| There is a lot of talk these days about tax
reduction. The National post has been particularly hard on the Federal
Government, as Canada is one of the highest tax jurisdictions in the
World, and in particular vis-à-vis our neighbour and largest trading
partner, the United States. To put it succinctly, our tax rates are
ten percent too high. Our top marginal rate is still close to 50%, even
with the marginal tax reductions of the last Ontario Budget. Companies,
in the high-technology sector, find this reality a real burden when
going to the U.S. capital markets. Share prices are usually valued as a
multiple of earnings, which are computed on an after-tax basis.
Therefore, if our tax rates are 10% higher, then a Canadian company with
all other things being equal will have lower earnings. Consider the
following example where identical companies have pre-tax earnings of
$10.00 per share. Assume the market capitalizes these earnings using a
25 times earnings multiple.
| |
U.S. Based Company |
Canadian Based Company |
| Pre Tax Earnings |
$10.00 |
$10.00 |
| Taxes |
3.50 |
4.50 |
| |
$6.50 |
$5.50 |
| Multiple |
25x |
25x |
| Indicated Value |
$162.50 |
$137.50 |
In this case, the market penalizes the Canadian company $25.00 per
share or 15.3%. No wonder Canadian companies use very complex offshore
structures, such as Barbados International Business Corporations (IBC's)
which are legal for Canadian Tax purposes. Our tax system is terribly
schizophrenic, as it allows indirectly a tax affect through certain
rules and the Tax Treaty system, that it doesn't allow Corporations
directly. The so-called concept of "fairness" is simply a facade because
corporations, that do not want to pay the full rate, simply are not. The
offshore gymnastics would simply stop if Canada would just lower its
rate to a competitive rate.
|
