June 6, 2002
The Honourable John Manley
Minister of Finance
140 O'Connor Street
Ottawa, ON
K1A 0G5
Dear Mr. Manley:
On behalf of all members of the Canadian Advanced Technology Alliance, let me congratulate you on your appointment as Minister of Finance. We have had a very cooperative and productive relationship with you in your previous portfolios. Our members have been impressed by the vigour and ability which you have displayed, and your enthusiasm in supporting the growth of Canada's high tech industries.
In your new portfolio, there is one particular tax issue of concern to our members which I would like to draw to your attention. The personal and corporate income tax cuts announced in the October 2000 mini-budget placed Canadian tax rates on a competitive level with rates then in force in the United States. They answered most of CATAAlliance's tax recommendations to the federal government. The problem now is the corporate capital tax.
There is no shortage of evidence on the negative impact of capital taxes. A Department of Finance study in the 1996-7 OECD Economic Survey of Canada said that capital taxes cost $7 in output for every $1 collected, due to their effect on innovation and investment. Another Finance study, in 2001, warned the government that capital taxes discourage the behaviour that the government is trying to encourage in order to stimulate innovation and productivity. There is scarcely an economist in the country who does not recommend they be eliminated. The House of Commons Standing Committee on Finance, in its November 2001 report "Securing Our Future", recommended their elimination.
There has been some progress on the capital tax at the provincial level. Alberta eliminated its capital tax in 2001, and British Columbia will do the same this year. Quebec will halve its rate by 2007. Ontario has promised to eliminate its capital levy, beginning by raising the threshold at which it applies. Saskatchewan has raised its threshold this year, in an effort to attract investment. CATAAlliance is urging the provinces which still impose capital taxes to eliminate them on an urgent basis.
CATAAlliance recommends that the federal government abolish its capital taxes at the first opportunity. Capital tax is diametrically opposed to every aspect of innovation strategy. It discourages innovation, the investment in the new technologies, processes, and equipment which must take place if Canada is to grow. There are no budgetary reasons to delay. There is no existing or potential new government program under the Innovation Strategy which will have such an immediate positive impact on innovation, investment, productivity, jobs and economic growth in Canada.
Mr. Manley, CATAAlliance, and the high tech industry, have had a very effective relationship with you in your previous portfolios. We are confident that the high level of cooperation will continue in your new appointment. We expect that elimination of the capital tax will be only the first of many issues on which we can work together.
Yours sincerely,
John Reid,
President