Good morning. Thank you for having me and my colleague, Craig Alexander, here today. For background, Craig is Deloitte Canada's chief economist and I'm a tax partner who practises in the area of M and A in Calgary. I also lead our national tax office within Deloitte.
Since 2011 we at Deloitte have been communicating our views on issues that matter through our Canada 175 program, a multi-year research initiative designed to spark vital discussion amongst Canada's businesses, governments and citizens about Canada's future.
We are convinced that Canada will remain the best place in the world to live and work in 2042 when we reach our next major milestone marking the 175th anniversary of Canada's Confederation.
Canadian businesses will play a critical role in achieving that vision, harnessing innovation, creating new opportunities and proudly expressing Canadian values, but they won't do it alone. Governments must act as a critical partner in creating conditions for productive and thriving businesses to emerge.
In Deloitte's submission to this committee we will outline four broad areas that we believe government should focus its efforts and investment on in the next federal budget. Today I want to focus in greater detail on an element in those areas, namely tax policy.
Canadian tax policy can play an important role in helping Canada to be more productive and globally competitive by creating a tax ecosystem capable of fostering innovation and investment, while at the same time looking at ways to allocate the tax burden across elements of the economy in a fair and equitable manner.
Importantly, tax policy is also an area in which other countries are competing with Canada to attract investment dollars as well as attract top talent. We see OECD countries across the board moving forward on tax competitiveness in three key areas. First is reducing corporate tax rates; second is reducing personal tax rates; and third is providing incentives for innovation. My remarks today will focus on these areas.
First, as a relatively small open economy, Canada must make itself a competitive choice for capital investment. Businesses are increasingly mobile and investors face a choice when deciding where to invest. Corporate income tax rates are a strategic consideration when foreign investors are looking at investment.
In recent years Canada enjoyed a significant corporate tax rate advantage relative to our largest trading partner, the United States, but as a result of U.S. tax reform, our competitive tax advantage is now gone. In fact, we're now at a slight disadvantage.
While restoring the quantum of our old advantage is too costly to consider, we would recommend some rate reduction in coordination with the provinces to restore some competitive advantage.
Second, in order to scale and to thrive, Canadian companies need access to the best global talent to meet our labour needs, particularly in emerging and high-growth industries. We believe that Canada's personal income tax rates should be competitive with those of our international trading partners.
At 53.5% our top rate is now significantly higher than most of our global trading partners', and the threshold for reaching that top rate is much lower than those in many of those countries. A significant difference in personal tax rates may discourage immigration to Canada and make it much more challenging for Canadian businesses to recruit top talent, as well as retain top domestic talent.
In this vein we recommend coordinating with the provinces to reduce the top rate to 50% and/or consider increasing the threshold at which the top rate is reached.
Third, we feel there's opportunity to improve our competitive advantage regarding innovation. Global competition to attract R and D spending has increased significantly in recent years. Not only are countries adopting or expanding R and D incentives for such activities, but they are also now providing new tax incentives to encourage commercialization of that R and D. One example of this is the patent box. It's a mechanism that allows corporate income tax related to the sale of patented products to be taxed at significantly lower rates than those applied to regular business income. This preferential treatment of intellectual property provides firms with stronger incentives to innovate and commercialize in jurisdictions that provide those incentives.
Canada's poor performance in R and D spending, despite our strong publication credentials, suggests that our leading-edge academic discoveries are not reaching the point of commercialization. To encourage companies to commercialize and retain patents in Canada, we recommend that the government study whether the patent box regime should be implemented in Canada at the federal level.
Deloitte is committed to playing a key role in shaping Canada's future. We look forward to your questions.