Ottawa announced a phase-out of the capital tax on corporations — except for big financial institutions — in Tuesday’s federal budget.

The tax has long been a thorn in the side of several major Canadian industries, including manufacturing, high-tech, mining, oil and gas and finance. Unlike income taxes, which a corporation pays when it is profitable, capital taxes must be paid even when it is not profitable.

The tax’s elimination will be enabled by increasing the threshold deduction from $10 million to $50 million and by reducing the capital tax rate. It will be eliminated over five years, beginning January 2004.

This phase-out will result in capital tax elimination for 5,000 medium-sized corporations in 2004, says Ottawa. Full elimination will occur in 2008.

However, Ottawa is explicitly preserving the tax on large financial institutions. No reason was given for the apparent disparity.

The capital tax is levied at a rate of 0.225% of a corporation’s taxable capital — its total shareholder equity, surpluses and reserves used in Canada — in excess of a $10 million capital deduction.

According to the Association for Abolition of Capital Taxes (which includes the Canadian Bankers Association, the Canadian Life and Health Insurance Association and the Insurance Bureau of Canada), levying this tax discourages investment in plants, technology and equipment and it significantly hinders the productivity of Canadian enterprises.