A report from the C.D. Howe Institute showed Moncton, along with other Maritime cities, has among the highest tax burdens for business investment in Canada. On the bright side, it also found that Canadian cities have a competitive advantage compared to the top five American cities for business investment.
The report found Halifax (45.9 per cent), Charlottetown (43.1 per cent), Moncton (45.1 per cent), Montreal (45.5 per cent) and Winnipeg (47.6 per cent) have the highest overall tax burdens on new business investment in 2018.
Meanwhile, St. John’s (34.6 per cent), Toronto (38.5 per cent), Saskatoon (38.1 per cent), Calgary (38.2 per cent) and Vancouver (41 per cent) offer more competitive rates.
The report’s authors, Adam Found and Peter Tomlinson, compared the tax burdens in the largest city of each province. They focused on corporate income taxes, retail sales taxes, land transfer taxes and business property taxes, which together, determine the overall tax burden on new business investment, or the marginal effective tax rate (METR).
The business property taxes are often overlooked or excluded from such analysis, even though much of the variation in competitiveness is attributable to those taxes in the provincial and municipal level, Found said in a release.
“We find business property taxes account for about half the total METR on corporate investment, a share much too large for Canadian governments and other analysts to continue overlooking,” he said.
“When business property taxes are included in METR estimates, the rate of return an investment needs to be economically viable is much higher.”
Most Canadian METR estimates generally indicate that the Atlantic provinces have the lowest METRs, the report noted. But once property taxes are included, Atlantic Canadian cities, except for St. John’s, didn’t come out very competitive compared to the rest of Canada.
Moreover, New Brunswick along with B.C. and Manitoba, impose the largest provincial tax burdens. In these provinces, provincial business property taxes are significant barriers to new investment, the report said.
But David Campbell, an economist who is also the President of Jupia Consultants, said while New Brunswick has one of the highest property tax rates in Canada, looking at the rates alone is misleading. Plus there are other fees that other jurisdictions may charge in addition to taxes.
“It’s very difficult to do these kinds of reports accurately…the problem is, you pay property taxes not just based on your rate but on the assessed value of your building. So an office tower in downtown Toronto – the value of the building is going to be 10 times than in Moncton. So you’re going to end up paying a lot more property taxes Toronto than you would pay in Moncton because the assessed value is higher,” he said.
Campbell said reports like these from highly credible sources like C.D. Howe worry him because investors may overlook the details and be discouraged from investing in New Brunswick.
“You need to consider both the rate and the value of the property when you’re looking at taxes,” he said.
Bottom line is, the tax rates in New Brunswick are probably higher, but the ultimate taxes that a lot of businesses would pay are not that high here. They’re very competitive.”
According to the report, municipal business tax burdens are the highest in Montreal, Halifax and St. John’s, but near the group average in Calgary, Winnipeg, Moncton and Charlottetown.
“It’s interesting because Moncton in particular often fares well in many other national and international reports as a good place to do business due to the cost of our labour, quality of life. But the tax burden is something that we need to address,” said John Wishart, CEO of the Chamber of Commerce of Greater Moncton.
Wishart said the current government, led by Premier Blaine Higgs, has taken the right steps by announcing plans to eliminate the small business tax and the “double tax” on non-owner occupied secondary properties. The government also promised to have a timeline to reduce WorkSafeNB premiums, something applauded by the chamber.
But there’s more to do and Wishart suggests the government should do an overall tax reform study.
“What’s becoming more and more crucial is the overall tax burden on businesses…The carbon tax is coming in next year, so there are all kinds of layers of tax that make it hard to do business,” he said.
“That’s why we’ve urged the last provincial government and this one to take a hard look at the overall tax burden on business. Because we feel if it’s lower, we will be able to attract new businesses and the businesses that are already here will be able to create more employment and wealth.”
The report noted heavy tax burdens erode the returns on investment and divert investment to jurisdictions with lower taxes. That’s why for governments, a competitive business tax regime is a key factor in retaining existing businesses and attracting new investment.
The Canadian Advantage?
Because of the recent corporate tax reforms under the U.S. Tax Cuts and Jobs Act, Found and Tomlinson also extended their analysis to five America cities: Boston, New York, Chicago, San Francisco, and Los Angeles. They compared them to the tax burdens in Toronto, Vancouver, Montreal, Winnipeg and Calgary. The results look good for Canada.
“Once business property taxes and local taxes are included in our analysis,” said Tomlinson, “the Canadian cities emerge with a notable competitive advantage.”
The found that when only commonly analyzed business taxes – like corporate income taxes and provincial/state non-value-added sales taxes – are considered, the American cities listed an average METR of 19.2 per cent, almost as competitive as the Canadian average of 19.1 per cent.
But once provincial/state property taxes and land transfer taxes are included along with local taxes, the Canadian cities become much more competitive at an average METR of 40.2 per cent, while the U.S. cities average 49.5 per cent.
“While average METR results for 10 cities won’t necessarily apply to all of urban North America, they could prompt investors looking only at U.S .locations to look northward,” the report said.
Even so, Wishart said the work doesn’t stop there.
“We need to be ever vigilant to make sure that whatever advantages that we can put on the marketplace translate into employment and new businesses operating here,” he said.
Campbell noted that while the tax burden in Canada is lower, the U.S. has much more room to provide tax breaks for certain companies or industries it wants to see succeed. In Canada, and in New Brunswick, tax breaks are much more difficult to apply. Instead, governments would give payroll rebates and other forms of subsidies to attract and retain businesses.
“Rates are lower here but with all the tax breaks in the U.S., it’s still a challenge for us to compete with many of [their cities],” he said.