The
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January 2001

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January Questions & Answers and January Graph

by Joel Emes

Q: How much income tax do corporations pay?

A: None. In the end, corporations do not pay tax, people do. Think about what a corporation is—machinery, contracts, office space, employees, shareholders, bondholders, and so on. These parts work together to make income for people, so corporate tax is, therefore, a tax on people. The corporation itself cannot pay the tax because it is not the final destination of the income it generates. In the end, people pay the corporate tax. There are, of course, corporations owned by wealthy families and these families bear a portion of the tax. There are also many ordinary working people, however, who entrust their savings to mutual fund managers. These managers invest this money in corporations and the income of those corporations flows back to these small investors. Approximately one-half of all Canadians now own shares, directly or indirectly, in the Canadian banks. Money set aside by employers for pensions is also invested in corporations. For example, OMERS, the Ontario Municipal Employees' Retirement System, is one of the largest stock owners and traders in Canada.

With the above caveat in mind, we can analyze the tax that is levied on corporations. Direct taxes on enterprises¹ were $36.9 billion in 1999: 33.7 percent of pre-tax profits and 10.4 percent of total tax revenues (see table 1).

Table 1: Enterprise Profitibility and Taxation
	GDP ($millions)	Enterprise profits before taxes ($millions)	Enterprise profits before tax as a percentage of GDP	Direct taxes from enterprises ($millions)	Tax as a percentage of pre-tax profits	Enterprise tax as a percentage of total tax revenue
1964	52,653	6,383	12.1	2,101	32.9	16.4
1969	84,006	9,252	11.0	3,221	34.8	13.2
1974	154,290	21,979	14.2	7,051	32.1	14.3
1979	280,309	38,822	13.8	10,038	25.9	12.7
1984	449,249	50,165	11.2	14,984	29.9	10.8
1989	656,190	66,025	10.1	18,566	28.1	8.4
1994	767,506	69,894	9.1	19,342	27.7	7.1
1999	957,911	109,521	11.4	36,869	33.7	10.4
Source: Statistics Canada; calculations by the author.

Q: Has the share of government revenue from enterprises fallen over the last three decades?

A: Yes. This question often comes up in discussions of tax fairness and is usually coupled with claims that corporations do not pay their fair share of taxes. Unfortunately, this question is not relevant. The January Graph shows taxes as a percentage of profits, direct taxes on enterprises as a percentage of total tax revenue, and enterprise profits before tax as a percentage of GDP. What is clear from this graph is that taxes on enterprises are highly related to pre-tax profits. In years of high profit, taxes are high; in years of low profit, taxes are low. This uncertainty in tax revenue from enterprises is the reason that enterprise tax as a percentage of the total has fallen—governments have sought out more stable sources of revenue. The solid line on the graph shows that direct taxes on enterprises as a percentage of pre-tax profits have fluctuated greatly, but have remained between 25 and 41 percent. While taxation on enterprises has remained fairly constant, other forms of taxation, mainly the personal income tax, have grown.

Q: Are there any taxes levied on corporations that do not depend on profit?

A: Yes, and increasingly so. Table 2 lists the corporation and financial institution capital tax rates that were in force in the provinces in 1987 and 1999. The federal government also levies these profit-insensitive taxes.² The shaded areas show jurisdictions that either implemented or increased a capital tax. Prince Edward Island, Nova Scotia, New Brunswick, Alberta, and British Columbia implemented new capital taxes in this time period. All provinces currently levy profit-insensitive taxes on financial institutions; only three, Newfoundland, Prince Edward Island, and Alberta do not levy such a tax on corporations. These taxes look insignificant until you consider that the base for such taxes is larger than for the income tax, and these taxes must be paid even if the company posts a loss for the year.

Table 2: Corporation and Bank Capital Tax Rates, percentage
	Corporation Capital Tax		Financial Institution Capital Tax
	1987	1999	1987	1999
NF	0.00	0.00	2.00	4.00
PE	0.00	0.00	0.00	3.00
NS	0.00	0.25	1.50	3.00
NB	0.00	0.30	2.00	3.00
QC	0.48	0.64	0.97	1.57
ON^a	0.30	0.30	0.80	0.6/0.9
MB^b	0.30	0.3/0.5	3.00	3.00
SK	0.50	0.60	3.00	3.25
AB	0.00	0.00	0.00	2.00
BC^c	0.00	0.30	0.00	1.0/3.0
Notes: ^aCorporations that have taxation years after May 4th, 1999 and before January 1, 2000 and have taxable capital of between $2,000,001 and $2,399,999 pay reduced levels of capital tax. For financial institutions, the rate of tax is 0.6 percent on the first $400 million of taxable capital and 0.9 percent on taxable capital over $400 million. ^bManitoba levies a surcharge of 0.2 percent on corporations with more than $10 million in taxable paid-up capital. ^cBritish Columbia taxes the capital of banks and trust companies with worldwide paid-up capital of less than $1 billion at 1 percent; those with more than $1 billion are taxed at 3 percent. Sources: Canadian Tax Foundation, Finances of the Nation, 1999 edition; The Manitoba Budget 1998, Department of Finance.

Q: How much revenue do Canadian governments collect in capital taxes on corporations? How has this changed recently?

A: Capital taxes on corporations generated $4.5 billion in revenues in 1997, up from $1.6 billion in 1988. Table 3 lists federal and provincial corporate capital tax revenues for 1988 through 1997. This table highlights one of the main problems with these type of taxes; total capital tax revenue as a percentage of enterprise profits before taxes peaked during the recession in the early 1990s.

Table 3: Capital Tax Revenues in Canada
Year	Provincial capital tax revenue ($millions)	Federal capital tax revenue ($millions)	Total capital tax revenue ($millions)	Total capital tax revenue as a percentage of enterprise profits before taxes
1988	1,490	93	1,583	2.2
1989	1,885	157	2,042	3.1
1990	1,917	776	2,693	5.3
1991	1,863	1,140	3,003	8.1
1992	2,089	1,201	3,290	8.7
1993	2,393	1,086	3,479	7.8
1994	2,611	1,087	3,698	5.3
1995	2,795	990	3,785	4.6
1996	3,272	1,054	4,326	5.1
1997	3,654	846	4,500	4.8
Sources: Statistics Canada, as reported in Haymes (1997); calculations by the author. Note: Shaded areas are estimates.

Q: Which other G7 countries levy these taxes?

A: Only Germany and Japan levy corporate capital taxes, and according to the Report of the Technical Committee on Business Taxation (1998), capital taxes in Canada tend to be more substantial, assessed not just on corporate equity but on a base that includes a large part of the company's debt (as reported in Haymes, 1997).

Notes

¹Enterprises consist of corporations and government business enterprises.

²Profit insensitive taxes are levied on paid-up capital. Each province defines the base differently but in general, it includes: the amount received by a company on its issued share capital, its contributed surplus, retained earnings, long-term debt, short-term debt of a capital nature, and all reserve funds except those for depreciation, depletion, and doubtful debts. (Source: Canadian Tax Foundation, 1999.)

References

Canadian Tax Foundation (1999). Finances of The Nation. 1999 edition.

Mintz, Jack (1998). Report from the Technical Committee on Business Taxation. Prepared for the Federal Minister of Finance. April.

Haymes, Greg (1997). In Statistics Canada, Financial and Taxation Statistics for Enterprises. Cat. 61-219.

January Graph

Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.

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