives.

Tax costs vary more than most other costs. Tax costs represent up to 12% of location-sensitive costs – much lower than other costs such as labour (46% to 85%). However, since tax costs vary more widely than other costs, they can take on relatively more importance than other costs in business location decisions.

Greg Wiebe, FCA, is Canadian managing partner, tax at KPMG LLP