The Canadian corporate income tax system has a number of problems that call for fundamental reforms, starting with rethinking the main role of the system, says a report from the C.D. Howe Institute. ‘Modernizing Business Taxation’ says the corporate tax is designed to prevent shareholders from sheltering income from the personal income tax. “The problem is most capital income can be sheltered and, therefore, the system is not meeting its intended goal,” says Robin Boadway, one of the report authors. “The current system also places most of the tax burden on labour and distorts firms’ investment decisions, financing decisions, risk-taking, and innovation efforts. The system desperately needs reform.” The report recommends changing the tax base from shareholder income to above-normal profits or revenues above the normal cost of doing business. They also urge the government to eliminate the dividend-tax credit and partial tax-exemption of capital gains; allow firms to carry forward and backward tax losses at the risk-free interest rate; maintain the small business deduction to compensate for the non-refundability of losses which are more prevalent among small businesses; and, to promote innovation, consider introducing a preferential tax rate for patent income, as well as extending flow-through share financing to investment in small innovative firms.
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