Further, crucial thoughts on Morneau's CCA proposals

There will be further commentary about Morneau's fall economic statement this week, but fuzzy  accusations are already being posted about their effectiveness. For instance, Jack Mintz raised the following point in the Financial Post:

"As it stands, about three-fifths of Canadian corporations do not pay corporate taxes, according to the Canada Revenue Agency’s recent corporate tax statistics (a breakdown by sector or size of companies is not available)."

 While he does give an important qualification, he doesn't necessary point out that many corporations required to file returns are automatically exempt from income tax liability, including:

1. Charities and other non-profit corporations
2. Federal and provincial Crown corporations
3. Municipally-owned corporations
4. Bare trustees whose only purpose is to hold property on behalf of another individual or entity
5. Dormant and other inactive corporations

Why the CRA doesn't isolate those entities in its analysis does tend to make us wonder. I would also add the following groups for consideration, based on person observation:

1. Holding companies that act as trustees for trusts whose income flows directly to beneficiaries
2. Management companies whose expenses are offset by management fees charged to related parties

It's up for debate as to whether the underlying arrangements for these companies are legally valid, but that is a topic to be debated another time, especially as to why the CRA is not as aggressive as it should be in questioning them.

The current debate is as to whether the new measures for accelerated capital cost allowance will help to boost the economy. I am skeptical as to whether that will happen, because Canadian businesses have been historically notorious for underpaying and underinvesting:

• For these past decade, the cost of capital has been at historical lows, which would have made borrowing for business investment correspondingly cheap. Coupled with capital cost incentives that were much more attractive than their US equivalents, and given the economists' teaching that any project having a return greater than the cost of capital should be undertaken, we should have seen significant uptakes in investment. That, however, has not been the case.
• Even before that, when the Canadian dollar achieved temporary parity with the US dollar, we should have seen significant imports of capital equipment to upgrade our under-performing manufacturing plants. That did not happen either.
• We witnessed the existence of dead money, where corporations just sat on their cash instead of investing it.
• We have witnessed a massive waste of energy by business lobbies in promoting the concept that lower corporate tax rates will increase productivity, whether through the general rate or the small business rate. That hasn't worked either, because we have seen businesses using their improved cash flow to buy back their shares instead. That may very well be linked to the above point about dead money, but I have heard of no analysis published in that regard.
• As for the small business rate break, the UK abolished its small profits rate in April 2015, because it became quite obvious that it is an incentive to stay small, while Australia introduced a gross revenue test (subject to certain passive income limitations) in July 2017 to bypass the games corporations play to minimize their taxable income to qualify for the break.

In addition, there has always been an over-conservative tradition in Canadian business when it comes to investing. The first employer I worked for after graduation in the 1970s had an effective policy of only approving projects with a payback of less than a year, which really halted a lot of potential investment. I remember a financial analysis supervisor that wrote up a mock appraisal for acquiring an electrical pencil sharpener, and I believe she was able to justify it on the basis of an annualized rate of return of 3,078%! Another employer later on used a hurdle rate of 15% to identify projects that would make the cut for a formal appraisal. As that was an after-tax rate, even at a time when bank rates were around 20%, the tax rate of around 50% would still have made for an after-tax rate of about 10%, and the financial analysts there were wondering why a higher rate was being applied for projects that were essentially risk-free.