Efforts to enhance the business tax regime in Canada have been a great success, suggests new research from the University of Calgary’s School of Public Policy.

Although Canada ranks only in the middle of the 83 countries studied in terms of the level of taxation on capital investments, that ranking is considerably higher than it was only a few years ago.

“Canada has made a successful effort to move from having the highest tax burden in the [Organization for Economic Development and Co-operation] in 2005 toward the average by 2012,” says Jack Mintz, the school’s director and co-author of the research paper, Canada’s 2010 Tax Com-petitiveness Ranking: Moving to the Average but Biased Against Services.

The paper, co-authored by Duanjie Chen, a research fellow at the School of Public Policy, notes that for the first time since 1975, the year Canada’s marginal effective tax rates were first measured, Canada has become the most tax-competitive country among the G7 states with respect to taxation of capital investment.

“Even more remarkably,” the paper states, “Canada accomplished this feat within a mere six years, having previously been the least tax competitive G7 member. Even in comparison to strongly growing emerging economies, Canada’s 2010 marginal effective tax rate on capital is still above average.”

The paper points out that Canada’s marginal effective tax rate on capital investment has almost been cut in half to 20.5% in 2010 from 39% in 2005. The corresponding G7 average is 28.2% (vs 33.6% in 2005). The corresponding figure for the OECD is 18.6% in 2010 (22% in 2005); for the other countries in the study, the figure is 17.7% (20.4%).

Canada’s higher ranking reflects new policies, programs and approaches at both the provincial and federal levels, says Jim Milway, executive director of the Institute for Competitiveness & Prosperity in Toronto: “The [paper] shows Canada has done a fabulous job over the past five years. Federal governments — both stripes — started us on a journey to decrease corporate taxes and eliminate the capital tax. Provincial governments have also worked to get their corporate taxes down.”

The 16-page paper also highlights the work other countries are doing to enhance their tax competitiveness. Britain has announced it will reduce its corporate income tax rate by another four percentage points in 2014 to 24% — less than the 25.6% rate legislated for Canada next year. New Zealand has brought out its most comprehensive tax reform in 25 years, and Taiwan reduced its corporate income tax rate twice in 2010 to the current 17% from 25%.

Most significant, perhaps, is the announcement from Japan’s government that it will decrease its corporate income tax, effective this April, by five percentage points. This is being done in tandem with major reform of the country’s corporate tax on foreign earnings. If everything goes according to plan, the paper states: “…the U.S. will have the highest corporate income tax rate among OECD countries.”

But what is bad news for the U.S. may bode well for Canada. If governments south of the border fail to reduce their “exorbitant taxes on corporations and get in line with international rates,” says Mintz, they will face “a bleeding of capital, business and jobs to more competitive countries, including Canada, because of its geographical proximity.”

However, he cautions, Canada cannot become complacent or buckle under pressure to increase federal coffers with corporate tax dollars in the aftermath of the recession: “It is crucial to carry out the final reforms.”

Those reforms include reducing the federal corporate tax rate to 15%, cutting provincial rates to 10%, eliminating capital taxes and ensuring sales tax harmonization.

The report also points out that Canada has a built-in bias that favours manufacturing and processing businesses: “Canada has the greatest gap in tax burdens between manufacturing and services among OECD countries. Surprisingly, preferential tax treatment (such as fast writeoff and investment tax credits) favouring only manufacturing and processing activities has become the norm in Canada, although it does not exist in most developed economies.”

New ideas may be necessary to propel Canada to the top of the pack, says Milway: “We’ve gotten ourselves to be average. It would be nice if Canadian governments were thinking about what’s next. There will be ongoing pressure to reduce corporate taxes. It’s a moving target. We need to make sure we’re not asleep at the switch.”

Other countries are certainly wide awake. The report says many nations have marginal effective tax rates on capital investment below 10%, including Iceland, Singapore and Hong Kong. Belgium and Serbia have rates below zero. IE