Why is BC’s business sector so small?
Despite all the arguments outlined on this blog, and the federal election debates, the race to the bottom in corporate taxation seems to be alive and well in the G-7. The latest move comes from the UK, whose March budget announced a new 2 percentage point reduction in their corporate tax rate.
Meanwhile, Canadian provinces have their own corporate tax race to the bottom, with BC Finance Minister Kevin Falcon proudly pointing to the fact that BC now has the lowest provincial corporate tax rate in Canada whatever chance he gets (most recently, while speaking to reporters about the federal budget).
If BC’s tax regime is so competitive, then why does BC account for only 7% of the total corporate taxable income in Canada? In comparison, Ontario, Quebec and Alberta are reported to account for 80 per cent of the corporate taxable income in the country. These statistics are attributed to Prof. Jack Mintz in this Globe and Mail article though I’m sure that Statistics Canada data is available to back them up.
BC is home to 13% of Canada’s population, and about 13% of Canada’s GDP. Why do we only have 7% of the total corporate taxable income?
Jack Mintz’ explanation: “B.C. has a relatively small business sector,†he said. “They got a lot of retired people instead.â€
What a slap in the face for our current BC Liberal provincial government after a decade of cutting taxes that were supposed to make the investment environment in BC more competitive.
It might be worth asking Mintz where he got that percentage. Statistics Canada indicates that BC had $18.3 billion out of $146.9 billion in pre-tax corporate profits for 2009 and $23.2 billion out of $217.0 billion for 2008. That’s 12.5% and 10.7%.
Of course, those figures are not the same as the Canada Revenue Agency’s definition of corporate taxable income. However, I do not immediately see a provincial breakdown of its figures.
As we await clarification on the data, allow me to offer some loose speculation on BC’s unspectacular corporate profits. A significant chunk of Canadian corporate profits are from resource extraction and banking.
BC has the wrong natural resources: lumber and natural-gas prices have been relatively low in recent years. (Oil and potash are where it’s at, says the guy from Saskatchewan.)
Vancouver is not in the same league as Toronto and Calgary for corporate headquarters. It is not a predominant financial centre.
The tax-cutters suggest that corporations would report more profits in BC to take advantage of its low corporate tax rate. However, the Canada Revenue Agency allocates taxable corporate profits among provinces based on actual sales and payrolls.
Therefore, corporations have little ability to shift reported profits between provinces (except by relocating real business activity, which is unlikely to be worthwhile for a few points of corporate income tax).
Perhaps if grow-ops were added to the tax base a different picture would emerge, and I am at least semi serious. I suspect the underground economy is a lot larger than average in BC.