In keeping with the government’s vision of making Canada a low-tax jurisdiction, the Conservatives have been gradually cutting taxes on corporate profits since 2007.
By 2015 under this plan, the share of federal government programs paid for by corporate income taxes will have shrunk to 12.3 per cent from 20.8 per cent in 2000.
Shortly after rolling out the Harper government’s first budget in 2006, a boisterous Finance Minister Jim Flaherty was asked during a visit to New York what Canada would look like in five years under a Conservative majority regime.
“It will look more like Ireland — more dynamic, more attractive to investors, brighter, more positive, outward-looking,” Flaherty said in a published report of his comments.
Perhaps in part due to his Irish heritage, Flaherty has long been a fan of Ireland’s fundamental economic strategy — rock-bottom corporate income tax rates.
But with Ireland's low-tax Celtic Tiger now dead, the Harper government no longer cites the Irish example to promote corporate tax cuts in Canada. Nonetheless, despite the dire state of Ottawa's finances, the Conservatives are sticking to the low-tax policy pioneered in nearly bankrupt Ireland.
Banks in the United States and Europe are getting hit by bonus taxes and a welter of new regulation but here in Canada, where policy makers see less need to penalize the sector, the Royal Bank of Canada and Toronto Dominion Bank thrashed earnings expectations with combined first quarter profit of $3.4 billion, driving their shares higher.
Royal Bank of Canada, the country's biggest lender by market capitalization, had net income for the first quarter of $1.84-billion, up 23 per cent from last year. TD, the country's second biggest bank, had a profit of $1.54 billion, up from $1.3 billion amid record performance from retail banking in both Canada and the United States.
Canadian corporate operating profits rose to $65.5 billion in the last three months of 2010, Statistics Canada reported Wednesday, a 7.9 per cent increase over the previous quarter.
StatsCan said the increases were widespread across the economy, with 19 of 22 industries reporting higher earnings.
The rise followed moderate declines in the previous two quarters. Operating revenues were up 2.8 per cent for the sixth straight quarter.
Operating earnings in the non-financial sector increased by 7.3 per cent, with the biggest gains in mining and oil and gas.
Financial institutions climbed by 9.5 per cent as insurance firms rebounded from a poor performance in the third quarter. Chartered banks rose 5.6 per cent.
Profits up 9% for the year
Compared with the same period a year earlier, operating profits for all industries were nine per cent.
By the end of 2010, profits had grown by 5.5 per cent since the beginning of the recovery, regaining 56 per cent of the ground lost during the recession.
Please sir, I want some more dividends.
Flush with cash and encouraged by a strengthening economy, companies are doling out dividend increases to the delight of yield-hungry investors.
And with corporate profits rebounding strongly, the trend is likely to gather momentum over the next couple of years, analysts predict.
This month alone, Canadian companies including Rogers Communications Inc., Shoppers Drug Mart Corp., TransCanada Corp. and Russel Metals Inc. have raised their quarterly payments, signalling their confidence in both the economy and the strength of their balance sheets.
Armine Yalnizyan: Five economic reasons to say no to more corporate tax cuts in Canada
Least effective job creation measure: According to the nation’s official number crunchers, if you want policy to encourage job creation, cutting corporate taxes is the weakest option (20 cents growth from every dollar of tax cut). Spending on infrastructure has the most impact ($1.50 on every dollar spent). The Department of Finance shows that spending on income supports for the unemployed and for low-income Canadians has an equally big pop, and housing initiatives are almost as good ($1.40 for every dollar spent).
Little impact on investments: Federal corporate tax rates have fallen from 28 percent in 2000 to 18 percent in 2010. Business investment (in non-residential structures and equipment) as a share of GDP was 12.4 percent in 2000. It was also 12.4 percent in 2009, and on track for the same in 2010. In the 1960s, the heyday of industrial expansion and economic development in Canada, the federal corporate tax rate was 40 percent. Statistics Canada’s data on business investment starts in 1981. That year the federal corporate tax rate was 36 percent, and business investment represented 11.5 percent of the economy. By 1990 the federal corporate tax had fallen to 28 percent. Business investment had fallen to 10.8 percent of the economy. There are many factors that drive business investment practices, and while taxes are a consideration, they are not the primary factor in investment decisions. The historic evidence shows that a commitment to this strategy is a costly faith-based proposition.
Pay more tax to cut taxes: Since fall 2010 the Harper team has been saying corporate tax cuts “pay for themselves”. But Budget 2009 figures show that reducing the general corporate tax rate from 22.12 percent in 2007 to 18 percent by January 2010 removed $6.7 billion annually from public coffers, right through the worst of the recession. Cutting the rate further this year to 16.5 percent meant another $2.8 billion in foregone revenues annually. The Harper team’s commitment to reducing the corporate tax rate to 15 percent will reduce the size of the public purse by $13.7 billion annually by 2012, according to Finance estimates, at which time the federal budgetary deficit will be between $21 and $26 billion (the range of Finance, PBO and IMF estimates). Financing this tax cut requires borrowing more money. The average Canadian taxpayer will pay interest on the borrowed money to provide a tax break for profitable corporations.
