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The Progressive Economics Forum

Interest Deductibility Letter

Recently, CLC President Ken Georgetti sent the following letter to Jim Flaherty:

May 8, 2007

Honourable Jim Flaherty, P.C., M.P.

Minister of Finance

House of Commons

Ottawa, ON

K1A 0A6

Dear Minister:

On behalf of the Canadian Labour Congress (CLC), I write to express our support for your promise, in Budget 2007, to end the corporate-tax deduction for interest on debt used to finance foreign affiliates. At a time when Canada has lost 250,000 manufacturing jobs, Canadian tax dollars should not be used to subsidize the transfer of such jobs out of the country. Ending this subsidy for foreign investment will raise revenues needed to finance vital public investment and help to promote business investment in Canada.

In principle, corporate tax should apply to profit: income minus the expenses incurred in generating it. Since Canada generally does not tax income from the foreign affiliates of Canadian companies, the interest costs of generating this income should generally not be deductible from Canadian taxes.

Multinational corporations and the Liberal Party argue that Canada should allow the deduction of foreign-affiliate interest because the United States, Britain and Japan do so. However, these critics consistently neglect to mention that these countries also tax the foreign-affiliate income of their corporations. The federal government should not allow the deduction of foreign-affiliate interest unless it taxes foreign-affiliate income.

While it is not surprising that business would seek to retain a tax break, other advocates of low corporate taxes recognize that foreign-affiliate interest-deductibility is unjustifiable. The 1997 Technical Committee on Business Taxation, chaired by Jack Mintz, proposed eliminating this deduction. In The??Financial Post, Terence Corcoran wrote, “Canadian taxpayers are subsidizing borrowing to finance foreign operations that other countries can tax. Why would we do that?” The C. D. Howe Institute questions your policy change, but does not advocate a return to deductibility.

Mintz, Corcoran and the C. D. Howe Institute have instead called for further reductions in corporate-tax rates. However, the Canadian affiliates of American, British and Japanese companies deduct taxes paid in Canada from those paid to their home governments. Therefore, reducing Canadian corporate-tax rates further below American, British and Japanese rates would simply transfer their tax payments from the Canadian treasury to the American, British and Japanese treasuries.

Tax breaks would increase the profits of Canadian-based corporations, making them more expensive for foreign buyers. However, as you have correctly observed, Budget 2007 did not prompt Alcoaa€?s bid to takeover Alcan. As Manulife CEO Dominic Da€?Alessandro recently pointed out, there are less costly and more reliable means of regulating foreign takeovers.

In particular, the Investment Canada Act allows reviews of large foreign takeovers to ensure that they produce a “net benefit” for Canada. Proposed takeovers that fail this test can and should be rejected. The CLC calls for a thorough, rigorous review of Alcoaa€?s proposal to takeover Alcan. Your government should provide a full opportunity for ordinary working people, and the unions that represent them, to meaningfully participate in the review process.

You made the right decision in ending the deductibility of interest on debt used to finance foreign affiliates. Neither complaints from business nor Alcoaa€?s proposed takeover of Alcan should alter this decision.

Yours truly,

Kenneth V. Georgetti

President

Canadian Labour Congress

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