Dion Keeps Right of Harper
True to form, the Liberals will put forward a motion tomorrow calling for the tax-deductibility of foreign-affiliate interest and for lower taxes on income trusts in the name of economic nationalism.
UPDATE (May 10): The Canadian Labour Congress has released a letter opposing the motion.
Obviously, you don’t understand the issue of interest deductibility (not “tax deductibility” which is quite the oxymoron).
If a Canadian company borrows money to grow its business, say by buying another business (a leveraged buyout), then normally the interest on that loan is an ordinary business expense that is deducted against income. Basic tax principle: expenses incurred in the pursuit of income are deductible against any of that income.
The Conservatives planned to make a significant change. If you were borrowing to buy another Canadian business, then the normal tax rules apply. BUT if you wanted to compete on the global market, well, you no longer get to deduct the interest.
There is a fragment of a tax fairness issue and that is where there are a few “multinationals” using the tax deductibility to put their assets in tax havens. Normally, that is dealt with in tax treaties. The tax treaty creates the problem in the first place by allowing this.
But the approach of Harper and Flaherty is to use the tax act to address the problem. In the process they create a much bigger problem because now a Canadian business that wants to grow and generate more income (and yes that means more jobs at the head office… if the head office stays in Canada) has to compete with foreign multinationals that get to leverage buyouts and deduct the interest expense.
It was a very stupid measure and Flaherty has finally come to his senses.
This flip flop by the Conserservatives is good for Canadians, for Canadian jobs, for Canadian tax revenue, for the Canadian economy.
Jobs in head office in Canada, investing in overseas businesses. So how many head offices jobs have been created prior to this change? More to the point, how much personal income is created in proportion to jobs actually created here?
Why should my taxes increases because a Canadian wants to generate more personal income and not pay interest income on that income?
Ted, I completely agree that, in principle, corporate tax should apply to profit: income minus the expenses incurred in generating it. Since Canada generally does not tax income from the foreign affiliates of Canadian companies, the interest costs of generating this income should generally not be deductible in Canada. Budget 2007 simply implemented this principle.
I agree with Jan that subsidizing investment in foreign countries is a funny way of creating jobs in Canada.
My more detailed explanation of this issue follows:
http://progecon.wordpress.com/2007/04/14/bay-street/