A New Year’s Day cut in the corporate tax rate – from 18 percent to 16.5 percent, marks the latest effort by the Canadian government to reach out to potential U.S. investors. The January tax cut is the fourth time that the tax has been cut in as many years and, the rate is scheduled to drop again next year to 15 percent. When provincial corporate taxes are factored in, the average rate will be 25 percent. Cutting corporate taxes is a way of establishing Canada as the lowest-taxed nation among the G7.
Contrast this to the United States, where the average rate is a world-leading 40 percent (35 percent federal rate plus average 5 percent state rate). There are murmurings that President Obama may be open to a corporate tax reduction, but given the steep opposition that followed the Lame Duck deal to extend the Bush tax cuts, any deal perceived as favorable to business would likely be a steep hill to climb.
Meanwhile, our neighbors to the north are doing their best to lure U.S. investment. In addition to the lower corporate tax rate, Canada has eliminated corporate surtaxes, survived the economic downturn relatively unshaken, and now enjoys a rosy financial forecast. And, with a strong Canadian dollar (loonie) in hand, Canada’s 34 million consumers are hungry for U.S. goods.
Is it working? Seems to be. In the past few years, U.S. chains including Gap, Victoria’s Secret, Brooks Brothers, Staples and Lowe’s have opened stores. Others, including Target and J.Crew, are expected to break into the Canadian market during 2011.