In its first major tax reform in over 30 years, the United States is considering a package of tax changes that if passed into law, could significantly impact Canada’s ability to keep top talent and business ventures from moving across the border.
While Canadian high-income earners have faced various federal and provincial tax hikes since 2016, and private businesses are fighting this summer’s controversial high-tax reforms, the federal tax proposals in the U.S. are much friendlier to several taxpayer profiles:
- For low-income earners the standard deduction will increase from $6350 to $12,000 (slightly more than Canada’s current basic personal amount of $11, 635). For those filing jointly, the amount would rise from $12,700 to $24,000.
- Above the standard deduction, the number of tax rates will be reduced from 7 to 4 ranging from: 12 percent (on incomes up to $45,000), to 25 percent (incomes between $45,001 to $200,000) and 35 percent (incomes between $200,001 to $500,000). A high rate of 39.6 percent will be applied to incomes above $500,000. The bracket amounts double for joint filers.
- It’s at income levels between $142,354 and $202,800 that American taxpayers have the most favorable tax rates, saving 4% over Canadian rates. The next most advantageous tax rates occur on incomes up to $45,000, where Americans would save 3% over Canadian rates.
- A new Family Credit would enhance the current Child Tax Credit, increasing it from $1,000 to $1,600. In addition, a $300 credit will be provided to each parent and adult dependant.
- The Estate Tax exemption would double immediately; and be repealed entirely after six years.
- The corporate tax rate would be reduced to 20 percent from 35 percent. The tax rate for active small business income would be 25 percent. For small businesses, a rate of 9 percent for incomes under $75,000 is proposed, with the rate phasing out as incomes exceed $150,000 with a full phase out at $225,000 of income.
- It’s interesting to note that Canada’s small business tax rate is proposed to drop to 9% by 2019 – a hasty announcement made last month by Finance Minister Morneau, who has been under attack for trying to substantively change the landscape for business owners with exorbitant taxes on family members who don’t meet “reasonableness” tests and passive investment income in the corporation.
- Business could immediately write off the full cost of new equipment.
- It would become easier for American business to repatriate foreign earnings; incentives to move overseas would be eliminated.
- Mortgage interest rate deductibility will continue, but only for existing mortgages and on the cost of newly acquired homes up to $500,000.
- The Alternative Minimum Tax would be repealed.
Canadians have already expressed concerns about some of these proposals and their effect on our economy. Writing in the Financial Post, tax expert Jamie Golombek noted that in combination with Florida’s zero tax rates, the Trump tax reductions at the top end of the income scale, would make the U.S. more attractive for Canada’s highly skilled people and professionals. Using the example of a medical professional paying tax at 53.5% on income above $220,000 in Ontario, accepting an offer to move to Florida would mean “. . .not only could she be paid in U.S. dollars but that income would be subject to tax at a top rate of 33 per cent – that’s more than 20 per cent lower than her current, combined federal/Ontario rate.”
Speaking to the Canadian Press last December, Dr. Jack Mintz, President’s Fellow of the School of Public Policy, also worried about the potential brain drain through tax competitiveness: “We don’t look particularly competitive in attracting talent when you have both a low dollar and, now, a really high marginal tax rate cutting in at a relatively low income level. I think the government needs to worry about attracting talent.”
Craig Alexander, chief economist for the Conference Board of Canada, agreed, noting that “businesses and individuals often make decisions based on after-tax incomes . . .so, if America cuts its corporate and personal income-tax rates significantly, it could create a competitive challenge for Canada.”
More recently, Dr. Mintz opined on what Canada must do if the tough NAFTA negotiations it is in with the U.S. fail: “Like the U.K. following its Brexit experience, we will need to pursue more vigorously new avenues for trade and create a better business environment with better regulations and growth-oriented tax system.”
Combined with the recent tax proposals, which are going in the opposite direction, and new CPP tax hikes on the horizon, it could be a very bumpy road ahead for Canadian business and their government, and by extension, the taxpayers who work for them.
To weigh in with your view, participate in the Canadian Federal Budget consultations at this link: http://www.fin.gc.ca/n17/17-113-eng.asp
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