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A. Tax Legislation

1. Parliamentary Budget Officer Develops a Corporate Tax Model

The mandate of the Parliamentary Budget Officer (PBO) is to provide independent analysis to Parliament on the state of the nation’s finances, the Government’s estimates and trends in the Canadian economy. In addition, upon request from a committee or parliamentarian, the PBO can be asked to estimate the financial cost of any proposal for matters over
which Parliament has jurisdiction.

In this January 31, 2017 announcement the PBO announced it has developed a new microsimulation model of the
federal corporate income tax system to undertake analytical and costing work. This report describes the technical elements and properties of the model. Model simulation results are also available on the PBO website through the interactive Ready Reckoner tool.

Executive Summary

The microsimulation model produces cost estimates for federal corporate income tax measures. The model replicates tax filings for over two million Canadian firms under the baseline tax code and alternative policies. This new tool enables PBO to produce costing and analysis on the following corporate tax topics:

  1. general and small business income tax rates and eligibility;
  2. tax incentives for capital investment, research and development activities and resource development; and,
  3. the impact of federal corporate tax measures on industries.

The PBO notes in its introduction of this new tool that:

  1. Corporate income tax is the second largest revenue source for the federal government.
  2. The PBO has faced significant challenges undertaking policy analysis in this area.
  3. No publicly available model exists for corporate income tax in Canada.
  4. Tax rates have fallen in Canada, while corporate tax base has been broadened, but the basic structure remains a tax on shareholder income.
  5. A key purpose of the corporate income tax system is to serve as a withholding tax on corporate shareholders. It is designed so that tax exempt
    earnings cannot be retained indefinitely within the firm until withdrawal when a taxpayer faces a lower marginal tax rate, such as in retirement, or when there is a legislated future tax rate reduction.
  6. As dividends are taxed at the personal rate, the immediate incidence of changes to corporate tax rates is primarily on retained earnings.
  7. The corporate tax system is also used to achieve public policy objectives through measures such as preferential tax rates, exemptions, deductions, deferrals and credits (Finance Canada, 2010). These measures are often referred to as “tax expenditures” because they achieve policy objectives at the cost of lower tax revenue – examples cited include the tax credit for expenditures related to scientific research or film and video production and the tax credit allowed small businesses to pay a lower statutory rate of tax on revenues than large corporations. There are also tax credits for manufacturing and processing profits, as well as deductions for resource development expenditures.

The report also notes that as tax on business income is ultimately born by individuals, changes to one element of either the corporate or personal income tax system may necessitate other, balancing, adjustments to the other, which can alter the revenue impact. As noted in the report “…the existing corporate tax is designed to be a tax on shareholder income, reflecting its prevailing rationale as a withholding device for the personal income tax. This tax is complemented by the dividend tax credit and preferential treatment of capital gains as mechanisms for crediting Canadian shareholders for corporate taxes withheld on their behalf.”

Lastly, a core consideration for corporate tax analysis is the degree to which corporations undertake planning activities
to reduce their tax payable. AS the PBO report notes, such tax planning can have a meaningful fiscal impact.