Building a stronger Canadian export-oriented economy
Around the world there has been growing controversy about the taxes paid by large corporations. Civil society organizations, the media and members of the public are paying closer attention to tax policy and tax payments. In this environment, companies face significant reputational and financial risks if they are perceived as not having paid their fair share.
In this environment, companies face significant reputational and financial risks if they are perceived as not having paid their fair share.
“What’s fair?” asks the Honourable John Manley, President and Chief Executive Officer of the Ottawa-based Canadian Council of Chief Executives. It’s a question the former Deputy Prime Minister has pondered from both sides of the business-government relationship. He spent 10 years in the federal Cabinet, including as Finance Minister, a role in which he was responsible for the Income Tax Act. “I think everyone in Canada, certainly among our membership, recognizes the importance of paying an appropriate level of tax,” Manley says. “Corporations do consume the benefits of government. They rely on government for a range of things – everything from infrastructure to maintenance of order in society, to support for research and development, to support for exports and so on. We’re consumers of government services. The corporate sector should be contributors to government revenues.”
The CEO Council is a nonpartisan organization composed of the chief executives and controlling shareholders of 150 of Canada’s leading enterprises. Since the Council’s creation, responsible fiscal management and competitive tax policies have been among its priorities. Striking the right balance on taxes is key to Canada’s economic competitiveness, Manley asserts. Among other things, tax policy drives decisions on job-creating investments and research and development.
Canada has a combined average tax rate of about 26 per cent. “We’re around the midpoint,” Manley says. “We’re not unduly low; we’re not unduly high. It’s a burden that’s capable of being borne.”
“When you look at it in relative terms across the spectrum internationally, the Canadian tax regime’s not bad,” he adds. “I think that we have a great advantage in it being predictable, run by a competent agency. Not everybody always agrees with what it does, but we have processes and procedures that are reliable when we want to appeal decisions of the taxing agency.”
What the CEO Council wants governments to address is the complexity of the nation’s tax system. In Manley’s words, the objective should be to “broaden the tax base, reduce the number of preferences, simplify the rules and make it easier for compliance purposes.”
In 2014, PwC surveyed 80 member companies of the CEO Council to determine the extent of their contributions to what Manley calls “the cost of doing government in Canada.” Together, the 80 companies surveyed accounted for 19.4 per cent of federal corporate profit tax revenue in 2013. But profit tax is just one piece of this puzzle. The study revealed more than 68 points of taxation, including municipal fees and property taxes as well as sector-specific levies and fees. For every $1 that these corporations paid in profit tax, they shelled out another $1.01 in other business taxes, plus $0.53 in other payments to government. “When you add all of that up, you get a very remarkable level of contribution and quite a remarkable level of complexity,” Manley says. On average, each of the companies surveyed spent $3.9 million and retained 17 full-time staff to comply with Canadian taxes. Together they employ approximately 1,014,000 Canadians – and collect and pay a total of more than $58 billion in taxes. “When you look at the money that a corporation earns in total income before all taxes are all calculated,” Manley says, “40 cents of every dollar is going to government at some level. That might be local; it might be federal; it might be provincial. It might be taxes; it might be fees; it might be other things. Twenty-eight cents goes to employees. Thirty-two cents is retained by the corporation either for its shareholders and then paid out as dividends or perhaps as share buybacks, or reinvested in the company itself.” Greater transparency shows that the story goes well beyond corporate profit tax, he notes.
“If you really want to compare how this jurisdiction is doing as a competitor to that jurisdiction,” Manley says, “there’s actually so much more to take into account.”
Tax transparency also demonstrates that corporations are living up to their social responsibilities, he adds. “This is an important part of the narrative, if you like, that companies need to tell in order to make sure that the communities in which they are located – their employees, their customers, their clients and their suppliers – all understand the role they play,” Manley says. “When they don’t get that story out in a fully transparent way, then they tend not to be credited with the full contribution that they’re actually making.”