Cost Estimate of a Reduction in the Federal Corporate Income Tax Rate

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Summary

A member of parliament requested that the Parliamentary Budget Officer (PBO) estimate the annual fiscal cost of gradually reducing the federal corporate income tax (CIT) rate by 1 percentage point each year over 6 years. Starting with a combined rate of 26.8 per cent in 2018, this leads to a combined federal-provincial statutory rate of 20.7 per cent in 2024.

The net cost of a 1 per cent decrease in the corporate income rate is approximately $1.6 billion in 2019. At a 6 per cent decrease in the federal rate, this leads to a net cost of $11.1 billion per year in 2024. The net cost of the proposal considers the impact of increased personal income tax (PIT) revenue.

Due to the integration between corporate and personal income taxes in the Canadian tax system, the decrease in CIT leads to an increase in PIT revenue. This comes from a decrease in dividend gross up and tax credits to maintain integration.

However, the impact of PIT does not negate the decrease in CIT revenues for the government completely. In 2024, the CIT revenue forgone is approximately $13.2 billion and the increase that the government receives in PIT revenue is approximately $2.1 billion. This difference is driven by the fact that corporations do not distribute all their profits as dividends and that many of the dividends received by shareholders are not taxable.

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