November 19, 2002 by Canadian Underwriter
Insurers, represented by the Insurance Bureau of Canada (IBC), were among those calling for the elimination of capital taxes in a submission to the federal government’s Standing Committee on Finance.
A new association of business groups known as the Association for the Abolition of Capital Taxes (AACT) made the submission urging the tax be immediately repealed.
The submission was based on data prepared by Ernst & Young. “Canada remains an anomaly among industrialized countries for its application of a direct tax on investment namely, specific taxes on capital used in this country by Canadian corporations,” says Satya Poddar, director, tax policy services, Ernst & Young. “Capital taxes are truly harmful, discouraging investment by increasing the cost of capital, resulting in economic inefficiencies and loss of economic output.”
Ernst & Young argues that elimination of the tax would result in economic gains similar to the replacement of the Manufacturers Sales Tax with the Goods & Services Tax, which the government had estimated would lead to 14% growth in GDP. The consulting firm says that capital taxes are, in effect, an excise tax on investments such as plant construction and upgrades, machinery and equipment purchases. And this tax is charged not only at the time of purchase but over the entire time of the investment.
“The longer the life of an investment, the more years there are for the tax to be repeated, and the tax snowballs into a bigger and bigger hit,” says Ron Cook of Trans Canada Pipelines, chair of the Canadian Energy Pipeline Association (CEPA) income tax committee. CEPA is among the AACT members.
AACT points out that the Finance committee has recommended in two previous pre-budget consultation reports that the capital tax be eliminated.
AACT is specifically addressing the large corporations tax (LCT), calling for its elimination in the next federal budget. Ernst & Young reports that 55% of LCT in 1998 came from companies in loss positions including growing high-tech companies and those vulnerable to profit cycles, a category that could apply to insurers.