Ottawa to release competitiveness plan, but it’s unclear how much help is needed

Morneau has heard many warnings from corporate Canada that American tax reforms will have a big, negative impact on investment here. But some experts insist the country has performed well even after the U.S. overhaul. (File Photo: Bill Morneau/Facebook)

OTTAWA — The federal government will roll out an update to its fiscal plan Wednesday to help Canada compete for investment dollars following major American corporate tax reforms — but it’s up for debate whether the country is facing a serious investment challenge.

The business community has called on federal Finance Minister Bill Morneau to respond to the Trump administration’s tax and regulatory overhaul — and corporate tax cuts for Canada have been the most-cited suggestion.

The government, however, has signalled it will be focused on targeted measures to attract investment, rather than broad-based corporate tax reductions that would lower federal revenues by billions of dollars per year.

Wednesday’s much-anticipated fall economic statement arrives after months of debate about whether Canada has lost its edge as an investment destination, and by how much.

Morneau has heard many warnings from corporate Canada that American tax reforms will have a big, negative impact on investment here. But some experts insist the country has performed well even after the U.S. overhaul.

Economist Randall Bartlett said investment in Canada has been pretty strong through the first part of 2018 and he believes it’s difficult to draw a direct link between the country’s performance and the U.S. tax changes.

“It’s one of those things where I feel everyone’s interpreting the data the way they want right now,” said Bartlett, who works for University of Ottawa’s Institute for Fiscal Studies and Democracy.

“Everyone’s just cherry-picking for whatever side they want to land on.”

Bartlett said trade policy uncertainty around the globe has probably had a bigger impact on investments in Canada and the U.S. than American tax reforms.

Brett House, deputy chief economist for Scotiabank Economics, said Canada has seen broad improvements in both resident and non-resident foreign direct investment numbers. At the beginning of 2018, the flow of foreign direct investment reached its highest level in three years, he said.

“I think the notion that Canada has become a pariah state for foreign investment is just at odds with the actual data,” House said.

He added that a lot of academic literature implies tax rates are not the “be all and end all of criteria of where to locate investment” when it comes to business decisions. Investors, he stressed, also look for factors like educated work forces, resilient communities and strong infrastructure.

“Tax rates are one of the issues that contribute to that decision, but it’s by no means the only one,” he said.

Last month, a report by parliamentary budget officer Yves Giroux predicted the U.S. tax overhaul will result in multinationals shifting some of their profits to the U.S., but that it would not have a “material impact on Canada’s investment climate.” The changes, he said, will lower Ottawa’s corporate tax revenues by an average of $500 million per year.

A recent Bank of Canada survey of executives found that investment intentions are “strong.”

But the bank said competitiveness challenges related to U.S. reforms and uncertainty around pipeline approval were still expected to lead some exporters to either delay their investments or to invest outside Canada. Investment in the oil and gas sector was expected to be roughly flat in 2019—20 compared to a year earlier, it said.

But in recent months, a number of reports have argued the U.S. tax changes present the Canadian economy with major challenges.

A study released in September by the PwC accounting firm warned the American tax reforms will have a major, negative impact on Canada.

It warned the U.S. changes threaten 635,000 Canadian jobs, which represents about 3.4 per cent of all workers, and could lower Canada’s gross domestic product by 4.9 per cent. The report said $20 billion worth of government revenue could also be at risk.

Canada’s favourable corporate tax environment was once a big advantage in terms of attracting investment and now that edge is gone, said the report, which recommended federal and provincial tax reductions among its policy options.

The study was commissioned by the Business Council of Canada, which has been pushing for lower corporate taxes.

This week, the Fraser Institute think tank released a report that said “ill-conceived policies” by the federal government and several provinces have “materially worsened” the country’s economic competitiveness. It said higher tax rates, mounting debt and increased regulation over the years have made Canada a less attractive place to do business.

The Fraser Institute said business investment as a share of GDP has fallen this year to 11.6 per cent from 13.5 per cent.

There are recommendations that Morneau could consider a cheaper option than corporate tax cuts: allowing all companies to immediately write off new equipment purchases.

The U.S. tax package enables American companies to immediately write off the full cost of new machinery and equipment. Canada already offers this provision for its manufacturing sector and there are calls for it to be expanded to cover all industries.