TORONTO -- Capital taxes hinder business productivity, especially when companies are in the red, according to a study by Ernst and Young LLP for the Coalition of the Elimination of Capital Taxes (CECT).

"Capital tax is applied on a corporation's total assets," says Peter Tzanetakis, Senior Tax Policy Manager with Ernst and Young. "It's not an income tax. So, no matter how the company performs in terms of its income, whether it has a profit or a loss, the tax is still applied."

Highlights of the report:

• Negative taxable incomes were reported by 55 per cent of companies that paid the Large Capital Tax (LCT) in 1998.

• Manufacturing industries, including technology companies, that accounted for 19 per cent of Gross Domestic Product (GDP) in 1998, the last year for which StatsCan has figures, paid 27 per cent of the total LCT.

• Resources sector companies paid 12 per cent in LCT while accounting for 4.5 per cent of the GDP.

• The more productive a company, the higher the capital taxes it paid.

Capital tax is applied by federal and provincial governments. Thresholds for small businesses are $10 million for the federal tax and $5 million or less for the provincial levy.

"At the federal level," says Mr. Tzanetakis, "the capital tax raises about $1.2 billion. It's probably more appropriate to eliminate it, considering that they have a revenue base of $180 billion."

Moves to have the provincial tax eliminated are well under way. Alberta, Newfoundland and PEI have all scrapped it and British Columbia is preparing similar action, while Quebec, which has no threshold, will cut the tax levy in half by 2007.

An articulate advocate of eliminating the tax is Mark Witkowski, Director of Taxation with MDS Inc., one of the Coalition's high-tech member companies.

"Among the provinces," he says, "we're urging the Ontario government, especially, to take concrete measures if it wants to help the manufacturing and high-tech sectors get back on their feet and to generally level the taxation playing field.

"Now is also an excellent time for Ottawa to act. With the economy improving, the federal government has the fiscal flexibility to abolish the unfair and investment-hindering capital tax."

 

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