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Canada High Tech: After Taxes, What’s left? [Global Business magazine]

by Hope Katz Gibbs
Global Business magazine
November 1999

TAKE ONE LOOK AT THE net income line on the average pay stub in Canada and it isn’t difficult to understand why a highly educated worker there might opt to move to a similar job in the United States.

Take, for instance, a skilled engineer in Ontario who earns the equivalent of US$94,000 per year. After federal, provincial and local taxes, he will take home roughly US$56,000. Compare that to the salary of an engineer in, Austin, Texas who earns the same base of US$94,000. Her take-home pay is about US$72,000.

The difference—$16,000—equals nearly 30% of the total
take-home wage in Canada. And, apparently, it is finally starting to have a real effect on workers. The Conference Board of Canada reports that between 1995 and 1997, as many as 12,500 Canadian engineers immigrated to the United States. This number roughly equals half the total number of engineering students who graduated from Canadian universities over that same three-year period.

This pay envy may soon be over, however. Just last month Prime Minister Jean Chrétien announced plans for broad-based tax cuts. Specific measures are to be unveiled in Finance Minister Paul Martin’s spring budget, expected in February or March. However Martin did say that the first priority was to reduce personal income taxes, which are so high that they drive Canada’s best workers to the United States.

The argument certainly sounds solid enough, and it jibes with a trend that is growing among European countries to reexamine the linkages between personal tax rates and high-tech investment. In Canada’s case, however, personal tax rates may be only part of the story.

What Brain Drain?

Many Canadians get downright defensive when it is suggested that any native would actually want to leave the country to work in the United States.

“Our brains aren’t being drained south!” shouted the headline of a report by the Canadian Association of University Teachers, issued shortly after the Conference Board
issued its report.

“Aside from a few selective anecdotes, there is surprisingly little real evidence that university-educated Canadians are fleeing south,” says Jim Turk, director of the association. “Not only is there no evidence of a brain drain, but differences in tax rates between Canada and the United States are simply not a major factor in explaining emigration flows.”
Mark Deacon concurs. He’s president of Smart Toronto, a 100-member business association for high-tech companies, and after graduating from Northwestern University in 1992 the Canadian native chose to move back north to work.

“I came back despite fact that the country was in a recession at the time,” Deacon says. “The quality of life is simply better here.”

Nonetheless, the suggestion of a mass exodus of Canadian brain power—combined with Conference Board’s figures—has caught not only the attention of Canada’s top government officials, but also of the country’s business leaders.

John Roth, vice-chairman and chief executive officer of Nortel Networks, one of Canada’s most prized high tech companies, said in April that while his firm remains committed to Canada, it is finding it more difficult to attract and retain the employees the company needs. Roth’s main culprit? High personal tax rates.

Nortel has no plans to move south, Roth emphasizes, though the company has said it might relocate certain research and development activities outside of Canada.

“The issue in the recent controversy isn’t about Nortel Networks leaving Canada,” Roth said at the firm’s most recent annual shareholders meeting at its headquarters in Brampton, Ontario. “It is about the shortage of scarce skills and high tech stars that Nortel Networks needs to continue to grow in the country. It is about the movement of Canada’s best and brightest out of the country, the difficulty in drawing experienced people from abroad, and the dampening effect this causes on growth here.”

Roth said that although taxes in Canada have traditionally been higher than in most parts of the United States, the quality of life in Canada used to help attract employees from other countries. This is no longer the case, he said.

The Canadian Advanced Technology Alliance (CATA), a high tech industry association with more than 500 members in the information technology, biotech, and aerospace and advanced manufacturing industries, buttresses Roth’s argument.

“It is not a secret that the growth of Canada’s standard of living has lagged well behind other countries, and most particularly the United States,” CATA wrote in a report submitted recently to the Canadian House Standing Committee on Finance. “Personal income is now one quarter lower than in the U.S., and the gap is widening. There is a serious threat that unless our performance improves significantly, Canada will become a low income backwater of the global economy, supplying cheap resources to the more sophisticated economies.”

Beyond Tinkering

CATA officials conclude that the Canadian economy needs a major stimulus. Since Canadian companies already receive some of the world’s most generous subsidies for research and development and high-tech production, cuts in personal tax rates are a logical next step, the report said.

“We need something to encourage the expansion of efficient, high growth industries,” the report reads. “The Canadian tax system discourages the transition to a new economy. It imposes very high rates of personal income tax, with marginal rates that peak at very modest levels of income. These high taxes act as a disincentive to work and to entrepreneurship. They act as an incentive to emigration.”

Canada’s Business Council on National Issues (BCNI) recently came to the same conclusion. Last October the group—made up of CEOs of 150 leading Canadian companies—urged the federal government to reduce its annual tax bill by $18 billion over the next seven years, beginning with a $3 billion tax cut in the 1999 budget.

About 80% of the proposed cuts would be used to trim personal income tax rates, with 13% going to reduce employment insurance premiums and 7% allocated to assist in corporate tax reform. The $14.5 billion in personal tax cuts is equivalent to 20% of this year’s personal income tax revenue.

In a paper entitled, “Creating Opportunity, Building Prosperity—A Tax Reduction Strategy for Canadians,” the BCNI proposed a framework for sustainable tax cuts that would cost the federal government only $2 billion to $3 billion per year in income.

The BCNI differed with some tax cut proponents in making tax cuts only a secondary goal, after the reduction in public sector debt. But the group concurred that Canada’s personal income tax burden is so far out of line with its major trading partners and competitors that significant tax reduction must begin now.

“It is time not merely to tinker, but to change the course of personal taxation in Canada,” says Thomas d’Aquino, BCNI’s president and chief executive officer. “For more than a generation, persistent deficits ensured that taxes could only go up. Now the government must convince Canadians that taxes are going down, that they will continue to year after year, and that once cut they will stay cut.”

Lesser Measures

Though the argument in favor of lowering taxes in Canada has only really become front-page news in the country this year—until recently polls showed that Canadians didn’t spend a lot of time fretting about their tax rates—the subject has been festering for some time, at least in some regions.

The provincial government in Alberta, for instance, has made tax cuts a central point in its message. Business leaders in British Columbia, meanwhile, have blamed the deep recession there at least part on that province’s very high personal tax rates.

Exactly how and when the proposed tax cuts will be implemented remains uncertain. While this proposal is a reversal in policy for the ruling Liberal party, opposition parties have attacked the plan on a number of fronts, including its vagueness, and urged Chrétien no, to wait until the spring budget to unveil a more specific plan.

In the meanwhile, the federal government has launched a series of more traditional efforts to retain homegrown skilled workers and to attract new business immigrants.

In September 1998 Citizenship and Immigration Minister Lucienne Robillard launched a program allowing the spouses of foreign workers employed in the high-tech arena to get their own work permit.

“People with advanced skills in information technology, engineering and management are in demand around the world,” says Robillard. “If they know that Canada welcomes their spouses, too, they may be more receptive to Canadian employers’ Minister of State for the Economy and Finance, announced last March a four-point strategy to lure in new private investments.

The first point is to establish a 8250 million private investment and job creation promotion fund that will assist businesses in the manufacturing. mining, tourism, recycling and high-value-added services sectors, such as infotech.

Other points include bolstering public-private partnerships, direct support for environmental-industry investments, and a series of minor adjustments for specific forms of investment.

Additionally, in hopes of attracting high-tech companies, the Quebec government has started to encourage the establishment of private-sector consortia in which the province will own a minority interest. Priority will be given to the ventures in the aluminum processing, petrochemical, semiconductor, pharmaceutical and paper and wood industries.

Landry estimates that tax incentives and partnerships with government corporations should engender a minimum of $1.3 billion in new industrial investments.

The effort has already borne fruit with the May announcement by Motorola that it planned to invest nearly $70 million in a new software center in Montreal that could eventually create up to 600 new engineering and related jobs. In all, Quebeckers will pick up the tab for nearly 20% of the total costs.

In Ontario, meanwhile, the government there is working to attract high-tech companies by providing a cooperative education tax credit, apprenticeship training for jobs in the trades, and an R&D “challenge fund.” Some big name firms that already reside in the province include IBM Canada, Nortel, Honeywell, and Hewlett Packard.

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"I get by with a little help from my friends," says Hope, who gives special thanks to:

• MICHAEL GIBBS, website illustration and design: www.michaelgibbs.com
• MAX KUKOY, website development: www.maxwebworks.com
• STEVE BARRETT, portrait of Hope on Bio page: www.stevebarrettphotography.com

Contact HOPE KATZ GIBBS by phone [703-346-6975] or email.

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