Canada

What can the middle market expect from Alberta's proposed tax cuts

TAX ALERT  | 

Introduction

As promised during Premier Jason Kenney’s election campaign, Treasury Board and Finance Minister Travis Toews tabled legislation on Tuesday, May 28, 2019 to reduce Alberta’s corporate tax rate by a third over the next four years.

Proposed corporate tax rate changes

The Job Creation Tax Cut (Alberta Corporate Tax Amendment) Act proposes to reduce the top Alberta corporate tax rate as follows:

  • July 1, 2019 – from 12% to 11%
  • January 1, 2020 – from 11% to 10%
  • January 1, 2021 – from 10% to 9%
  • January 1, 2022 – from 9% to 8%

With these changes, and assuming there are no cuts to other provincial rates, Alberta will have the lowest corporate tax rate in Canada (Ontario will be next lowest at 11.5 per cent). Similarly, by 2022, Alberta’s combined federal-provincial corporate tax rate would be lower than the combined federal-state rate of the most states in the United States.

No change to small business tax rate

The reductions will only affect the general corporate tax rate, the small business tax rate of 2 per cent will remain the same. Consequently, smaller businesses in Alberta with active business income below $500,000 will not benefit from these proposals.

Anticipated benefits

The idea behind the tax cuts is to make Alberta more competitive both nationally and internationally, and to attract more business investment into the province. The United Conservative Party’s government cites economist Jack Mintz’ claim that these changes will help to create at least 55,000 additional jobs, and University of Calgary professor Bev Dahly’s projection that the cuts will increase Alberta’s GDP by nearly $13 billion. The cuts also received a thumbs-up from the Canadian Taxpayer’s Federation, which proclaimed the cuts to be a “huge victory” for Alberta businesses. However, Rachel Notley, leader of the Official Opposition NDP and former Premier, has criticized the plan as a “giveaway to big, profitable corporations”.  

Comparison to United States tax reform

Tax cuts are usually proclaimed by governments as a job creation stimulus, and this one is no different, although it remains to be seen how successful Premier Kenney and Minister of Finance Toews will be against the backdrop of other economic challenges facing the province, including constrained transportation for resources and low natural gas prices.

In the United States, President Trump’s sweeping “Tax Cuts and Jobs Act”, signed into law December 22, 2017, was also touted as a stimulus for job creation, and included a one-time reduction in the federal United States corporate tax rate from 35 per cent to 21 per cent in 2018. However, on May 22, 2019, the nonpartisan Congressional Research Service (CRS) released a report on the short-term effects of the 2017 United States Tax Reform. The report states that the United States corporate tax cut had a relatively small, if any, first-year effect on the overall American economy. The 2.9 per cent growth in 2018 to the United States GDP was anticipated before the passage of the tax rate cut. According to the CRS, inflation-adjusted wages grew by far less than the growth in the economy and that “there is no indication of a surge in wages in 2018 either compared to history or relative to GDP growth”.

Takeaways for middle market businesses

For corporations with active business income exceeding the small business limit of $500,000, these tax reductions will create welcome additional cash flow for reinvesting in or expanding businesses, increasing wages, and hiring new employees. The reduced rates will make Alberta more competitive and potentially attract new businesses to open offices in the province and hire local workers.

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