Technical Committee on Business Taxation
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1996-08

Capital Tax Issues

Peter E. McQuillan and E. Cal Cochrane

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Abstract

This paper examines the history of federal capital taxes beginning with the "temporary" capital tax on financial institutions introduced in May 1985 (Part VI tax). A second federal capital tax was introduced in April 1989 and has become known as the Large Corporations Tax.

The application of federal capital taxes is examined using a Chartered Bank for illustration of the Part VI tax and a manufacturing company for illustration of the Large Corporations Tax.

The rules used for computation of federal capital taxes are compared to the rules for provincial capital taxes. The paper also includes a comprehensive summary of the rules for computing capital tax under the various provincial regimes.

The potential for economic distortions that may result from the imposition of federal capital taxes is considered as well as the effect of capital taxes on investment and business decisions. Common techniques that are used to minimize federal and provincial capital taxes are also discussed.

The paper concludes with the following recommendations:

• effort should be made to harmonize federal and provincial capital taxes; 
• federal capital tax rates should not be increased due to the potential distortions and inequities noted in the paper; 
• consideration should be given to an alternative minimum corporate tax at the federal level in order to eliminate or reduce federal capital taxes.

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