Taxing Tim Hortons
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.”
David Olive posted on this and wasn’t very impressed with Harper. To say the least.
Oh, can I pay it for them? I’m going to pay for timberwest, catalyst, wfp, plutonic power, bc ferries translink, the olympics, vanoc, viha, I could go on, but I’m out of money to pay their taxes!
It’s not accurate to say that Canada’s tax system taxes Canadian corporations only on their Canadian profits. The general rule is that a taxpayer resident in Canada (such as a taxable Canadian corporation) is subject to tax on its world-wide income. Of course, our system provides tax credits for foreign taxes paid, and our foreign affiliate rules will exempt from taxation in Canada certain profits earned by foreign subsidiaries resident in certain countries. But the same is true, in principle, of almost any tax system, including the US system, which is required to provide credits for foreign taxes by its tax treaties. (I understand that the US system is less generous than ours in that respect. Perhaps that is what you are thinking of?)
The US taxes its corporations on a â€œworldwideâ€ basis, as you accurately describe. By contrast, Canada taxes its corporations on a â€œterritorialâ€ basis.
Profit repatriated from any country with which Canada has a tax treaty is an â€œexempt surplusâ€ not subject to Canadian tax (regardless of the foreign tax rate). The rare exemption is profit repatriated from countries without tax treaties, which is a â€œtaxable surplus.â€
For more information, please see this Finance Canada backgrounder. I have quoted a relevant portion of it here.
David Oliveâ€™s post is indeed excellent. Also on The Toronto Star blog, Susan Delacourt noted the goofiness of this announcement even sooner.
You are confusing our foreign affiliate regime — our rules for subsidiaries of Canadian corporations — with the taxation of a Canadian corporation as such. Remember that we don’t allow consolidation of corporate groups for tax purposes unlike the US. In any case, a Canadian corporation that carries on business in the US is subject to tax in Canada on the income earned in the US (but with the ability to claim tax credits). It is simply not accurate to say that Canada imposes tax on a “territorial basis”.
You accurately describe the exempt surplus rules for foreign affiliates to which I referred in my previous post (albeit rather vaguely). Keep in mind, however, that most countries with which we have treaties impose higher corporate taxes than we do, which is the rationale for allowing income to be earned and repatriated without additional Canadian tax being paid.
Of course, once the repatriated earnings are distributed to shareholders, they are subject to tax again in the hands of the shareholders.
Your post on Barbados is accurate, but isn’t it the exception that proves the rule? I wonder whether changing our system in the way you seem to advocate wouldn’t simply mean full employment for tax accountants and lawyers. Perhaps you have data on this?
No, I think your exception is the one that proves the rule. The vast majority of international business activity is conducted through foreign affiliates.
Many reputable publications classify Canada as having a territorial, as opposed to worldwide, corporate-tax system because it generally does not tax foreign-affiliate profits. I have not seen any publications classify Canada as having a worldwide, as opposed to territorial, system on the grounds you cite.
Anyway, I do not believe that your point contradicts any of what I wrote about the Tim Hortons case.
On the broader advocacy that you ask about, the simplest solution (which might create less work for accountants and lawyers) would be to just stop corporations from taking Canadian tax deductions for interest to finance foreign affiliates, whose profits are generally not subject to Canadian tax.
Budget 2007 proposed this change, but then the government wimped out. My point in the Barbados post was that, â€œif we continue to allow corporations to deduct foreign-affiliate interest here, we should start taxing their foreign-affiliate income.â€