This is part of a series of looks at what the financial services sector is hoping for in the Feb 23 federal budget.

The Canadian Bankers Association is urging Ottawa to make Canada’s tax regime more competitive by reducing corporate income tax rates and accelerating the elimination of both the large corporations and withholding taxes in next week’s budget.

In its 10-page pre-budget recommendation, CBA says that such reforms would bolster the Canadian economy by attracting new investments, increasing the tax base and effectively boosting the government’s tax revenue.

“If Canada is going to be able to finance the programs that are vital to our country – such as health care and education – then it must be able to sustain tax revenue, and the only way to ensure that is to have a broadened tax base,” says Kelly Shaughnessy, vice president of operations at the CBA in Toronto.

“We firmly believe you don’t achieve that tax base through higher rates of taxation, you achieve them through a competitive tax environment,” Shaughnessy e says.

While Canada’s corporate income tax rates are among the most competitive in the world, CBA is asking Ottawa to continue to lower the tax rate, which has already seen a 8% drop since 1996. Several OECD countries have similarly reduced the tax rates, particularly Ireland, which cut rates by more than 25% in the past eight years.

The CBA links tax competitiveness to capital investments, pointing out that reducing the corporate income tax rate will foster a culture of innovation and entrepreneurship, as well as a strengthened tax base. On the flip side, the CBA warns that an increase in corporate income tax rates would dampen investors’ enthusiasm, consequentially costing Canadians the benefits of new investments, including employment opportunities and new technology.

The CBA also takes aim at capital taxes, which for large corporations are 50% higher in Canada than in the U.S. Shaughnessy says capital taxes are a particular burden for employment in the banking industry to the extent that employee salaries are attributed to capital. What’s more, banks must maintain high levels of capital for credential purposes and are consequentially taxed for it.

“We firmly believe capital taxes should be eliminated,” says Shaughnessy. “For one, they’re a tax on the reserves of our members, and secondly they’re a penalty for investing in Canada and in job creation.”

The report applauds the government’s proposal to expel the large corporations tax, which the CBA feels will encourage businesses to hire more Canadians, invest more in training and technology and increase their capacity to innovate.

The CBA is also calling for the abolition of the Canada-U.S. withholding taxes on cross-border interest payments. At present, Canadian financial institutions withhold 15% to 25% of the interest paid to non-residents who hold an account in Canada, an amount that is remitted to the Canadian government.

Though U.S. citizens can claim the tax as a credit against their income taxes, Shaughnessy calls the practice “ administratively onerous” and says it impedes the flow of capital between the border.

The CBA report says that eliminating the withholding tax between the U.S. and Canada would lower Canadian interest rates, increase Canadian investments, provide greater access to borrowed funds and reduce the cost of capital.

“The overall benefits of making Canada’s tax regime more competitive is greater investments and higher levels of employment that will result in higher tax revenues for the government,” Shaughnessy says.