Introduction

The recent (Nov 8-9) BC Business Summit held in Vancouver, identified taxation as the business community's number one concern. Three important components were emphasized: personal income taxes, corporate taxes, and social (e.g. sales) taxes. The summary report emphasized mainly personal tax reductions, but did go far enough on R&D and equity investment incentives (perhaps because these are more technology venture oriented).

Personal income taxes are a major deterrent in attracting (and keeping) talent in B.C. especially in comparison to our neighbors. Alberta's top marginal rate is 45.6% vs 52.7% in B.C. Washington State's is 37.2% but this kicks in at a much higher income level.  The Summit suggests eliminating the surtaxes and reducing the B.C. rate from 49.5% to 46.5% of Federal tax over 3 years. But, isn't the bigger part of the tax burden at the federal level?

Corporate taxes are higher (10% or so on average) relative to the U.S., but are reasonably uniform (within 2-3%) across Canada. Sales taxes are approximately twice as high in B.C. as in Alberta and Washington - also a deterrent in attracting talent. Although studies have been done that prove that lower tax levels will actually increase overall tax revenues, there is a concern that politicians are worried about short-term pain arising from long-term gain. But, to mitigate any immediate concerns, a comprehensive tax package - especially one which stimulates investment (e.g. in R&D, Venture Capital companies, flow-thru share offerings, etc.) - might replace, almost immediately, any dip in gross tax levels due to the injection (and hence increased spending) of new investment capital.

Many business groups and industry organizations are working on the tax question. There is a lot of consensus on this subject and it appears that governments are listening, but so far we've seen little action. The challenge to us in B.C., especially for the high tech industry, is to figure out what can reasonably be expected on an immediate basis.

Does it make a lot of sense to pressure B.C. into reducing personal tax levels to make B.C. competitive to Washington State? Provincial income taxes and surtaxes are calculated as a percentage of federal taxes (49.5% plus surtaxes). Hence, B.C. would have to drop its taxes by almost 50% to compete with Alberta and eliminate income taxes altogether to compete against Washington.

With regard to our competitiveness, we must remember, though, that the real villain with respect to Brain Drain issues is the weak Canadian dollar. No amount of tax reduction will compensate for a $.65 dollar. However, this disparity will diminish as well as our international competitiveness increases.

Provincial vs Federal Taxes

In 1998, $1.00 of personal income at the top marginal rate resulted in a tax of 31.32 cents (i.e. 29 cents at the top rate plus a surtax of 8% on that tax). The B.C. tax is another 22.85 cents (i.e. 50.5% of the federal tax plus additional provincial surtaxes) for a total tax of 54.17 cents.
 
Personal and Social Taxes

The personal tax levels are making us uncompetitive as Canadians. This is not a provincial issue. It is both a provincial and national matter and groups like CATA (Canadian Advanced Technology Alliance) have been lobbying on this front.

Higher social (e.g. sales) taxes, especially in comparison to the USA, also make it more difficult for our industry to attract talent. Notwithstanding the competition from Alberta (which has no sales tax), this too, is a combined joint national and provincial issue. However, it is a consumption tax and at least it does not penalize earnings.

Business Taxes

The recent Mintz Report (see below) addresses this issue and this is consistent with the BC Business Summit recommendations. This subject is well studied and represented. Certainly, more endorsement and push won't hurt.

R&D Tax Incentives

This is an area in which we could make an immediate impact to boost our industry. In comparison to other provinces, B.C. offers the least attractive environment for high technology companies. Ontario and Quebec offer very attractive incentives for technology ventures. Ontario, for example, offers three programs to stimulate technology development and investment. Quebec has similar incentives. B.C. has none. An Ernst and Young study summarizing the after tax costs of performing research in Canada shows that the costs are higher in B.C. by a range of from 10 to 20% (depending on size of corporation) as compared to Ontario and Quebec. What is very interesting here is that Alberta does not have a competitive advantage in this area (although we often point to Alberta as offering lower personal and social taxes). Hence, there's an opportunity for B.C. to get back some of the ground lost to Alberta.

As an example, it costs a small high technology CCPC (Canadian Controlled Private Company) in B.C. $50.62 on an after tax basis to do $100 of R&D. It would cost the same company only $33.51 in Ontario and $33.90 in Quebec! It is exactly this type of company which makes up much of our technology sector.

One reason given by many high tech companies for being based in B.C. is the proximity to the research community (the Universities). By not leveraging our research capability we will lose out to other provinces. Why are we ignoring this? It is surprising that the high tech sector has not been more vocal in this area.

It is important to note that B.C. does have program funding for organizations such as the Science Council of B.C. and the B.C. Advanced Systems Institute. Such program spending is critical and essential in encouraging early stage startups and university spin-offs. B.C. has a positive track record in nurturing early stage venture development through R&D funding programs and these should not be compromised.

Technology Investment Incentives

Equity investment into high tech ventures is key to their success. Early stage seed capital (i.e. patient capital) investment must be encouraged. The provincial tax incentives associated with labor-sponsored venture funds, i.e. Working Opportunity Fund, have attracted private investment and the payback to the economy has shown to be positive (see WOF special report). Incentives such as this are critical in attracting more capital. In much the same way that oil and gas tax flow-thru shares stimulated investment in the resource sector, such programs could boost the technology sector. Another form of incentive could be reduced capital gains on investments which are made in treasury shares of technology ventures and held for long periods of time. For example, capital gains on a 10-year holding would not be taxed whereas a 9 year holding would be 90% tax-free, and 8 year holding would be 80% tax-free and so on. Such incentives cause no immediate impact on fiscal tax revenues and when utilized, they will have been fully re-captured through other tax-flows.

Recommendation

It is proposed that VBT - ATTF become more active at the National level and align itself with organizations like CATA (Canadian Advanced Technology Alliance) which already has the sympathetic ear of Finance Minister Martin and Industry Minister Manley. Personal income tax changes must begin in Ottawa. At the provincial level, though there are some immediate actions that we could advocate. With respect to corporate taxes and incentives there is one very important aspect that the Task Force should address. This relates to B.C.'s uncompetitive position with respect to corporate R&D incentives. We must not forget that R&D is the foundation on which high tech companies are built. R&D is synonymous with high tech.

So, in summary, let's: a) put our industry on a level field with respect to provincial R&D tax incentives - but not at the expense of any current program spending on R&D (e.g. S&T Fund); b) propose investment incentives (like flow-thru shares for high tech or VCC expansion) to immediately provide the capital needed to fuel the growth of high tech in B.C.; and c) push forward on the income tax question on a national front - in that order.

The next step could be to focus on the immediate disadvantage we have in B.C. with respect to sustaining and growing our technology sector by stimulating R&D investment and providing more competitive incentives. It may even be possible to work with groups like the Vancouver Economic Development Commission to provide Quebec-style incentives to stimulate certain industries, like New Media (Quebec offers a $600 million employment incentive in its "multi-media complex").

Input and suggestions are welcomed.

The Technical Committee on Business Taxation, released its Mintz Report (Jack Mintz is a professor of taxation at the University of Toronto) on April 6, 1998.

The Committee's mandate was to consider ways to improve the tax system to promote job creation and economic growth; simplify the taxation of businesses to facilitate compliance and administration, and enhance fairness by ensuring that all businesses share the cost of providing government services. This Canadian Tax Letter summarizes some the Committee's wide-ranging recommendations on the business tax structure, including changes to federal and provincial corporate and capital taxes, employment insurance premiums, and excise taxes.

Much like the BC Summit, this Committee identified three major deficiencies in the current business tax structure: high corporate income tax rates by international standards, impediments to economic growth and job creation and a growing reliance on profit insensitive taxes such as capital, payroll and property taxes.

The Committee concluded that one overall principle for business taxation – neutrality together with internationally competitive tax rates – would achieve the aims of job creation and economic growth, simplification and fairness.

Although the federal government commissioned the study, it reflects the views of the committee, not the government. Paul Martin emphasized that the government wants to reduce taxes, but that the first priority will be tax relief for individual Canadians. Since the Committee made its recommendations as an all-or-nothing package in accordance with its mandate to leave overall tax revenues from business unchanged, it may be a long time before we see any of the Committee's recommendations implemented.

Martin added that a corporate tax system that treats all industries equally is a laudable objective but the government will want to continue using the tax code to favor certain activities and industrial sectors. He mentioned research and development as an activity that he believes the government should encourage. This, of course, is very positive for high technology industries.

The table below summarizes how the Committee would reduce average federal-provincial corporate income tax rates on large and small businesses. The federal corporate income surtax would be eliminated for both large and small businesses.

The Committee also proposes a number of base broadening measures to maintain revenue levels and improve efficiency and fairness including:

• Treating mining and oil and gas industries in a way more comparable to other industries;
• Adjusting capital cost allowance (CCA) rates to reflect economic depreciation, along with a reduction in some accelerated classes;
• Eliminating the deduction of capital taxes from the corporate income tax base; and

Temporarily increasing the federal capital surtax on financial institutions pending a new study.
• Phasing out immediate deductibility of R&D capital assets (specialized R&D assets would be depreciated at a rate of 35 percent while non-specialized assets would be included in their normal CCA class); and
• Gradually reducing the general R&D tax credit for large companies to 15 percent from 20 percent, and the enhanced rate for small business to 27 percent from 35 percent.