In recent years there has been a trend of aggressive corporate tax cuts across the globe as countries compete for foreign direct investment to stimulate economic growth. Since 2000, the average corporate income tax rate among OECD countries has dropped from 34.1% to 26.7% in 2008.
In response to these global pressures, the Canadian Federal government, beginning in 2006, has introduced significant reductions in corporate tax rates. The reductions have included a change to the general corporate income tax rate from 22.12% in 2007 (including the 1.12% corporate surtax, which was eliminated January 1, 2008) to the current rate of 19%, but which is to be reduced to 15% by 2012.
In the fall of 2007, the Federal Minister of Finance publicly challenged the provinces to lower their general corporate income tax rates to 10% by 2012 to achieve a combined rate of 25%, which would be the lowest corporate income tax rate among the G7 nations. In December 2008, the Advisory Panel on Canada’s System of International Taxation released its final report, "Enhancing Canada’s International Tax Advantage." The report agreed that Canada must lower its domestic corporate tax rates in order to stimulate foreign direct investment and for Canadian companies to remain competitive in the international markets.
Despite the global financial crisis and decreasing fiscal revenues, in the 2009 Federal Budget the Federal government stated that it is committed to moving ahead with its corporate income tax rate reductions. The general corporate income tax rate will be decreased as follows: 18% for 2010, 16.5% for 2011 and 15% for 2012. Once again, the Federal Minister of Finance called on the provinces and territories to join Alberta and British Columbia to reduce their corporate income tax rates to 10%.
In the recently announced provincial budgets, some of the provinces have committed to reducing corporate income tax rates despite the current fiscal challenges, while others have demonstrated reluctance to sign on.
In March 2009, the New Brunswick Department of Finance released "The Plan to Lower Taxes in New Brunswick." According to the Plan, the 2008 corporate income tax rate of 13% will be reduced to 12% in 2009, 11% in 2010, 10% in 2011 and 8% in 2012 (effective July 1 of the particular year). The Plan provides the largest one-time tax reduction package ever introduced in the Province of New Brunswick. The measures will reduce New Brunswick’s general corporate income tax rate from one of the highest rates in 2001 (16%), to the lowest by 2012.
The general corporate income tax rate for the Province of Nova Scotia will remain unchanged from 2008 at 16% in 2009 and 2010. However, the Nova Scotia Department of Finance is currently conducting a review of its tax system to determine how it can best be used to achieve its long-term fiscal and economic objectives.
The Province of Prince Edward Island forecasts a provincial deficit for the 2008/09 and 2009/10 fiscal years. Prince Edward Island's general corporate income tax rate is 16% for 2009 and no corporate income tax rate reductions have been announced for the future. Instead, the 2009 Prince Edward Island Budget focused on infrastructure and capital spending.
Newfoundland & Labrador’s corporate income tax rate remains unchanged at 14% for 2009. There is no mention in the 2009 Budget of rate reductions going forward.
The Province of Québec expects deficits in the 2009/10 and 2010/11 fiscal years. The corporate income tax rate in Québec was increased from 11.4% in 2008 to 11.9% in 2009. This is an increase from 8.9% in 2005. Québec has not announced any plans to further increase corporate tax rates in the province.
The corporate income tax rate in the Province of Ontario remains unchanged at 14% for 2009. The corporate income tax rate will be reduced to 12% in 2010, 11.5% in 2011, 11% in 2012 and 10% in 2013 (effective July 1 of the particular year). Ontario has no plans to cancel the proposed corporate income tax rate reductions because of any increase in the provincial deficit as a result of the current economic crisis.
In the 2008 Budget, the Province of Manitoba reduced its corporate income tax rate from 14% to 13%, effective July 1, 2008. In its 2009 Budget, Manitoba confirmed a further rate reduction from 13% to 12%, effective July 1, 2009. Subject to having a balanced budget, Manitoba plans to reduce its general corporate income tax rate to 11% in the future; however, no date has been released for the proposed reduction.
The Province of Saskatchewan has already implemented a number of reductions to its general corporate income tax rate. The rate was reduced from 17% to 14% in 2006, 13% in 2007 and 12% in 2008 (effective July 1 of the particular year). In its 2009 Budget, Saskatchewan stated that its economy remains strong and that growth is forecasted for the 2009/10 fiscal year. However, no further corporate income tax rate reductions have been announced.
The Province of Alberta has had the lowest corporate income tax rate since 2006 at 10%. The rate was gradually reduced over several years from 15.5% in 2000. In its 2009 Budget, Alberta announced that its corporate income tax rate will remain at 10% for 2009 and was silent on any future rate reductions, but did state that a changing revenue outlook requires the government to be cautious before making any additional tax reductions.
The corporate income tax rate in the Province of British Columbia was decreased from 12% to 11%, effective July 1, 2008. The rate will remain at 11% for 2009, but will be further reduced to 10.5% in 2010 and 10% in 2011 (effective January 1 of the particular year). This follows a gradual reduction over several years from 16.5% in 2001. In its 2009 Budget, British Columbia announced that, rather than reducing spending or increasing taxes, it will run its first deficit in five years.
With respect to the Territories, the Yukon’s corporate income tax rate of 15% for 2008 remains unchanged for 2009. The Yukon’s 2009 Budget is silent on any future changes. The Northwest Territories’ corporate income tax rate of 11.5% for 2008 remains unchanged for 2009. This is a reduction from 14% in 2005. Nunavut’s corporate income tax rate is 12% for 2009. The Nunavut Budget is silent on any future changes.
Based on the proposed changes as they stand today, the combined federal-provincial general corporate income tax rates in 2012 will be as follows: 23% New Brunswick; 31% Nova Scotia; 31% Prince Edward Island; 29% Newfoundland & Labrador; 26.9% Québec; 26% Ontario; 27% Manitoba; 27% Saskatchewan; 25% Alberta; 25% British Columbia; 30% Yukon; 26.5% Northwest Territories; 27% Nunavut. With only three provinces meeting the Federal government’s challenge by 2012 (Ontario will meet it by 2013), it will be interesting to see which provinces emerge from the current recession stronger and more prosperous.