Yesterday, the Prime Ministerâ€™s office put out a press release trumpeting Tim Hortonsâ€™ reorganization as a Canadian company as validation of deep federal corporate tax cuts. There was no real news: shareholders predictably ratified a decision that hadÂ been extensively reported back in June, when Tim Hortons management described it as “a pretty bland corporate announcement.”
Nevertheless, far too many journalists followed Harperâ€™s trail of stale doughnuts to Oakville. Canadian Press wrote a print story. TheÂ Globe and Mail printed a big picture of Harper drinking coffee with a caption carrying his message (page A10 today).Â Both Global National and CBCâ€™s The National accordedÂ this itemÂ prime-time television coverage last night.
The Toronto Star and Global TV criticized Harper for blowing off the opening of the United Nations General Assembly to do the tacky photo-op. However,Â some critical assessment is also needed of the Tim Hortons “story” itself.
As a registered Canadian corporation, will it be paying any additional tax to the Canadian government? Will it be relocating any facilities or jobs north of the border? Neither the Prime Minister nor Tim Hortons have even suggested any such benefits for Canada.
As far as I can tell, the only consequence of Tim Hortonsâ€™ reorganization is that it will pay less American tax. The US government taxes the global profits of US corporations, which had no effect on Tim Hortons when Canadian corporate taxes were a little higher than American corporate taxes. Now that Canadian corporate taxes are lower, it is better off as a Canadian corporation because it will pay the higher American tax rate only onÂ its American profits.
Either way, Canadian tax applies only to Tim Hortonsâ€™ Canadian profits. The difference, as noted by the Prime Ministerâ€™s press release, is that it is now payingÂ just 19% as opposed to 22% of these profits to Ottawa. This tax rate is being slashed to 15% by 2012.
So, Tim Hortons will pay less tax to the American government and less tax to the Canadian government. It will not move any offices or employment opportunities from the US to Canada. Has Canada gained anything?
This case appears to be Harperâ€™s best or only example of whatÂ recent corporate tax cuts have achieved. If so, they have not achieved anything worthwhile.
Finance Canada estimates that federal corporate tax reductions enacted since 2006 will cost $14.9 billion annually in lost revenue when fully implemented. Cutting provincial corporate taxes will cost billions more. The prospect of ongoing budget deficits should prompt policymakers to compare the imagined benefits and real costs of continuing corporate tax cuts.
UPDATE (September 25): The following letter appears in todayâ€™s Toronto Star.
Re: Doughnuts over diplomacy, Sept. 24
By reorganizing itself as a Canadian corporation for tax purposes, Tim Hortons will no longer pay American tax on its global profits. But it will pay no additional Canadian tax on its Canadian profits. There is no indication of Tim Hortons relocating any facilities or jobs to Canada.
This corporate reclassification appears to be the Prime Minister’s best or only example of what deep corporate tax cuts have achieved. If so, it suggests that these cuts provide essentially no public benefit.
Meanwhile, Finance Canada estimates that federal corporate tax reductions enacted since 2006 will cost $14.9 billion annually in lost revenue when fully implemented. Slashing provincial corporate taxes will cost billions more. The prospect of ongoing budget deficits should prompt policy-makers to compare the imagined benefits and real costs of continuing corporate tax cuts.
Erin Weir, Economist, United Steelworkers, Toronto
UPDATE (September 29): Aaron Wherry, the prolific Macleans blogger, has kindly featured a link to this post. Comments on his blog drew my attention to a press release from the Conservative Party that goes well beyond the one from the PMO.
The Conservative Party boldly claims that Tim Hortons “will be moving their head office to Canada. Tim Hortonsâ€™ choice to make Canada their new base of operations will not only create new jobs and generate economic activity . . .”
In fact, the head office has been in Canada all along. As Canadian Press reported this summer, “In 2006, the company was spun off into its own American entity, though its corporate headquarters remained in Oakville.”
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